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Coronavirus Tests Fed Officials' Wait-and-See Rates Stance; Fed Paper Highlights Inflation
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Good day. Two Fed officials said yesterday that for now they're monitoring risks from the virus and are not ready to act on interest rates because of its economic ripple effects. But, as investors place growing bets on rate cuts later this year, the central bank is in a delicate position. Meanwhile, new research by the San Francisco Fed suggests that inflation is unlikely to be sustained at the Fed’s 2% target until the central bank finds a way to convince the public that it can provide meaningful stimulus in the next downturn.
Now on to today’s news and analysis.
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Fed’s Wait-and-See Posture Tested by Spread of Coronavirus
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Signs that the virus is spreading to countries like South Korea led to a sharp pullback in risk taking by investors. Above, a woman at a shopping district in Seoul Monday. PHOTO: KIM HONG-JI/REUTERS
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Markets and global events are giving central bankers a case of déjà vu. Last year the threat of a growth downturn exacerbated by trade uncertainty prompted the Federal Reserve to cut interest rates. Now, the potential for a global coronavirus outbreak is again putting the Fed in a delicate spot. Fed officials have said it is too soon to say whether any virus fallout that roils supply chains, output and travel will force the kind of “material reassessment” of the economy that they said last fall would be needed to resume rate cuts.
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Cleveland Fed President Loretta Mester said Monday she is comfortable with the current interest-rate posture and is closely monitoring the risk of the coronavirus outbreak on global growth.
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Minneapolis Fed President Neel Kashkari, another FOMC voter, said it was too soon to say how the Fed might respond: “I don’t see any urgent need to move until we have more information.”
Coronavirus Latest:
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Fear of Coronavirus, Rather Than Virus Itself, Hits Economies
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The stock market’s steep drop on Monday reflected fears that as the coronavirus spreads to other countries, the reaction may be as draconian as it has been in China, Greg Ip writes at The Wall Street Journal. He adds that authorities have fewer compunctions about raising barriers to trade and travel in the name of disease control than in the recent past, such that "The epidemic is thus one more force working to undo globalization."
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Utilities’ Message About Central Banks
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The renewed vigor of utility stocks likely has to do with central banks and how they address tectonic shifts in common wisdom, Jon Sindreu writes at The Wall Street Journal. He says that market expectations for prices "remain very stable, showing no fears of a deflationary spiral like they did back in 2016. Instead, it is expectations of inflation-adjusted or 'real' interest rates that have collapsed."
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Derby's Take: Market Pressure Mounts on Fed to Lower Rates
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While Federal Reserve officials have thus far shown no appetite for lower short-term borrowing costs, pressure in financial markets is mounting for lower rates as worries over the coronavirus’ negative impact on the global economy increase. Read more.
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Other Developments Around the World
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With Current Tools, Fed Unlikely To Sustainably Hit Inflation Target
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Inflation stands a good chance of not sustainably hitting the Federal Reserve’s 2% target until central bankers find a new mix of policies that will boost public confidence the central bank can provide meaningful stimulus in the next downturn, according to a paper published by the San Francisco Fed Monday. The researchers found that inflation remains historically low because the public worries that in the next downturn the central bank will once again hit de facto zero rates and struggle to provide stimulus after that.
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Fed Temporary Liquidity Rises Monday After Weak Demand on Friday
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Canada Police Begin Taking Down Rail Blockade
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Police began dismantling a rail blockade led by indigenous antipipeline protesters that had choked off passenger and freight-rail traffic for more than two weeks and threatened to shave 0.1% to 0.3% from the country’s economic output this month.
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Financial Regulation Roundup
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SEC Rethinks Approach to Conflicts Among Bond-Rating Firms
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The head of the agency’s Office of Credit Ratings said it is seeking input on ways to limit pressure firms such as S&P Global Inc. and Moody’s Corp. face to boost bond ratings. Bond issuers, which benefit from higher ratings, pay ratings firms to grade the bonds.
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Argentina’s New Bond-Market Nemesis Is Fidelity
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Once viewed as hands-off, big money managers are becoming a force to be reckoned with when governments try to force restructurings on bondholders because they often find themselves owning the lion’s share of bonds when governments fail to pay.
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Japan’s Aging Population Breathes New Life Into an Old Idea
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A controversial centuries-old investment arrangement—the tontine, in which the longest-surviving participants benefit from the money forfeited by those who die sooner—is experiencing a resurgence in Japan as a savings vehicle designed for the era of longevity.
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Payments Startup Revolut Valued at $5.5 Billion With New Funding
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Revolut Ltd., one of the fastest-growing startups in the hot U.K. digital banking and payments market, was valued at $5.5 billion after it raised $500 million in new funding from venture capitalists. The company plans to start offering services in the U.S. this year.
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Time N/A: National Bank of Hungary releases policy statement
8:45 a.m.: Dallas Fed’s Kaplan speaks at University of Missouri-Kansas City real estate trends symposium in Kansas City
12:30 p.m.: Bank of Canada’s Lane speaks on money and payments in the digital age at fintech conference in Montreal
3 p.m.: Fed’s Clarida speaks on economy and monetary policy at National Association for Business Economics conference in Washington
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3 a.m.: European Central Bank’s Panetta speaks at joint Deutsche Bundesbank, ECB and Chicago Fed conference on central counterparty risk management in Frankfurt
9:35 a.m.: Dallas Fed’s Kaplan speaks in Austin, Texas
10 a.m.: U.S. Commerce Department releases January new-home sales
1 p.m.: Minneapolis Fed’s Kashkari speaks about his bank in Minneapolis
3 p.m.: Bank of Mexico releases policy statement
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Mexico's consumer-price index rose 0.12% from the end of January and was up 3.52% from a year earlier, the National Statistics Institute said. The Bank of Mexico's inflation target is 3%.
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The Chicago Fed National Activity Index, a measure of economic activity in the U.S., inched higher in January, signaling growth. The index was -0.25 for January, compared with a -0.51 reading in December. When a reading is above -0.35, it has in the past meant the economy is expanding. (DJN)
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Manufacturing in Texas improved in February and executives said they were more optimistic about their companies and the economy, the Dallas Fed said. The production index in its manufacturing outlook survey rose to 16.4 points this month from 10.5 in January. (DJN)
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Germany’s economy stalled in the fourth quarter as consumption lost steam, Germany’s Federal Statistical Office said Tuesday, confirming a preliminary estimate.
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French manufacturing sector sentiment remains unchanged in February from January, as business leaders continued to be largely optimistic about activity in the sector despite coronavirus fears.
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The two hottest U.S. job markets in 2019 were growing Southern state capitals with vibrant music scenes and an influx of technology jobs: Austin, Texas, and Nashville, Tenn.
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