Tag: central banks

Bond prices mean revert after all

Mary Pat Campbell

Link: https://allisonschrager.substack.com/p/bond-prices-mean-revert-after-all?utm_campaign=post&utm_medium=web

Excerpt:

On day one of Fixed Income School, you learn that bond prices mean-revert. While a stock or a house’s price can continue to increase as the company or land becomes more valuable, yields can only go so low. Nobody will pay to lend someone else money, or at least, they won’t pay much to do that. Bond prices can only climb so high before they fall. While some evidence shows that yields trended downward slightly as the world became less risky, they still tended to revert to a mean greater than zero.

It’s easy to blame Silicon Valley Bank for being blissfully ignorant of such details. They purchased long-term bonds and mortgage-backed securities when the Fed was doing QE on steroids! Did they expect that to last forever? Well, maybe that was a reasonable assumption, based on the last 15 years, but I digress.

Many of these smaller banks, particularly Silicon Valley, are in trouble because they were particularly exposed to rate risk since their depositors’ profit model relied on low rates. So, when rates increased, they needed their money—precisely when their asset values would also plummet. It’s terrible risk management. But, to be fair, even the Fed (the FED!) did not anticipate a significant rate rise. Stress tests didn’t even consider such a scenario, even as rates were already climbing. Why would we expect bankers in California to be smarter than all-knowing bank regulators?

According to the New York Times, Central Bankers still expect rates to fall back to 2.5%. Why? Because of inequality and an aging population. But how does that work, and what’s the mechanism behind it? No good answer, or not one that squares with data before 1985, but we can hope. Sometimes we just want something to be true and for it to be true for politically convenient reasons.

Author(s): Allison Schrager

Publication Date: 20 Mar 2023

Publication Site: Known Unknowns at Substack

Panel on “Central Bank Independence and the Mandate—Evolving Views”

Mary Pat Campbell

Link: https://www.federalreserve.gov/newsevents/speech/powell20230110a.htm

Excerpt:

It is essential that we stick to our statutory goals and authorities, and that we resist the temptation to broaden our scope to address other important social issues of the day.4 Taking on new goals, however worthy, without a clear statutory mandate would undermine the case for our independence.

In the area of bank regulation, too, the Fed has a degree of independence, as do the other federal bank regulators. Independence in this area helps ensure that the public can be confident that our supervisory decisions are not influenced by political considerations.5 Today, some analysts ask whether incorporating into bank supervision the perceived risks associated with climate change is appropriate, wise, and consistent with our existing mandates.

Addressing climate change seems likely to require policies that would have significant distributional and other effects on companies, industries, regions, and nations. Decisions about policies to directly address climate change should be made by the elected branches of government and thus reflect the public’s will as expressed through elections.

At the same time, in my view, the Fed does have narrow, but important, responsibilities regarding climate-related financial risks. These responsibilities are tightly linked to our responsibilities for bank supervision.6 The public reasonably expects supervisors to require that banks understand, and appropriately manage, their material risks, including the financial risks of climate change.

Author(s): Jerome Powell

Publication Date: 10 Jan 2023

Publication Site: Federal Reserve

Fed Chair Warns President Biden “We will not be a climate policymaker”

Mary Pat Campbell

Link: https://mishtalk.com/economics/fed-chair-warns-president-biden-we-will-not-be-a-climate-policymaker

Excerpt:

  • Central Bank Independence: “Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time. But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy. The absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors.”
  • New Goals: “Taking on new goals, however worthy, without a clear statutory mandate would undermine the case for our independence.”
  • Stick to Mandates: “It is essential that we stick to our statutory goals and authorities, and that we resist the temptation to broaden our scope to address other important social issues of the day.”
  • Climate Change: “Without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals. We are not, and will not be, a ‘climate policymaker.‘” 

Author(s): Mike Shedlock

Publication Date: 10 Jan 2023

Publication Site: Mish Talk

Interest Rate Hikes vs. Inflation Rate, by Country

Mary Pat Campbell

Link: https://www.visualcapitalist.com/interest-rate-hikes-vs-inflation-rate-by-country/

Graphic:

Excerpt:

To understand how interest rates influence inflation, we need to understand how inflation works. Inflation is the result of too much money chasing too few goods. Over the last several months, this has occurred amid a surge in demand and supply chain disruptions worsened by Russia’s invasion of Ukraine.

