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Tag: the federal reserve

  • US Treasury secretary takes aim at Fed’s interest rate control system

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    By Michael S. Derby

    (Reuters) -U.S. Treasury Secretary Scott Bessent said on Tuesday the Federal Reserve’s system of managing interest rates is struggling and needs to be simplified.

    “We’ve gotten to this point where monetary policy has gotten very complicated” and the U.S. central bank should “simplify things,” Bessent said in an ​interview with CNBC.

    “The Fed has taken us into a new regime, and what is called ample-reserves regime. And it looks like that might be fraying a bit here in terms of whether ‌the reserves are actually ample,” Bessent said.

    The Treasury secretary did not say what he meant by fraying.

    The Fed has faced and continues to face challenging money market conditions tied to how it has been managing its $6.56 trillion balance sheet and financial system liquidity levels.

    Officials at ‌the Fed’s last policy meeting announced that they would stop the contraction of the central bank’s overall balance sheet at the start of December. They did so as liquidity in financial markets in the run-up to the late October policy meeting tightened enough to complicate control of the federal funds rate, the Fed’s primary tool to achieve its inflation and employment goals.

    The turbulence was such that it drove eligible financial firms to borrow notable levels of cash from the Fed via its Standing Repo Facility, a tool used to put a ceiling over short-term interest rates. There were also intermittent large inflows of cash into the Fed’s reverse repo tool, which is used to set a floor ⁠underneath money market rates.

    CRITIC OF FED BALANCE SHEET

    Bessent has been a persistent Fed critic ‌who has expressed particular concern about its large balance sheet, which is primarily stocked with trillions in bonds bought in large part to stabilize financial markets and to provide stimulus to the economy.

    The large footprint, at least in dollar terms, is seen by Bessent and others, including some at the Fed, as distorting market pricing levels. ‍There also has been concern about the complex way the Fed manages rates, which relies on liquidity facilities and eschews the highly managed system it used prior to the financial crisis that began nearly 20 years ago.

    “A large balance sheet increases the Fed’s footprint in financial markets, distorts the price of duration and the slope of the yield curve, and potentially blurs the line between monetary and fiscal policy,” Kansas City Fed President Jeffrey Schmid said in a speech on November 14.

    Others have ​lamented that managing liquidity under the current system has led the Fed to pay out substantial sums to financial institutions. That approach turned the Fed from an institution that made substantial profits to one that is currently ‌$240 billion in the red, even as those losses have no impact on its ability to operate.

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  • Judge blocks Trump’s attempt to fire Lisa Cook from Federal Reserve, but Trump can appeal

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    A federal district judge’s ruling late Tuesday keeps Lisa Cook on the Federal Reserve Board of Governors for now. But it’s probably not the last word in the historic case, which is likely to come from the Supreme Court.

    Cook moved for a temporary restraining order against what she called President Donald Trump’s “unprecedented and illegal” attempt to fire her from the central bank board long before her term’s expiration in 2038. Trump argues that he had cause to fire her, citing his administration’s claim of mortgage fraud by Cook prior to her Senate confirmation. Cook was nominated by former President Joe Biden, as was the judge who sided with her Tuesday in Washington, U.S. District Judge Jia Cobb.

    Cobb wrote that Cook had made a “strong showing” that Trump’s attempt to fire her violated federal law, which requires cause for removal. The judge reasoned that the “for cause” requirement in the Federal Reserve Act “does not contemplate removing an individual purely for conduct that occurred before they began in office.” She wrote that the “best reading of the ‘for cause’ provision is that the bases for removal of a member of the Board of Governors are limited to grounds concerning a Governor’s behavior in office and whether they have been faithfully and effectively executing their statutory duties.”

    Cobb noted that the case involves “the first purported ‘for cause’ removal of a Board Governor in the Federal Reserve’s 111-year history” and that it “raises important matters of first impression,” meaning issues that haven’t been legally resolved by courts before.

    Cook, who has not been officially charged with any fraud, argues that Trump’s claim of wrongdoing against her falls well short of the cause mandated by federal law to remove a board member prematurely. “Without emergency relief,” her lawyers wrote ahead of a hearing Cobb held before she ruled, the government is “now likely to allow an unexpired vacancy to occur for which President Trump has indicated he is ready to fill.”

    Cook’s complaint underscores the stakes, noting that the Federal Reserve’s independence “is vital to its ability to make sound economic decisions, free from the political pressures of an election cycle” and warning that “[i]f markets and the public believe that the central bank is making decisions based on political pressure rather than sound economic data, that confidence erodes.”

    With the justices likely to have the last word, it’s worth noting that, while the high court’s Republican-appointed majority has been boosting Trump’s firing powers in his second term, it also has signaled an intention to protect the Federal Reserve’s independence more than that of other agencies whose members it has been letting Trump fire without cause. That the president has claimed he has cause to fire Cook could help him carry out this particular firing, but his success could hinge on the extent to which the justices say the president must prove his claim (if he has to at all).

    Subscribe to the Deadline: Legal Newsletter for expert analysis on the top legal stories of the week, including updates from the Supreme Court and developments in the Trump administration’s legal cases.

    This article was originally published on MSNBC.com

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  • Stocks Drop, US Yields Top 4% as Rate-Cut Bets Ebb: Markets Wrap

    Stocks Drop, US Yields Top 4% as Rate-Cut Bets Ebb: Markets Wrap

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    (Bloomberg) — Stocks fell and key Treasury bond yields rose back above 4% after robust US data undercut wagers on a big interest-rate reduction next month from the Federal Reserve.

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    Contracts on the S&P 500 shed 0.4% while Nasdaq 100 futures fell 0.5%. Ten-year US Treasury borrowing costs topped 4% for the first time since August, extending gains from Friday, when the monthly US jobs number blew past expectations. Swaps markets have moved to pricing less than a quarter-point rate cut next month, having expected a 50 basis-point move until recently.

    The shifting rate expectations are likely to weigh on equity markets, which have rallied to record highs recently amid signs of a robust US economy, easing inflation and big rate cuts. In addition, crude oil prices pushed higher to approach $80 a barrel, as investors await Israel’s response to the recent Iranian missile strike.

    Marija Veitmane, head of equity strategy at State Street Global Markets, said she still remains constructive on the equity outlook as economies remain resilient and inflation is easing. However, “we have to be a bit careful in terms of drivers, as we will probably not get a lot of big aggressive rate cuts,” Veitmane said on Bloomberg TV.

    Investors are now looking ahead to the US inflation data due Thursday, with economists surveyed by Bloomberg expecting year-on-year price growth at 2.3%, a slight slowdown from the previous reading. The earnings season also kicks off this week with reports from big US banks. Earnings growth is seen robust though it’s expected to slow from the second quarter.

    Among individual stocks, Pfizer Inc. climbed more than 2% in US premarket trading, after Bloomberg reported activist investor Starboard Value had taken a stake of about $1 billion in the firm. Arcadium Lithium Plc. leapt 29% on news Rio Tinto Plc had made a non-binding takeover approach.

    Europe’s Stoxx 600 equity index edged higher, while bond yields rose across the continent. The biggest stock movers were Heidelberg Materials AG, which benefited from a report that the Adani Group has started talks to buy the company’s Indian cement operations, and luxury-goods firm Richemont, which rose after an announcement it would sell the online retailer YNAP to Mytheresa.

    Here are some key events this week:

    • Euro-area finance ministers meet in Luxembourg on Monday. ECB President Christine Lagarde will participate

    • Minneapolis Fed President Neel Kashkari, Atlanta Fed President Raphael Bostic, St. Louis Fed President Alberto Musalem and Fed Board member Michele Bowman speak at different events on Monday as investors listen for any clues to policymakers’ thinking ahead of next month’s meeting

    • Brazil and Mexico publish CPI data, New Zealand, Israel and India hold interest rate decisions

    • US CPI for September, the final inflation print before the presidential election, is due Thursday

    • President Biden embarks on a trip to Germany and Angola, through Oct. 15, his first trip abroad since withdrawing from the presidential race, on Thursday

    • New York Fed President John Williams gives keynote remarks at Binghamton University in New York. Richmond Fed President Thomas Barkin speaks in a fireside chat on the economic outlook on Thursday

    Some of the main moves in markets:

    Stocks

    • S&P 500 futures fell 0.4% as of 8:19 a.m. New York time

    • Nasdaq 100 futures fell 0.5%

    • Futures on the Dow Jones Industrial Average fell 0.4%

    • The Stoxx Europe 600 rose 0.1%

    • The MSCI World Index rose 0.2%

    Currencies

    • The Bloomberg Dollar Spot Index was little changed

    • The euro was little changed at $1.0980

    • The British pound fell 0.3% to $1.3081

    • The Japanese yen rose 0.4% to 148.07 per dollar

    Cryptocurrencies

    • Bitcoin rose 0.6% to $63,022.61

    • Ether rose 1.2% to $2,467.38

    Bonds

    • The yield on 10-year Treasuries advanced three basis points to 4.00%

    • Germany’s 10-year yield advanced three basis points to 2.24%

    • Britain’s 10-year yield advanced five basis points to 4.18%

    Commodities

    This story was produced with the assistance of Bloomberg Automation.

    –With assistance from Catherine Bosley and Sujata Rao.

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    ©2024 Bloomberg L.P.

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  • FedNow could soon expedite FEMA payments for hurricane survivors

    FedNow could soon expedite FEMA payments for hurricane survivors

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    Survivors of future natural disasters like last week’s devastating Hurricane Helene, could soon be able to receive Federal Emergency Management Agency funds instantly through the FedNow payments rail. The Biden administration announced it will provide $10 million in flexible, upfront funding to survivors through its presidential discretionary funds, according to Federal Emergency Management Agency (FEMA) […]

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    Vaidik Trivedi

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  • Nasdaq Futures Jump 2% as Big Fed Cut Spurs Rally: Markets Wrap

    Nasdaq Futures Jump 2% as Big Fed Cut Spurs Rally: Markets Wrap

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    (Bloomberg) — Stocks rallied across the globe as the Federal Reserve’s half-percentage-point interest-rate cut reignited investor sentiment.

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    US equity futures soared, with a 1.5% gain in S&P 500 contracts putting the underlying benchmark on course to test a record high in the cash market. Nasdaq 100 contracts jumped 2%, fueled by bets of resilient American growth and lower borrowing costs. Europe’s Stoxx 600 index advanced as much as 1.3%.

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    “What we are seeing is the belief that the Fed has everything under control and they are going to engineer a soft landing and therefore risk assets are moving ahead strongly,” Jon Bell, a portfolio manager at Newton Investment Management, said on Bloomberg TV.

    A gauge of the dollar weakened 0.5%, pulling it closer to its January lows. Treasuries steadied as traders returned their focus to the state of the labor market and US jobless claims data due later. Bitcoin hit a three-week high.

