Financial Markets – Fed Leaders Want Powell-Put | new

President Jerome Powell is now under pressure to accept a put that would be tied to the bond market this time around. Some Fed regional bank governors want the central bank to be wary of rate hikes to prevent short-term cash flow returns from going beyond the long term. It can be argued that such monetary policy makers argue that such a reversal of the yield curve has proven to be a reliable omen of past recessions.

Although Powell understands their concerns, he does not seem inclined to adopt the monetary policy idea to avoid tipping over the curve. "He noted their concerns but did not accept them," says Lou Crandall, chief economist at Wrightson ICAP LLC.

Under the expression of Greenspan – whose existence was disputed by the then Fed chief, the Fed cut interest rates when the stock market shows signs d & # 39; collapse. A Powell put would work in the same way on the bond market. If the yield curve turns out to be the opposite, the Fed would be expected to reduce interest rates, pushing bond yields lower in the shorter term and depressing yields [19659002] Powell and his Fed counterparts will meet on July 31 and 1. August. While investors expect the US Federal Reserve to remain unchanged next week, they see a good chance to raise interest rates in the second half of 2018, despite President Trump's attacks.

Higher returns than long-term

Investors being persuaded that the Fed will continue to raise interest rates this year, the yield curve has flattened, yields short-term growth faster than long-term returns. This trend has been interrupted in recent days by the defamation of the Fed by Trump and speculation that the Japanese central bank will reduce its support for Japanese and global bond markets.

The Fed's presidents have been using flattening of the curve this year as the central bank should be cautious in raising rates much further to avoid reversal. The historical evolution is on their side: over the past 50 years, the United States has always entered recession after one or two years of reversal of the curve

"Given the US inflationary expectations, it is unnecessary to normalize the US economy.To push monetary policy until the yield curve turns in reverse, "said St. Louis Fed President James Bullard in Glasgow, Kentucky, July 20th.

Powell tried to focus on the curve last week hijack. He said it was clear why short-term yields had risen: the Fed is raising interest rates. Above all, "what is becoming of long-term interest rates" and what does that say about monetary policy.

What is the neutral rate of federal funds?

By raising the key rate of interest rates to 1, Between 75 and 2% in June, the Fed has described its policy as accommodating and still favorable to the economy.

FOMC members set the federal funds neutral rate – the rate that neither encourages nor hinders growth – to 2.9 percent, according to their median projection, released in June. However, Roberto Perli, a former Fed banker and partner at Cornerstone Macro LLC, said markets seemed to see the neutral rate slightly higher at around 3.25%.

At first glance, this would mean that the Fed raises interest rates and could turn the tide – the 10-year Treasury yield now stands at around 2.94% – without having to go back. Worry about too much restricting the economy.

"A yield curve that is flat or inverse means William England, a professor at Yale University, who resigned as special advisor to the Fed's board last year.

Fed governor Lael Brainard may suggest that an opposite turn might not cause much concern these days, because long-term interest rates are historically "very low" It does not take much to turn the corner

Bond purchases

Mbadive bond purchases by the Fed and other central banks drove long-term returns. some Fed economists, these purchases have had a negative impact on the term premium – the amount of additional compensation required by investors to hold longer-term securities – while a reversal of the yield curve was a reliable precursor to the recession It is very clear why this is the case. Probably the best explanation is that it puts these banks under pressure that lend money at short term interest rates to lend it to the longer term. If short-term interest rates exceed the long-term, this strategy will no longer be profitable and banks will reduce business and household lending.

"There will be a slowdown in credit growth," says Joachim Fels, Global. Pacific Investment Management Co.'s economic advisor "contributes to a slowdown or a recession".

Powell reported to reporters in March that the question of whether an inverse curve would affect the supply of credit to the economy was open. "It's hard to find that in the data," he said.

Today's debate on the importance of the yield curve is reminiscent of a similar discussion before the recent recession: playing the role of Fed chairman in February 2006 one month after its entry according to Ben Bernanke down the meaning of the gap. "I would not interpret the currently flat rate curve as a sign of a major downturn," he said in a New York address. 21 months later, the economy has slid into the worst slowdown since the Great Depression.

(Bloomberg)