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Bostic Doesn't Think Rate Cut Was Justified; John Williams Transcript; BOE's Brexit Forecast
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Good day. Atlanta Fed President Raphael Bostic said he probably would have voted against week's rate cut if he had been able to, and that trade policy uncertainty seems to be "largely a nonissue" for firms in his district. Weak inflation despite low unemployment has Fed officials rethinking elements of their monetary policy framework. And the Bank of England said the U.K. economy could pick up modestly if Prime Minister Boris Johnson’s Brexit deal passes, but that it is prepared to cut rates if that boost to growth doesn’t materialize.
Now on to today’s news and analysis.
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Bostic ‘Fairly Comfortable’ With Holding Rates Steady for Now
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Atlanta Fed President Raphael Bostic. PHOTO: CHRISTOPHER ALUKA BERRY/REUTERS
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Federal Reserve Bank of Atlanta President Raphael Bostic said he doesn’t believe last week’s rate cut was justified and would have most likely voted against it if he could have.
Referring to the private board of directors that oversees the Atlanta Fed, Mr. Bostic told reporters after a speech on Thursday that “my directors were pretty much in the hold stage [with interest rates], so that’s probably where I would have come down for that meeting.” He added, “my directors were pretty clear that they weren’t seeing the weakness and didn’t feel like an easing was really required, that the amount of risk management that had happened was sufficient.”
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“The Fed’s current stance is, if anything, a bit accommodative.”
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— Atlanta Fed President Raphael Bostic
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Transcript: Conversation With New York Fed President John Williams
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New York Fed President John Williams discussed the labor market, inflation, the reasons behind the Fed’s rate cuts and monetary policy tools in a world of lower interest rates at a Wall Street Journal event in New York on Wednesday. Here is a transcript.
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Timiraos's Take: How the Fed Learned to Stop Worrying and Love Full Employment
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Inflation’s feeble response this year to persistently low levels of unemployment has forced Fed officials to reconsider long-held views about their framework for raising interest rates.
Fed officials lifted their short-term benchmark four times last year, and nine times total since 2015, to prevent against an overheated economy that could lead to financial bubbles or undesired inflation.
Key to the Fed’s considerations was an economic concept developed in the late 1960s by Milton Friedman known as the natural rate of unemployment. Estimates of the natural rate are particularly important to the Fed because economists have long held that inflation rises as unemployment moves down, and vice versa. But that hasn't happened recently. Read More.
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Other Developments Around the World
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WSJ Survey: Economists Split on Causes of Hiring Slowdown
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Economists are roughly split over whether the recent U.S. hiring slowdown reflects primarily a shortage of workers or softening demand for labor, a sign of continuing uncertainty about the outlook. In The Wall Street Journal’s latest survey of economists, 45.3% blamed the slowdown on the tight labor market, which has made it harder for many employers to find enough workers. An additional 37.7% of respondents said the issue was ebbing desire to expand payrolls.
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Official: Bank Regulators' Interest in Climate-Change Risks Growing
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A top New York Fed official put a price tag on climate- and weather-related events and said financial firms need to take seriously the danger of climate change in risk-management decisions.
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BOE Forecasts Modest Economic Boost if Brexit Plan Passes
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The Bank of England said it expects the U.K. economy to pick up modestly over the next three years if lawmakers back Prime Minister Boris Johnson’s Brexit deal and the country pursues a free-trade accord with the European Union.
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RBA Expects Growth to Rebound as Rate Cuts Support Economy
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The Reserve Bank of Australia said it is relatively upbeat on the outlook for growth and inflation as the impact of recent interest cuts is felt more strongly, cementing its view that the economy has reached a gentle turning point.
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Sweden’s Central Bank Names New Deputy Governor
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Sweden’s central bank named Anna Breman as its new deputy governor, replacing Kerstin af Jochnick who left the Riksbank last month to join the European Central Bank. Ms. Breman was previously chief economist at Swedbank.
