Fed Chair Yellen Sees ‘No New Crisis in Our Lifetimes’, ECB Hints at Tightening Monetary Policy, more…


Federal Reserve Chairwoman Janet Yellen went on record Tuesday night by stating her belief that another financial crisis will not happen ‘in our lifetimes‘. As with all comments emanating from the Fed, they should not be taken at face value. What she meant is that the Fed’s policy mandate for monetary ‘normalisation‘ will not be attributed as the cause of the next downturn. She quantified this by saying that unwinding reforms to the financial services industry e.g. rolling back measures passed under Barack Obama, would ‘not be a good thing‘. In other words, the reforms, along with other measures from the White House, will be used to attribute blame to Donald Trump and his administration. We appear to be in a period where the Fed are openly positioning themselves for the months ahead.

Language from members of the Fed board is developing all the time. Comments this week have ranged from how asset prices may have plateaued to an increase in risk appetite from investors. But the overriding message is clear (save for lead ‘dissenter’ Neel Kashkari). The Federal Reserve’s course of raising rates is to continue, in spite of evidence that the U.S. economy is stagnating in some quarters and contracting in others.

Reuters: Fed’s Yellen expects no new financial crisis in ‘our lifetimes’

  • U.S. Federal Reserve Chair Janet Yellen said on Tuesday that she does not believe that there will be another financial crisis for at least as long as she lives, thanks largely to reforms of the banking system since the 2007-09 crash.
  • “Would I say there will never, ever be another financial crisis?” Yellen said at a question-and-answer event in London.
  • “You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be,” she said.
  • Yellen said it would “not be a good thing” if reforms of the financial services industry since the crisis were unwound, and urged those who had helped manage the fallout at the time to be vocal in preventing such a dilution.
  • “We think it will be appropriate for the attainment of our goals to raise interest rates very gradually to levels that are likely to remain quite low, although there is uncertainty about this, to remain low by historical standards for a long time,” she said.

Business Insider: FED’S WILLIAMS: The US stock market is ‘running pretty much on fumes’

  • Investors are bidding up U.S. stocks on bets that lower taxes under the Trump administration will boost corporate profits, but they may be getting overly complacent about risks, a U.S. central banker said in an interview.
  • “The stock market seems to be running pretty much on fumes,” San Francisco Federal Reserve Bank President John Williams said in an interview carried on Sydney’s ABC News affiliate and available on the internet on Tuesday. “It’s something that clearly is a risk to the U.S. economy, some correction there — it’s something we have to be prepared for to respond to if it does happen.”

Reuters: ‘What’s the rush’ on interest rate hikes, asks Fed’s Kashkari

  • With inflation low and wages showing little sign of an upward surge, the U.S. Federal Reserve should not be raising interest rates, Minneapolis Fed President Neel Kashkari said on Tuesday.
  • “What’s the rush?” Kashkari asked at an event at Michigan Technological University in Houghton, Michigan, adding that neither wage nor inflation data is giving any sign that the economy is about to overheat and indeed may suggest that there is still some slack in the labor market.
  • “Why are we trying to cool down the economy, when there may still be some slack in the job market, and there is still some room to run on the inflation front?” he said. “We’re not seeing wages climb very fast, and we’re not seeing inflation. That tells me the economy is not on the verge of overheating.”

CNBC: Harker stands by Fed rate hikes but nods to weak inflation

  • The Federal Reserve rightly plans to raise U.S. interest rates once more this year given recent inflation weakness is likely temporary, a Fed policymaker said on Tuesday even as he predicted it would take a bit longer for prices to rebound to the U.S. central bank’s goal.
  • “I’m sticking to my outlook that we’re on the right path,” Harker told the European Economics and Financial Center in London, according to prepared remarks. “In the case of inflation, I’ve seen the factors exerting downward pressure as temporary.”
  • “I still support the continued gradual removal of accommodation,” Harker said. “I still see another rate hike as appropriate for 2017.”

