Fed Minutes Show Concern About Global Market Turmoil

Federal Reserve policy makers debating their outlook for interest rates last month expressed concern that the fall in commodity prices and the rout in financial markets increasingly posed risks to the U.S. economy.

“Participants judged that the overall implications of these developments for the outlook for domestic economic activity was unclear but they agreed that uncertainty had increased,” according to minutes of the Federal Open Market Committee’s Jan. 26-27 meeting released Wednesday in Washington. “Many saw these developments as increasing the downside risks to the outlook.”

Policy makers, who projected in December that they’d raise interest rates four times this year, are grappling with the fallout of market turbulence that has cast doubt over the economic outlook globally.

Fed Chair Janet Yellen suggested in congressional testimony last week that the central bank could delay its plans for tighter policy to assess how the economy reacts to current headwinds.

The minutes go into more detail than the FOMC’s statement on policy makers’ concerns about the risks to the U.S. economy.

While voting members “generally agreed” they couldn’t assess the balance of risks to the outlook in the statement, officials “observed that if the recent tightening of global financial conditions was sustained, it could be a factor amplifying downside risks,” according to the report.

Yellen Heads for March Crossroads as Market Urges Policy Detour

Janet Yellen has her eyes on the road.

After the Federal Reserve chair assured U.S. lawmakers that the U.S. economy is strong enough to weather a gradual tightening of monetary policy, she is set to spend the next four weeks measuring the bumps that financial-market turbulence put on the path to higher interest rates.

With jobless data signaling full employment and inflation expected to rise toward 2 percent over the medium term, the March 15-16 meeting of the Federal Open Market Committee will be a test of how data dependent policy makers are prepared to be.

Since the Fed raised interest rates for the first time in almost a decade in December, Yellen and her colleagues have stressed that the pace of future tightening will be determined by incoming data about the economic outlook.

While those readings don’t undermine the case for higher borrowing costs, tighter financial conditions and market volatility reflecting uncertainty over global economic prospects are risks that may stay Yellen’s hand.

The mantra Yellen recited frequently during her testimony to the House Financial Services Committee and the Senate Banking Committee last week was that monetary policy is “by no means” on a preset course. Her comments upstage the minutes of the Jan. 26-27 meeting the Fed will release on Wednesday, though these will still provide important clues about the balance of views within the committee.

Racked Markets Hand Verdict to Central Banks on Sub-Zero Rates

It seemed like a good idea at the time: Cut interest rates below zero to revive growth.

But as policy makers from Tokyo to Stockholm embrace the notion, investors are close to panic mode.

Far from buoying financial markets this year, negative rates have helped to put global stocks on the brink of a bear market, sent the cost of protection against corporate defaults soaring and driven investors to havens such as U.S. Treasury bonds and gold.

Fueling the turmoil is fear that negative rates will slam the world’s banks. In theory, negative rates could be the panacea to cure sluggish global growth: by charging lenders fees for parking money at central banks, policy makers hope banks will use that cash to make loans, jump-starting their economies. In practice, investors worry it may squeeze bank profits and rattle money markets.

About a quarter of the world economy is now in negative-rate territory with more than $7 trillion of government debt offering yields less than zero.

On Thursday, Sweden’s central bank lowered its key interest rate even further below zero, cutting the repo rate to minus 0.50 percent from minus 0.35 percent.

Last month, the Bank of Japan joined counterparts in the euro-zone, Denmark, Sweden and Switzerland with the same policy experiment.

Federal Reserve Chair Janet Yellen said this week that the Fed was taking another look at negative interest rates as a potential policy tool if the U.S. economy falters.
 
Almost $8 trillion has been erased from global equity values this year as the benchmark MSCI All-Country World Index tumbled 20 percent from its May high, entering a bear market. Negative interest rates have suddenly eclipsed investor worries over China’s fading economic miracle and the near two-year collapse in oil prices.

Yellen Suggests Fed May Delay Rate Rises, Not Abandon Them

Federal Reserve Chair Janet Yellen suggested that the central bank might delay, but not abandon, planned interest-rate increases in response to recent turmoil in financial markets.

In presenting the Fed’s semi-annual economic report to Congress, Yellen said the turbulence had "significantly" tightened financial conditions by pushing down stock prices, pushing up the dollar and raising some borrowing costs.

Policy makers provisionally penciled in four quarter percentage point rate increases for 2016 when they hiked borrowing costs in December for the first time since 2006.

The financial markets since then have been rocked by a series of shocks, from a depreciation of China’s currency to a steep fall in oil prices, that raised concerns among investors about the outlook for the world economy.

In spite of the big moves in the markets, Yellen said she hasn’t seen a steep drop-off in economic growth, either in the U.S. or globally. "Recent economic indicators do not suggest a sharp slowdown" in China, she added.

