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Fed loses control of its own interest rate on day of big decision — ‘This just doesn’t look good’
Published an hour ago  Updated 19 min ago
Patti Domm  @pattidomm
Key Points

    It’s been a turbulent week in the overnight funding markets, where short-term rates spiked to levels as high as 10% Monday and Tuesday before the Fed calmed it down.
    The Fed was forced to do two open market operations to tame the rate move, but its own fed funds target rate, in an unusual move, rose to 2.3% — above the fed funds target rate range it set on July 31.
    Market pros said the problem came from a cash crunch, not a credit crisis, but the Fed will have to find a permanent fix for it before it impacts the financial system.
    Fed Chairman Jerome Powell will have to speak on it later Wednesday, when he briefs the press after the Fed’s meeting.

Jerome Powell, chairman of the U.S. Federal Reserve, waits for the start of a House Financial Services Committee hearing in Washington, D.C., on Wednesday, July 10, 2019.
Andrew Harrer | Bloomberg | Getty Images

As the Fed was meeting to consider cutting interest rates, it lost control of the very benchmark rate that it manages.

It’s been a rough week in the overnight funding market, where interest rates temporarily spiked to as high as 10% for some transactions Monday and Tuesday. The market is considered the basic plumbing for financial markets, where banks who have a short-term need for cash come to fund themselves.

The odd spike in rates forced the Fed to jump in with money market operations aimed at reining them in, and after the second operation Wednesday morning, it seemed to have calmed the market.

In a rare move, the Fed’s own benchmark fed funds target rate rose to 2.3% on Tuesday, above the target range set when it cut rates at its last meeting in July. The target range is 2% to 2.25%, and the funds rate was at 2.25% on Monday.

A second rate the Fed watches, the secured overnight financing rate, or SOFR, shot up to 5.25% on Tuesday from 2.43%. That is the median rate for $1.2 trillion in short-term funding transactions that occurred Tuesday. SOFR affects floating rates on about $285 billion outstanding in corporate and other loans.

Fed Chairman Jerome Powell is expected to face questions on the issue when he briefs the press, after the central bank’s 2 p.m. rate decision Wednesday afternoon. The Fed is expected to cut the fed funds target rate by a quarter point to 1.75% to 2%.

“This just doesn’t look good. You set your target. You’re the all-powerful Fed. You’re supposed to control it and you can’t on Fed day. It looks bad. This has been a tough run for Powell,” said Michael Schumacher, director rates at Wells Fargo.

Schumacher and other strategists said the Fed’s two operations Tuesday and Wednesday seem to have calmed the market for now, but the question is why did the wild swing in rates happen in the first place. Strategists say it seems to be the result of a cash crunch, not for now, the makings of a credit crisis.
What is repo?

But the concern is if it persists, it could give the appearance of an underlying problem in the financial system. Strategists pin the problem on a number of factors, including the Fed’s reduction in its own balance sheet which removed some liquidity from the market, as well as changes in rules after the financial crisis which required banks to hold more capital, reducing their ability to offer repo. Repo is an exchange of collateral, such as Treasury securities, for cash.

On Monday, there seems to have been a perfect storm in the market, causing a cash shortage. Corporations were seeking dollars for quarterly tax payments, and the Treasury had also issued a large amount of bills, which reduces liquidity. There was also speculation that the attack on Saudi Aramco, which took half its production off line, may have spurred demand as oil spiked and investors feared a Middle East conflict.

The Fed Tuesday accepted $75 billion of $80.5 billion in bids submitted in its overnight repo operation, after accepting $53 billion on Monday. The repo rate was quoted at 2.25 to 2.60% after Tuesday’s operation from a range that was up to above it at 3%, just before it. That rate on Tuesday temporarily hit a high of 9%.

“They’re working on this repo problem. It’s a work in progress. They’re doing very well. They pretty much got it under control,” said Ralph Axel, rates strategist at Bank of America Merrill Lynch.