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Czech Central Bank Seen Shifting Debate to Rate Cut
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The Czech central bank may consider cutting interest rates in mid-2020 as it is likely the economy will slow sharply and inflationary pressures will ease, Capital Economics says. The Czech National Bank left its key interest rate at 2%, but two policy makers voted for a quarter-percentage-point increase, which suggests there is "still a hawkish bias," Liam Peach at Capital Economics says. "We expect interest rates to remain on hold" at the CNB's upcoming meetings, he says, but "we think that the focus of the debate will quickly shift to rate cuts next year." (Dow Jones Newswires)
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Financial Regulation Roundup
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Blockchain Makes Inroads Into the Stock Market’s Plumbing System
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Technology from the bitcoin world is coming to the trillion-dollar plumbing that underpins the U.S. stock market. Last week, the Securities and Exchange Commission gave the green light to a pilot project in which blockchain will be used to settle trades in stocks like General Electric and AT&T. Paxos, the blockchain startup leading the project, hopes to construct a faster and cheaper way to process stock trades, ultimately reducing costs for Wall Street banks and investors alike.
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As WeWork Grew, Wall Street Lent It Money and Credibility
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Banks jockeying for a role in WeWork’s public debut wooed founder Adam Neumann with sky-high valuations that would make him a billionaire many times over. Their loans to the company told a different story.
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Tower Research to Pay $67 Million to Settle Spoofing Claims
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High-speed trading firm Tower Research Capital agreed to pay $67 million to settle regulatory claims that its traders manipulated the price of stock-index futures, the biggest penalty imposed by the U.S. derivatives watchdog in such a case.
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Capital One Senior Security Officer Being Moved to New Role
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Capital One Financial is moving its chief information security officer out of the role in the wake of the bank’s massive data breach, according to people familiar with the matter.
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Pensions Venture Into Risky Corners of the Market in Hunt for Returns
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Some pension-fund managers are venturing further into unusual investment territory as this year’s plunge in bond yields makes it even harder to find decent long-term returns. Funds are dabbling in riskier asset classes, including private markets, real-estate projects, infrastructure financing and direct lending. Some are making riskier fixed-income bets, buying volatile assets such as 100-year Argentine government bonds.
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Trump Must Pay $2 Million in Settlement of Suit Over Foundation
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President Trump admitted to misusing nonprofit funds and was ordered to personally pay $2 million to an array of charities as part of a settlement to a lawsuit that accused his now-defunct foundation of illegally helping his 2016 campaign for the White House.
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10 a.m.: University of Michigan releases preliminary November U.S. consumer sentiment
11:45 a.m.: San Francisco Fed’s Daly speaks at research conference on the economics of climate change at her bank
1:30 p.m.: Bank of Canada’s Beaudry speaks at his bank in Ottawa
8 p.m.: New York Fed’s Williams speaks in New York
8:35 p.m.: Fed’s Brainard speaks at San Francisco Fed research conference on the economics of climate change
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Trade Policy Uncertainty and Supply Chains
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The uncertainty surrounding trade policy—even without actual tariff changes—can drastically change supply chains for companies, researchers suggest. U.S. companies may operate their supply chains on an “inspection” or a “relationship” model, write Sebastian Heise, Justin R. Pierce, Georg Schaur and Peter K. Schott for the New York Fed’s Liberty Street Economics blog. Under the inspection system, U.S. companies buy imported products for a lower cost, but pay for each shipment to be inspected for quality. “Under the ‘relationship’ system, a firm enters into a long-term relationship with a foreign supplier and, instead of inspections, incentivizes the supplier to provide
high-quality inputs by paying a premium over the supplier’s costs,” they write. Companies may forgo entering long-term agreements with suppliers in the face of trade uncertainty, potentially increasing costs. The authors find “that an increase in the probability of a trade war could...lead to a shift back from just-in-time procurement toward the inspection-based system. Such a shift would increase U.S. firms’ procurement costs, raise consumer prices, and lower welfare.”
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Beijing’s announcement that the U.S. and China have mutually agreed to roll back tariffs as part of a “phase one” trade accord lifted financial markets, but questions remained over how much ground—if any —the Trump administration had agreed to give.
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China’s exports recovered a little in October, in an early sign that global demand may be picking up as trade tensions with the U.S. ease.
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A surge in government-bond yields world-wide carried the yield on the benchmark 10-year Treasury note to its highest close in three months Thursday, as signs of further progress in trade negotiations between the U.S. and China stoked investor optimism.
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Mexican inflation held steady in October, in line with the central bank’s 3% target, leaving the door open for further interest-rate cuts this month.
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