AuthorTopic: Da Fed: Central Banking According to RE  (Read 31710 times)

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Opinion: Stock market’s eerie parallels to September 2007 should raise recession fears

Published: Sept 18, 2019 2:45

Fed watchers may have just witnessed Powell’s ‘Bernanke moment’
AFP/Getty Images
Federal Reserve Chairman Jerome Powell


Read this paragraph carefully in light of the Fed’s latest rate cut:

Since last year real GDP growth in the U.S. has been slowing. The chair of the Federal Reserve has been signaling that while growth is slowing, there is no recession risk and the Fed is forecasting continued positive growth. Warning signs in the economy, including an inverted yield curve, have been ignored and stock markets continued to make new highs in July. In August a correction took a place and subsequently a rally ensued into early September. On September 18 the Fed cut rates.

Sound familiar? It fairly describes market and economic conditions in the U.S. over the past couple of months. Except that this paragraph would be as true for the U.S. economy and stock market in September 2007 as it is today. Consider that 12 years ago the yield curve was inverted and U.S. economic growth was markedly slower than it had been in 2006. Yet the Standard & Poor’s 500 SPX, +0.03%   made a new high in July 2007 (same as 2019), there was an August correction (same as 2019), and then the Fed cut rates on September 18 (ditto — same day even).

U.S. stocks proceeded to make another marginal high that October — and that was it. Lights out. We all know what happened next.

It seems we are at a curious moment in time. Parallels to late 2007 are running through the markets now. This doesn’t mean the market’s fate will play out as it did then, but the ingredients are there and all that’s needed is a trigger. Perhaps the trigger was the attack on Saudi oil installations last weekend. It’s too early to tell, but clearly this is something to keep in mind.

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Markets topped in October 2007 following the Fed’s September rate cut. That November, Ben Bernanke, then Fed chair, said there wouldn’t be a recession. According to a November 2007 Reuters report, Bernanke told a congressional committee: “Our assessment is for slower growth, but positive growth, going into next year.” The U.S. economy entered recession in December 2007.

Does this not sound eerily similar to what Fed Chairman Jay Powell has been saying? Here’s Powell on September 6: “We’re not forecasting or expecting a recession,” he said. “The most likely outlook is still moderate growth, a strong labor market and inflation continuing to move back up. Our main expectation is not at all that there will be a recession.”

Sure, there are differences between now and 2007, and of course no two time periods are alike, but the confluence of circumstances is impressive. Markets now are behaving in highly correlated ways with 2007, and the Federal Reserve seems to be behaving similarly as well.

Read: The S&P 500 should be 13% lower because a recession is coming

What does all of this suggest?

For starters, the Fed will not tell you when a recession starts. They can and will be in total denial until after the fact. The 2007 recession began one month after Bernanke stated in front of Congress that there wouldn’t be a recession. So when Powell makes the same declaration as the Fed cuts rates again, know that such a statement has absolutely no meaning. “Not forecasting or expecting a recession” he stated on September 6. Is this Powell’s Bernanke moment?

To avoid the same fate, markets now need to make sustained new highs or risk seeing similar circumstances to 2007 play out in similar ways.

Sven Henrich is founder and the lead market strategist of He’s known for technical, directional, and macro analysis of global equity markets. Follow him on Twitter at @NorthmanTrader.
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🏦 Powell to Trump: Now it's your turn
« Reply #256 on: September 19, 2019, 09:58:10 AM »

Powell to Trump: Now it's your turn

,Reuters•September 18, 2019

By Howard Schneider

WASHINGTON (Reuters) - Tucked into Fed Chair Jerome Powell's news conference on Wednesday was a not-so-subtle message for President Donald Trump: the economy is holding up because the U.S. central bank has acted to support it through a volatile patch, and whether that continues is now in the president's lap.

In a buck-stops-over-there-now performance, Powell indicated that the Fed's two rate cuts this year are likely adequate as insurance against the rising global risks posed by Trump's whipsaw trade negotiations with China, and that going forward the Fed sees little need to move unless those risks materialize in the form of weaker U.S. economic data.

"Trade developments have been up and down and then up, I guess, back up perhaps over the course of this interview," Powell said in a reference to Trump's sometimes unpredictable trade war with China and, on occasion, other countries.

"I do believe our shifting to a more accommodative stance over the course of the year has been one of the reasons why the outlook has remained favourable," Powell said, citing reasonably strong U.S. data. Going forward "we are going to be highly data-dependent" in deciding on further rate moves.

The Fed cut its benchmark overnight lending rate by a quarter of a percentage point on Wednesday, the second such move this year, but new policymaker projections showed no further cuts were anticipated in 2019.

The comments continue a subtle push back by Powell against a chief executive who has used personal insults and a steady stream of Twitter invective to demand the Fed slash rates to recession levels and take other out-of-the-norm steps to boost the economy.