Strategists said the Fed is likely to trim the interest on excess reserves at its meeting Wednesday. That rate is currently at 2.10%, and Schumacher said it could be cut by the Fed to 1.80% when it cuts rates Wednesday.That could help the Fed keep better control of fed funds.

“Generally this whole repo spike is declining too. So you would expect fed funds to probably print a little bit lower tomorrow, but it may not be enough to be within the band,” said Axel.

Drew Matus, chief market strategist at MetLife Investment Management, said Powell’s briefing could be especially difficult.

“He’s going to have to respond to questions coherently, and repo is not the most easy topic for most people to understand, even for the Fed chair. It’s really a specialist area on Wall Street,” Matus said. “He’s going to have to respond in a way that’s reassuring to people. It could be a challenging press conference.”
Fed must address Wednesday

Axel said the market will be looking for answers from the Fed on how it will solve the problem permanently, particularly with the approach of the end of the quarter on Sept. 30, when there is more funding pressure as alternate financing is typically reduced at quarter end and repo is in high demand. There have been other incidents where rates in the repo market shot up including in December when markets were selling off.

“Does the Fed continue to roll over the $75 billion facility for the rest of the month? Or does it shift over to permanent operations?” said Axel. “September 30 is another potential hot spot for funding rates. It’s a big issue to make sure they control rates on September 30 to make sure they stay within their band,”

Axel said he believes the quick crunch came, just as the Treasury Department moved to shore up its own cash reserves, which went from $183 billion a week ago Wednesday to $298 billion on Monday.

“Since the 2011 debt ceiling crisis, Treasury has has decided to maintain a very large cash balance,” said Axel, adding the Treasury previously did not find it necessary. He said Treasury decided that it is in the public interest to have a large cash balance to absorb any problems in the Treasury funding market.

Axel said the funds are drawn from excess reserves which the Fed controls, and that lowers the money supply. “That’s why to offset this, and to solve the problems that were in the financing markets, the Fed added money to the money supply through open market operations which is the traditional role of the New York fed,” he said.
Geopolitics / 💩 Ruling elite in ‘state of panic’ over Brexit
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Economics / 🏦 Central Bankers' Desperate Grab for Power
« Last post by RE on Today at 07:47:59 AM »

Sep 17, 2019
TD originals
Central Bankers' Desperate Grab for Power

Eli Christman / CC BY 2.0

Central bankers are out of ammunition. Mark Carney, the soon-to-be-retiring head of the Bank of England, admitted as much in a speech at the annual meeting of central bankers in Jackson Hole, Wyo., in August. “In the longer-term,” he said, “we need to change the game.” The same point was made by Philipp Hildebrand, former head of the Swiss National Bank, in a recent interview with Bloomberg. “Really, there is little if any ammunition left,” he said. “More of the same in terms of monetary policy is unlikely to be an appropriate response if we get into a recession or sharp downturn.”

“More of the same” means further lowering interest rates, the central bankers’ stock tool for maintaining their targeted inflation rate in a downturn. Bargain-basement interest rates are supposed to stimulate the economy by encouraging borrowers to borrow (since rates are so low) and savers to spend (since they aren’t making any interest on their deposits and may have to pay to store them). At the moment, over $15 trillion in bonds are trading globally at negative interest rates, yet this radical maneuver has not been shown to measurably improve economic performance. In fact, new research shows that negative interest rates from central banks, rather than increasing spending, stopping deflation and stimulating the economy as they were expected to do, may be having the opposite effects. They are being blamed for squeezing banks, punishing savers, keeping dying companies on life support and fueling a potentially unsustainable surge in asset prices.
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So what is a central banker to do? Hildebrand’s proposed solution was presented in a paper he wrote with three of his colleagues at BlackRock, the world’s largest asset manager, where he is now vice chairman. Released in August to coincide with the annual Jackson Hole meeting, the paper was co-authored by Stanley Fischer, former governor of the Bank of Israel and former vice chairman of the U.S. Federal Reserve; Jean Boivin, former deputy governor of the Bank of Canada; and BlackRock economist Elga Bartsch. Their proposal calls for “more explicit coordination between central banks and governments when economies are in a recession so that monetary and fiscal policy can better work in synergy.” The goal, according to Hildebrand, is to go “direct with money to consumers and companies in order to enliven consumption,” putting spending money directly into consumers’ pockets.