    Wednesday’s decision by the Fed has reinforced expectations that the US economy will escape a downturn. A survey of Bloomberg Terminal subscribers shows 75% expect the US to avoid a technical recession by the end of next year.

    The Fed’s first reduction in more than four years was accompanied by projections indicating an additional 50 basis points of cuts across the remaining two policy meetings this year.

    Fed Chair Jerome Powell said launching the unwind of the central bank’s historic tightening campaign with a big move while the US economy is still strong would help limit the chances of a downturn.

    “The Fed is embarking on what I see as a series of rate cuts,” said Stephen Jen, the chief executive at Eurizon SLJ Capital. The size of the initial move “won’t make a big difference as equities should soon stabilize, bond yields will likely drift lower for good reasons — like disinflation and not a hard landing. The dollar should continue to weaken against a broad range of currencies,” he said.

    Meanwhile, the Bank of England is likely to refrain from cutting rates for a second consecutive meeting on Thursday, maintaining a patient approach to reversing the most aggressive policy tightening in decades. Governor Andrew Bailey may provide investors more hints that the central bank will cut rates again in November.

    Norway’s krone led gains against the dollar after the central bank kept borrowing costs unchanged and signaled no intention to cut them before next year as it contends with inflation risks.

    In Asia, a gauge of the region’s stocks rallied by the most in a week, while an index of Asian currencies rose to the strongest level in more than a year.

    Still on the monetary policy decision front, Bank of Japan Governor Kazuo Ueda faces the delicate task on Friday of making sure investors are firmly aware of rate hikes to come, without ruffling markets even as he stands pat on policy. The yen swung between gains and losses in volatile trading Thursday.

    In metals, gold rose toward a record, silver rallied and copper climbed to its highest level since mid-July, spurred on by the Fed’s move. Oil advanced as the risk-on tone swept across wider markets, with traders monitoring escalating tensions in the Middle East.

    Key events this week:

    • UK rate decision, Thursday

    • US Conf. Board leading index, initial jobless claims, existing home sales, Thursday

    • FedEx earnings, Thursday

    • Japan rate decision, Friday

    • Eurozone consumer confidence, Friday

    Some of the main moves in markets:

    Stocks

    • The Stoxx Europe 600 rose 1.3% as of 11:01 a.m. London time

    • S&P 500 futures rose 1.5%

    • Nasdaq 100 futures rose 2%

    • Futures on the Dow Jones Industrial Average rose 1.1%

    • The MSCI Asia Pacific Index rose 1.4%

    • The MSCI Emerging Markets Index rose 1.1%

    Currencies

    • The Bloomberg Dollar Spot Index fell 0.5%

    • The euro rose 0.5% to $1.1178

    • The Japanese yen fell 0.3% to 142.78 per dollar

    • The offshore yuan rose 0.5% to 7.0632 per dollar

    • The British pound rose 0.5% to $1.3283

    Cryptocurrencies

    • Bitcoin rose 3.5% to $62,319.01

    • Ether rose 4.6% to $2,432.11

    Bonds

    • The yield on 10-year Treasuries was little changed at 3.70%

    • Germany’s 10-year yield advanced one basis point to 2.20%

    • Britain’s 10-year yield was little changed at 3.84%

    Commodities

    • Brent crude rose 1.3% to $74.58 a barrel

    • Spot gold rose 1.3% to $2,591.02 an ounce

    This story was produced with the assistance of Bloomberg Automation.

    –With assistance from Winnie Hsu, Masahiro Hidaka, Anchalee Worrachate, Chiranjivi Chakraborty and Farah Elbahrawy.

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    ©2024 Bloomberg L.P.

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  • S&P 500 Has Its Worst Jobs Day Since October 2022: Markets Wrap

    S&P 500 Has Its Worst Jobs Day Since October 2022: Markets Wrap

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    (Bloomberg) — The selloff in stocks intensified and bond yields tumbled as a weak jobs report fueled worries that the Federal Reserve’s decision to hold rates at a two-decade high is risking a deeper economic slowdown.

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    Those fears roiled trading around the globe, spurring a massive surge in volatility and a flight away from the riskier corners of the market. The S&P 500 saw its worst reaction to jobs data in almost two years. A plunge in key technology companies sent the Nasdaq 100 down over 10% from its peak, passing the threshold that meets the definition of a correction. A rally in Treasuries extended into a seventh straight day, with traders projecting the Fed will cut rates by more than a full percentage point in 2024.

    The rout in equities follows a torrid advance partly driven by bets on a “soft economic landing” that would keep driving Corporate America. While the Fed has been able to successfully bring down inflation, the latest jobs figures may give officials some reason to believe their policies are cooling the labor market too much.

    “Bad news is no longer good news for stocks,” said John Lynch at Comerica Wealth Management. “Of course, we’re in a period of seasonal weakness, but sentiment is fragile given economic, political, and geopolitical developments. Pressure will escalate on the Federal Reserve.”

    Wall Street giants like Citigroup Inc. and JPMorgan Chase & Co. are now calling for more aggressive Fed action. Speaking on Bloomberg Television, Chicago Fed President Austan Goolsbee said officials won’t overreact to any one piece of data, echoing comments by Jerome Powell on Wednesday.

    “The Fed almost always waits too long to cut rates,” said Matt Maley at Miller Tabak + Co. “Then, as investors come to realize that the rate cuts are coming more due to a slowdown in growth — rather than a drop in inflation — the situation on the stock market tends to get ugly.”

    The S&P 500 slid 1.8%. The Nasdaq 100 sank 2.4%. The Russell 2000 tumbled 3.5%. Wall Street’s “fear gauge” — the VIX — hit the highest since March 2023. Intel Corp. plunged 26% on a grim growth forecast. Treasury 10-year yields slipped 18 basis points to 3.8%. The dollar fell 0.7%.

    “Oh dear, has the Fed made a policy mistake?” said Seema Shah at Principal Asset Management. “The labor market’s slowdown is now materializing with more clarity. A September rate cut is in the bag and the Fed will be hoping that they haven’t, once again, been too slow to act.”

    To Scott Wren at Wells Fargo Investment Institute, markets have turned attention from “when and how much will the Fed ease” to a mindset of “growth looks like it is plunging and the Fed is behind the curve.”

    “After the big equity run higher, investors are taking money off the table and booking profits,” Wren said. “Expect the near-term volatility to continue.”

    Nonfarm payrolls rose by 114,000 — one of the weakest prints since the pandemic — and job growth was revised lower in the prior two months. The unemployment rate unexpectedly climbed for a fourth month to 4.3%, triggering a closely watched recession indicator.

    How much should investors worry about a slowdown?

    “This marks an official ‘growth scare’ and one that the Fed will have to pay close attention to,” said George Mateyo at Key Wealth. “To be true, the economy is still expanding and jobs are still being added, so calls that a recession is upon us are overstated in our view. But the economic environment is changing quickly and the Fed should be attentive to downside risks.”

    “The big question is: are we sliding right into a recession? Or is the economy simply hitting a rough spot?” said Ryan Detrick at Carson Group. “We’d side with we will still avoid a recession — but the risks are rising.”

    At Evercore, Krishna Guha says he doesn’t think the evidence overall suggests the labor market is “cracking” — but it is clearly softening and may weaken further — so there is “ample cause for the Fed to pull forward cuts.”

    To Lara Castleton at Janus Henderson Investors, the “soft landing narrative” is now shifting to “worries about a hard landing.” While fears of a policy mistake are rising, she thinks one negative miss shouldn’t lead to overreaction given that other data points that still show economic resilience.

    “Equities selling off should be seen as a normal reaction, especially considering the high valuations in many pockets of the market,” she said. “It’s a good reminder for investors to focus on the earnings of companies going forward.”

    With just three meetings left, swap pricing reflects the growing perception that the Fed will need to make an unusually large half-point move at one of the gatherings or act between its scheduled meetings — moving rapidly to bolster growth.

    Still, large policy moves with an aggressive response could imply an emergency, triggering even more jitters among traders.

    To Chris Low at FHN Financial, the market is “probably right” to think the Fed should cut by 50 basis points, but psychology is as important as data at turning points.

    “FOMC participants are more likely to take it slowly with a quarter-point cut at first, if for no other reason than to project calm and control,” he said.

    “From a Fed perspective, this does not translate into making hasty policy decisions, but it should help them remove the rose-tinted glasses when assessing policy decisions at the next meeting,” said Charlie Ripley at Allianz Investment Management.

    Stocks are likely to fall when the Fed delivers its first rate cut because the pivot will come as data signal a hard — rather than soft — landing for the US economy, according to Bank of America Corp.’s Michael Hartnett.

    In the history of the start to Fed easing since 1970, cuts in response to a downturn have proved negative for stocks and positive for bonds, the BofA strategist wrote in a note, citing seven examples that demonstrated this pattern. “One very important difference in 2024 is extreme degree to which risk assets have front-run Fed cuts,” Hartnett said.

    Some of the main moves in markets:

    Stocks

    • The S&P 500 fell 1.8% as of 4 p.m. New York time

    • The Nasdaq 100 fell 2.4%

    • The Dow Jones Industrial Average fell 1.5%

    • The MSCI World Index fell 2%

    • The Russell 2000 Index fell 3.5%

    Currencies

    • The Bloomberg Dollar Spot Index fell 0.7%

    • The euro rose 1.1% to $1.0912

    • The British pound rose 0.5% to $1.2809

    • The Japanese yen rose 1.9% to 146.59 per dollar

    Cryptocurrencies

    • Bitcoin fell 3.2% to $62,592.26

    • Ether fell 4.9% to $3,011.61

    Bonds

    • The yield on 10-year Treasuries declined 18 basis points to 3.80%

    • Germany’s 10-year yield declined seven basis points to 2.17%

    • Britain’s 10-year yield declined five basis points to 3.83%

    Commodities

    • West Texas Intermediate crude fell 3.1% to $73.97 a barrel

    • Spot gold fell 0.4% to $2,436.77 an ounce

    This story was produced with the assistance of Bloomberg Automation.

    –With assistance from Andre Janse van Vuuren, Lynn Thomasson and Lu Wang.

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    ©2024 Bloomberg L.P.

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  • Fed’s Favorite Underlying Inflation Gauge Is Seen Cooling

    Fed’s Favorite Underlying Inflation Gauge Is Seen Cooling

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    (Bloomberg) — The Federal Reserve’s first-line inflation gauge is about to show some modest relief from stubborn price pressures, corroborating central bankers’ prudence about the timing of interest-rate cuts.

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    Economists expect the personal consumption expenditures price index minus food and energy — due on Friday — to rise 0.2% in April. That would mark the smallest advance so far this year for the measure, which provides a better snapshot of underlying inflation.

