Good day. Atlanta Fed chief Raphael Bostic added to the chorus of Federal Reserve officials saying the central bank should hold off on any rate moves, while Boston Fed leader Eric Rosengren said he sees higher inflation and financial-stability issues as potential risks for the economy. The New York Fed today will update its schedule for intervening in financial markets to help prevent volatility in short-term interest rates. And one tool Fed officials are considering as a repo-market fix could be a tough sell for policy makers.

Now on to today’s news and analysis.

Atlanta Fed leader Raphael Bostic offered an upbeat view of the U.S. economy, in remarks that showed no appetite for a change in interest rates. “The economy is doing fine,” Mr. Bostic said. In this environment, “there is not a lot we have to do to really to stimulate or slow down” the overall course of economic momentum, he said.

Boston Fed leader Eric Rosengren warned that the biggest risks the economy faces after last year’s rate cuts are from higher inflation and financial-stability problems driven by very low borrowing costs, although he added these risks are mostly theoretical right now.

Today is an important day for money markets and the Federal Reserve’s efforts to limit volatility in short-term interest rates, as the New York Fed will update its schedule for open-market operations.

Some Wall Street analysts believe the Fed will need to keep going with its repo operations due to issues in money markets that are complicating banks’ ability to lend and borrow short term. Read More. 

Federal Reserve officials are considering a new tool to ease stresses in the market for Treasury repurchase agreements, or repos. One potential solution is to lend cash directly to smaller banks, securities dealers and hedge funds through the repo market’s clearinghouse, the Fixed Income Clearing Corp., or FICC. Critics of the new plan say if the Fed lends cash directly through the clearinghouse, it could end up contributing to a hedge-fund bailout.

• How the U.S. and China Settled on a Trade Deal Neither Wanted

Eligible banks offered $30.5 billion in U.S. Treasurys and $30.2 billion in agency securities to the central bank, taking considerably less liquidity than the $120 billion the Fed was willing to extend.

Hedge funds are cashing in on an unintended consequence of European financial regulations on investment research: Less information about some stocks. Put in place two years ago, the regulations require banks to charge fees for stock research that used to be mostly free. Many sell-side outfits have scaled back their research as investors have spent less money on it since the rules were implemented.

The rules clarify and expand the instances where overseas investors will need clearance from a panel of national security experts—called the Committee on Foreign Investment in the U.S., or Cfius—before they can put their money into a U.S. business that handles personal data or American technology used by the U.S. military.

8:30 a.m.: U.S. Labor Department releases December CPI
9 a.m.: New York Fed’s Williams speaks at London School of Economics
1 p.m.: Kansas City Fed’s George speaks on economy and monetary policy at her bank

3:40 a.m.: Bank of England’s Saunders speaks in Bangor, Northern Ireland
8:30 a.m.: U.S. Labor Department releases December PPI
10:45 a.m.: Philadelphia Fed’s Harker speaks on low interest rates and the new normal in New York
11:30 a.m.: Dallas Fed’s Kaplan speaks to Economic Club of New York
2 p.m.: U.S. Federal Reserve releases beige book report on U.S. economic conditions
6:50 p.m.: Bank of Japan releases December corporate goods price index

A well-planned cyberattack on the U.S. banking system could have a devastating effect on U.S. financial stability, according to new research from the Federal Reserve Bank of New York. In a paper termed a “pre-mortem analysis," bank analysts Thomas Eisenbach, Anna Kovner and Michael Junho Lee looked at how banks would react to cyberattacks that impaired their ability to process payments between banks. “If a cyber attack were to compromise the integrity of banks’ systems, the reconciliation and recuperation process would be an unprecedented task,” the authors wrote. “This could have severe implications on the stability of the broader financial system vis-à-vis spillovers to investors, creditors, and other financial market participants.”

Former Fed vice chairman Alan Blinder’s discussion of possible alternatives to the central bank's 2% inflation target in a column last week generated discussion in the Journal's letters page. One economist says the problem isn't the 2% target but the way it is measured: "The Fed’s inflation target is based on a price gauge in which only 70% of the index is based on prices that consumers actually experience; the remainder involves business prices or nonmarket prices...policy makers pin their rate decisions on a price index that only they use." Another respondent says the main cause of low inflation has been an eight-year decline in goods prices: "Monetary policy is largely impotent in countering such supply-side forces." 

• Households' expected inflation reading for a year and three years from now were essentially unchanged at 2.5%, for both measures, the New York Fed's December consumer expectations showed. The New York Fed said consumers were slightly more pessimistic about the labor market. (Dow Jones Newswires)
• The U.S. budget gap continued to widen in 2019, but not as much as the previous year when Republican tax cuts reduced revenue and a bipartisan budget deal boosted government spending.
• The wheels are coming off China's auto market—the world's largest—after decades of blistering growth, as a prolonged and unprecedented sales slump partly induced by policy changes closes thousands of dealerships, idles factories and weighs on an already slowing economy.
• The U.K. economy contracted 0.3% in November from October, as political uncertainty hampered growth heading into the country’s general election last month. GDP was 0.6% higher than in November 2018, the weakest pace of annual growth since June 2012 and making it more likely the Bank of England will cut rates in coming months.
• Selling in European government bonds narrowed the gap between U.S. and German bond yields Monday, extending a recent move propelled by easing concerns about the eurozone economy.
• Canadian Finance Minister Bill Morneau said climate change would be a central focus of the Liberal government’s 2020 budget plan, with policies aimed at further curbing energy consumption, and money allocated to mitigate the fallout from fires and flooding.

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