Tag: Interest rates

Wall Street reacts to key speech from Fed Chair Powell

Monetary business sectors across Money Road firmly watched and responded to the profoundly expected discourse conveyed by Central bank Seat Jerome Powell recently. Powell’s comments, conveyed at the yearly Monetary Conference in Jackson Opening, Wyoming, gave bits of knowledge into the national bank’s reasoning on the ongoing financial climate and potential approach changes.
Market Instability
Seat Powell’s discourse set off quick responses in monetary business sectors, as financial backers parsed through his proclamations for hints with respect to the future heading of money related strategy. Significant stock files experienced prominent intraday swings following the arrival of the discourse.
The Dow Jones Modern Normal (DJIA) at first plunged by roughly 0.5%, mirroring a careful reaction to Powell’s remarks. In any case, by early in the day exchanging, the file had generally recuperated its misfortunes, demonstrating the market’s general flexibility to the Federal Reserve’s correspondence.
Loan cost Assumptions
One of the focal subjects of Powell’s discourse was the Central bank’s position on financing costs. He underlined the Federal Reserve’s obligation to cultivating greatest work and accomplishing stable costs while perceiving the new increase in expansion.
Powell expressed, “We are intently checking expansion and its short lived nature. The way of loan costs will rely upon the developing financial circumstances.” His remarks were seen as a wary affirmation of the inflationary tensions however avoided flagging an impending rate climb.
Tightening Resource Buys
One more point of convergence of Powell’s discourse was the course of events for downsizing the national bank’s resource buys, a program started during the pandemic to help the economy.

“The Central bank keeps on assessing the proper speed for tightening our resource buys,” Powell expressed. “We will convey our aims well ahead of time to guarantee market soundness.”
Market examiners noticed that the absence of a particular course of events for tightening consoled financial backers, who had been worried about an expected fast decrease in security buys.
Financial Standpoint
Powell gave an outline of the U.S. financial scene, featuring the continuous recuperation from the pandemic-initiated slump. He noticed that while progress had been made, the way forward stayed dubious.
“The financial recuperation is continuous, yet there are still difficulties to address, including the delta variation of the infection,” Powell commented. “We stay focused on offering the essential help for a vigorous recuperation.”
Financial backer Feeling
Market members and experts said something regarding Powell’s discourse. Michael Johnson, a portfolio supervisor at XYZ Capital, remarked, “Powell’s message was clear: the Federal Reserve is careful about the recuperation’s direction, particularly given the vulnerabilities. This recommends a steady way to deal with fixing strategy, which ought to be strong for values in the close to term.”
Sarah Mill operator, a financial specialist at ABC Bank, added, “The Fed has all the earmarks of being in no hurry to make huge approach changes. Powell’s remarks mirror an information subordinate methodology, which lines up with their new informing

August 25, 2023
Top global regulator warns of ‘massive adjustment’ for financial system

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AMSTERDAM — The world’s financial system needs a “massive adjustment” to cope with higher interest rates, and key rules will have to be revisited, according to a top global regulator.
Klaas Knot, chair of the Financial Stability Board, an international standard-setting body, told POLITICO that rising interest rates fueled problems at several regional U.S. banks and similar losses may show up elsewhere.
“The speed with which interest rates have changed, that, of course, implies a massive adjustment in the financial system,” the Dutchman said in an interview from his office in Amsterdam. He added it was unclear exactly where those losses would be.

“In many, many places of the financial system, that adjustment will go well because it has been well-anticipated and has been well-managed. But history teaches us that is not always the case everywhere.”
The warning of potential trouble ahead echoes fears of other global officials and comes after the failure of Silicon Valley Bank, a $200 billion lender to the tech sector, sparked contagion across U.S. regional banks. The subsequent market panic contributed to bringing down Credit Suisse in Europe, forcing the Swiss government to hastily merge the lender with UBS.
Any domino effect can have huge impacts for the economy, businesses and households.
“We’ve seen the impact of rapidly changing interest rates manifest in the second tier of the regional U.S. banks,” Knot said. “But I would be very surprised if that was the only sub-sector of the financial system where you would have a significant impact.”
Despite the turmoil, Knot said he was more worried about risks stashed at “nonbanks” — a term that encompasses investment funds, insurers, private equity, pension funds and hedge funds — where authorities have less visibility on hidden losses.
“If they are hidden for a very long period of time, sometimes the problem then grows so big, that it only becomes unhidden or visible when it’s too big to deal with,” he said.
The FSB boss pointed to financial players that took the wrong side of a bet on interest-rates and may now be nursing losses. “I hope, of course, that this is well-dispersed over the financial sector,” he said. “Where we are worried is specific concentrations of such risk.”
In particular, he said, those losses could be amplified when there is a mismatch between hard-to-sell assets and easy withdrawals, and borrowed money is used to juice returns.
That combination has worried authorities for some time — but Knot said this didn’t mean regulators are behind. For instance, the FSB, whose membership includes central bankers, financial regulators and finance ministries, will issue recommendations for open-ended investment funds in July.
Under the plans, regulators would get more powers to trigger restrictions in a crisis, rather than leaving those decisions in the hands of the fund manager.
Rewriting the rules
The financial rulebook will need to be revisited substantially in light of recent events, he said.
“It’s a mistake to see the regulatory framework as something that is fixed, and something that should not be touched,” he said. “The financial industry is not at all fixed, it is continuously evolving. So, the regulatory framework should evolve with the evolving risks.”
The Dutchman said this means revisiting assumptions about how quickly banks can sell assets to meet depositor withdrawals, the speed of those withdrawals in a digital era, and the reserves that have to be set aside to cover potential unrealized losses from interest-rate risks — all of which were factors in the U.S. bank collapses.