    The overall PCE price index probably climbed 0.3% for a third month, according to median projection in a Bloomberg survey. Increases this year stand in contrast to relatively flat readings in the final three months of 2023, underscoring uneven progress for the Fed in its inflation fight.

    Fed Chair Jerome Powell and his colleagues have stressed the need for more evidence that inflation is on a sustained path to their 2% goal before cutting the benchmark interest rate, which has been at a two-decade high since July.

    The PCE price measure is seen rising 2.7% on an annual basis, while the core metric is expected at 2.8% — both matching the prior month’s levels.

    Officials earlier this month coalesced around a desire to hold interest rates higher for longer and “many” questioned whether policy was restrictive enough to bring inflation down to their target, according to minutes of their last meeting.

    Read more: Minutes Show Officials Rallying Around Higher-for-Longer Rates

    The latest inflation numbers will be accompanied by personal spending and income figures. While demand grew at a solid pace in the first quarter, the data will inform on services spending after flat retail sales in April previously reported.

    What Bloomberg Economics Says:

    “The report will likely provide some encouraging signs that the disinflation process hasn’t completely stalled. With income growth slowing in a cooling labor market, consumers are gradually cracking, which should provide a continued disinflationary impulse in the rest of the year. Yet, with catch-up price pressures still in the pipeline, inflation will likely moderate only very gradually this year.”

    —Anna Wong, Stuart Paul, Eliza Winger and Estelle Ou, economists. For full analysis, click here

    Other data for the week include revised first-quarter gross domestic product on Thursday. Economists forecast growth probably cooled from the government’s initial estimate. The Fed on Wednesday will issue its Beige Book summary of economic conditions around the country.

    Among the US central bankers speaking during the holiday-shortened week are John Williams, Lisa Cook, Neel Kashkari and Lorie Logan.

    Looking north, Canada will release gross domestic product data for the first quarter. Waning monthly momentum in March and weak domestic demand would likely keep a June rate cut in play for the central bank.

    Elsewhere, a likely pickup in euro-zone inflation, Chinese industrial data and PMI numbers, and price reports from Brazil will be among the highlights.

    Click here for what happened in the past week and below is our wrap of what’s coming up in the global economy.

    Asia

    China’s manufacturing sector is in the spotlight in the coming week. Industrial data Monday will show whether profits bounced back in April after a sharp retreat in March dragged the pace of gains for the first three months to 4.3%.

    Persistent deflation in producer-gate prices and soft domestic demand may keep profitability under pressure. China gets its official manufacturing PMI data on Friday, with the focus on whether the gauge stays above the 50 threshold that separates contraction from expansion for a third month in May.

    Also on Friday, Japan’s industrial output growth is seen slowing while retail sales chug along in April.

    Consumer inflation in Tokyo may pick up a bit in May, foreshadowing gains for the national figures.

    Meanwhile, China asked South Korea to maintain stable supply chains as the countries began their first three-way summit with Japan since 2019.

    Australia’s consumer price growth is forecast to slow to 3.3%, still hot enough to keep the Reserve Bank of Australia on hold.

    Vietnam also reports CPI data, along with industrial output, retail sales and trade during the week.

    In central banking, Kazakhstan sets its benchmark policy rate on Friday.

    Europe, Middle East, Africa

    In the euro zone, inflation probably accelerated in May to 2.5%, according to economists’ forecasts. An underlying gauge is anticipated to have stopped weakening for the first time since July, holding at 2.7%.

    In tune with the wider euro-zone data, national releases that start with Germany’s on Wednesday are expected to have gone the wrong way in three of the region’s four biggest economies. Only Italy is seen to be experiencing slower price growth.

    Such outcomes impede progress toward the ECB’s 2% target, but officials’ consistent signals for a quarter-point rate reduction on June 6 make it unlikely that one month of data will derail them. Even so, some policymakers are arguing against any rush to ease further.

    “The probability is increasing that in 13 days we will see the first rate cut,” Bundesbank President Joachim Nagel, a policy hawk, said in an interview on Friday. “If there’s a rate cut in June, we have to wait, and I believe we have to wait till maybe September.”

    Other reports in the euro-zone include Germany’s Ifo business confidence index on Monday, the ECB’s survey of inflation expectations on Tuesday, and economic confidence on Thursday.

    ECB officials scheduled to speak in the coming week include chief economist Philip Lane and the Dutch, French and Italian governors. A pre-decision blackout period kicks in on Thursday.

    The Bank of England has already gone silent, cancelling all speeches and public statements by policymakers during the campaign before the UK general election on July 4.

    Among other European central banks, a financial stability report from Sweden’s Riksbank on Wednesday, and a speech in Seoul by Swiss National Bank President Thomas Jordan will be among the highlights.

    Several monetary decisions are scheduled in the wider region:

    • Israel’s central bank is expected to keep its base rate steady at 4.5% on Monday, largely to keep war-related inflationary pressures in check and provide support to the shekel. Governor Amir Yaron is wary of easing monetary policy and further widening the gap between borrowing costs in Israel and the US.

    • Ghana’s monetary authority is set to leave its key rate at 29% on Monday to vanquish sticky inflation and support its floundering currency.

    • On Wednesday, Mozambique’s policymakers are poised to cut borrowing costs, with consumer-price growth expected to remain in the single digits for the rest of the year.

    • And on Thursday — a day after elections where the ruling African National Congress risks losing its majority — South African monetary officials are predicted to maintain their key rate at 8.25%, with inflation yet to return to the 4.5% midpoint of their target range.

    Latin America

    Brazil in the coming week reports the mid-month reading of its benchmark consumer price index along with the May reading of its broadest measure of inflation.

    The combination of Brazil’s tight labor market and weaker currency likely limit the scope for further disinflation from current levels, with inflation already running near consensus year-end forecasts.

    The IPCA-15 price index fell back below 4% last month after jumping over 5% in September — which came just two months after hitting 3.19%, below the central bank’s 2023 target.

    Also in Brazil, the central bank on Monday posts its weekly survey of economists, whose inflation expectations and interest rate forecasts are rising again, along with national unemployment, total outstanding loans, and budget balances.

    Chile posts six separate indicators for April, with the highlights being joblessness, retail sales, industrial production and copper output.

    Mexico’s light schedule will be dominated by the central bank’s publication of it quarterly inflation report, followed by a press conference hosted by Governor Victoria Rodriguez.

    Banxico earlier this month marked up its inflation forecasts through the third quarter of 2025, while Wednesday’s report will reveal the bank’s revised GDP forecasts.

    On Thursday, Mexico’s April labor market data are due. The early consensus sees the unemployment rate rising from the record low of 2.28% posted in March.

    –With assistance from Robert Jameson, Piotr Skolimowski, Monique Vanek and Laura Dhillon Kane.

    (Updates with Israel tout in EMEA section)

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  • Bond Traders Surrender to Higher-for-Longer Reality From the Fed

    Bond Traders Surrender to Higher-for-Longer Reality From the Fed

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    (Bloomberg) — Bond investors who were once convinced that the Federal Reserve would start cutting interest rates this week are painfully surrendering to a higher-for-longer reality and a murky path forward for the market.

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    Treasury yields spiked in recent days and are on the cusp of setting new highs for the year as data continues to point to persistent inflation, which is causing traders to push back their timetable for US monetary easing.

    Interest-rate swaps now reflect market expectations for fewer than three quarter-point rate cuts this year. That’s less than the Fed’s median projection in December and a shade of the six reductions that were priced in at the end of 2023. And the first move lower? Investors are no longer confident that it’ll even happen in the first half of the year.

    The shift underscores mounting worries that US central bankers led by Fed Chair Jerome Powell may signal an even shallower easing cycle at this week’s two-day gathering, which begins on Tuesday. Already, economists at Nomura Holdings Inc. scaled back their estimate for Fed rate reductions this year to two cuts from three. And recent trading flows in options markets show investors are seeking protection against the risk of higher long-term yields and fewer rate cuts — even if their longer-term view is for rates to eventually come down.

    “The Fed wants to ease but the data isn’t allowing them,” said Earl Davis, head of fixed income and money markets at BMO Global Asset Management. “They want to maintain optionality to ease in summer. But they will start to change, if the labor market is tight and inflation remains high.”

    US 10-year yields jumped 24 basis points last week, the most since October, to 4.31% — nearing their year-to-date high of 4.35%. Davis sees 10-year yields rising toward 4.5% a move that would eventually offer an entry point for him to buy bonds. The benchmark rose above 5% last year for the first time since 2007.

    Both two- and five-year US yields surged more than 20 basis points, for their biggest rise since May. The selloff extended Treasuries’ losses for the year to 1.84%.

    As recently as December, bond traders were all but certain the Fed would start to ease at this week’s meeting. But after a raft of surprisingly strong data on growth and inflation, they see zero chance of action this week, slim odds of a move in May and only a 60% possibility of a cut in June. For the year, traders have penciled in expectations for a total reduction of 71 basis points, meaning a three full-quarter-point cut is no longer seen as guaranteed.

    For its part, Nomura now sees the Fed easing in July and December, instead of in June, September and December. “With little urgency to ease, we expect the Fed will wait to see whether inflation is slowing before beginning a rate-cut cycle,” economists including Aichi Amemiya wrote in a note.

    The margin to shift the Fed’s median rate projections on its so-called dot-plot is thin. It would take only two policymakers switching to two cuts this year from three for the central bank’s median forecast to move higher.

    Read more: Bond Traders Prep for Dot Plot, With Three Cuts in Question

    “It’s not going to take a lot” for the median dots to move higher, said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle Investment. “What I am nervous about is the front end of the curve. It’s super-sensitive to the near-term policy path.”

    Even if 2024 median rate projections remain intact, the dots in 2025 and 2026 as well as the long-term “neutral” rate — the level seen as neither stoking growth or holding it back — may move higher, a scenario will prompt traders to price in less rate reductions, according to Tim Duy, chief US economist at SGH Macro Advisors LLC.

    “We don’t think market participants need to wait for the Fed’s permission” to price in less cuts, wrote Duy. If the two-cut scenario doesn’t materialize this week, it may come by the June meeting, “or at least that market participants will price it as coming by June,” he added. “The risks at this moment are decidedly asymmetric.”

    What Bloomberg Intelligence Says …

    “Changes are likely to be incremental, though the knee-jerk reaction to a move higher in the 2024 dot may be quickly discounted if the 2025 dots are largely unchanged. …the market is sensitive to the end of next year dots, meaning rate markets may focus on 2025.”

    — Ira Jersey, chief US interest-rate strategist

    Instead of sweating over two or three reductions, investors shouldn’t lose the big picture that the Fed’s next move is a cut, not a hike, said Baylor Lancaster-Samuel, chief investment officer at Amerant Investments Inc. That means it’s time to buy bonds and take the interest-rate, or “duration” risk, in Wall Street parlance.

