Date: August 13, 2018
Fed Dove Evans Veers in Hawkish Direction Over Rate Outlook
The Federal Reserve may need to raise interest rates to “somewhat restrictive” levels to combat the effects of recent fiscal stimulus on the U.S. economy, said Chicago Fed President Charles Evans in hawkish comments from one of the central bank’s most reliable doves. “If inflation continues to be on the order of 2, 2.2 (percent) — I’m not expecting it to get as high as 2.5 — that suggests only a modest amount of restrictiveness above our neutral rate might be called for in 2020,” Evans told reporters Thursday in Chicago. The Fed under Chairman Jerome Powell has raised rates twice this year and penciled in two more moves in 2018, with investors widely expecting officials to act at their next meeting on Sept. 25-26. Policy makers have also signaled they expect to raise rates into slightly restrictive territory — above the “neutral” rate that would neither speed up nor slow down economic growth — though some officials prefer to pause the hiking campaign when rates reach that point. Evans, who has long been considered one of the most dovish officials at the U.S. central bank, said “it would not surprise me at all if we make a judgment to move to a somewhat restrictive setting,” citing roughly half a percentage point above his 2.75 percent estimate of neutral. The tone of his comments mark a shift in his thinking. As recently as December, Evans dissented against rate increases on the grounds that inflation expectations were too low and may prevent inflation from rising to the Fed’s 2 percent target.
U.K. Economy Rebounds But Services End Quarter on a Weak Note
The U.K. economy bounced back from its turgid start to the year in the second quarter but the dominant services sector lost momentum toward the end of the period. Gross domestic product increased 0.4 percent between April and June, in line with the median forecast in a Bloomberg survey, figures from the Office for National Statistics Friday showed. In June alone, output gained just 0.1 percent, its weakest performance since March. While manufacturing and construction posted reasonable gains, services output was entirely unchanged with hotels and restaurants and business services and finance both recording declines. With an annualized expansion of 1.5 percent in the second quarter, growth is back to the rate the Bank of England estimates to be the economy’s speed limit. Still, the slowdown in June may give ammunition to those who say Governor Mark Carney and his colleagues acted too early when they raised the benchmark interest rate to the highest since 2009 last week. The pound was 0.5 percent lower at $1.2756 as of 9:34 a.m. in London. The currency is set for a seventh day of losses against the dollar, a run that has taken it to the weakest since June 2017. Investors also slightly cut bets on the pace of BOE rates increases. A big question mark over the economy, and BOE action, remains Brexit, with a lack of clarity over the U.K.’s future relationship with the European Union putting investment decisions at risk. Investors are betting the BOE won’t act again before Britain quits the EU in March. The statistics office said good weather lifted retail sales and construction, suggesting the reasons behind the second quarter’s relative strength may be just as transient as the snow and storms that caused a near standstill at the start of 2018. Growth in the second quarter was driven by services, with the best quarter for the sector since the end of 2016 offsetting the worst manufacturing performance since 2012. Construction rebounded, recovering the weather-related losses it incurred in the first quarter.
Turkey Takes First Steps to Bolster Banks Amid Lira Decline
Turkish policy makers made their first move to bolster the financial system and investor confidence amid a plunge in the lira. The currency, stocks and bonds extended their decline. Promising to “take all necessary measures,” the central bank in Ankara lowered the amount commercial lenders must park at the regulator and eased rules that govern how they manage their lira and foreign-currency liquidity. While there was no mention of higher interest rates, it said all options were on the table. “The central bank will closely monitor the market depth and price formations, and take all necessary measures to maintain financial stability, if deemed necessary,” according to the statement released early Monday. It’s all part of an action plan announced by Treasury and Finance Minister Berat Albayrak late Sunday to respond to market tumult. He also rejected capital controls as an option to stem outflows of hard currency and vowed to crack down on those he said were spreading damaging rumors that deposits would be seized. Albayrak has visited Kuwait and was expected to visit other members of the Gulf Cooperation Council seeking investment, according to Kuwait’s Al Jarida newspaper. The lira briefly trimmed losses after the central bank statement but weakened about 6.6 percent to 6.8819 to the dollar at 12:02 p.m. in Istanbul. The yield on two-year government bonds jumped 94 basis points to 25.74 percent, the highest level since the global financial crisis in 2008. The cost of insuring Turkish debt against default over five years surged more than 100 basis points to 537 basis points, while the benchmark stock index dropped as much as 4.6 percent. The currency has lost about a quarter of its value against the dollar since the U.S. sanctioned two ministers in President Recep Tayyip Erdogan’s government in a spat over the continued detention of an American pastor in Turkey, pushing the economy toward a full-blown financial meltdown. After Albayrak’s comments on Sunday, the banking regulator put restrictions on dollar-lira swaps in an attempt to make it harder for offshore investors to bet against the currency. The use of fringe tools is unlikely to be a “game changer” for the lira, Global Securities analysts including Research Director Sertan Kargin said in an emailed report.