At a keynote speech at a central bankers conference in Jackson Hole, Wyoming, last month, Powell said the U.S. central bank had "no recent precedents" to set monetary policy when the rules of global trade had become so unpredictable and begun to sap business confidence and depress global growth.

The United States, the world's largest importer, has been locked in often contentious negotiations with its top trading partners since the Trump administration imposed tariffs on steel and aluminium imports in March, 2018. The escalating U.S. tariff war with China has shut down Chinese imports of petroleum and many agricultural products, and uncertainty about when trade talks could be resolved is dampening capital expenditure.

The International Monetary Fund said in July that global trade slowed in the first quarter of 2019 to the lowest level since 2012. Tariffs applied in the U.S.-China trade war could shave 0.5% off global economic growth in 2020, the IMF said.

Whether that starts to effect a still-relatively optimistic Fed outlook will depend mightily on whether Trump's trade talks with China end on a note that restores what the Fed said is "weakened" business investment, or leave the world stalled and guessing.

"It is an unusual situation," Powell said. "The U.S. economy in itself is strong. ... The difference here is we have significant risks" that elected officials will have to manage.
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🏦 Fed Injects Cash for Fourth Day as Funding Markets Stabilize
« Reply #257 on: September 21, 2019, 12:41:52 PM »
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Fed Injects Cash for Fourth Day as Funding Markets Stabilize
By Alex Harris
and Liz McCormick
September 20, 2019, 4:33 AM AKDT Updated on September 20, 2019, 6:58 AM AKDT

    Friday’s $75 billion dose matched Wednesday, Thursday amounts
    Next week may bring more funding pressures in repo: Crandall

Kroszner: Markets Have Fragilities That Nobody Expected

The Federal Reserve added liquidity for a fourth straight day to a vital corner of the funding markets, helping further stabilize rates as investors remain concerned that fresh bouts of stress may be felt in the weeks ahead.

The New York Fed injected another $75 billion Friday through an overnight repo operation. That followed operations of the same size on Wednesday and Thursday, and $53.2 billion on Tuesday, with each of these prior agreements rolling off the morning after they’re completed.

The actions, commonplace in pre-financial crisis times, temporarily add cash, with the Fed taking government securities as collateral. Wall Street bond dealers submitted about $75.6 billion of securities for Friday’s Fed action, lower than the previous two days’ levels. Many analysts are already predicting the Fed will do a similar operation on Monday.

“Given it was slightly oversubscribed and the rate was at 1.8%, its shows the Fed is playing an important role in calming the market and needs to keep doing these operations,” said Priya Misra, head of global rates strategy at TD Securities in New York. “But overall, these operations are only a temporary fix, it’s a band aid. The big fear is that around quarter-end, when dealer balance sheets are more constrained that these Fed operations won’t work as well any more.”

The latest addition of liquidity -- with the Fed making clear it’s ready to do more as needed -- follows the Federal Open Market Committee’s move Wednesday to reduce the interest rate on excess reserves, or IOER, by more than their main interest rate -- all attempts to quell money-market stresses.

The operations have calmed the funding market, with repo rates declining to more normal levels after soaring to 10% Tuesday, four times last week’s levels. Overnight general collateral repurchase agreement rates remained steady Friday, trading around 1.9%, according to ICAP.

Fed Vice Chairman Richard Clarida said on Friday the repo market strain isn’t a concern for the economy and that the central bank acted decisively to address the issue. Chairman Jerome Powell said on Wednesday that he was confident the New York Fed’s actions would contain funding problems. Former New York Fed President William Dudley echoed that view in an editorial published Friday.

Click here to read Dudley’s editorial

The Fed effective on Thursday was 1.9% -- within the central bank’s target rate range of 1.75% to 2%. That compares to 2.25% on Wednesday, and 2.3% Tuesday -- when it busted above the top of the Fed’s previous target band, before policy makers lowered borrowing costs on Wednesday.

However, there are signs of investor apprehension about future funding levels, which is manifesting in different ways.

Treasury bill sales on Thursday were met with a poor reception, as investors demanded to be compensated via higher yields for locking up cash. And the rate on two-week repo, which would fund investors through the end of the quarter, is around 2.58%, ICAP data show.

The Fed may conduct term repurchase agreements, with such transactions extending beyond one day, to contain the risk of outsized repo rate movements over the final days of the quarter, said Scott Skyrm, executive vice president at Curvature Securities, a New Jersey-based broker-dealer that focuses on the repo market.

“It’s the right time for the Fed to come in and do a term operation into October, which would pre-fund some cash into the market for quarter-end and take care of some of those liquidity concerns now,” Skyrm said.

Meanwhile, in cross-currency basis -- which shows floating-rate payments in different currencies -- the premium for the Australian dollar over its U.S. counterpart collapsed by the most in eight years during Asian trading hours.

Lou Crandall of Wrightson ICAP said in a note this morning that next week may bring more funding pressures in repo.

“Bill settlements as well as the early liquidity-chilling effects of the approaching quarter-end statement date could start to move repo rates higher,” Crandall wrote.
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