    “You can debate the timing, but in our opinion, the Fed is still likely to cut sometime this year,” said Lancaster-Samuel. “In that environment, we think the level of rates does not have too much risk of ratcheting higher from here. So we believe the opportunity cost of not taking duration is higher than the risk of taking it.”

    Options traders are less sanguine. On the heels of last week’s stronger-than-expected data on producer prices, traders rushed to buy hawkish protection for this year and next in options linked to the Secured Overnight Financing Rate, a measure which closely tracks the central bank policy rate.

    “Higher inflation readings, coupled with outsize deficits, the potential for the Fed to remain on hold longer, lends itself to another move toward the 2023 yield highs,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities.

    What to Watch

    • Economic data:

      • March 18: New York Fed services business activity; NFIB housing market index

      • March 19: Building permits; housing starts; TIC flows

      • March 20: MBA mortgage applications; FOMC meeting

      • March 21: Current account balance

      • March 21: Philadelphia Fed business outlook; initial jobless claims; S&P Global US manufacturing PMI; leading index; existing home sales

    • Fed calendar:

      • March 21: Vice Chair for Supervision Michael Barr

      • March 22: Chair Jerome Powell, Vice Chair Philip Jefferson and Governor Michelle Bowman at Fed Listens event; Barr; Atlanta Fed President Raphael Bostic

    • Auction calendar:

      • March 18: 13-, 26-week bills

      • March 19: 52-week bills; 42-day cash management bills; 20-year note re-opening

      • March 20: 17-week bills

      • March 21: 4-, 8-week bills; 10-year TIPS re-opening

    —With assistance from Edward Bolingbroke.

    Most Read from Bloomberg Businessweek

    ©2024 Bloomberg L.P.

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  • The Fed’s 2% inflation target is a source of growing liberal discontent

    The Fed’s 2% inflation target is a source of growing liberal discontent

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    The Federal Reserve’s goal is to get the inflation rate at least near 2% before it begins cutting interest rates.

    That’s a formal target backed by written policy, but it’s also the source of growing liberal discontent serving as another form of political pressure on Fed Chair Jerome Powell as he tries to navigate a white-hot election year.

    Some on the left want that number to be higher. Some would prefer the Fed add a second target focused on the labor market. And several Democrats used public hearings this past week with Powell to question the target’s origins and why it has so much importance inside the central bank.

    “It seems to come from Auckland and from the 1980s” a somewhat disbelieving Rep. Brad Sherman said Wednesday when it was his turn to question Powell.

    The liberal stalwart from California was right. The path to 2% began with an off-the-cuff comment in New Zealand in 1988.

    The Fed publicly adopted the standard 24 years later, in 2012, in a process that was met with discomfort from the left side of the political spectrum largely because of the lack of a parallel labor market target.

    Senator Sherrod Brown, chairman of the Senate Banking Committee, underlined this dynamic Thursday when he suggested Powell move quickly to cut rates “to prevent workers from losing their jobs” and added that “this town too often seems to forget that maximum employment is part of the Fed’s dual mandate.”

    The Fed doesn’t have a numeric labor target even though its dual mandate requires it to aim for both stable prices and maximum employment.

    Its inflation target is key because of how rate cuts are decided. Powell and other Fed officials have made it clear they won’t start lowering the benchmark rate from its 22-year high until they are confident inflation is moving down “sustainably” to 2%.

    And Powell strongly signaled this week that the 2% inflation target isn’t going anywhere. He mentioned it seven different times within the span of his five-minute-long opening remarks before lawmakers on both Wednesday and Thursday.

    He also acknowledged its Kiwi origins in response to Sherman’s questioning but added that “2% has become the global standard, it’s a pretty durable standard.” He reinforced his belief that it wouldn’t be a problem for the US to achieve the 2% level in the months ahead.

    “People are always talking about this,” said Preston Mui, who is with a labor market-focused group called Employ America. Changing the target by moving it even higher to 3% “is probably not something that’s politically in the cards for the Fed at all right now.”

    But talking about the number has nonetheless “caused a lot of headaches for Powell over the last two to three years,” Mui added.

    How the Fed got here

    The path to the Fed’s 2% inflation target was a winding one that began with an interview that is now infamous in central banking circles.

    Don Brash, who was governor of New Zealand’s Reserve Bank, offered an off-the-cuff comment in 1988 that he wanted an inflation rate between 0 and 1%. That set off a policy-making process and led his nation to adopt a formal 2% target soon thereafter.

    Other central banks followed and the moves were criticized from some quarters as being too inflation-focused.

    Perhaps the most colorful takedown came from Mervyn King, a British economist who served as governor of the Bank of England. He said in 1997 that he worried a hyper-focus on price targets would lead to central bankers becoming “inflation nutters.”

    WELLINGTON, NEW ZEALAND - MAY 17: Dr Don Brash, Governor of The Reserve Bank Of New Zealand announces the increase of the official cash rates. (Photo by Robert Patterson/Getty Images)

    Don Brash, then the governor of the Reserve Bank Of New Zealand, during a press conference. (Robert Patterson/Getty Images) (Robert Patterson via Getty Images)

    The Federal Reserve, under Alan Greenspan at the time, was resistant to a public embrace of the idea but debated it throughout the 1990s and early 2000s.

    “If you read FOMC transcripts around inflation targeting it’s a concern,” said Federal Reserve historian Sarah Binder of political considerations in a recent interview.

    There was resistance to implementing it during a 2008 downturn, with Ben Bernanke in charge. There was concern among Fed governors that “we’ve got to be worried about pushback from Democrats,” Binder said.

    But by 2012, with a recession in the rearview mirror and Bernanke in his second term as chair, the Fed pivoted and a 2% target was publicly adopted.

    Bernanke argued in his memoir that a 2% target increases business and consumer confidence and therefore gives the bank more flexibility to address both sides of its dual mandate.

    It’s an argument that is still used today, with an explainer on the Fed’s website saying the 2% target “is most consistent with the Federal Reserve’s mandate for maximum employment and price stability.”

    But many on the left were never fully on board. Bernanke acknowledged in his memoir that a main liberal voice of that era — Rep. Barney Frank of Massachusetts — brought up the lack of parallel labor market target and “wasn’t completely comfortable” with the policy even if he went along with it in the end.

    It’s a critique that has persisted for years.

    “I think it should be higher than that,” Rep. Maxine Waters said of the 2% target in an interview with Yahoo Finance’s Jennifer Schonberger this week, saying an increase would help support working families.

    Rakeen Mabud, the chief economist at the left-leaning group Groundwork Collaborative, put a finer point on it, saying the target “codifies the fact that inflation is just more important to the Fed than unemployment is.”

    The ongoing critique is further contextualized by a 2020 move at the Fed to adopt a flexible average inflation targeting framework. In effect, the change made 2% into a less rigid target by allowing the Fed to look at 2% as an average and allows inflation to run slightly hotter for stretches.

    Republicans appear inclined to return to the harder pre-2020 target, with some quarters of the GOP eager to remove employment from the Fed’s dual mandate entirely.

    The policy will be under review, Powell said this week, beginning later this year and through the end of 2025.

    Why it won’t be so easy to change

    The 2% target could grow as an issue in the months ahead, with many Democrats continuing to call for rate cuts even as forecasts have dropped throughout the early months of 2024. Some in the financial world are even predicting zero cuts all year.

    “Interest rates are too damn high,” Congresswoman Ayanna Pressley of Massachusetts told Powell.

    Another issue for the left is that simply adding a corollary target focused on the unemployment rate — which ticked up to 3.9% in the February jobs report — is not necessarily as easy as it might sound.

    Mui, the senior economist at Employ America, said his group is focused on more nuanced measures like the prime age employment rate — the number of younger people working against their overall population — or wage growth or quit rates or overall labor force participation.

    “I think if there was this rigid commitment to defining an unemployment target, there’s actually a risk [in some scenarios] that it actually doesn’t pay enough attention to that side of their mandate,” he says.

    Ben Werschkul is Washington correspondent for Yahoo Finance.

    Click here for politics news related to business and money

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  • Federal Reserve keeps key interest rate unchanged and foresees 3 rate cuts next year | Long Island Business News

    Federal Reserve keeps key interest rate unchanged and foresees 3 rate cuts next year | Long Island Business News

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    Listen to this article

    The Federal Reserve kept its key interest rate unchanged Wednesday for a third straight time, a sign that it is likely done raising rates after having imposed the fastest string of increases in four decades to fight painfully high inflation.

    The Fed’s policymakers also signaled that they expect to make three quarter-point cuts to their benchmark interest rate next year. Those envisioned rate cuts — which wouldn’t likely begin until the second half of 2024 — suggest that the officials think high borrowing rates will still be needed for much of next year to further slow spending and inflation.

    In a statement it issued after its 19-member policy committee met Wednesday, the Fed said “inflation has eased over the past year but remains elevated.” It was the first time since inflation first spiked in 2021 that the Fed has formally acknowledged progress in its fight against accelerating prices. It also provided a hint that its rate-cut efforts may be over, saying it is considering whether “any additional” hikes are needed.

    The Fed kept its benchmark rate at about 5.4%, its highest level in 22 years, a rate that has led to much higher costs for mortgages, auto loans, business borrowing and many other forms of credit. Higher mortgage rates have sharply reduced home sales. Spending on appliances and other expensive goods that people often buy on credit has also declined.

    So far, the Fed has achieved what few observers had thought possible a year ago: Inflation has tumbled without an accompanying surge in unemployment or a recession, which typically coincide with a central bank’s efforts to cool the economy and curb inflation. Though inflation remains above the Fed’s 2% target, it has declined faster than Fed officials had expected, allowing them to keep rates unchanged and wait to see if price increases continue to ease.

    At the same time, the government’s latest report on consumer prices showed that inflation in some areas, particularly health care, apartment rents, restaurant meals and other services, remains persistently high, one reason why Fed Chair Jerome Powell is reluctant to signal that policymakers are prepared to cut rates anytime soon.

    On Wednesday, the Fed’s quarterly economic projections showed that its officials envision a “soft landing” for the economy, in which inflation would continue its decline toward the central bank’s 2% target without causing a steep downturn. The forecasts showed that the policymakers expect to cut their benchmark rate to 4.6% by the end of 2024 — three quarter-point reductions from its current level.

    A sharp economic slowdown could prompt even faster rate reductions. So far, though, there is no sign that a downturn is imminent.

    In its quarterly projections, the Fed’s policymakers now expect “core” inflation, according to its preferred measure, to fall to just 2.4% by the end of 2024, down from a 2.6% forecast in September. Core inflation, which excludes volatile food and energy costs, is considered a better gauge to inflation’s future path.

    The policymakers foresee unemployment rising to 4.1% next year, from its current 3.7%, which would still be a low level historically. They project that the economy will expand at a modest 1.4% next year and 1.8% in 2025.