It sounds a lot like “helicopter money,” but he was not actually talking about raining money down on the people. The central bank would maintain a “standing emergency fiscal facility” that would be activated when interest rate manipulation was no longer working and deflation had set in. The central bank would determine the size of the facility based on its estimates of what was needed to get the price level back on target. It sounds good until you get to the part about who would disburse the funds: “Independent experts would decide how best to deploy the funds to both maximize impact and meet strategic investment objectives set by the government.”

“Independent experts” is another term for “technocrats”—bureaucrats chosen for their technical skill rather than by popular vote. They might be using sophisticated data, algorithms and economic formulae to determine “how best to deploy the funds,” but the question is, “best for whom?” It was central bank technocrats who plunged the economies of Greece and Italy into austerity after 2011, and unelected technocrats who put Detroit into bankruptcy in 2013.

Hildebrand and his co-authors are not talking about central banks giving up their ivory tower independence to work with legislators in coordinating fiscal and monetary policy. Rather, central bankers would be acquiring even more power, by giving themselves a new pot of free money that they could deploy as they saw fit in the service of “government objectives.”

Carney’s New Game

The tendency to overreach was also evident in Carney’s Jackson Hole speech when he said, “we need to change the game.” The game-changer he proposed was to break the power of the U.S. dollar as global reserve currency. This would be done through the issuance of an international digital currency backed by multiple national currencies, on the model of Facebook’s “Libra.”

Multiple reserve currencies are not a bad idea, but if we’re following the Libra model, we’re talking about a new, single reserve currency that is merely “backed” by a basket of other currencies. The questions then are who would issue this global currency, and who would set the rules for obtaining the reserves.

Carney suggested that the new currency might be “best provided by the public sector, perhaps through a network of central bank digital currencies.” This raises further questions. Are central banks really “public”? And who would be the issuer—the banker-controlled Bank for International Settlements, the bank of central banks in Switzerland? Or perhaps the International Monetary Fund, which Carney happens to be in line to head?

The IMF already issues Special Drawing Rights to supplement global currency reserves, but they are merely “units of account” which must be exchanged for national currencies. Allowing the IMF to issue the global reserve currency outright would give unelected technocrats unprecedented power over nations and their money. The effect would be similar to the surrender by European Union governments of control over their own currencies, making their central banks dependent on the European Central Bank for liquidity, with its disastrous consequences.

Time to End the “Independent” Fed?

A media event that provoked even more outrage against central bankers in August was an op-ed in Bloomberg by William Dudley, former president of the New York Federal Reserve and a former partner at Goldman Sachs. Titled “The Fed Shouldn’t Enable Donald Trump,” it concluded:

    There’s even an argument that the [presidential] election itself falls within the Fed’s purview. After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.

The Fed is so independent that, according to former Fed chair Alan Greenspan, it is answerable to no one. A chief argument for retaining the Fed’s independence is that it needs to remain a neutral arbiter, beyond politics and political influence; and Dudley’s op-ed clearly breached that rule. Critics called it an attempt to overthrow a sitting president, a treasonous would-be coup that justified ending the Fed altogether.

Perhaps, but central banks actually serve some useful functions. Better would be to nationalize the Fed, turning it into a true public utility, mandated to serve the interests of the economy and the voting public. Having the central bank and the federal government work together to coordinate fiscal and monetary policy is actually a good idea, so long as the process is transparent and public representatives have control over where the money is deployed. It’s our money, and we should be able to decide where it goes.

The 'New Agenda' campaign marks the publisher's most significant message messaging since 2008

The FT has established itself as a campaigning voice dedicated to reforming capitalism with the launch of a new brand campaign – and the paper has scrapped its paywall for Thursday (18 September) only to mark the occasion.

