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.

Fed's new rate-hike tools passed key test, Fischer says

New financial tools meant to help the Federal Reserve pull off its historic interest rate hike last month have worked, easing some internal concerns at the U.S. central bank, the Fed's vice chairman said on Sunday.

Federal Reserve Vice Chairman Stanley Fischer speaks during a televised interview during the Federal Reserve Bank of Kansas City's annual Jackson Hole Economic Policy Symposium in Jackson Hole, Wyoming August 28, 2015.

"One possible concern about our unconventional policies has eased recently, as the Fed's normalization tools proved effective in raising the federal funds rate following our meeting two-and-a-half weeks ago," Stanley Fischer, the Fed's second in command, told an American Economic Association conference.

The Fed tightened monetary policy for the first time in nearly a decade last month. To lift rates from near-zero, it relied on a relatively new rate on excess bank reserves and on a lightly tested reverse repurchase (repo) facility to mop up some of the $2.6 trillion in excess reserves in financial markets.

The liftoff, on Dec. 17, boosted the U.S. policy rate into its new target range of 0.25-0.5 percent.
A key topic at the conference was the so-called equilibrium real interest rate: the level of borrowing costs associated with stable inflation and full employment.

The debate over this rate appears set to be a defining focus for the Fed in 2016, as policymakers seek to raise rates quickly enough to head off the threat of inflation but slowly enough to keep the recovery from losing steam.

Fischer said this equilibrium rate, which is key to forecasting by how much the Fed will ultimately tighten policy, is now around zero and is likely to remain low for the "policy-relevant future."

John Williams, the president of the San Francisco Fed, argued earlier in the day that the rate looks likely to stay near zero through at least the end of this year. 

Fed opens meeting to put an end to crisis era policy

Eight years after a devastating recession opened an era of loose U.S. monetary policy, the Federal Reserve on Tuesday began a two-day meeting at which it is expected to turn in the other direction and raise rates in an increasingly normal economy.

The decision will be released on Wednesday at 2 p.m. (1900 GMT), with markets prepared for an initial 25 basis point "liftoff" that would move the Fed's target rate from the zero lower bound to a range of between 0.25 and 0.50 percentage points.

It is to be followed by a news conference by Fed Chair Janet Yellen to elaborate on the central bank's latest policy statement.

Markets on Tuesday set a positive stage for the Fed's potentially historic turn. U.S. stock indices were up around one percent, bond yields moved higher, and analysts said that after weeks of preparation a surprise decision not to hike would be the more disruptive choice.

The rate hike will separate the Fed from major central banks in Tokyo, Frankfurt, Beijing and elsewhere that are all battling to stimulate their economies and generate growth.

The initial hike expected on Wednesday will still leave U.S. policy extremely loose, and Fed officials have signaled they will act cautiously from that point forward to nurture a tepid recovery.

Markets and analysts will focus on the exact language the Fed uses in its statement to justify the hike and describe how it will evaluate the timing of a second and subsequent steps.

The Fed Awakens

After years of waiting, it's finally here. No, not the new "Star Wars" movie: Fed week.

Federal Reserve Chairman Janet Yellen walks after speaking at an event hosted by the Economic Club of Washington in Washington December 2, 2015.

Barring a shock, the Federal Reserve will raise U.S. interest rates on Wednesday for the first time since June 2006, a full year before the global financial crisis began.

Data releases will meanwhile give clues to the robustness of other economies, some of which are seen as vulnerable to investment outflows as higher interest rates make U.S. assets more attractive. Especially in emerging markets, where currencies and other assets have plunged in value this year, that process has already started.

Forecast-beating numbers on Saturday showing Chinese industrial output growth picked up to a five-month high of 6.2 percent in November signaled that stimulus measures from Beijing may be steadying the world's second-largest economy.

China's wobble has been a major uncertainty for the global outlook, so better fixed-asset investment and retail sales growth last month should offer investors and policymakers some reassurance.

The Bank of Japan's tankan survey on Monday showed business sentiment among big manufacturers holding steady, although they expected conditions to worsen in the next three months as sluggish emerging market demand weighs on exports.

Flash PMIs for France, Germany and the euro zone are due on Wednesday, hours before the Fed announces its decision.

Thursday's survey of French business sentiment will be the first taken in the euro zone's second-largest economy since the attacks that killed 130 people in its capital on Nov. 13.

Fed to take up 'too big to fail' emergency lending curb

The Federal Reserve Board will consider on Monday a proposal to curb its emergency lending powers, a change demanded by Congress after the central bank's controversial decision to aid AIG (AIG.N), Citigroup (C.N) and others in 2008.

A proposed rule, to be considered by the Fed's Washington-based board in an open meeting, would require that any future emergency lending be only "broad-based" to address larger financial market problems, and not tailored to specific firms.

The 2010 Dodd-Frank financial reform law instructed the Fed to curtail emergency loans to individual banks and prohibited it from lending to companies considered insolvent.

While some at the Fed worry the new rules will hamper the central bank's response in future crises, some politicians have said the proposed regulations are too imprecise, for example in defining insolvency, to prevent the types of deals done in 2008.

As the financial crisis intensified in 2008, the Fed invoked its little-used emergency lending power to stave off the failure of AIG and Bear Stearns, and help other "too big to fail" companies including Citigroup and Bank of America (BAC.N).

