US Interest rates

Federal Reserve chair tells House committee that no decision has been made but a rise in rates is still a ‘live possibility’ despite continued low inflation. “At this point, I see the US economy as performing well.” Janet Yellen said…

 

Powered by Guardian.co.ukThis article titled “Janet Yellen says December interest rate hike is still on the table” was written by Jana Kasperkevic in New York, for theguardian.com on Wednesday 4th November 2015 17.23 UTC

A December interest rate increase is still on the table, US Federal Reserve chair Janet Yellen said Wednesday during testimony before the House financial services committee.

Asked by New York congresswoman Carolyn Maloney, a Democrat, whether the risk of raising rates in December outweigh the benefits, Yellen said that the committee has made no decision yet but that December rate hike was still a “live possibility”.

Her testimony comes exactly a week after the Federal Reserve chose not to raise interest rates in October.

“At this point, I see the US economy as performing well. Domestic spending has been growing at a solid pace,” Yellen said. She added, however, that trade performance and net exports are soft and that there has been a slowdown in job gains recently. The US economy added 64,000 fewer jobs in September than expected.

“Inflation is, as you mentioned, running considerably below our 2% objective. Nevertheless, the committee judges that an important reason for that is the declines in energy prices and the prices of non-energy imports,” Yellen told Maloney. (Crude oil prices were falling on Wednesday morning after a brief rally early in the week.) “As those matters stabilize, inflation will move back to our 2% target. With this economic backdrop in mind, the committee indicated in our most recent statement that it could be appropriate to adjust rates in our next meeting.”

Yellen went on to add that “no decision has been made on that” and that it will depend on the data assessed by the committee before it meets in December. That includes two more jobs reports, one of which will be released this coming Friday.

“What the committee has been expecting is that the economy will continue to grow at a pace that’s sufficient to generate further improvements in the labor market and to return inflation to our 2% target over the medium term,” said Yellen. “If the incoming information supports that expectation, then our statement indicates that December would be a live possibility, but, importantly, that we have made no decisions about it.”

Yellen added that if the data is there to support a rate hike, such a move would be “a prudent thing to do” because it would allow the Federal Reserve to move at a “gradual and measured pace”.

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USA 

World markets rise as investors welcome boost from cheaper credit in China and prospects for further delay to Federal Reserve rate hike in US. The unexpected rate cut, the sixth since November last year, reduced the main bank base rate to 4.35%…

 

Powered by Guardian.co.ukThis article titled “China interest rate cut fuels fears over ailing economy” was written by Phillip Inman Economics correspondent, for The Guardian on Friday 23rd October 2015 13.24 UTC

China fuelled fears that its ailing economy is about to slow further after Beijing cut its main interest rate by 0.25 percentage points.

The unexpected rate cut, the sixth since November last year, reduced the main bank base rate to 4.35%. The one-year deposit rate will fall to 1.5% from 1.75%.

The move follows official data earlier this week showing that economic growth in the latest quarter fell to a six-year low of 6.9%. A decline in exports was one of the biggest factors, blamed partly by analysts on the high value of China’s currency, the yuan.

The rate cut sent European stock markets higher as investors welcomed the boost from cheaper credit in China, together with the hint of further monetary easing by the European Central Bank president, Mario Draghi, on Thursday.

Investors were also buoyed by the likelihood that the US Federal Reserve would be forced to signal another delay to the first US rate rise since the financial crash of 2008-2009 until later next year.

The FTSE 100 was up just over 90 points, or 1.4%, at 6466, while the German Dax and French CAC were up almost 3%.

The People’s Bank of China’s last rate cut in August triggered turmoil in world markets after Beijing combined the decision with a 2% reduction in the yuan’s value. Shocked at the prospect of a slide in the Chinese currency, investors panicked and sent markets plunging.

Some economists have warned that the world economy is about to experience a third leg of post-crash instability after the initial banking collapse and eurozone crisis. The slowdown in China, as it reduces debts and a dependence for growth on investment in heavy industry and property, will be the third leg.

