Grand Central: U.S. Growth Revisions Pose Challenge for the Fed – Real Time Economics

The Wall Street Journal’s Daily Report on Global Central Banks for Thursday, March 26, 2015:

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HILSENRATH’S TAKE: U.S. GROWTH REVISIONS POSE CHALLENGE FOR THE FED

Bloomberg News

The U.S. central bank is getting whipsawed this week by conflicting signals on the U.S. economic outlook.

On Tuesday the Labor Department reported the U.S. consumer price index firmed in February, rising 0.2% in February after three straight monthly declines. That, and an increase in the index excluding food and energy, were a sign slack in the economy is diminishing, as Fed officials project.

On Wednesday, a grim economic report led a wave of Wall Street firms to downgrade their estimates of first quarter economic growth, a sign slack in the economy actually might be building again. Bank of American reduced its estimate of growth for the quarter to near zero, while Morgan Stanley, Barclays, J.P. Morgan and Macroeconomic Advisers also cut their projections. The precipitating event was a Commerce Department report that orders by U.S. firms for durable goods declined in February. My colleague Kate Davidson covered both developments.

Bad winter weather might be a transitory factor holding the economy back. If that’s the case, there’s no reason to worry. Output contracted in the first quarter of 2014 and then bounced back in the second. The worry is that other strains, including the fallout on energy sector investment from tumbling oil prices, might be having deeper and longer-lasting effects on output growth than Fed officials anticipated.

It’s a good thing they have until June to make sense of the cross-currents. That’s when they have said they’ll consider whether interest rate increases from near-zero are warranted.

-By Jon Hilsenrath

MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD

Major Central Banks Agree on Guidelines for Forex Market. The world’s major central banks have agreed to a new set of guidelines for the foreign-exchange market, creating a road map for how individual countries’ regulators should protect client information. The document, which is expected to be made public this week, is a response to revelations last year that traders at large banks were sharing information about their clients’ positions. Representatives from the foreign-exchange committees of the Federal Reserve Bank of New York, the Bank of Japan and the Bank of England among others have signed off on an eight-page document that explicitly bans traders from sharing client identities and information and disclosing data that could allow someone to deduce that information.

Reuters

Fed’s Bullard: Risks of Keeping U.S. Policy Rates at Zero Too Long ‘May be Substantial.’  Current low levels of U.S. inflation are likely temporary and the risks of keeping U.S. policy rates at zero for too long “may be substantial,” Federal Reserve Bank of St. Louis President, James Bullard, said Thursday, signaling that the U.S. central bank should get on with raising rates soon.

Fed’s Lockhart: Rate Increase “Quite Likely” by September—NYT. Atlanta Fed President Dennis Lockhart, in an interview with the New York Times, also talked about his optimism that the economy was gaining strength despite signs of a slow start to 2015, and he dismissed a proposal by Richard Fisher, the recently retired Dallas Fed president, to reduce the role of the New York Fed in making monetary policy.

Sen. Shelby Seeks Democrats’ Buy-In on Dodd-Frank Changes. It’s no secret that Sen. Richard Shelby (R., Ala.) would like changes to the 2010 Dodd-Frank financial overhaul law, which he and almost all Republicans opposed when Congress passed it nearly five years ago. On Wednesday, Mr. Shelby – who gained the gavel on the Senate Banking Committee after Republicans took control of the Senate this year – gave a status report on those efforts. The short answer: He’s still trying to figure out where he can find agreement with Democrats on the panel.

European Rate Cuts Prove No Match for Mighty ECB. Some European countries outside the euro area are cutting interest rates, but that’s not weakening their currencies as it usually does. Wednesday, it was the turn of Hungary, whose currency, the forint, hit a 14-month high against the euro despite a cut to record-low rates on the previous day. Earlier this month, Poland’s zloty also rallied against the euro after interest rates dropped by half a percentage point. Nordic countries have also been chopping interest rates with limited success in cooling their overly-strong currencies.

ECB’s Praet: Eurozone Experiencing Cyclical Recovery But Reform Needed. The eurozone economy is experiencing a recovery but governments in the currency union need to push ahead with reforming their economies, the European Central Bank’s chief economist said Wednesday. Peter Praet told an audience in London that forging a durable recovery requires a “comprehensive policy response,” and not just central-bank stimulus.