She forecast that the American economy would bounce back this quarter after slowing in the final three months of 2015 and said she expects wage gains to accelerate now that unemployment has fallen to an eight-year low.

The Fed chair said the policy-making Federal Open Market Committee continues to see the next move in interest rates as up, rather than down. "I do not expect the FOMC is going to be soon in a situation where it’s necessary to cut rates," she said.

Dollar Bulls Await Yellen as Citigroup Says Pessimism May Reign

Dollar bulls are looking to Janet Yellen for salvation. They may be disappointed.

The greenback has dropped against 14 of 16 major counterparts so far this month as traders pared to 30 percent the odds of a Federal Reserve interest-rate increase this year. Analysts have started to examine the prospect of the U.S. following the euro area and Japan in adopting rates below zero if the economy deteriorates. 

The Fed chair in testimony before Congress Wednesday should “deflate” some of the enthusiasm around negative rates and that may boost U.S. yields and support the dollar, according to Citigroup Inc.

“Her hope would be to unwind some of the bearishness that has engulfed asset markets, and this would be supportive for U.S. dollar, rates and equities,” Steven Englander, Citigroup’s New York-based global head of Group-of-10 currency strategy, wrote in a note. 

“However, at times market pessimism is so deep seated that good news is viewed only as an opportunity to sell at better levels.”

The dollar dropped 0.1 percent to 115 yen as of 7:52 a.m. in London after falling to 114.21 Tuesday, the weakest level since November 2014. It gained 0.1 percent to $1.1281 per euro, after reaching $1.1338 on Tuesday which was its weakest in three months. 

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, was little changed at 1,220.80 and has lost 2.5 percent since Jan. 29.

U.S. Stock Market News - Fed Chair Janet Yellen

Dollar hovers near three-month high, U.S. jobs awaited for rate clues

The dollar held firm on Friday with investors on tenterhooks over whether upcoming U.S. jobs data will be strong enough to cement rising expectations of a Federal Reserve interest rate hike next month.

The dollar index .DXY treaded water at 97.927, keeping in close reach of a three-month high of 98.135 .DXY =USD struck on Thursday.

"Fed policymakers appear to be trying to keep the possibility of a December rate hike alive since their last policy meeting," said Shinichiro Kadota, chief Japan forex strategist at Barclays.

Fed Chair Janet Yellen said on Wednesday that "liftoff" in interest rates in December was a live possibility, leading investors to think a rate hike will come next month unless economic indicators drastically weaken in coming weeks.

"There have been comments from Fed officials that appear to be attempting to lower the hurdle on the payroll increase. If payrolls increase about 170,000-180,000 as markets expect, rate hike expectations will heighten further," Barclays' Kadota said.

The median forecast for October nonfarm payrolls in a Reuters poll of economists is an increase of 180,000, above slightly sluggish job growth of 142,000 in September. The data is due at 1330 GMT.

Market focus was on how equities react to the jobs report if the data heightens prospects of a rate hike in December.

Federal Reserve News - Chair Janet Yellen

Yellen, consensus-builder, needs to send strong signal at Fed meet

Federal Reserve Chair Janet Yellen holds a news conference following the Federal Open Market Committee meeting in Washington September 17, 2015.

Federal Reserve Chair Janet Yellen, praised as an adept listener and consensus builder, may need to adopt a stronger tone at this week's policy meeting if she expects to keep a December interest rate rise in play.

Yellen's inclusive style has been tested recently by two fellow governors who publicly appeared to disagree with her view, shared by Vice Chair Stanley Fischer, that the Fed will probably need to raise interest rates this year.

Governors are permanent members of the Fed's policy-making panel who typically vote with the chair, and it is unusual for them to publicly contradict the Fed chief. 

Yet both Lael Brainard and Daniel Tarullo, speaking shortly after Yellen and Fischer, listed an array of risks to economic growth that suggested rate hikes should wait.

Most other Fed voters, with the notable exception of the dovish president of the Chicago Fed, have suggested that they, like Yellen, support a 2015 rate rise. 

The arithmetic suggests Yellen could face as many as three dissents from her 10-member panel if she decides to raise rates at the Fed's December meeting.

What is perhaps more troubling for Yellen than the specter of dissents is that many investors do not believe the Fed will raise rates at all this year. Unless Yellen manages to shift those expectations well ahead of time, possibly starting with the Oct. 27-28 meeting, a rate hike could roil markets.

Yellen's style contrasts with that of some of her predecessors, notably Alan Greenspan, who used to dictate the outcome of meetings as, or even before, they began.

Yellen spends the better part of the days leading up to each policy-setting meeting talking in person or by phone with each of her 16 fellow policymakers, her schedules show. Not even Ben Bernanke, a former academic who like Yellen valued consensus, appears to have conferred as much on so regular a basis.