The 'New Agenda' campaign marks the publisher's most significant brand message since the advent of the 2008 global financial crisis with the intent of positioning the FT on the frontline of debate on where our established corporate and economic model is headed.

Headlined as 'Capitalism: Time for a Reset' the discussion will centre on the pursuit of profit and how to promote a broader sense of corporate purpose.

Editor Lionel Barber explained: “The liberal capitalist model has delivered peace, prosperity and technological progress for the past 50 years, dramatically reducing poverty and raising living standards throughout the world.”

“But, in the decade since the global financial crisis, the model has come under strain, particularly the focus on maximising profits and shareholder value. These principles of good business are necessary but not sufficient. It’s time for a reset.”

The content-driven campaign was created by the Brooklyn Brothers and seeks to provoke readers with a series of articles delving into the ethics of investing, the downsides of big tech and the future of borderless corporations.

Accompanying this work global brand creative will span out of home, on digital, mobile and display with today’s edition of the FT introducing the message via a distinctive cover wrap.

How long are we going to continue to deny that we are all interconnected?

Since the right of return principle of international law was ratified in 1948, millions of people all over the world have returned to their native lands and countries. And despite the right to re-enter your country of origin or citizenship being enshrined in numerous modern treaties—such as 1948 Universal Declaration of Human Rights, the 1966 International Covenant on Civil and Political Rights, and the 1948 Fourth Geneva Convention—not all natives have been accorded similar dignities.

From Israelis in Palestinian lands to Caucasians displacing native Americans to Argentines whitening policy against black natives, the right to return—and the conflict that follows it—plagues many countries. It’s blatant hypocrisy: Western colonialists are giving themselves a right that they don’t give to the communities they displaced.

What’s happening in Palestine and Israel is of particular concern. Despite small advances, Israel continues to carry with it occupational and imperialistic ambitions that exclude Palestinian people.

The world explicitly gave Israel the right of return under an Israeli law passed in 1950, which gave Jews the right to come and live in Israel and to gain Israeli citizenship. The law was further extended in 1970 to include those with Jewish grandparents. Meanwhile, Palestinians continue to be locked out of their ancestral occupied lands and denied rights and freedoms. This denial has ensured that Palestinian people remain stuck within never-ending dehumanizing conditions, disease outbreaks, food and housing shortages, violence, and social instability.

But what if they applied the same fervor they use to justify their human-rights abuses to other populations?

If Israelis have the right of return, Africans and Native Americans and every other native community should have a right of return to their land. Since transatlantic slavery started in 1619 to when it was abolished in 1807, nearly 12.5 million Africans were shipped to the Americas. Many now feel stuck between an America that doesn’t respect them and an Africa that they’ve never been to.

Unlike the Jews, African Americans do not have the privilege of retuning to Africa. Besides Haiti seeking a position in the African Union and Ghana extending the right of return for African Americans, there isn’t much black descendants are being offered. What if African Americans were given a right to return to their forefathers’ lands?

It unfortunately wouldn’t look the same as it did centuries ago—because the same thing is happening with internally displaced populations inside Africa. The first genocide in Namibia was of the Herero people, who were killed by the Germans. If you go to Namibia today, the descendants of the Herero survivors are landless, and the Germans still occupy their lands. The same problem is encountered in Zimbabwe, where 4,000 Western farmers own a majority of the land, Kenya where roughly 10 families own nearly 2.5 million acres, and South Africa where white farmers own 70% of the land.

But the Germans can still go back to Germany. If you came to South Africa as a Dutch colonialist, you can go back to the Netherlands. If you came to Zimbabwe when Mugabe took the land, the British can go back to Britain. Australians can go back to England and leave the land to the aboriginal people, the French can leave Reunion, and the Portuguese can leave Brazil.

But the problem is that unlike Europeans and Americans who ostensibly have land to go back to, an African has no place to go. Even here in Kenya, there’s little land for me because settler grabbers still occupy lots of the property they took under colonialism.

