November 21, 2019
Fed Fretted About Economic Risk While Shifting From Cuts to Hold
“Federal Reserve officials stressed that risks to the U.S. economy remained elevated as they agreed to put interest rates on hold following their third cut this year. Many participants saw downside risks to the economic outlook as elevated, “further underscoring the case for a rate cut at this meeting,’’ according to minutes of the Oct. 29-30 Federal Open Market Committee session released Wednesday in Washington. “In particular, risks to the outlook associated with global economic growth and international trade were still seen as significant,’’ the minutes said. “The risk that a global growth slowdown would further weigh on the domestic economy remained prominent.” The FOMC lowered rates by a quarter percentage point at its October gathering, the third such move in three months. At his press conference following the announcement, Chairman Jerome Powell said monetary policy was “in a good place,’’ signaling rates would stay on hold until officials saw a “material’’ change in their economic outlook.”
OECD Warns That QE Only Deepens Pain of Negative Interest Rates
“The pain of negative interest rates for banks will only get worse as long as the European Central Bank maintains its asset-purchase program, the Organization of Economic Co-operation and Development warned on Thursday. “In the euro area, banks’ payments on excess reserves will gradually increase over time if net monthly asset purchases by the ECB of 20 billion euros ($22 billion) per month translate proportionally to higher excess reserves,” the OECD said in its economic outlook report published Thursday. Under that scenario, euro-area bank payments could increase by 17% in 2020 compared with a situation where excess reserves are unchanged, the organization calculated. It noted that while central banks can mitigate the impact of negative rates with measures such as exemptions up to a certain level, that dampens the stimulative effect. The OECD also flagged unfavorable effects from sub-zero rates on pension funds and financial institutions offering life insurance policies. “Sustained negative interest rates at longer maturities would likely incentivise insurers and pension funds to rebalance their portfolio from safe assets into risky assets, with ensuing risks for their clients,” it said. “This would increase the chances of incurring financial losses, in particular during a downturn.” The ECB itself pointed to the potential side effects from its loose monetary policy on Wednesday, highlighting how unconventional policy has contributed to an erosion of financial stability.”
China’s Top Negotiator ‘Cautiously Optimistic’ About Reaching Trade Deal
“China’s chief trade negotiator indicated he was “cautiously optimistic” about reaching a phase one deal with the U.S., as two titans of American diplomacy in Asia warned of the dangers of escalating the tariff war. Vice Premier Liu He made the comments in a speech in Beijing on Wednesday ahead of the Bloomberg New Economy Forum, according to people who attended the dinner and asked not to be identified. He has also reportedly asked the top U.S. trade negotiator to travel to China to continue talks this month, an invitation that so far hasn’t been accepted. Speaking at the Forum on Thursday, former U.S. Secretary of State Henry Kissinger said America and China were in the “foothills of a Cold War,” and warned that the conflict could be worse than World War I if left to run unconstrained. Later in the day, former Treasury Secretary Henry Paulson warned of the perils of decoupling the world’s two largest economies. Since President Donald Trump announced the phase one deal a month ago, markets have been whipsawed by comments from both sides, first indicating progress, and then the opposite. The latest potential hurdle came after Liu made his dinner-time comments, when the U.S. House voted 417-1 for legislation supporting Hong Kong protesters that has already been unanimously approved by the Senate. It could go to Trump as soon as Thursday and he plans to sign the bill, a person familiar with the matter said. Asian stocks and American equity futures dropped after the House passed the bill, though moves eased after Bloomberg published news of Liu’s comments. Liu also explained China’s plans for reforming state enterprises, opening up the financial sector, and enforcing intellectual property rights — issues at the core of U.S. demands for change in China’s economic system. Separately from the speech, he told one of the attendees that he was “confused” about the U.S. demands, but was confident the first phase of an agreement could be completed nevertheless. U.S. and Chinese trade negotiators will continue communicating closely and work toward a phase one deal, Ministry of Commerce spokesman Gao Feng said at a briefing in Beijing on Thursday. Responding to questions including whether the two sides agreed on agricultural purchases and tariff removal, as well as a media report on the timetable for a deal, Gao said related rumors were not accurate. It was unclear exactly what he was referring to. If efforts to reach a phase one deal fail before Dec. 15, Trump has threatened to impose 15% tariffs on some $160 billion in imports from China.”
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