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( With inputs from : www.politico.eu )

April 28, 2023
The tension at the heart of the ECB

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FRANKFURT ― The markets are jittery and inflation still needs taming. Coming together, those two things put the European Central Bank in a real bind.
Fight one fire and it could cause the other to flare. The ECB can keep raising interest rates to try to get inflation under control, but that risks fueling financial market tensions. Conversely, it can give banks some breathing space by slowing its rate-hiking, but that carries the danger of prolonging the region’s economic malaise.
Frankfurt’s official line is that it can do both with no serious consequences. Many economists in the eurozone don’t buy that.

In private, it’s a dilemma that splits the ECB’s decision-makers, and even in public differences of opinion are bubbling to the surface. Here’s what’s at stake:
Why is the ECB raising rates?
The idea is that increasing interest rates subdues inflation because it makes consumers and businesses less likely to borrow ― so that results in reduced spending.
As inflation has started to pick up since last summer, the ECB has raised interest rates at a record pace. They’ve gone from -0.5 to 3 percent as the annual rate of price rises has surged to a eurozone record 10.6 percent in October.
The Bank tries to keep inflation at 2 percent so it’s currently way off target.
How this contributed to the crisis
The unpleasant side effect is that with rising borrowing costs (because of higher interest rates), the value of bonds that banks hold usually fall. This gives investors a bad case of the jitters. After the collapse in March of lenders like Silicon Valley Bank and Credit Suisse ― though their problems seemed unconnected ― it was this that prompted concerns they might not be the only institutions with troubles, and fueled contagion fears around the globe.
But Lagarde plowed on regardless
The ECB remained unfazed in the face of emerging banking troubles: It delivered a previously signaled 0.5 percentage-point rate increase in March, less than a week after SVB failed and at a time when Swiss banking giant Credit Suisse was teetering.
Following that decision, ECB President Christine Lagarde stressed that she sees no trade-off between ensuring price stability and financial stability.
In fact, she said the Bank could continue to lift rates while addressing banking troubles with other tools.
The case against
Many economists disagree with Lagarde that the battle for price stability can be pursued without risking financial stability.
The ECB delivered 0.5 percentage-point rate increase in March, less than a week after SVB failed | Patrick T. Fallon/AFP via Getty Images
Claiming so “should be a career-ending statement,” said Stefan Gerlach, chief economist at EFG Bank in Zurich and a former deputy governor of the Central Bank of Ireland. “This is the idea of the ‘separation principle’ of 2008 revisited. That wasn’t a good idea then, and isn’t now either,” he added.
What’s the separation principle?
In 2008, at the start of the financial crisis, as well as in 2011, when the sovereign debt crisis hit, the ECB adhered to the idea that interest rates could be used to ensure price stability at the same time as other measures, such as generous liquidity injections, could ease market tension.
But this just added to the problems and had to be unwound quickly.
This time around, the Portuguese member on the ECB Governing Council, whose country suffered particularly under the consequences of the sovereign debt crisis, is less blasé than Lagarde.
“Our history tells us that we had to backtrack a couple of times already during processes of tightening given threats to financial stability. We cannot risk that this time,” Mario Centeno told POLITICO in an interview.
The case for Lagarde
After the initial fears that troubles could spread across the eurozone, investor nerves have calmed and bank shares started to recover. At the same time, new data showed that underlying inflation pressures kept rising, suggesting that Lagarde and her colleagues were right to stick to their guns ― at least for now.
If that’s the case, March’s interest rate rise ― what Commerzbank economist Jörg Krämer described as “necessary” investment in the central bank’s credibility ― will have paid off.
Market turmoil actually helps
The nervous markets could help the ECB to reach its inflation target without having to raise interest rates as aggressively as previously thought.
Banks tend to slap an additional risk premium on their lending rates which raises the cost of borrowing money for consumers and business. So banks end up doing part of the tightening job for the central bank.
ECB Vice President Luis de Guindos suggested as much in an interview released last month, though he cautioned that it was too early to assess how much impact exactly it may have.
What’s the endgame?
The challenge for the ECB is to strike the right balance. If it doesn’t it risks either the repeat of 2008-style financial troubles or a return to the stagflationary period (low growth on top of high inflation) that roiled the Continent in the 1970s.
If it raises rates too aggressively, bank failures followed by a recession risks forcing the ECB into an interest rate U-turn for the third time, creating massive credibility risks. Conversely, if they don’t hike enough, the central bank may lose a grip on inflation, which is its main mandate.
The only way Lagarde can win is to deliver both price stability and financial stability. In that sense, there is no trade-off ― one without the other just won’t be enough.

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( With inputs from : www.politico.eu )

April 4, 2023