    Interest rate cuts by the Fed, whenever they happen, would reduce borrowing costs across the economy. Stock prices could rise, too, though share prices have already rallied in expectation of rate cuts, potentially limiting any further increases.

    Powell, though, has recently downplayed the idea that rate reductions are nearing. He hasn’t yet even signaled that the Fed is conclusively done with its hikes.

    One reason the Fed might be able to cut rates next year, even if the economy plows ahead, would be if inflation kept falling, as expected. A steady slowdown in price increases would have the effect of raising inflation-adjusted interest rates, thereby making borrowing costs higher than the Fed intends. Reducing rates, in this scenario, would simply keep inflation-adjusted borrowing costs from rising.

    Recent economic data have modestly cooled financial markets’ expectations for early rate cuts. Last week’s jobs report for November showed that the unemployment rate fell to 3.7%, near a half-century low, down from 3.9% as businesses engaged in solid hiring. Such a low unemployment rate could force companies to keep raising pay to find and retain workers, which would fuel inflationary pressures.

    And consumer prices were mostly unchanged last month, the government said Tuesday, suggesting that while inflation is likely headed back to the Fed’s 2% target, it might take longer than optimists expect. The central bank, as a result, could opt to keep rates at their current level to try to ensure that prices resume their downward path.

    The Fed is the first of several major central banks to meet this week, with others also expected to keep their rates on hold. Both the European Central Bank and the Bank of England will decide on their next moves Thursday.

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  • Podcast: Managing payments pressure | Bank Automation News

    Podcast: Managing payments pressure | Bank Automation News

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    Payments fintechs are leaning on technology as consumers look to them to alleviate payments pressure in today’s high interest rate environment. 

    “The payments space today is in a stress test,” payments fintech Sunbit’s Chief Executive Arad Levertov, tells Bank Automation News on this episode of “The Buzz” podcast, noting that consumers are struggling to make payments and payments fintechs are struggling to scale. 

    Sunbit uses machine learning, AI and software to offer payment options to customers through retailers, according to Sunbit. The tech provider connects to retail APIs to collect data on performance of their technology and simultaneously offers buy-now-pay-later capabilities, a credit card and point-of-sale lending.  

    Sunbit customers include dental office Dossett Dental, automotive retailer Highline Parts and Service Center and vision eyewear retailer Henry Ford OptimEyes, according to the Sunbit website.  

    As payments providers help consumers, they also want to ensure they can scale. To be sure payment companies can accomplish both, Levertov says they should ask themselves: 

    Listen as Sunbit’s Levertov discusses with “The Buzz” how to navigate a high-rate environment with consumers and technology at the forefront.  

    The following is a transcript generated by AI technology that has been lightly edited but still contains errors.

    Whitney McDonald 0:03
    Hello and welcome to The Buzz a bank automation news podcast. My name is Whitney McDonald and I’m the editor of bank automation News. Today is November 2 2023. Joining me is Chief Executive of FinTech Sunit Arad Levertov. He is here to discuss payments disruptors, leveraging AI and Gen AI today and the future of the payments landscape. he co founded Sunday in 2016, and has been in FinTech since 2009. Thanks for joining us.

    Arad Levertov 0:30
    Thank you for having me. Happy to be here. I’m Arad Levertov. I’m the co founder and CEO of Sunbit. Sunbit is a financial technology for Real Life. We are based in Los Angeles, and we have about 500 employees across the nation. Many people are familiar with the pay overtime functionality, or the Buy Now pay later. And usually the this happens in the online sun beat we have two main products. The first product is a pair of real time functionality that is used for where people needed the most. So when you go to fix your car, or when you go to the dentist or to to get an eyeglass, we help the customer to get the service they need and pay overtime. We are right now operate in about 7500 locations of car repair services, which is about 40% of the market of authorized car dealerships. So if you go to fix a car in the authorized car dealership, there is four out of 10 chances that you will see us. In addition, we are in dental, as I mentioned that eyeglasses places overall over 20,000 locations, and we are adding five to 700 a month. Our second product is the sun beat card. And the Sunday card is a product that we announced in 2022. And basically brings the best of credit, debit and buy now pay later into the hands of each customers. And the customer can use it in with a physical card, or with a virtual card. In over there, we’ve processed over 300 million transaction and customer uses 60% of the time in everyday purchases like gas, food, and groceries. And basically we allow the customer to choose each transaction, how they want to pay where it’s like a debit, which means paying full credit, paid only the minimum or split into 236 or 12 months like buy now pay later. Our products are focused on the customers, we are inclusive, which means we have to have more customers, and we never charge any fees.

    Whitney McDonald 2:43
    Great. Well, thank you again for joining us and for talking us through some bit. I’d love to get started with just setting the scene for today’s payments industry. What are you seeing today kind of where to where do we stand within payments today?

    Arad Levertov 2:58
    That’s a good question. Because when you think about where we are today, you you cannot ignore the macro economics condition. Right. So you know, the Fed increased rates starting last year. And the current interest rate is super, super high, which impacts the entire economy, but mostly the payments and the FinTech companies. So today, when the interest is I customers are struggling more to make payments and customer struggling more to make purchases. And that actually it’s an opportunity and also I call it a stress test for every company, especially companies that are in the payment spreads, which also got impacted by the by the increase in interest rate. And when it when I look at this stress test, each company needs to ask itself like three basic questions. One, do I really add value to consumer? Two? Can I make profit out of it? And three? Can I do it? With the same core values and promises? I promised the consumers the employee like you know, three, four years ago when things were easier. So what does it mean? It means that especially in the payment space, when interest is high in customer struggling, our customers still willing to take my product and pay money for it? In our case, it’s like you know, the customers and the merchant Do they really value needs? Second, can I do it while I my cost is lower than the revenue which is super important these days? And three Can I do it with the same core values and promises? As I promised to my employees, we promise to customers we promise to invest up to three years ago when the market was different. So I think that the payment space today is in in a stress test and in the good news that eventually it will differentiate the I call it the real value companies from the free riders companies that were riding on the payment Space. Two, three years ago when interest was low, and everybody was, you know, money was easy.

    Whitney McDonald 5:06
    Now you talk through the stress that’s in the macroeconomic environment today, maybe you could talk us through where technology comes in to address these pain points within payments.

    Arad Levertov 5:20
    So this is exactly where technology technology, but only if it’s kind of in the fundamental of the business is coming into play. Because at the end of the day, in order to both serve customers, and make profit, when you’re you know, basic costs increasing, you need to think about scale, and scale comes with technology. So, when you are able to operate with, you know, with more technology, better underwriting, smarter decisions, better go to market or you know, something that is pretty famous right now, what we call the CAC, to LTV, the customer acquisition costs, and the lifetime value of the to get from the from the from the customer, the CAC to LTV ratio. This is where technology comes into play. So you can actually operate in scale without the additional cost of you know, manual costs or travel costs or stuff like this. And this is happens in the entire world. In many, many industries. I mean, right now we’re sitting in a recording of podcasts, which was never like 2030 years ago, there was no podcast, people actually listen only to what comes to the news. Now people listen to us because they want to focus on something personalized. In the payment space. Specifically, it’s a little bit delayed because of regulations because of other stuff. But now when you get to the technology around regulation, this is where you will be able to win for the long term.

    Whitney McDonald 6:56
    Now, when it comes to payments, companies like Sunday, it’s not a traditional means means for payments, how do companies like sun bet, disrupt the financial services industry, if you could kind of talk us through that that would be great. Course.

    Arad Levertov 7:18
    So there are many people talking about FinTech over the last literally 10 years, which is great. However, still, the biggest, biggest player in the markets are the credit cards, right. And consumer credit, people use credit cards, everybody has credit card in their hand, and credit card are easy to use many people you know it is to pay, but it’s horrible experience to apply. approval rate is really low there, you know, sometimes only 50%, actually of the people get approved, people get declined. By the way, I personally got declined for credit card after moving to the US when applying at point of sale at one of the retail places. And the most important there are many, many unnecessary and hidden fees. And when you think about this, in general financial market, they focus on making a lot of money, and they less focus on the consumer. fun bit. Try to innovate for good and put the customer in the center. So for example, one of our our main mission was from day one, eliminate financial waste and pass the value to the consumers. And one of our values innovate for good. So what does it mean? We try to be better to be more personalized for the customer. So your rate should be different in my rate, right? And end it up. But both rates should be transparent. No hidden fees, no fees at all. Actually, exactly. You know how much you’re gonna pay. We want to be more inclusive than the competition because we use more under more sophisticated data, more machine learning, and we use it across the across the business to get more customer into the door. And if we do it well and these customer pay back, we can get lower rates for everybody. So use technology across the entire spectrum. How do we get to the merchant? As I said, we are adding five to 700 new merchants amongst we choose them to make sure that we do it with the right operating costs. So we add them right the sales calls, of course, how do we handle customers? How do we treat customers? And how do we run the operation in general, we use technology. However, I would say that this is not enough. Technology is amazing in the most sophisticated under artificial intelligence, and machine learning is being used across the nation across the business. However, in addition, one we put the customer in the center, which is super important, we remember that it’s all for the customer and to we never get blinded by the numbers. You know at some beat we sell have millions of customers and posts of billions of dollars of loans. But we remember that behind these numbers, there are people that at the end of the day, wanted to fix the car and go back to work, wanted to get the root canal. And you know, and get out with the pain and go back to the life. And when I’m able to, to help these customers, split the purchase, over three months over sometimes 12 months without paying any interest and still make money because they make from the merchant, I see that I’m doing the right thing. And using technology to help people, that’s the basic of what we do we never forget about it.

    Whitney McDonald 10:42
    Now I know they said it’s not the most important part. But technology is is a key player here for some but can we talk through the application of data and machine learning and AI to accomplish all of this?

    Arad Levertov 10:56
    Of course, yes, technology is the basically enabler that helps us actually get what we do, right. So when you think about some between when we think about machine learning, you know, all the big world machine learning AI data science, we from day one, and we started in in 2016, decided to put it really across their operations. So because we work with mostly physical locations, we have retail operations, which means we need to get to the stores, we need to sell to them, we need to implement our solution into their systems into their API’s into the system. And we all need to do it in a smart way because it costs money. So we build technology and data that basics, give us feedback on how does the how the how much time it takes to get the store how much data you’d like these stories better than the other stories, these vertical versus that better than the other vertical. And we get this data and get better and better and better. And then we need the stars to keep using us and working with us and working with the customer. So again, here, use underwriting use technology to get the feedback about these customers and how they do versus the store to get better and better and continue when you serve the customer, you want the end user customer to have seamless experience when they take the loan when they pay for the loan. And if they want to, you know to change some time and they have some challenges not paying the loan, give them the best experience. And we use technology look at the entire system, from A to Z with technology with underwriting with AI, and then go back with the focus on the customer.

