Saturday, October 6, 2018

Ambrose Evans-Pritchard - US Federal Reserve interest rate hikes 'will trigger debt meltdown'

Problems for the zombie companies as the Fed fights inflation.

Fitch Ratings has warned that global bond markets face a rude shock as the US Federal Reserve jams on the brakes to avert overheating, with grave implications for inflated asset prices across the world.
Brian Coulton, the agency's chief economist, said investors have underestimated the Fed's determination to drain excess liquidity and prevent the inflation genie escaping from the bottle. It can no longer wait as White House fiscal stimulus drives a surge in late-cycle growth.
"When you listen to what Fed chairman Jay Powell is saying, you have to take him at his word," Mr Coulton told The Daily Telegraph.
"We think there will be four more rate rises by the end of next year, and the markets have not got their arms around this."

There is a shock coming'

"There is a shock coming," said Mr Coulton. Yields on 10-year US Treasuries surged to a seven-year high of 3.22 per cent after Mr Powell said the US economy was firing on all cylinders and issued fire-breathing comments on interest rates.
We may go past neutral," he said. "But we're a long way from neutral at this point."
Pepperstone Group said a move of this size is a "very rare occurrence" for the US Treasury market. Contagion spread instantly through the global debt Trump's

Trump's spending blitz on infrastructure has suddenly begun to flow through, at exactly the wrong moment in the economic cycle.
The Financial Review (source, The Financial Times) 

11 comments:

Ralph Musgrave said...

Meltdown? I thought all sorts of wonderful "stress tests" had been done to ensure there is no meltdown. Or were the stress tests all BS?

Andrew Anderson said...
This comment has been removed by the author.
Andrew Anderson said...

Due to government privilege, fiat use is largely limited to banks and other depository institutions.

Thus the demand for fiat is artificially suppressed and, we are told, the natural interest rate for fiat is ZERO percent.

Then how does the Federal Reserve RAISE the interest rate of fiat if its so-called natural rate is ZERO percent?

The answer is welfare for banks and the rich such as Interest on Reserves (IOR), borrowing reserves from the banks at interest (reverse repos), and the re-selling of the inherently risk-free debt of the monetary sovereign at whatever high yields are required to hit the Federal Reserve's interest rate target.

So, to counter the effect of government privileges for the banks - a so-called natural interest rate in fiat of ZERO percent - we have government welfare for the banks!

Filthy lucre, indeed.

Matt Franko said...

“Fed's determination to drain excess liquidity”

If they were to drain even all $2T of current reserve assets that would mean depositories would be approx 200b over capitalized...

Matt Franko said...

“government welfare for the banks!”

Yo It’s a penalty rate... in ANY other business segment they can make more munnie than via ior...

Andrew Anderson said...

Fiat account balances at the Central Bank are inherently risk-free and thus (given overhead costs of the Central Bank), non-negative interest on them is WELFARE proportional to account balance.

A true penalty rate would thus be even more negative.

Andrew Anderson said...

that would mean depositories would be approx 200b over capitalized... Franko

via welfare for the banks.

Joe said...

I just watched an interview with the chair of the Fed by PBS's Judy Woodruff and he basically said the goldilocks times are here to stay for quite some time, more or less the indefinite future...

Weren't officials saying the same thing circa fall 2008?

Matt Franko said...

They could go out and lend against cars at like 6% and instead they are forced to finance reserves at 2% and somehow you think this is “welfare!”

????

Ralph Musgrave said...

Andrew Anderson is right to say the Fed can raise interest rates by paying interest on reserves. However, I’m not sure how much truth there is in his claim that commercial banks benefit from that.

Obviously they are the INITIAL beneficiaries: i.e. if the Fed raises interest on reserves by 1%, then the initial effect for a bank with say one billion in reserves is to raise its income by 1% of one billion. But if competitive forces are working (and that’s a big “if” of course), then the eventual beneficiaries will be all the bank’s customers: those making deposits, those getting loans, etc.

As for who pays for that interest, that’ll be taxpayers or the population in general: e.g. if the effect of that extra interest is to reduce the Fed’s profits (which are remitted to the Treasury every year or so), then the Treasury has less money, which in turn means less public spending, or tax increases, all else equal.

So my conclusion is: if competitive forces are working, the effect of interest on reserves is to benefit bank customers, with the biggest customers benefiting the most of course. As for who pays for that benefit, well that’s the population in general.

Andrew Anderson said...

They could go out and lend against cars at like 6% and instead they are forced to finance reserves at 2% and somehow you think this is “welfare!” Franko

If banks are at their capital leverage limit, then they should increase their capital by issuing and selling more of their common stock.

Of course with 100% private banks with 100% voluntary depositors, banks could do as they please with regard to capital and liquidity. But you don't want that, do you Franko?

So, live by government privilege; die by government regulation sounds fair to me.