The Fed also enacted a series of more general emergency programs, in all providing $710 billion in loans and guarantees. Those programs were separate from the much larger Fed asset and bond purchases known as quantitative easing.

The loans have been repaid and the guarantees ended, ultimately earning the Fed a net profit of $30 billion, according to a September Congressional Research Service review.

Fed gives largest U.S. banks extra year for debt rule calculation

The Federal Reserve said on Wednesday that bigger U.S. banks would have an extra year to calculate a capital requirement known as the supplementary leverage ratio for stress testing.

The United States Federal Reserve Board building is shown in Washington October 28, 2014.

Institutions subjected to the leverage ratio requirement will have to show regulators what the ratio would be in a stressed scenario beginning in 2017.

The extension applies to banks with more than $50 billion of assets, of which there were 39 at the end of the third quarter, according to data from the Federal Deposit Insurance Corp.

The supplementary leverage ratio creates hard limits on how much debt banks can borrow relative to their assets, without giving banks credit for having relatively low-risk assets.

Analysts have said that the supplementary leverage ratio is creating distortions in a number of corners of the bond market, including interest-rate swaps and repo funding markets, by essentially making it more expensive for banks to fund positions in those markets.

Gennadiy Goldberg, U.S. rates strategist at TD Securities, said the delay is unlikely to have much of an impact on credit markets as banks typically look to comply with capital rules well ahead of their actually kicking in.

The change was one of several the Fed made to its rules for stress testing banks and assessing their readiness for dividend hikes and share buybacks. Many of the changes relate to the timing of compliance with certain requirements, though the Fed also removed a requirement for banks to make a calculation known as the tier 1 common ratio.

Fed officials again flag December; see smooth rates liftoff

Federal Reserve officials on Wednesday continued to flag December as a likely time for interest rates to rise after seven years near zero, with two expressing confidence they will be able to pull off a rate hike smoothly despite fears of an abrupt market reaction.

Investors reacted by increasing the odds for a rate increase next month to 72 percent, from 64 percent on Tuesday, based on interest rate futures prices.

Cleveland Fed President Loretta Mester repeated her position that the U.S. economy is now strong enough to absorb a modest policy tightening. 

Atlanta Fed President Dennis Lockhart, sitting alongside her on a panel in New York, said global financial markets have settled since the August turmoil that caused the U.S. central bank to delay raising rates.

Sentiment for a December hike took firm hold at the Fed's October 27-28 policy meeting, according to meeting minutes released on Wednesday that showed a solid core of U.S. central bankers poised for liftoff.

The Fed's October statement helped convince skeptical markets that a rate hike may finally be imminent after several years of near zero rates. 

But the October session also saw central bankers begin grappling with longer-term issues that may be relevant to the pace of subsequent rate hikes, including whether the U.S. economy's lower long-term potential means low interest rates will become a permanent norm.

For now, however, Fed officials seem confident that the central bank will meet its twin goals of full employment and stable two percent inflation.

White House threatens veto of rule-based monetary policy bill

The White House on Tuesday issued a veto threat for a Republican-backed bill to make the Federal Reserve set interest rate policy using a mathematical rule, a proposal Fed Chair Janet Yellen said would "severely damage" the U.S. economy.

The Obama administration opposes the proposal because it would hinder the Fed's ability to help the economy, the White House said in a statement.

"If the president were presented with (the legislation), his senior advisors would recommend that he veto the bill," the statement said.

Lawmakers in the U.S. House of Representatives cleared the way on Tuesday for vote on the bill, called the Fed Oversight Reform and Modernization Act, as soon as Wednesday.

The proposal, which could pass the Republican-controlled house, is not expected to become law but has nonetheless prompted a host of Fed policymakers to air their concerns.

Under the type of policy rule envisioned by lawmakers, the Fed would commit to moving interest rates up or down depending on the readings of economic indicators like the jobless rate and inflation.

In a letter to lawmakers, Yellen said the proposed law would hamstring the Fed's ability to respond to crises and would also be an intrusion on its independence.

European Stock Market News - European Shares Rose

European stocks firm, dollar near two-and-a-half-month highs as Fed revives Dec hike talk

Europe Shares Rise

European shares rose, while the U.S. dollar stood near 2 1/2 month highs against the euro on Thursday, after the Federal Reserve gave a vote of confidence to the U.S. economy and revived expectations it may raise interest rates by year-end.

The Fed, which kept its rates on hold as expected, took the unusual step of strengthening its language about timing in its statement, bringing a December rate hike back on the table.

In another hawkish tilt, the Fed also took out a warning about slowing global growth, going against earlier speculation that China's cooling economy could delay a rate hike in the United States. 

The pan-European FTSEurofirst 300 index .FTEU3 was up 0.3 percent at 1,489.45 points by 0811 GMT, while Japan's Nikkei share average .N225 gained 0.2 percent to close at 18,935.71.

That came after Wall Street ended a volatile session with solid gains, underpinned by the Fed's vote of confidence in the U.S. economy. The Fed's relatively upbeat stance came despite recent worries about global growth due to a slowdown in China.

In overnight trade, U.S. Treasury yields and the dollar rose while shares initially sold off and then reversed, after the Fed explicitly referred in its statement at the end of its two-day policy meeting, to conditions necessary "to raise the target range at its next meeting." Reference to a particular meeting is rare for the Fed.