In an effort to combat inflation, central banks will raise their policy rate. This is the rate they charge commercial banks for loans or pay commercial banks for deposits. Commercial banks pass on a portion of these higher rates to their customers, which reduces the purchasing power of businesses and consumers. For example, it becomes more expensive to borrow money for a house or car.

Ultimately, interest rate hikes act to slow spending and encourage saving. This motivates companies to increase prices at a slower rate, or lower prices, to stimulate demand.

Author(s): Jenna Ross, Nick Routley

Publication Date: 24 June 2022

Publication Site: Visual Capitalist

Diversity At the Fed and ECB? There is None, It’s a Big Self-Serving Lie

Mary Pat Campbell

Link: https://mishtalk.com/economics/diversity-at-the-fed-and-ecb-there-is-none-its-a-big-self-serving-lie

Graphic:

Tweet link:

Excerpt:

At the ECB, you better be gung-ho pro-EU. You better believe negative interest rates are a good idea. And you must back the idea that targeting 2% inflation makes sense.

Finally, if somehow you find yourself at the ECB disagreeing with any of those things, you are expected to shut your mouth so the consensus view never shows any dissent.

….

At FRBNY, I recall the people who ran Treasury markets, money markets, etc. literally had no relevant experience or expertise. The job of staff was to make them appear competent, but it didn’t really matter what they did because Fed can’t fail and they can’t get fired.  

This creates a culture where anyone with talent or ambition GTFO ASAP. There are exceptions, but those who rise tend to be those who have no where else go. It’s a weird structure where the higher you go, the more incompetent you are.

So it’s no surprise Fed is failing

Author(s): Mike Shedlock

Publication Date: 13 May 2022

Publication Site: Mish Talk

Omicron Is an Economic Threat, but Inflation Is Worse, Central Bankers Say

Mary Pat Campbell

Link:https://www.nytimes.com/2021/12/16/business/economy/omicron-inflation.html

Excerpt:

Facing surging inflation, three of the world’s most influential central banks — the Federal Reserve, Bank of England and European Central Bank — took decisive steps within 24 hours of each other to look past Omicron’s economic uncertainty.

On Thursday, Britain’s central bank unexpectedly raised interest rates for the first time in more than three years as a way to curb inflation that has reached a 10-year high. The eurozone’s central bank confirmed it would stop purchases under a bond-buying program in March. The day before, the Fed projected three interest rate increases next year and said it would accelerate the wind down of its own bond-buying program.

….

Aside from Omicron, the central banks were running out of reasons to continue emergency levels of monetary stimulus designed to keep money flowing through financial markets and to keep lending to businesses and households robust throughout the pandemic. The drastic measures of the past two years had done the job — and then some: Inflation is at a nearly 40-year high in the United States; in the eurozone it is the highest since records began in 1997; and price rises in Britain have consistently exceeded expectations.

….

The Federal Reserve and Bank of England are worried about the persistence of high inflation. For the European Central Bank, inflation in the medium term is too low, not too high. It is still forecasting inflation to be below its 2 percent target in 2023 and 2024. To help reach that target in coming years, the central bank will increase the size of an older bond-buying program beginning in April, after purchases end in the larger, pandemic-era program. This is to avoid “a brutal transition,” Ms. Lagarde said.

Author(s): Eshe Nelson

Publication Date: 16 Dec 2021

Publication Site: New York Times

Huge Credit Stress Starting in China May Easily Rock the Whole World

Mary Pat Campbell

Link: https://mishtalk.com/economics/huge-credit-stress-starting-in-china-may-easily-rock-the-whole-world

Graphic:

Excerpt:

“If funding stress signs don’t emerge, don’t conclude that there is no contagion. Contagion is playing out already if you know where to look.”

The mess in China does not stop with Evergrande. 

…..

Everglade shows the theft of wealth and money in a giant Ponzi scheme, not to be confused with real savings (i.e. net tangible assets at true market value)!

There is no savings glut. 

The alleged savings glut is nothing but a fiat Ponzi scheme where central banks have to keep money supply soaring to keep asset prices (based on debt) from imploding!

How much longer this setup can continue before it blows up in a currency crisis, war with China, or some other major economic disruption remains a key mystery.

Author(s): Mike Shedlock

Publication Date: 20 Sept 2021

Publication Site: MishTalk