Market Watch: Rising stock market valuations reflect increased risk taking, Fed’s Fischer says

  • Rising valuations in equities and in other parts of the global market are partly explained by a brighter economic outlook but also by elevated risk appetite, Federal Reserve Vice Chairman Stanley Fischer said Tuesday.
  • “There is no doubt the soundness and resilience of our financial system has improved since the 2007-09 crisis. We have a better capitalized and more liquid banking system, less run-prone money markets, and more robust resolution mechanisms for large financial institutions. However, it would be foolish to think we have eliminated all risks,” Fischer said.

CNBC: Financial conditions another reason to tighten Fed policy: NY Fed’s Dudley

  • The recent narrowing of credit spreads, record stock prices and falling bond yields could encourage the Federal Reserve to continue tightening U.S. policy, one of the most influential Fed officials said in remarks published on Monday.
  • “When financial conditions ease, as has been the case recently, this can provide additional impetus for the decision to continue to remove monetary policy accommodation,” he said according to prepared remarks published by the New York Fed.

CNBC: IMF cuts U.S. growth forecasts, cites Trump fiscal plan uncertainty

  • The International Monetary Fund on Tuesday cut its growth forecasts for the U.S. economy to 2.1 percent for both 2017 and 2018, dropping its assumption that President Donald Trump’s tax cut and fiscal spending plans would boost growth.
  • The IMF, after a review of U.S. economic policy, said the Trump administration was unlikely to achieve its goal of annual GDP growth of 3 percent over a sustained period, partly because the labor market is at a level consistent with full employment. The U.S. economy grew 1.6 percent last year.
  • The assumed stimulus from expected tax cuts and new federal spending spurred the IMF earlier this year to bump up its U.S. growth forecasts to 2.3 percent in 2017 and 2.5 percent in 2018.

Bloomberg: U.K. Banks Brace for $14.5 Billion Capital Demand From BOE

  • The Bank of England plans to increase capital requirements for U.K. lenders by 11.4 billion pounds ($14.5 billion) to tackle risks posed by the recent rapid growth in consumer credit and prepare for the uncertain outcome of Brexit talks.
  • The BOE set the countercyclical capital buffer at 0.5 percent of risk-weighted assets for U.K. loans effective in June 2018, and if nothing material changes the central bank plans to increase the level again to 1 percent in November.
  • The countercyclical capital buffer is meant to guard against banks’ tendency to boost lending in boom times and slash it in a bust, potentially exacerbating a slowdown. The regulation is meant to ensure banks have enough capital to weather losses and continue making loans to support the economy.

Bloomberg: Draghi Sees Room for Paring Stimulus Without Tightening Policy

  • Mario Draghi hinted at how he may sell a gradual unwinding of European Central Bank stimulus.
  • The ECB president repeated his mantra that the Governing Council needs to be patient in letting inflation pressures build in the euro area and prudent in withdrawing support. At the same time, there’s room to tweak existing measures.
  • “As the economy continues to recover, a constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments — not in order to tighten the policy stance, but to keep it broadly unchanged.”
  • The comments echo an argument first made by Bundesbank President Jens Weidmann as early as November that, all else being equal, ECB policy would become more accommodative as inflation picked up. With his nod to a frequent critic of quantitative easing who has been calling for an end of the 2.3 trillion-euro ($2.6 trillion) program, Draghi may have set the stage for a discussion in the coming months on phasing out asset purchases. They are currently scheduled to run until the end of the year.

Market Watch: Draghi hints ECB may start winding down QE

  • Mr. Draghi didn’t directly address the question of timing. He highlighted positive developments in the eurozone economy, including broadening economic growth and reduced political uncertainty. Emmanuel Macron’s victory in France’s presidential elections last month helped stem concerns that his far-right rival, Marine Le Pen, might drastically alter the shape of the eurozone.
  • “Political winds are becoming tailwinds,” Mr. Draghi said. “There is newfound confidence in the reform process, and newfound support for European cohesion, which could help unleash pent-up demand and investment.”
  • Still, he stressed that the ECB will need a “gradual” adjustment of its policy “to ensure that our stimulus accompanies the recovery amid the lingering uncertainties.”

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