Date: June 28, 2018
Powell Wants ‘Real Economy’ to Guide Fed
Federal Reserve Chairman Jerome Powell is testing the economy’s room to run. It’s a strategy that contains both big benefits and risks for ordinary Americans and is causing excitement, tinged with caution, inside the central bank. Take Fed treatment of one of its bedrock conceptual benchmarks, a rate of unemployment that keeps inflation stable. In June, they estimated that level at 4.5 percent. Unemployment in May was 3.8 percent. Yet with no sign of price pressures, policy makers plan to let the labor market run even hotter, with the jobless rate projected at 3.5 percent over the next two years. Powell, a Trump administration appointee, shares his predecessor Janet Yellen’s appreciation that labor-market slack may be greater than estimated. He’s combined that with a sense that the range of uncertainty around guidepost estimates that govern monetary policy are highly uncertain tools. For Powell, the first non-economist to hold the job in more than three decades, conceptual benchmarks can’t fully describe the complexity of the U.S. economy. So in this first five months, he’s brought a subtle but important change to the chairmanship at a key juncture in the business cycle: trust evidence as much as economic models. “Let’s be guided by what’s going on and what the real economy’s telling us,” Powell said on the sidelines of a June 20 central bank conference in Sintra, Portugal, at which he also repeated the case for gradual interest-rate increases. “And let’s also admit that our understanding of what the location” of full employment is must be “informed by reality and what’s actually happening.” A hot labor market has tremendous benefits for U.S. workers, millions of whom were locked out of jobs during the post-crisis recovery because of age or racial bias, or a lack of skills. Some of these gains are already showing up. Workers are moving off disability rosters, black unemployment fell to 5.9 percent in May, the lowest going to back to 1972, and Hispanic unemployment has matched record lows. Powell said on June 13, and again in Sintra, that there’s “a lot to like” about low unemployment. He even hinted that it could have lasting benefits. Julio Joaquin is the sort of person he might have in mind.
ECB May Have to Tighten Monetary Policy More Quickly
The European Central Bank announced in June that it will soon be bringing its asset purchase program to an end and also hinted that the first rate hike will come after summer 2019. Bloomberg Economics’ estimates of the neutral policy stance suggest the following one shouldn’t be too far behind as monetary policy is looser than called for at this stage of the economic cycle. Given the enormous stock of asset purchases, the refinancing rate might need to be 1.25 percentage points higher to keep the economy on trend. If the stance of policy prompts overheating, the ECB may find it has some catching-up to do, according to BE.
Cut Debt or You’ll Undermine the Euro, ECB Tells Member States
The European Central Bank warned euro-area countries to use the current economic expansion to cut their debt burdens, or else risk undermining the single currency and the political efforts to strengthen the bloc. “Recent financial-market volatility underlines the need to use the current favorable macroeconomic environment more decisively to create fiscal buffers and reduce high debt,” the ECB said in an Economic Bulletin article on European Union budget recommendations. “This is indispensable for trust in the common currency.” While the ECB didn’t take aim at specific countries, the warning is especially relevant as Italy heads for a clash with the EU over bold spending plans by its new populist leaders. Along with the euro-skepticism of several members of the ruling parties, those plans have pushed up yields on Italian 10-year debt by a full percentage point since the election. A bond auction on Thursday was poorly received, widening yield spreads further. The twice-yearly assessment of government spending and debt-reduction plans — known as the European Semester — was introduced to impose fiscal discipline on states in the aftermath of the sovereign-debt crisis. But the ECB has often complained that the process is too watered-down and countries aren’t doing enough to shore up their finances ahead of the next downturn. “This year’s European Semester exercise is important particularly with a view to avoiding any repetition of mistakes made prior to the financial crisis when sufficient fiscal buffers were not built up in economic good times,” according to the ECB. “The ensuing recession was aggravated by the sudden necessity of pro-cyclical fiscal tightening.” A failure to enforce the rules consistently could also weaken the effort, spearheaded by France and Germany, to strengthen the integration of the currency bloc by adding a limited fiscal capacity and identifying a backstop for its bank-resolution fund. That plan is intended to be discussed at an EU summit that starts in Brussels on Thursday.
China Considers Banning Short-Term Dollar Bond Sales
China is slowing approvals for offshore bonds and considering whether to ban short-dated issuance in dollars, according to people familiar with the matter, moves that would reduce financing options for the debt-laden developers that sit at the center of the nation’s economy. The National Development & Reform Commission is weighing a ban on the sale of dollar bonds with tenors of less than one year, said the people, who asked not to be named because they’re not authorized to speak publicly. The regulator is already restricting offshore issuance quotas for Chinese companies, people said. The new measures threaten to further constrain cash-strapped property developers even as concerns about China’s financial risks ripple across markets. And it’s not just funding problems that are plaguing the industry: this week, the housing ministry escalated a crackdown on property speculation, while the nation’s policy banks tightened approvals on new lending for shanty-town redevelopment projects. Selling bonds that mature in 364 days had become a popular financing tactic because it didn’t require pre-approval from the NDRC. The regulator has publicly signaled that it’s wary of the offshore issuance boom, saying in a Wednesday statement that developers are only allowed to use proceeds to refinance existing debt, that some companies are borrowing amounts that are out of proportion with their profits, and that many don’t have foreign-currency revenues to protect themselves against the yuan’s slide. “I find this an understandable move, however issuers will unlikely be happy,” said Scott Bennett, Hong Kong-based executive director of fixed income at Oppenheimer Investment Asia Ltd. “It could be negative in the short-term for weaker Chinese property developers as this removes one source of refinancing and may potentially lead to defaults.” The NDRC, which regulates foreign debt sales by companies, didn’t immediately respond to a faxed message seeking comment. Calls went unanswered. In the regulator’s Wednesday statement, it said that the use of proceeds from builders’ overseas bond sales must be limited to just refinancing, instead of investing in domestic property projects and replenishing working capital.