World trade has already contracted this year with analysts forecasting weaker trade next year. The International Monetary Fund (IMF) in July trimmed its forecast for global economic growth for this year to 3.1% from 3.3% previously, mainly as a result of China’s slowing growth. The Washington-based fund also warned that the weak recovery in the west risks turning into near stagnation.

At its October annual meeting, it said growth in the advanced countries of the west is forecast to pick up slightly, from 1.8% in 2014 to 2% in 2015 while growth in the rest of the world is expected to fall from 4.6% to 4%.

Sanjiv Shah, chief investment Officer of Sun Global Investments, said: “The Chinese decision indicates that the authorities are clearly worried about the slowdown in the pace of economic growth and have decide to engage in more pre-emptive action. The [People’s Bank of China] has cut benchmark rates and reduced banks’ reserve requirements as well as scrapping deposit controls.”

But Mark Williams, chief Asia economist at Capital Economics, remained upbeat about the prospects for China’s sustained growth, arguing that the cut in interest rates was part of a longer-term strategy and not a reaction to deteriorating growth.

“The key point is that we shouldn’t take today’s announcement as evidence that policymakers have grown more concerned about the economy. Instead, this is a controlled easing cycle that underlines how China’s policymakers, unlike many of their peers elsewhere, still have room for policy manoeuvre,” he said.

“Admittedly, we’re still waiting for clear evidence of an economic turnaround – September’s activity data still don’t show any great improvement. Nonetheless, with more stimulus in the pipeline, we still believe the economy will look stronger soon.”

Corporations considered bellwethers of the global economy have also warned of a sharp slowdown. Caterpillar, the industrial equipment manufacturer, has seen profits slide over the last year. AP Moller-Maersk, the shipping firm cut its 2015 profit forecast by 15% on Friday, blaming a slowdown in the container shipping market.

The Danish conglomerate operates Maersk Line, the world’s largest container shipping company which transports roughly 20% of all goods on the busiest routes between Asia and Europe.

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The US economy grew faster than previously thought by 3.9% in the second quarter of the year, exceeding economists’ expectations. New estimate fuels expectations the Federal Reserve will raise interest rates in 2015…

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Government data suggested the world’s biggest economy grew at an annual pace of 3.9% between April and June, exceeding economists’ expectations for the GDP estimate to stay unchanged at 3.7%. It marked an even stronger bounceback from the sluggish 0.6% growth recorded in the opening months of 2015 when an especially harsh winter hit economic activity.

The report followed comments on Thursday from the head of the US central bank, Janet Yellen, who said she could start raising borrowing costs from their record low “later this year”.

US GDP

The dollar strengthened against other currencies and US stock markets rallied after the upward revision to GDP, which the Commerce Department said was largely driven by consumer spending being stronger than previously thought.

Economists said the figures left the door open for the US central bank to raise interest rates from their current record low of close to zero at policy meetings in October or December.

“Yellen has confirmed a hike can still occur in 2015, so speculation over a December move is currently rife in the market – with short-term dollar bulls hoping for an October move,” said Alex Lydall, senior trader at foreign exchange business Foenix Partners.

“With the exception of inflation, economic indicators are still solid for the domestic economy in the US, so the pertinent question remains: will the Fed risk looking irresponsible and delay rate hikes into 2016, or will they take the plunge this year, with perhaps a more cautious hike than the expected 0.25%? The jury is still out.”

The Federal Reserve held off raising borrowing costs at its policy meeting last week as it cited volatility in the global economy. But Yellen indicated in a speech on Thursday this week that there was a still a good chance the first hike for almost a decade could come before the year is out. She said US economic prospects “generally appear solid” and it was best not to wait too long to tighten policy, which has been ultra-loose since the global financial crisis.

However, some experts noted that GDP figures did not give the most up-to-date picture of the economy’s performance and that more timely economic indicators painted a gloomier picture.

The revision had “little bearing on US policy”, said Chris Williamson, chief economist at economic data company Markit, which tracks business activity in the US and other economies.