Reuters

ECB’s Weidmann Flags Risks of Interest-Rate Policy. Germany’s central bank president Jens Weidmann warned Wednesday that pockets of the country’s property market in urban centers may be overvalued by up to 20%, an indication that the European Central Bank’s ultra-loose monetary policies may be fueling a housing bubble in parts of its largest member country.

ECB Lifts Ceiling on Greek Emergency Loans. The ECB on Wednesday increased the amount of money Greek banks can borrow under an emergency lending program, extending a lifeline for the banks as the government continues tense negotiations with its creditors over its bailout program. Under the emergency-liquidity assistance program, or ELA, the Greek central bank lends money to its country’s financial institutions. The loans carry a higher interest rate than standard ECB loans, and the credit risk stays with Greece.

Greek Central Bank Governor Says Grexit Isn’t An Option. Bank of Greece Gov. Yannis Stournaras said Wednesday that exiting the single currency union is “not an option” for Greece. Mr. Stournaras told an audience at the London School of Economics that a Greek exit–dubbed “Grexit” in financial markets–risks triggering another severe downturn in the stricken Mediterranean economy. Greece has already improved its global competitiveness by driving down wages and prices, he said, and growth is returning.

BOE Warns of Elevated Risks to Financial Stability. The Bank of England said Thursday that risks to the stability of the U.K. financial system remain elevated, citing threats ranging from Greece’s debt troubles to diverging central-bank policies. The BOE’s Financial Policy Committee, which safeguards the stability of the financial system, made no new policy recommendations at its quarterly meeting that ended March 24, the BOE said Thursday. But the panel highlighted a slate of issues in the world economy and global financial system that it is monitoring closely.

Reuters

SNB Says Franc Cap Stopped Being Beneficial. Switzerland’s central bank was forced to scrap its cap on the value of the Swiss franc because mounting costs would have been “out of all proportion” to potential benefits of maintaining the policy, the bank said in its annual report published Thursday.

BOC Policymaker Says Growth to Slow. Bank of Canada Deputy Governor Timothy Lane said the global economy has disappointed but is slowly gaining momentum, as Canada deals with the fallout from the swift drop in the price of oil, Canada’s top export. Mr. Lane, in a presentation Wednesday to the local chamber of commerce in Kelowna, British Columbia, said Canadian economic expansion would slow this year before returning to full potential, adding an improving U.S. economy is helping to offset the drop in crude.

Philippines Central Bank Keeps Overnight Rates Unchanged. The Philippine central bank on Thursday left overnight rates unchanged, noting that inflation continues to move at the lower end of its target for the year. The Bangko Sentral ng Pilipinas kept overnight rates at 4.0% for borrowing and 6.0% for lending. The central bank last raised rates by a quarter percentage point in October. Economists polled by the Wall Street Journal were unanimous in predicting that the BSP wouldn’t touch policy rates this month — Dow Jones Newswires.

Taiwan Central Bank Leaves Key Interest Rates Unchanged. Taiwan’s central bank on Thursday left its benchmark interest rates unchanged as expected, citing muted inflation and moderate economic growth. While other Asian exporters such as China and South Korea recently cut their interest rates to spur growth, Taiwan has decided it can afford to keep rates steady. Economists say the island could even lift rates if the U.S. Federal Reserve increases rates later this year as widely expected – Dow Jones Newswires.

Weaker Euro To Boost Hungary 2015 GDP Growth–Central Bank. The weakening of the euro could significantly increase Hungary’s exports and bolster its economic growth, the country’s central bank said on Thursday. Hungary’s biggest export market is the eurozone and Germany in particular, and has a strong presence in the motor industry. German car manufacturers export some 50% to 60% of their output outside of Western Europe, so the euro’s devaluation can improve their sales and productivity significantly as well as those of their suppliers, the National Bank of Hungary said in its quarterly Inflation Report – Dow Jones Newswires.

GRAPHIC CONTENT

Weak Demand? Strong Dollar? U.S. Businesses Aren’t Investing Much. It’s increasingly looking like another ugly winter for the U.S. economy. Whether the main culprit is nasty weather, a limping global economy or woes in the U.S. energy sector, this much is clear: Companies aren’t doing much investing. Wednesday’s Commerce Department report on durable goods showed a 1.4% decline in orders for big-ticket items—refrigerators, cars, bulldozers–in February from January. The overall figure includes products like airplanes that don’t say much about underlying demand in the economy.