And it continues. There has been a new land grab in Africa under the guise of foreign investment. Centuries ago white Westerns forcibly took our land from us: Now Chinese and Arab programs are establishing ranches, signing opaque industrials treaties, and creating commercial farming practices that further distance us from our ancestral origins. When will it stop?

If Israelis have a right to return—and so do the Dutch, Germans, French, and Britons—why not Africans? Why isn’t this right extended to Palestinians, Rohingyas in Myanmar, and Roma people in Europe? Why are native American lands desecrated, their tombs unearthed, and their people still forcibly displaced by white companies in the name of profits?

How long are we going to continue to deny that we are all interconnected? Borders and boundaries are collapsing or becoming more fluid. Communities that were separated by slavery, war, and colonialism are reuniting. Lots of people are rediscovering and connecting with their ancestries and communities.

It is time for policy makers, families, legal scholars, governments, and societies to begin reimagining identity and its connection to history and ancestral lands. Nation states are no longer as powerful, and lots of people want to reimagine their nationalities and identities. If we don’t protect their right to do so, we will lose connection to our cultures—as well as our lives.
Energy / Re: Oil Price Crash: Who Cooda Node?
« Last post by BuddyJ on Today at 06:14:49 AM »
Until the current peak demand problem sorts itself out (assuming it does), oil prices have nowhere to go but down until A) enough marginal (mostly US) production comes off line or B) OPEC chooses to cut production more than they already have.

The good news for OPEC being that as US production decreases, OPEC can replace it at a price below that of the US marginal barrel, keeping it off-line. Doesn't cure government take problems in those countries, but at least they can get back in control of price.

Biden leads in new national poll, Warren close behind in second place
By Jonathan Easley - 09/17/19 05:32 PM EDT

Biden leads in new national poll, Warren close behind in second place
© Getty Images

Former Vice President Joe Biden leads the field of Democratic White House hopefuls, but Sen. Elizabeth Warren (D-Mass.) is running a close second, according to the latest national survey from NBC News and The Wall Street Journal.

The survey finds Biden at 31 percent support, followed by Warren at 25 percent. Biden and Warren are the two biggest gainers in the poll, with Biden rising 5 points from the same survey in July and Warren picking up 6 points.

Sen. Bernie Sanders (I-Vt.) is in third place with 14 percent support, a 1-point increase from July.

The survey found that Democratic voters are most excited about the Warren campaign, with 35 percent saying they would enthusiastically cast a ballot for her, compared to 25 percent who said the same of Sanders and 23 percent who said they would be enthusiastic about voting for Biden.

Warren is also the top second choice for voters who supported someone else in the survey, with 21 percent listing her as their backup, followed by Sanders at 16 percent, South Bend, Ind., Mayor Pete Buttigieg at 12 percent and Biden at 11 percent. 

If first choice and second choice preferences are combined, Warren leads with 45 percent, followed by Biden at 41 percent and Sanders at 29 percent.

No other candidate has double-digit support in the poll.

Buttigieg is at 7 percent support, followed by Sen. Kamala Harris (D-Calif) at 5 percent and tech entrepreneur Andrew Yang at 4 percent.

Harris's support has fallen dramatically since July, losing 8 points, the biggest drop of any candidate in the field.

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(D-Minn.) and Cory Booker (D-N.J.) are at 2 percent each, and no other candidate received more than 1 percent support.

The NBC-Wall Street Journal poll is a qualifying survey for the Democratic presidential debates.

Rep. Tulsi Gabbard (D-Hawaii) needs only one additional poll to qualify but did not hit the 2 percent mark here.

The NBC-Wall Street Journal poll of 506 likely Democratic primary voters was conducted between Sept. 13 and Sept. 16 and has a 4.4 percentage point margin of error.
Oil prices dropped sharply Tuesday, following Monday's surge that sent shock waves around the world.
US oil futures settled down 5.7% at $59.24 a barrel. It was the worst one-day drop for US oil since August 1, according to Refinitiv. Oil prices initially fell after Reuters reported Saudi Arabian oil production would return to normal within two to three weeks. Tuesday afternoon, Saudi Energy Minister Abdulaziz bin Salman said the country's oil exports would not fall in September, as the kingdom will rely on reserves to keep exports stable.
Investors took that as a positive sign about the impact of the weekend's attacks on global oil supply.
Brent crude, the international benchmark, settled down 6.5% at $64.55. On Monday, oil prices shot up more than 14%.