“It does little to change the story that the economy rebounded strongly in the spring after the weak patch seen earlier in the year. More important are the forward-looking indicators, which include a number of red flag warnings that growth is slowing amid headwinds of the strong dollar, slumping oil prices, financial market volatility and emerging market jitters,” he added.

“The more up-to-date survey data play into the hands of dovish policymakers and will reduce the odds of interest rates rising any time soon.”

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Ultra-low interest rates and purchases of government bonds may be shifting instability from banks to other parts of economy, according to the IMF. The Washington-based organization said risks would increase the longer the stimulus was kept in place…

 


Powered by Guardian.co.ukThis article titled “IMF warns over rock-bottom interest rates” was written by Larry Elliott, economics editor, for The Guardian on Thursday 11th April 2013 17.40 UTC

The International Monetary Fund has warned central banks to be alert to the potentially damaging side-effects of ultra-low interest rates and "unconventional" measures to boost growth after the deep slump of 2008-09.

While backing the use of exceptional action to prevent the collapse of the financial system, the IMF said the risks would grow the longer the stimulus was kept in place.

The Washington-based body used a chapter in its latest global financial stability report to note that rock-bottom interest rates and purchases of government bonds might be shifting instability from banks to other parts of the financial system or other parts of the global economy. It added that care would have to be taken when central banks decided the time was right to remove the stimulus.

"Interest rate and unconventional policies conducted by the central banks of four major regions – the euro area, Japan, the UK and the US – appear indeed to have lessened vulnerabilities in the domestic banking sector and contributed to financial stability in the short term," the IMF said.

"Policymakers should be alert to the possibility, however, that financial stability risks may be shifting to other parts of the financial system, such as shadow banks, pension funds and insurance companies. The central bank policy actions also carry the risk that their effects will spill over to other economies."

Finance ministers and central bank governors will discuss the results of what the report called their "unprecedented intervention" when they gather in Washington next week for the IMF spring meeting. The discussions will be given added spice by Japan's recent decision to use ultra-loose monetary policy to lift the economy out of deflation.

US federal reserve building
The US Federal Reserve is considering slowing quantitative-easing measures. Photograph: Karen Bleier/AFP/Getty Images

After the collapse of Lehman Brothers in September 2008, central banks cut interest rates and also created electronic money in an attempt to compensate for the drying up of credit from hamstrung commercial banks. Although the measures were intended to be temporary, borrowing costs have not been raised and quantitative-easing (QE) programmes have not been reversed.

Minutes of the latest meeting of the US Federal Reserve's policymaking committee revealed that a debate was under way over whether the pace of QE should be slowed, and this approach was backed by the IMF in its report.

In the UK, the Fund noted that the impact of the Bank of England cutting its key interest rate to 0.5% – the lowest in its 319-year history – and £375bn of quantitative easing could be encouraging lenders to "evergreen loans rather than recognise them as non-performing". There was a possibility, the IMF said, that non-viable firms were being kept alive, and that this explained the low level of corporate insolvencies in Britain.

"Despite their positive short-term effects for banks, these central bank policies are associated with risks that are likely to increase the longer the policies are maintained. The current environment shows signs of delaying balance sheet repair in banks and could raise credit risk over the medium term. Markets may be alert to these medium-term risks, as central bank policy announcements have been associated with declines in some bank stocks and increases in yield spreads between bank bonds and government bonds," the report said.

"Central banks also face challenges in eventually exiting markets in which they have intervened heavily, including the interbank market; policy missteps during an exit could affect participants' expectations and market functioning, possibly leading to sharp price changes."

The IMF said monetary policy – measures affecting the money supply, interest rates and exchange rates – should remain stimulative until recovery was well established but added that policymakers needed to exercise "vigilant supervision to assess the existence of potential and emerging financial stability threats".

It suggested tougher capital and liquidity standards, coupled with the need to make provisions against future losses, adding: "The crisis has shown that corrective policies enacted after the risks materialise may be too late to contain damage to financial stability."

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