    Whitney McDonald 12:41
    Now, of course, you’re in the business of innovation in payments, wondering if you could give us kind of a look ahead as to where the payments market is heading in the next year as we look into 2024.

    Arad Levertov 12:56
    So I think that the first thing I will try to look is look even farther, like even, you know, 20 to 2030. Because, again, I mentioned that you and I are doing right now podcast, which 20 years ago was nowhere, right. I mean, when I was a kid, we used to read newspaper like literally newspaper. When you think about the payment and you know, financial financial industry, it’s still closer to the newspaper and to the podcast that we are doing right now, which means it stuck many years ago, because customer gets the same, the same many customer get the same, the same products, and it’s all personnel is not focused on the customer. So I think that you know, 10 years from now or whatever, in the long term, it will have to change because customers deserve more, they deserve better product more personalized, and actually cheaper, right? So the companies that will be able to do it are the companies as we mentioned that, you know, focus on technology, put the customer in the in the center, and of course, make profit because if not, you’re not going to survive. So this is the long term, the next year is still going to be challenging, because the interest is high. And this is the new reality whether it’s ends or stuck, you know, easing in end of 2024 and 2025. I don’t know I treat right now this the current situation is the new normal. So it will actually, as I mentioned, be a stress test for all the companies in the space to see if you can get through this and keep growing and you know, doing it while while building profitable, profitable business. You will definitely be the winning for the long term. And you will do it if you focus on technology customers and in Detroit and this is what we try to do they have today.

    Whitney McDonald 14:51
    You’ve been listening to the buzz, a bank automation news podcast, please follow us on LinkedIn. And as a reminder, you can rate this podcast on your platform Choice thank you for your time and be sure to visit us at Bank automation news.com For more automation news

    Transcribed by https://otter.ai

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  • Stocks Rally as Fed’s Rate Hikes Seen Near End: Markets Wrap

    Stocks Rally as Fed’s Rate Hikes Seen Near End: Markets Wrap

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    (Bloomberg) — Stocks rallied as investors reacted to the possible peak of the Federal Reserve’s historic tightening campaign and processed the latest major company earnings.

    Most Read from Bloomberg

    Rates-sensitive real estate stocks led the advance in Europe’s Stoxx 600 index, which is set for its longest winning streak since July. US equity futures pointed to an extension of Wednesday’s gains on Wall Street as Asian stocks headed for their biggest gain in almost four months.

    Novo Nordisk A/S rose after reporting that third-quarter sales surged amid the frenzy for its blockbuster obesity and diabetes drugs. Shell Plc gained after accelerating the pace of share buybacks as its third-quarter profit rose. Apple Inc. headlines the roster of US earnings due later.

    While the Fed left the door open to another increase after pausing Wednesday, officials hinted that a run-up in long-term Treasury yields reduces the impetus to tighten policy further. The Bank of England is likely to keep interest rates at the highest level since 2008 later Thursday, amid evidence that the UK economy, labor market and inflation are weakening.

    “The Fed did not throw in the towel yesterday, but the changes in the speech are in line with a more moderate growth situation,” said Florian Ielpo, head of macro research at Lombard Odier Asset Management. “What transpires from the speech is essentially a first eyebrow raised at the real growth situation, which markets decided to take for a ‘bad news is good news’ message.”

    The dollar weakened and Treasuries steadied after Wednesday’s sharp gains.

    US yields were already heading lower prior to the Fed decision after the government announced plans to borrow slightly less than expected over the next three months, reassuring investors worried about a deluge of debt issuance. A gauge of US factory activity also came in below expectations, adding to concerns of an economic downturn.

    In Asia, the yen extended its gains from Wednesday, while the South Korean won led emerging-market currencies higher.

    Meanwhile, the rebound in the region’s stocks signaled relief among investors fretting over the expectation of higher-for-longer US rates and hikes continuing into 2024. Asian stocks lost more than 12% from the end of July through October.

    Fed Chair Jerome Powell on Wednesday noted that financial conditions have “tightened significantly in recent months driven by higher, longer—term bond yields, among other factors.” He repeatedly said the committee was moving “carefully,” a wording that often has signaled a low likelihood of any immediate change in policy, while adding that risks to the outlook have become more two-sided as the tightening campaign nears its end.

    US jobs data painted a mixed picture. There were more job openings than forecast, according to the latest JOLTS data, while ADP’s private payrolls figures showed fewer new roles than anticipated. Initial jobless claims figures will be released later Thursday.

    In commodities, global benchmark Brent crude oil rose past $85 a barrel, after sliding around 5% over the previous three sessions.

    Key events this week:

    • Eurozone S&P Global Eurozone Manufacturing PMI, Thursday

    • Bank of England interest rate decision. Governor Andrew Bailey holds news conference, Thursday

    • US factory orders, initial jobless claims, productivity, Thursday

    • Apple earnings, Thursday

    • China Caixin services PMI, Friday

    • Eurozone unemployment, Friday

    • US unemployment, nonfarm payrolls, Friday

    • Canada employment report, Friday

    Here are some of the major moves in markets:

    Stocks

    • The Stoxx Europe 600 rose 1.4% as of 8:52 a.m. London time

    • S&P 500 futures rose 0.5%

    • Nasdaq 100 futures rose 0.6%

    • Futures on the Dow Jones Industrial Average rose 0.3%

    • The MSCI Asia Pacific Index rose 1.4%

    • The MSCI Emerging Markets Index rose 1.6%

    Currencies

    • The Bloomberg Dollar Spot Index fell 0.3%

    • The euro rose 0.3% to $1.0604

    • The Japanese yen rose 0.4% to 150.42 per dollar

    • The offshore yuan was little changed at 7.3321 per dollar

    • The British pound rose 0.1% to $1.2166

    Cryptocurrencies

    • Bitcoin fell 0.4% to $35,306.23

    • Ether fell 1.3% to $1,831.95

    Bonds

    • The yield on 10-year Treasuries declined one basis point to 4.72%

    • Germany’s 10-year yield declined five basis points to 2.72%

    • Britain’s 10-year yield declined eight basis points to 4.42%

    Commodities

    • Brent crude rose 1.4% to $85.79 a barrel

    • Spot gold rose 0.2% to $1,987.46 an ounce

    This story was produced with the assistance of Bloomberg Automation.

    –With assistance from Winnie Hsu and Sagarika Jaisinghani.

    Most Read from Bloomberg Businessweek

    ©2023 Bloomberg L.P.

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  • Fed raises key rate but hints it may pause amid bank turmoil | Long Island Business News

    Fed raises key rate but hints it may pause amid bank turmoil | Long Island Business News

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    The Federal Reserve reinforced its fight against high inflation Wednesday by raising its key interest rate by a quarter-point to the highest level in 16 years. But the Fed also signaled that it may now pause its streak of 10 rate hikes, which have made borrowing for consumers and businesses steadily more expensive.

    In a statement after its latest policy meeting, the Fed removed a sentence from its previous statement that had said “some additional” rate hikes might be needed. It replaced it with language that said it will consider a range of factors in “determining the extent” to which future hikes might be needed.

    Speaking at a news conference, Chair Jerome Powell said the Fed has yet to decide whether to suspend its rate hikes. But he pointed to the change in the statement’s language as confirming at least that possibility. Powell said the Fed would continue to monitor the latest economic data in deciding whether to pause its hikes.

    The Fed’s rate increases since March 2022 have more than doubled mortgage rates, elevated the costs of auto loans, credit card borrowing and business loans and heightened the risk of a recession. Home sales have plunged as a result. The Fed’s latest move, which raised its benchmark rate to roughly 5.1%, could further increase borrowing costs.

    Still, the Fed’s statement Wednesday offered little indication that its string of rate hikes have made significant progress toward its goal of cooling the economy, the job market and inflation. Inflation has fallen from a peak of 9.1% in June to 5% in March but remains well above the Fed’s 2% target rate.

    “Inflation pressures continue to run high, and the process of getting getting inflation back down to 2% has a long way to go,” Powell said.

    The surge in rates has contributed to the collapse of three large banks and turmoil in the banking industry. All three failed banks had bought long-term bonds that paid low rates and then rapidly lost value as the Fed sent rates higher.

    The banking upheaval might have played a role in the Fed’s decision Wednesday to consider a pause. Powell had said in March that a cutback in lending by banks, to shore up their finances, could act as the equivalent of a quarter-point rate hike in slowing the economy.

    At his news conference, Powell said he believed conditions in the industry have improved since early March and that “the U.S. banking sector is sound and resilient.” At the same time, he acknowledged that “the strains that emerged in the banking sector in early March appear to be resulting in even tighter credit conditions for households and businesses.”

    Fed economists have estimated that tighter credit resulting from the bank failures will contribute to a “mild recession” later this year, thereby raising the pressure on the central bank to suspend its rate hikes.

    The Fed is now also grappling with a standoff around the nation’s borrowing limit, which caps how much debt the government can issue. Congressional Republicans are demanding steep spending cuts as the price of agreeing to lift the nation’s borrowing cap.

    The Fed’s decision Wednesday came against an increasingly cloudy backdrop. The economy appears to be cooling, with consumer spending flat in February and March, indicating that many shoppers have grown cautious in the face of higher prices and borrowing costs. Manufacturing, too, is weakening.

    Even the surprisingly resilient job market, which has kept the unemployment rate near 50-year lows for months, is showing cracks. Hiring has decelerated, job postings have declined and fewer people are quitting jobs for other, typically higher-paying positions.

    The turmoil in the nation’s banking sector, which re-erupted last weekend as regulators seized and sold off First Republic Bank, has intensified the pressure on the economy. It was the second-largest U.S. bank failure ever and the third major banking collapse in the past six weeks. Investors have grown anxious about whether other regional banks may suffer from similar problems.

    Goldman Sachs estimates that a widespread pullback in bank lending could cut U.S. growth by 0.4 percentage point this year. That could be enough to cause a recession. In December, the Fed projected growth of just 0.5% in 2023.

    Wall Street traders were also unnerved by this week’s announcement from Treasury Secretary Janet Yellen that the nation could default on its debt as soon as June 1 unless Congress agrees to lift the debt limit, which caps how much the government can borrow. A first-ever default on the U.S. debt could potentially lead to a global financial crisis.

    The Fed’s rate hike Wednesday comes as other major central banks are also tightening credit. European Central Bank President Christine Lagarde is expected to announce another interest rate increase Thursday, after inflation figures released Tuesday showed that price increases ticked up last month.

    Consumer prices rose 7% in the 20 countries that use the euro currency in April from a year earlier, up from a 6.9% year-over-year increase in March.