US stocks finished slightly higher, eking out gains just before the market closed. The Dow (INDU) finished 0.1% or 32 points higher, while the S&P 500 (SPX) closed up 0.3%. The Nasdaq Composite (COMP) closed up 0.4%.
Elsewhere in the world, stocks closed mostly in the red.
Stock investors' focus is turning from oil to the Federal Reserve, which is beginning a two-day monetary policy meeting that will culminate in its interest rate update on Wednesday.
Expectations for a quarter-percentage-point rate cut have dropped to less than 50%, according to the CME's FedWatch tool. That's down from 92% last week, when the majority still expected rates to be slashed.
A half percentage point cut is no longer priced in at all.
"There have been a variety of explanations for the change in expectations, be it stronger data last week, improved risk appetite, trade war optimism and even higher inflation potential following the oil price spike," said Craig Erlam, senior market analyst at Oanda.
"Whatever the reason, it would be an interesting move from the Fed to hold at the meeting and one that would almost certainly draw the ire of President Trump, although they must be used to that by now," Eriam added.
Investors were also concerned about a sudden spike in the overnight lending rate. The repo rate, which is the borrowing rate banks charge each other for short-term loans, jumped overnight, indicating low market liquidity. The New York Fed injected $53 billion to help matters. The market for US Treasuries is one of the most liquid markets in the world, so the repo rate spike was surprising.

Better-than-expected economic data has added to investors' concerns that the Fed may hold off on cutting rates. Industrial production was stronger than expected in August, even though the US manufacturing sector shrank for the first time in August.
Meanwhile, the National Association of Home Builders housing index for September climbed more than expected. Mortgage rates have been dropping to multi-year lows this summer in the United States, as longer-dated Treasury yields keep falling. This in turn has sparked some life in the housing sector.
Energy / 🛢️ Oil Continues To Plunge On Bearish Crude Inventory Data
« Last post by RE on Today at 06:01:06 AM »

Oil Continues To Plunge On Bearish Crude Inventory Data
By Julianne Geiger - Sep 17, 2019, 3:49 PM CDT

The American Petroleum Institute (API) has estimated a surprise crude oil inventory build of 592,000 barrels for the week ending September 12, compared to analyst expectations of a 2.889-million barrel draw.

Last week saw a large draw in crude oil inventories of 7.227 million barrels, according to API data. The EIA estimated that week that there was a slightly smaller inventory draw instead, of 6.9 million barrels.

After today’s inventory move, the net draw for the year is 25.31 million barrels for the 38-week reporting period so far, using API data.

Oil prices were trading down sharply on Tuesday prior to the data release, after anonymous Reuters sources gave a more optimistic timeline for Saudi Arabia’s oil production to return to normal within weeks, rather than within months. Oil prices had risen by 20% on Monday after oil giant Saudi Aramco suffered widespread oil production outages in the wake of an airstrike that targeted critical oil infrastructure.

At 11:35am EDT, WTI was trading down $3.44 (-5.47%) at $59.46—a $1.50 rise from this time last week. Brent was trading down $3.69 (-5.45%) at $63.99, or a $1.00 per barrel increase over last week’s levels. 

The API this week reported a build of 1.599 million barrels of gasoline for week ending September 12. Analysts predicted a draw in gasoline inventories of 1.033 barrels for the week.

Distillate inventories rose by 1.998 million barrels for the week, while inventories at Cushing fell by 846,000 barrels.

US crude oil production as estimated by the Energy Information Administration showed that production for the week ending September 6 stayed at 12.4 million bpd mark, down just 100,000 bpd from its all-time high.

At 4:42pm EDT, WTI was trading at $59.01, while Brent was trading at $63.21.

By Julianne Geiger for
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