The yield on the 10-year Treasury is closing in on 2%, while stocks were mixed on worries the Federal Reserve will begin to unwind its bond purchases sooner rather than later.
Central bank easing continues as Reserve Bank of Australia cuts borrowing costs overnight, following European Central Bank’s move last Thursday
Ben Bernanke defends the low interest rate policies of the US Federal Reserve and central banks in Europe, saying they were helping to boost the global economy.
See original here: Bernanke defends low interest rates
The US Federal Reserve says the economy has strengthened “moderately” but still needs stimulus measures to underpin recovery.
See original here: Fed cautious on US economic recovery
Federal Reserve officials dinged JPMorgan and Goldman for being off on their stress test results. Wells Fargo, however, got a pass.
The Federal Reserve rejected the plans from Ally Financial and regional bank BB&T. And in a bit of a surprise, the Fed conditionally okayed buyback and dividend plans from banking giants JPMorgan Chase and Goldman Sachs.
See original here: Fed approves capital plans from 16 of 18 big banks
The Reserve Bank of Australia confirms a press report that it has been targeted by hackers, but says no data has been lost.
The MPC held the base rate and refused to expand QE this month. But a more radical approach to stimulating the economy is still on the cards. Here’s how it might be done
The Bank of England resisted pressure to inject billions of pounds into the economy on Thursday, amid mounting speculation that its remit could be changed to encourage policymakers to focus on growth rather than inflation.
The monetary policy committee (MPC) voted against expanding its £375bn quantitative easing (QE) programme and kept interest rates at their historic four-year low of 0.5%.
The MPC announcement suggests outgoing bank governor Sir Mervyn King has been outvoted two months running for the first time in his 10 years at the helm of the Bank. At the February MPC meeting, King and two others voted to increase QE by £25bn to £400bn.
Speculation that the arrival of Mark Carneyin the summer to replace King will be accompanied by a broader remit for the MPC has gathered pace since the Canadian central bank chief made it clear he favours adopting unorthodox measures to stimulate growth.
The MPC is currently required to keep inflation at 2% over the “medium term”. This phrase has been interpreted as meaning between two and three years. The committee must also pay regard to employment and growth.
The Treasury is currently conducting its annual review of the remit, and it is possible that inflation, which is expected to remain above 2% for the next couple of years, will be de-emphasised in favour of a growth target, in a victory for the “market monetarists” – successors to Milton Friedman who believe that anchoring the market’s expectations of long-term interest rates should be the MPC’s main aim.
For now the committee’s main tool is QE and the decision over whether to increase the money-printing has probably been delayed rather than abandoned completely; many predict an expansion of the programme in the next two or three months.
Howard Archer of IHS Global Insight said: “The Bank of England’s decision to hold off from stimulative action was highly likely the result of a tightly split vote and we strongly suspect that the MPC will act in the second quarter and very possibly as soon as April.”
Other commentators were wary of any increase. David Kern, chief economist at the British Chambers of Commerce, said: “We believe this would be misguided, as more QE would provide only marginal benefits for the real economy, while heightening risks of financial distortions, bubbles and higher inflation.”
But last month the MPC discussed embracing a broader set of policy tools, seven of which are discussed below:
The Bank of England has “printed” £375bn of extra money since March 2009 and spent all of it on buying government bonds from banks and insurers in the hope they will lend the proceeds to other private sector companies.
The Bank could follow the example of the US Federal Reserve and buy other, more risky, assets, such as home loans. There are commercially traded bundles of mortgages, known as mortgage-backed securities, sitting in bank reserves; the central bank could relieve lenders of these mortgages, allowing them to lend more to ordinary customers. Capital Economics believes that under the current remit QE could rise to £500bn by the end of next year. A growth target, or a target to achieve a set level of GDP, could accelerate that process.
Funding for Lending
The Treasury has backed an £80bn scheme that offers high street banks and building societies access to money at 0.5% as long as they lend it to customers at a discounted rate. Some banks, like Barclays, have lent money, while others have stashed the cash – Royal Bank of Scotland, Lloyds and Santander being the largest. Funding for Lending could be expanded and made even cheaper. Non-deposit-taking lenders could be included. But when only a quarter of the £80bn has so far found its way into the system, it still has some way to go before a top-up is needed.
A cut in interest rates
A move from 0.5% to 0.25% would mimic the Federal Reserve. Or a 0% rate would create a clear gap between the UK and continental Europe, where base rates are 0.75%. Base rate tracker mortgages would come down in price. However, the suspicion is that most mortgage products would stay the same and the only beneficiary would be the profit margins of high street lenders.
Negative interest rates
Both Funding for Lending and QE are carrots. A negative interest rate is a big stick. Deputy governor Paul Tucker is tempted to make banks pay to deposit money at the central bank because too many of them are adopting a safety-first policy rather than lending to businesses.
Unfortunately, lots of mortgage products track the 0.5% base rate, so if the base rate became -0.5%, banks would be forced to cut the mortgage rate and lose money. Tucker believes it may be possible to apply the -0.5% to some high street bank reserves and set aside the cash that supports existing mortgage lending. Complex and tricky.
Working capital instruments
Tucker also says that big corporations, which are sitting on piles of unspent profits, could make loans to their suppliers. The loans, which he calls “working capital instruments”, would support investment by small and medium-sized firms and be underwritten in some form by the central bank. Tucker is looking around for money that businesses can access, which is logical, but maybe small businesses would benefit more from big firms simply paying them on time.
Lord Turner, the outgoing chairman of the Financial Services Authority who lost out to Carney in the governor race, has floated the idea of the Bank directly funding the government. The plan would allow chancellor George Osborne to announce multibillion-pound spending on infrastructure projects. Like a helicopter dropping cash from the sky, the central bank would supply the funds rather than the Treasury running up bigger current accounts deficits – an off-balance-sheet exercise that could keep the ratings agencies at bay.
Once there was a thriving commercial bill market, but it died out. It could be revived to provide an avenue for the private sector to access loans. It works like this: two businesses are trading; one owes the other money. The debtor might give the other a bill saying they will pay in three months. This bill can then be traded.
The Federal Reserve said banks are in better shape than in 2008. But another severe recession would still hit the industry hard. Ally Financial was deemed to be in the worst condition.
Read the original: Stress test results: Banks could lose nearly half a trillion dollars