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The Era of Fed Power Is Over; Kaplan Warns on Investor Risk Taking; Beige Book Reports Continued Modest Growth
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Good day. With interest rates stuck around zero, the Federal Reserve and other central banks are left without their principal lever over the business cycle, Greg Ip writes in a Wall Street Journal analysis. Dallas Fed President Robert Kaplan said he has concerns investors are taking more risks in response to Fed moves to boost its balance sheet. And the Fed's latest beige book report showed the U.S. economy continued its modest growth heading into the new year.
Now on to today’s news and analysis.
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The Era of Fed Power Is Over
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Fed Chairman Jerome Powell on Capitol Hill in November. PHOTO: SAM CORUM/EPA/SHUTTERSTOCK
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The Fed and other central banks have long been the unchallenged drivers of financial markets and the business cycle. “Don’t fight the Fed,” goes one Wall Street adage. That era is drawing to a close, Greg Ip writes for the Journal. In many countries, interest rates are so low, even negative, that central banks can’t lower them further. Tepid economic growth and low inflation mean they can’t raise rates, either.
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“We are one recession away from joining Europe and Japan in the monetary black hole of zero rates and no prospect of escape.”
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— Harvard University economist Larry Summers
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Kaplan Warns Central Bank Actions Are Driving Up Risk Taking
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Dallas Fed leader Robert Kaplan said central bank actions, most notably its injections of liquidity into financial markets, are boosting investors’ risk taking, adding he would like to find a way soon to pare back the expansion of the Fed’s balance sheet.
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Harker Says Rates Should Hold Steady for Now, Money Markets Calm
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Philadelphia Fed leader Patrick Harker said that while he was skeptical of last year’s central bank interest-rate cuts, he believes monetary policy is now in a good place.
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Other Developments Around the World
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Beige Book Reports Continued Modest Growth
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The U.S. economy is entering 2020 on solid footing, having kept up its modest expansion in the final six weeks of 2019, the Fed said. Tight labor markets, slow price increases and a solid holiday season—particularly among online shoppers—offset weakness in manufacturing, the central bank said in its beige book report.
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White House Readies Formal Nomination of Fed Picks
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White House officials will soon send to the Senate two nominations to the Fed's Board of Governors that were first announced by President Trump more than six months ago, according to people familiar with the matter. Trump announced his selections of economists Judy Shelton and Christopher Waller in July on Twitter, but the White House hasn't formally submitted the nominations pending reviews of the candidates' finances and writings. (Dow Jones Newswires)
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Fed Added Just Under $50 Billion in Temporary Liquidity Wednesday
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The New York Fed added $47.5 billion to financial markets Wednesday. The intervention came in the form of an overnight repurchase agreement, or repo, operation. Eligible banks offered the Fed $26.5 billion in Treasurys and $21 billion in mortgage securities. Banks sought far less than the $120 billion the Fed was willing to offer.
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Environmental Risks Loom Large for World Economic Forum Members
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Environmental risks have jumped to the top of the concerns of government, academic and business leaders over a 10-year horizon as the effects of climate change have struck harder and more rapidly than many expected, according to a report from the World Economic Forum ahead of its meeting next week in Davos, Switzerland.
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Swiss Franc Gains After Switzerland Added to Currency Watch List
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Inclusion on the U.S. Treasury’s watch list of currency manipulators is unlikely to lead to any immediate policy changes but acts as a warning to the Swiss National Bank, which has intervened in the past to cap gains in the currency.
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Turkish Central Bank Cuts Rates Again
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Turkey’s central bank cut its benchmark rate for the fifth time in six months, as its new governor continued to ease policy in line with President Recep Tayyip Erdogan’s attempt to stimulate economic growth.
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Financial Regulation Roundup
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SEC Market-Surveillance Project Hits Snag Over Hacker Fears
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A project to create a massive market-surveillance database for U.S. financial regulators is encountering fresh resistance from Wall Street brokerages that fear it could be targeted by hackers seeking investors’ private information.
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U.S. Banks, Card Companies Catch a Break in China Trade Deal
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A trade deal with China has given U.S. banks and financial companies new hope that their decadeslong attempts to crack the Chinese market may bear fruit. The deal promises to clear some of the bureaucratic obstacles that have hindered the efforts of U.S. banks, credit-card networks, insurance companies and investors to expand in China.
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SEC Meets With Private-Equity Leaders on Retail-Investing Push
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Two giant private-equity firms have told regulators that ordinary investors could benefit from access to private markets, but that any rule changes would need to be thought through carefully.
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New York Businessman Convicted in Insider-Trading Trial
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A federal jury in Manhattan found Telemaque Lavidas guilty on charges that he leaked inside information about a publicly traded biotechnology company to a Greek stock trader, as part of an alleged international insider-trading network.