FORWARD GUIDANCE

– Atlanta Fed’s Lockhart speaks on monetary policy and the economic outlook in Detroit at 9 a.m. EDT

– Czech National Bank releases a policy statement

– South African Reserve Bank releases a policy statement

– Bank of Mexico releases a policy statement

RESEARCH                                                                                                                     

Bad Weather Doesn’t Fully Explain Early 2014 Economic Weakness. A new paper from the Chicago Fed, timely given the bad weather’s repeat performance this year, looks back 2014’s icy winter to try to determine how much of the economic weakness seen early that year was due to weather. Their findings –not entirely. “Our results overall support the view that weather has a significant, but short-lived, effect on economic activity,” the authors write. However, they add that “except for a few industries, which are affected importantly (such as utilities, construction, hospitality, and, to a lesser extent, retail), the effect is not very large, so that even the fairly bad weather during the 2013–14 winter cannot account entirely for the weak economy during that period. Other factors must have been at play.”—Dow Jones Newswires

New U.S. Bank Formation Weakest in 50 Years. New U.S. banks are being created at the slowest pace in half a century, according to researchers at the Federal Reserve Bank of Richmond who say this could reduce the availability of credit to small businesses. The rate of new-bank formation has slipped from an average of around 100 per year since 1990 to an average of only about three per year since 2010, write Roisin McCord, Edward Simpson Prescott and Tim Sablik.

Fed Not Behind GSE Holders Getting Dividends. The Fed has thrown cold water on investor hopes that Fannie  Mae or Freddie  Mac might start paying dividends to holders of their junior preferred or common shares. The mortgage-finance giants were rescued from collapse by the infusion of taxpayer funds and put into conservatorship in 2008. Since then, they have made payments to the government that exceed the rescue funds they received. “Should these figures be interpreted to mean that the Treasury, and therefore taxpayers, have been ‘repaid’ by Fannie Mae and Freddie Mac and that the two firms should now pay dividends to their regular shareholders again? The answer is no,” say New York Fed researchers in a staff report released Tuesday.

COMMENTARY

Fed Should Push Unemployment Well Below 5%, Paper Says. The Fed should hold short-term interest rates near zero long enough to drive unemployment well below 5%, even if it means letting inflation exceed the central bank’s 2% target. That’s according to Laurence Ball, economics professor at Johns Hopkins University, in a paper to be published next week by the Center for Budget and Policy Priorities and made available to The Wall Street Journal.

How did the ECB Save the Eurozone Without Spending a Single Euro? ask Ana-Maria Fuertes, Elena Kalotychou, and Orkun Saka in a column for VoxEU. They find that the eurozone is a “fragile region” in which risk spreads on government debts were out of line with economic fundamentals at the height of the bond markets crisis in mid-2012, and that the announcement of the ECB’s Outright Money Transaction program helped restore the link between borrowing costs and economic conditions. “It is now clear that the OMT has been one of the most effective programmes in the recent history of central banking, bringing down the credit spreads across the Eurozone without spending a single euro under its name,” they write.

BASIS POINTS

-GDP Growth Estimates Tumble, Again. Several economists on Wednesday lowered their estimates for first-quarter growth in gross domestic product following a disappointing report on business spending and investment.

Chile Central Bank Survey Sees No Rate Change. A central-bank survey of financial-sector traders found expectations of no change in Chile policy rates at next month’s meeting. One year out, they see it being 3.13%; it’s currently at 3%. The traders also predict March inflation of 0.8%. –Dow Jones Newswires.

-German consumer confidence is set to improve further in April, buoyed by a weak euro and low energy costs, interpreted as supportive factors for the economy and for individuals’ own circumstances, according to a monthly sentiment survey.

Spain’s economy is likely to grow 2.8% this year, the country’s central bank said Thursday. The Bank of Spain had said in December that it expected the economy to grow by 2%. The upward revision comes amid a decline in the price of oil and easy-money policies put in place by the European Central Bank, the Bank of Spain said — Dow Jones Newswires.

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26 March 2015 | 11:09 am – Source: blogs.wsj.com

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