    In the United States, some major drivers of higher prices have stalled or started to reverse, causing slowdowns in overall inflation. The consumer price index rose 5% in March from a year earlier, sharply lower than its 9.1% peak in June.

    The rise in rental costs has eased as more newly built apartments have come online. Gas and energy prices have fallen steadily. Food costs are moderating. Supply chain snarls are no longer blocking trade, thereby lowering the cost for new and used cars, furniture and appliances.

    Still, while overall inflation has cooled, “core” inflation — which excludes volatile food and energy costs — has remained chronically high. According to the Fed’s preferred measure, core prices rose 4.6% in March from a year earlier, scarcely better than the 4.7% it reached in July.

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  • The Fed raises US rates by a quarter point, signaling possible pause | Bank Automation News

    The Fed raises US rates by a quarter point, signaling possible pause | Bank Automation News

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    The Federal Reserve raised interest rates by a quarter percentage point and hinted it may be the final move in the most aggressive tightening campaign since the 1980s as economic risks mount. “The committee will closely monitor incoming information and assess the implications for monetary policy,’’ the Federal Open Market Committee said in a statement […]

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  • SVB, Fed guilty of poor management | Bank Automation News

    SVB, Fed guilty of poor management | Bank Automation News

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    Silicon Valley Bank and federal regulators alike let poor management slide for several years — leading to the largest banking failure since 2008. SVB lacked board effectiveness, risk management and internal audits within its operations, and had 31 outstanding supervisory warnings when the bank collapsed in March. Similarly, the Fed failed to follow up on […]

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  • Bank turmoil led Fed officials to forecast fewer rate hikes | Long Island Business News

    Bank turmoil led Fed officials to forecast fewer rate hikes | Long Island Business News

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    Turmoil in the banking system after two major banks collapsed led many Federal Reserve officials to envision fewer rate increases this year out of concern that banks will reduce their lending and weaken the economy.

    The heightened uncertainty surrounding the banking sector also helped Fed officials coalesce around their decision to raise their benchmark rate by just a quarter-point, rather than a half-point, despite signs that inflation was still too hot, according to minutes of the Fed’s March 22-23 meeting.

    The Fed also revealed Wednesday that its staff economists have forecast that a pullback in lending resulting from the banking turmoil will cause a “mild recession” starting later this year. The minutes noted that this forecast depends on how severe the consequences of the industry’s troubles prove to be and to what extent it will cause a cutback in lending.

    Overall, the minutes showed that the banking troubles injected significant uncertainty into the Fed’s decision and reversed an emerging trend to keep raising rates aggressively to quell inflation. At their meeting last month, Fed officials projected that they will raise their key short-term rate — which affects many consumer and business loans — just once more this year, at their May meeting.

    Before the collapse of Silicon Valley Bank, many officials said they had expected to forecast more than just one additional hike this year because economic and inflation data showed that the Fed still had more to do to control the pace of price increases. Instead, Fed officials agreed that the collapse of the two large banks “would likely lead to some weakening of credit conditions,” as banks sought to preserve capital by curtailing lending to consumers and businesses.

    Several officials said they had considered supporting leaving rates unchanged at last month’s meeting. But they added that actions by the Fed, the Treasury Department and the Federal Deposit Insurance Corp. had “helped calm conditions” in banking and reduced the risks to the economy in the short run.

    Some other officials said they had favored a half-point hike last month because hiring, consumer spending, and inflation data still pointed to a hot economy. But given the uncertainty resulting from the banking troubles, they “judged it prudent” to implement a smaller quarter-point increase.

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  • A key inflation gauge tracked by the Fed slowed in February | Long Island Business News

    A key inflation gauge tracked by the Fed slowed in February | Long Island Business News

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    The Federal Reserve’s favored inflation gauge slowed sharply last month, an encouraging sign in the Fed’s yearlong effort to cool price pressures through steadily higher interest rates.

    Friday’s report from the Commerce Department showed that consumer prices rose 0.3% from January to February, down from a 0.6% increase from December to January. Measured year-over-year, prices rose 5%, slower than the 5.3% annual increase in January.

    Excluding volatile food and energy prices, so-called core inflation rose 0.3% from January and 4.6% from a year earlier. Both reflected slowdowns from the previous month. The Fed is believed to pay particular attention to the core measure as a gauge of underlying inflation pressures.

    The report also showed that consumer spending rose 0.2% from January to February, a drop from a hefty 2% increase a month earlier.

    Taken as a whole, Friday’s figures show that inflation pressures, though easing gradually, still maintain a grip on the economy. The Fed has raised its benchmark rate nine times since March of last year in a strenuous drive to tame inflation, which hit a four-decade high in mid-2022.

    Job openings remain plentiful, hiring is still strong, layoffs are still low and the unemployment rate is barely above a half-century low. A result has been upward pressure on wages, which have contributed to inflationary pressures. Even after having slowed, consumer prices are still posting year-over-year increases well above the Fed’s 2% target. Earlier this month, the Labor Department said its consumer price index rose 0.4% from January to February and 6% from February 2022.

    The Fed’s policymaking has been complicated by the tumult that erupted in the financial system after the collapse this month of Silicon Valley Bank and New York-based Signature — the second- and third-biggest bank failures in U.S. history. The central bank now must consider the risk that its continuing efforts to cool inflation through ever-higher interest rates could further destabilize the banking system.

    At a news conference last week, Fed Chair Jerome Powell acknowledged that the uncertainties now overhanging small and midsize banks will likely cause tighter lending conditions. If banks do restrict lending in the coming months, Powell noted, it would probably slow the economy and perhaps act as the equivalent of a Fed rate hike.

    “The Fed’s preferred inflation measures are off recent peaks but remain well above target, showing slow progress in response to tighter monetary policy,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “Elevated price pressures, coupled with strong job growth that is restoring incomes and is supporting demand, should keep the Fed on track to hike rates further.”

    Many American families are still feeling squeezed by higher prices.

    “I can go get a $5 meal at Wendy’s, which isn’t even healthy, but that’s cheaper than buying the ingredients to make a meal at home,’’ said Jennifer Schultz of St. Joseph, Missouri.

    “Eggs started to skyrocket, meat’s gone up tremendously, a gallon of milk: staple products that our seniors needed — they were really being affected by the inflation and still are,” said Michelle Fagerstone, chief development officer at St. Joseph’s Second Harvest Community Food Bank.

    On Friday, the European Union reported that inflation in the 20 countries that use the euro currency slowed to its lowest level in a year as energy prices dropped, though food costs still rose, keeping pressure on the European Central Bank to raise rates further. Consumer prices in the eurozone jumped 6.9% in March from a year earlier, down from 8.5% in February. Eurozone inflation has been easing since peaking at 10.6% in October.

    In the United States, the Fed is thought to monitor the inflation gauge that was issued Friday, called the personal consumption expenditures (PCE) price index, even more closely than it does the government’s better-known consumer price index. Typically, the PCE index shows a lower inflation level than CPI. In part, that’s because rents, which have been among the biggest drivers of inflation, carry twice the weight in the CPI that they do in the PCE.

    The PCE price index also seeks to account for changes in how people shop when inflation jumps. As a result, it can capture emerging trends — when, for example, consumers shift away from pricey national brands in favor of less expensive store brands.

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  • Fed raises key rate by quarter-point despite bank turmoil | Long Island Business News

    Fed raises key rate by quarter-point despite bank turmoil | Long Island Business News

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    The Federal Reserve extended its year-long fight against high inflation Wednesday by raising its key interest rate a quarter-point despite concerns that higher borrowing rates could worsen the turmoil that has gripped the banking system.

    “The U.S. banking system is sound and resilient,” the Fed said in a written statement released after its two-day meeting.

    At the same time, the Fed warned that the financial upheaval stemming from the collapse of two major banks is “likely to result in tighter credit conditions” and “weigh on economic activity, hiring and inflation.”

    The central bank also signaled that it’s likely nearing the end of its aggressive series of rate hikes. In a statement it issued, it removed language that had previously indicated that it would keep raising rates at upcoming meetings. The statement now says “some additional policy firming may be appropriate” — a weaker commitment to future hikes.

    And in a series of quarterly economic projections, Fed officials forecast that they expect to raise their key rate just one more time – from its new level Wednesday of about 4.9% to 5.1%. That is the same peak level they had projected in December.

    The latest rate hike suggests that Chair Jerome Powell is confident that the Fed can manage a dual challenge: Cool still-high inflation through higher loan rates while defusing the financial upheaval in the banking sector through emergency lending programs and the Biden administration’s decision to cover uninsured deposits at two failed U.S. banks.

    The Fed’s decision to signal that the end of its rate-hike campaign is in sight may also soothe financial markets as they continue to digest the consequences of U.S. banking turmoil and the takeover last weekend of Swiss bank Credit Suisse by its larger rival.

    The Fed’s benchmark short-term rate has now reached its highest level in 16 years. The new level will likely lead to higher costs for many loans, from mortgages and auto purchases to credit cards and corporate borrowing. The succession of Fed rate hikes have also heightened the risk of a recession.

    The Fed’s latest decision, after a two-day policy meeting, reflects an abrupt shift. Early this month, Powell had told a Senate panel that the Fed was considering raising its rate by a substantial half-point. At the time, hiring and consumer spending had strengthened more than expected, and inflation data had been revised higher.

    In its statement, the Fed included some language that indicated that its fight against inflation is still far from complete. It said that hiring is “running at a robust pace” and noted that “inflation remains elevated.” It removed the phrase, “inflation has eased somewhat,” which it had included in its statement in February.

    The troubles that suddenly erupted in the banking sector two weeks ago likely led to the Fed’s decision Wednesday to impose a smaller rate hike. Some economists have cautioned that even a modest quarter-point rise in the Fed’s key rate, on top of its previous hikes, could imperil weaker banks whose nervous customers may decide to withdraw significant deposits.

    Silicon Valley Bank and Signature Bank were both brought down, indirectly, by higher rates, which pummeled the value of the Treasurys and other bonds they owned. As anxious depositors withdrew their money en masse, the banks had to sell the bonds at a loss to pay the depositors. They were unable to raise enough cash to do so.

    After the fall of the two banks, the Swiss bank Credit Suisse was taken over by its larger rival UBS last weekend. Another struggling bank, First Republic, has received large deposits from its rivals in a show of support, though its share price plunged Monday before stabilizing.

    THIS IS A BREAKING NEWS UPDATE. AP’s earlier story follows below.

    WASHINGTON (AP) — The Federal Reserve is grappling with a hazier economic picture, clouded by turmoil in the banking industry and still-high inflation, just as it meets to decide whether to keep raising interest rates or declare a pause.

    Most Fed watchers expect the central bank to announce on Wednesday afternoon a relatively modest quarter-point hike in its benchmark rate, its ninth increase since March of last year. Yet for the first time in recent memory, there remains some uncertainty about what the Fed will announce when it issues its policy statement at 2 p.m. Eastern time.