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U.S. Government Recommends Time Served for ‘Flash Crash’ Trader
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The U.S. government said Navinder Singh Sarao, the British trader accused of contributing to the 2010 stock-market “flash crash,” shouldn’t serve any more time in jail.
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Michael Avenatti Ordered Jailed Until Trial
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A federal judge in California ordered celebrity attorney Michael Avenatti jailed until his trial in that state, after prosecutors accused him of committing a ream of financial crimes while free on bond.
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Insurance Officials Pursue Control of Some of Greg Lindberg’s Firms
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North Carolina insurance officials are seeking appointment of a temporary receiver to take control of numerous private companies owned by insurance executive Greg Lindberg, newly unsealed state court documents show.
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Goldman Profit Falls as Bank Braces for 1MDB Fine
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Eight years ago, Goldman Sachs Group bankers sold bonds on behalf of a little-known Malaysian investment fund. Wednesday, the fallout from that deal wiped out about 13% of the bank’s 2019 profit and darkened otherwise strong results.
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Cloud Security Concerns Prompt Scrutiny From Financial Regulators
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U.S. financial regulators put banks and brokers on notice that a key part of compliance audits will be the scrutiny of how these firms control the information they store in the cloud.
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7:30 a.m.: European Central Bank releases Dec. 11-12 meeting minutes
8:30 a.m.: U.S. Commerce Department releases December retail sales
9 a.m.: Philadelphia Fed’s Harker speaks on economic outlook to New Jersey Bankers Association in Somerset
10 a.m.: Fed’s Bowman speaks on outlook for housing in Kansas City, Mo.
1 p.m.: European Central Bank’s Lagarde gives speech in Frankfurt
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Time N/A: Bank of Korea releases policy statement
8:30 a.m.: U.S. Commerce Department releases December housing starts
9:15 a.m.: Federal Reserve releases December U.S. industrial production
10 a.m.: U.S. Labor Department releases November Job Openings and Labor Turnover Survey; University of Michigan releases preliminary January U.S. consumer sentiment
12:45 p.m.: Fed’s Quarles speaks on bank supervision at American Bar Association Banking Law Committee meeting in Washington
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What Happens When Central Banks Accept Riskier Collateral?
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After the global financial crisis, the Bank of England began accepting riskier assets such as loan portfolios in its liquidity operations. In an article for the BOE's Bank Underground blog, Calebe de Roure of the Reserve Bank of Australia and the Bank of England's Nick McLaren examine whether that has led to an increase in risk by incentivizing banks to use riskier assets as collateral, or by encouraging riskier banks to participate in liquidity operations.
The short answer: No. The BOE conducted liquidity operations after the crisis in two main ways with different collateral rules: through indexed long-term repos and the Funding for Lending Scheme. The structure of the FLS meant it attracted collateral assets with higher liquidity risk. But while riskier banks were more likely to use the FLS, they didn't end up borrowing more as a result, the researchers write. They conclude that they "find no evidence for risk concentration among weaker counterparties and illiquid collateral...The lack of bad incentives suggests that the BOE is able to appropriately account for risk and liquidity differences between collateral assets when setting its haircuts."
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The U.S. and China signed a trade deal that officials say will lead to a sharp increase in sales of U.S. goods and services to China, further open Chinese markets to foreign firms—especially in financial services—and provide new protections for trade secrets and intellectual property.
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U.S. business leaders generally applauded the trade pact but stressed the need to keep negotiations going on an accord that could result in a lifting of tariffs on Chinese imports.
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Chinese Vice Premier Liu He said he was confident in the Chinese economy after signing the trade deal. Meanwhile, a WSJ poll of 15 economists suggested the economy likely grew 6.1% on year in the fourth quarter, up from 6% in the third quarter.
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Canadian home sales fell in December, breaking a nine-month streak of gains that has powered a rebound in the national market and prompted the Bank of Canada’s governor to caution about a return of froth in real-estate prices.
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The Organization of the Petroleum Exporting Countries said aimproving outlook for the global economy will feed through into accelerated oil demand growth in 2020.
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Business activity in the state of New York expanded in January, while optimism looking six months out declined slightly. The general business conditions index for the New York Fed's Empire State Manufacturing Survey was 4.8 for January, up from 3.3 for December. (Dow Jones Newswires)
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China’s central bank injected 300 billion yuan ($43.5 billion) of liquidity via its reverse repurchase agreements in a bid to keep enough funds in the banking system ahead of the Lunar New Year.
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Jon Hilsenrath, Michael Derby, Nell Henderson, Nick Timiraos, Jason Douglas, Paul Hannon, Harriet Torry, Kate Davidson, David Harrison, Kim Mackrael, Tom Fairless, Megumi Fujikawa, Michael Maloney, Paul Kiernan, James Glynn
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