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.

Fed seen keeping interest rates steady amid market volatility

The Federal Reserve is expected to leave interest rates unchanged on Wednesday and acknowledge that turmoil in financial markets threatens its upbeat view of the U.S. economy, leaving the chances of a March hike diminished but alive. 

The Federal Reserve headquarters in Washington September 16 2015.

All 69 analysts in a Reuters poll see the central bank keeping its key overnight lending rate in a range of 0.25 percent to 0.50 percent when it issues its policy statement following a two-day meeting. The decision is due at 2 p.m. EST (1900 GMT).

A month-long plunge in U.S. and world equities has raised concerns that an abrupt global slowdown could act as a drag on the U.S. economy, with investors now betting on only one quarter-point rate hike in 2016 instead of the four signaled in Fed policymakers' economic forecasts last month.

The Fed probably does not want to appear too worried by market and economic volatility that could prove temporary, and its rate-setting committee may soften concerns by pointing to solid U.S. job growth.

U.S. economic growth will accelerate this year to 2.4 percent from 2.1 percent last year, according to the median forecast of Fed policymakers last month. New forecasts are not due until March.

The Fed raised rates by a quarter point on Dec. 16 in a sign the economy had largely recovered from the 2007-2009 financial crisis and recession and was shrugging off weakness in China, Japan and Europe.

U.S. exports took a hit last year, in part due to the impact of a strong dollar .DXY, but consumer spending accelerated and overall employment surged by 292,000 jobs in December.

Investors saw almost no chance of a January rate hike and expected only two hikes for the whole year even before the Standard & Poor's 500 index .SPX fell 8 percent in the first three weeks of the year.

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. 

World stocks, dollar dip as investors turn wary after Fed

Investors turned cautious on Friday about what a stronger dollar and weak commodity prices could mean for the world economy, as a clutch of central banks moved to cushion the impact of the first U.S. rate rise in nearly a decade.

Initial relief after the U.S. Federal Reserve enacted a long-expected hike on Wednesday started to fade, as falls in global stocks and emerging markets showed that the move might not pass off as smoothly as hoped.

The dollar sagged slightly on Friday but remained on track to record its strongest week since early November. .DXY

European shares fell back from a one-week high reached in the previous session, taking their cue from earlier slips in Asia and on Wall Street, as oil prices headed for their third consecutive week of losses.

The pan-European FTSEurofirst 300 index .FTEU3, which had risen 1.3 percent on Thursday, fell 0.6 percent.

"I am still quite bearish about the prospects for the first quarter of next year. The oil price problems are not going away any time soon," said Terry Torrison, managing director at Monaco-based McLaren Securities.

Debt markets built on gains made on Thursday, with bets that the Fed will make fewer rate rises next year than it is currently projecting, reflecting bigger concerns about the economy and doubts about significant inflation.

In Europe, Spanish bonds lagged in a broad rally on Friday ahead of an uncertain national election, with the country's traditional system of two-party dominance facing an unprecedented challenge from populist movements.