    The central bank will not only have to decide whether to extend its year-long streak of rate hikes despite the jitters roiling the financial industry. The Fed’s policymakers will also try to peer into the future and forecast the likely path of growth, employment, inflation and their own interest rates.

    Those forecasts will be particularly difficult this time. In their most recent forecasts in December, Fed officials projected that they would raise their short-term rate to about 5.1% by the end of this year, roughly a half-point above the current level. Some Fed watchers expect the policymakers on Wednesday to raise that forecast to 5.3%.

    But the upheaval in the banking industry has made any expectations far less certain. The Fed is meeting less than two weeks after Silicon Valley Bank failed in the second-largest bank collapse in American history. That shock was followed by the failure of another major bank, Signature Bank. A third, First Republic Bank, was saved from collapse by a $30 billion cash infusion.

    Given the heightened uncertainties overhanging the financial system, there’s a small chance that the Fed could decide not to issue its usual quarterly projections. Three years ago, when the pandemic struck, the Fed moved up a scheduled policy meeting to a Sunday, rather than on Tuesday and Wednesday, to urgently address the economic anxieties caused by new pandemic restrictions. After that meeting, the Fed didn’t release any quarterly projections.

    At the time, Powell said that issuing economic and interest rate forecasts, when the consequences of the COVID-19 pandemic were so unclear, “could have been more of an obstacle to clear communication than a help.” Still, the unusual decision then was as much a reflection of the chaos of the early pandemic as it was of the uncertain outlook.

    If the Fed does raise its key rate by a quarter-point on Wednesday, it would reach roughly 4.9%, the highest point in nearly 16 years. Early this month, Powell had said in congressional testimony that a half-point rate increase would be possible at this week’s meeting. The banking crisis has suddenly upended that outlook.

    It will be a tough call for the 11 Fed officials who will vote on the rate decision. With hiring still strong, consumers still spending and inflation still elevated, a rate hike would normally be a straightforward move.

    Not this time. The Fed is expected to treat inflation and financial turmoil as two separate problems, to be managed simultaneously by separate tools: Higher rates to address inflation and greater Fed lending to banks to calm financial turmoil.

    Complicating matters will be the difficulty in determining the impact on the economy of the collapse of Silicon Valley and Signature. The Fed, Federal Deposit Insurance Corp., and Treasury Department agreed to insure all the deposits at those banks, including those above the $250,000 cap. The Fed also created a new lending program to ensure that banks can access cash to repay depositors, if needed.

    But economists warn that many mid-sized and small banks, in order to conserve capital, will likely become more cautious in their lending. A tightening of bank credit could, in turn, reduce business spending on new software, equipment and buildings. It could also make it harder for consumers to obtain auto or other loans.

    Some economists worry that such a slowdown in lending could be enough to tip the economy into recession. Wall Street traders are betting that a weaker economy will force the Fed to start cutting rates this summer. Futures markets have priced in three quarter-point cuts by the end of the year.

    The Fed would likely welcome slower growth, which would help cool inflation. But few economists are sure what the effects would be of a pullback in bank lending.

    Other major central banks are also seeking to tame high inflation without worsening the financial instability caused by the two U.S. bank collapses and a hasty sale of the troubled Swiss bank Credit Suisse to its rival UBS.

    Even with the anxieties surrounding the global banking system, the Bank of England faces pressure to approve an 11th straight rate hike Thursday with annual inflation having reached 10.4%.

    And the European Central Bank, saying Europe’s banking sector was resilient, last week raised its benchmark rate by a half point to combat inflation of 8.5%. At the same time, the ECB president, Christine Lagarde, has shifted to an open-ended stance regarding further increases. In light of uncertainties, she said, “we are neither committed to raise further nor are we finished with hiking rates.”

    In the United States, most recent data still points to a solid economy and rampant hiring. Employers added a robust 311,000 jobs in February, the government said earlier this month. And while the unemployment rate rose, from 3.4% to a still-low 3.6%, that mostly reflected an influx of new job-seekers who were not immediately hired.

    Consumer spending was robust in January, fueled in part by a large cost-of-living adjustment for 70 million recipients of Social Security and other benefits. The Federal Reserve Bank of Atlanta projects that the economy will have expanded at a healthy annual rate of 3.2% in the first three months of this year.

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  • After two historic US bank failures, here’s what comes next | Long Island Business News

    After two historic US bank failures, here’s what comes next | Long Island Business News

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    Two large banks that cater to the tech industry have collapsed after a bank run, government agencies are taking emergency measures to backstop the financial system, and President Joe Biden is reassuring Americans that the money they have in banks is safe.

    It’s all eerily reminiscent of the financial meltdown that began with the bursting of the housing bubble 15 years ago. Yet the initial pace this time around seems even faster.

    Over the last three days, the U.S. seized the two financial institutions after a bank run on Silicon Valley Bank, based in Santa Clara, California. It was the largest bank failure since Washington Mutual went under in 2008.

    How did we get here? And will the steps the government unveiled over the weekend be enough?

    Here are some questions and answers about what has happened and why it matters:

    WHY DID SILICON VALLEY BANK FAIL?

    Silicon Valley Bank had already been hit hard by a rough patch for technology companies in recent months and the Federal Reserve’s aggressive plan to increase interest rates to combat inflation compounded its problems.

    The bank held billions of dollars worth of Treasuries and other bonds, which is typical for most banks as they are considered safe investments. However, the value of previously issued bonds has begun to fall because they pay lower interest rates than comparable bonds issued in today’s higher interest rate environment.

    That’s usually not an issue either because bonds are considered long term investments and banks are not required to book declining values until they are sold. Such bonds are not sold for a loss unless there is an emergency and the bank needs cash.

    Silicon Valley, the bank that collapsed Friday, had an emergency. Its customers were largely startups and other tech-centric companies that needed more cash over the past year, so they began withdrawing their deposits. That forced the bank to sell a chunk of its bonds at a steep loss, and the pace of those withdrawals accelerated as word spread, effectively rendering Silicon Valley Bank insolvent.

    WHAT DID THE GOVERNMENT DO SUNDAY?

    The Federal Reserve, the U.S. Treasury Department, and Federal Deposit Insurance Corporation decided to guarantee all deposits at Silicon Valley Bank, as well as at New York’s Signature Bank, which was seized on Sunday. Critically, they agreed to guarantee all deposits, above and beyond the limit on insured deposits of $250,000.

    Many of Silicon Valley’s startup tech customers and venture capitalists had far more than $250,000 at the bank. As a result, as much as 90% of Silicon Valley’s deposits were uninsured. Without the government’s decision to backstop them all, many companies would have lost funds needed to meet payroll, pay bills, and keep the lights on.

    The goal of the expanded guarantees is to avert bank runs — where customers rush to remove their money — by establishing the Fed’s commitment to protecting the deposits of businesses and individuals and calming nerves after a harrowing few days.

    Also late Sunday, the Federal Reserve initiated a broad emergency lending program intended to shore up confidence in the nation’s financial system.

    Banks will be allowed to borrow money straight from the Fed in order to cover any potential rush of customer withdrawals without being forced into the type of money-losing bond sales that would threaten their financial stability. Such fire sales are what caused Silicon Valley Bank’s collapse.

    If all works as planned, the emergency lending program may not actually have to lend much money. Rather, it will reassure the public that the Fed will cover their deposits and that it is willing to lend big to do so. There is no cap on the amount that banks can borrow, other than their ability to provide collateral.

    HOW IS THE PROGRAM INTENDED TO WORK?

    Unlike its more byzantine efforts to rescue the banking system during the financial crisis of 2007-08, the Fed’s approach this time is relatively straightforward. It has set up a new lending facility with the bureaucratic moniker, “Bank Term Funding Program.”

    The program will provide loans to banks, credit unions, and other financial institutions for up to a year. The banks are being asked to post Treasuries and other government-backed bonds as collateral.

    The Fed is being generous in its terms: It will charge a relatively low interest rate — just 0.1 percentage points higher than market rates — and it will lend against the face value of the bonds, rather than the market value. Lending against the face value of bonds is a key provision that will allow banks to borrow more money because the value of those bonds, at least on paper, has fallen as interest rates have moved higher.

    As of the end of last year U.S. banks held Treasuries and other securities with about $620 billion of unrealized losses, according to the FDIC. That means they would take huge losses if forced to sell those securities to cover a rush of withdrawals.

    HOW DID THE BANKS END UP WITH SUCH BIG LOSSES?

    Ironically, a big chunk of that $620 billion in unrealized losses can be tied to the Federal Reserve’s own interest-rate policies over the past year.

    In its fight to cool the economy and bring down inflation, the Fed has rapidly pushed up its benchmark interest rate from nearly zero to about 4.6%. That has indirectly lifted the yield, or interest paid, on a range of government bonds, particularly two-year Treasuries, which topped 5% until the end of last week.

    When new bonds arrive with higher interest rates, it makes existing bonds with lower yields much less valuable if they must be sold. Banks are not forced to recognize such losses on their books until they sell those assets, which Silicon Valley was forced to do.

    HOW IMPORTANT ARE THE GOVERNMENT GUARANTEES?

    They’re very important. Legally, the FDIC is required to pursue the cheapest route when winding down a bank. In the case of Silicon Valley or Signature, that would have meant sticking to rules on the books, meaning that only the first $250,000 in depositors’ accounts would be covered.

    Going beyond the $250,000 cap required a decision that the failure of the two banks posed a “systemic risk.” The Fed’s six-member board unanimously reached that conclusion. The FDIC and the Treasury Secretary went along with the decision as well.

    WILL THESE PROGRAMS SPEND TAXPAYER DOLLARS?

    The U.S. says that guaranteeing the deposits won’t require any taxpayer funds. Instead, any losses from the FDIC’s insurance fund would be replenished by a levying an additional fee on banks.

    Yet Krishna Guha, an analyst with the investment bank Evercore ISI, said that political opponents will argue that the higher FDIC fees will “ultimately fall on small banks and Main Street business.” That, in theory, could cost consumers and businesses in the long run.

    WILL IT ALL WORK?

    Guha and other analysts say that the government’s response is expansive and should stabilize the banking system, though share prices for medium-sized banks, similar to Silicon Valley and Signature, plunged Monday.

    “We think the double-barreled bazooka should be enough to quell potential runs at other regional banks and restore relative stability in the days ahead,” Guha wrote in a note to clients.

    Paul Ashworth, an economist at Capital Economics, said the Fed’s lending program means banks should be able to “ride out the storm.”

    “These are strong moves,” he said.

    Yet Ashworth also added a note of caution: “Rationally, this should be enough to stop any contagion from spreading and taking down more banks … but contagion has always been more about irrational fear, so we would stress that there is no guarantee this will work.”

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