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ECB to Review Its Strategy; Brainard Reinvigorates Fed Tool Kit Debate; Australia Central Bank Holds Rates Steady
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Good day. The European Central Bank is going to take a hard look at how it sets monetary policy, ECB President Christine Lagarde told European lawmakers. In the U.S., the Federal Reserve is already engaged in such a review of its strategy and policy tools, and Fed governor Lael Brainard recently laid out possible changes that could enliven those discussions. And the Reserve Bank of Australia held rates steady, but said it stands ready to take further action to support the economy.
Now on to today’s news and analysis.
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Lagarde Signals Long Review of ECB’s Strategy, Policy Toolbox
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European Central Bank President Christine Lagarde spoke Monday at European Parliament in Brussels. PHOTO: Stephanie Lecocq/Shutterstock
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ECB President Christine Lagarde signaled that the bank is gearing up for a lengthy review of its strategy and policy toolbox, an effort aimed at ensuring policy makers are equipped to respond to a range of deep changes in Europe’s economy. She said the ECB’s review would start in the near future and “be guided by two principles: thorough analysis and an open mind.”
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Australia’s RBA Holds Fire on Rate Cut, But Maintains Easing Bias
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The Reserve Bank of Australia left its official cash rate on hold at a record low 0.75% at its policy meeting on Tuesday, but maintained an easing bias with economists expecting a further cut early next year.
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“The Board agreed that due to both global and domestic factors, it was reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target,” RBA Gov. Philip Lowe said in a statement.
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Derby's Take: Brainard Adds Life to Debate Over Future of Fed Tool Kit
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Fed governor Lael Brainard last week shook up what had become an increasingly sleepy review by the central bank of its policy-making tool kit.
Over recent months, key central bank officials have played down the idea the existing tool set of rate changes, bond buying and guidance about the future of rates would be augmented with something radically new.
But Ms. Brainard in a Nov. 26 speech laid out a suite of options that could reinvigorate the debate. Read More.
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Other Developments Around the World
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Fed Adds Liquidity Amid Heavy Demand for Year-End Funding
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The New York Fed again saw strong demand for liquidity aimed at helping financial markets navigate the turn of the year. The demand once again arrived as the Fed added temporary liquidity to financial markets Monday. All together, the central bank pumped in $97.9 billion in two parts.
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Short-Term Rate Would Be Higher if Rate Rules Were in Charge
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If variations of a well-known monetary policy rule were setting central bank policy, short-term rates would be considerably higher than they are now. The Cleveland Fed said in a note last week that a rules-based monetary policy should be targeting an average federal-funds rate of 2.35% in the fourth quarter. In the real world, the Fed lowered rates three times this year to a fed-funds rate target range of between 1.5% and 1.75% and has signaled no plans to change rates for the time being. (Dow Jones Newswires)
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ECB's Corporate Bond Purchases Smash Expectations
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The European Central Bank has bought €6.6 billion of corporate bonds since it restarted its bond purchasing program in Nov. 1, smashing many investors' and analysts' projections for half that amount, according to ING Group.
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The figure includes €680 million of purchases from redemptions. Of the €5.92 billion increase in ECB holdings, 34% was from new bonds while the remainder from outstanding bonds trading in the secondary market, ING says. This suggests the portion of corporate bond purchases relative to the total asset purchase program could rise to 25% from a 13% in the previous program, which was suspended in December last year, says ING credit strategist Timothy Rahill. (Dow Jones Newswires)
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Trump Puts Tariffs on Brazil, Argentina, Citing Currencies
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President Trump said he would raise tariffs on steel and aluminum imports from Brazil and Argentina, surprising financial markets and opening a new front in the global trade war.
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Political Uncertainty Pressures Emerging-Market Currencies
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President Trump’s decision to restore steel and aluminum tariffs on Argentina and Brazil marks the latest threat to economic activity in emerging markets, underscoring geopolitical fears that have hurt currencies world-wide.
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Financial Regulation Roundup
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Treasury Eases Minimum-Tax Burdens on U.S. Multinationals
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U.S.-based multinationals will be less exposed to certain U.S. taxes after the Treasury Department issued new rules implementing two major pieces of the 2017 tax law.
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Shipbuilding Executive Found Not Guilty in Mozambique Case
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A federal jury in Brooklyn found a Lebanese shipbuilding executive not guilty of fraud and money-laundering charges related to $2 billion of debt deals in Mozambique, a spokesman for the U.S. Attorney’s Office said.
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Wednesday (all times EST)
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Time N/A: National Bank of Poland releases policy statement
10 a.m.: Fed’s Quarles testifies on bank supervision and regulation before House Financial Services Committee in Washington; Bank of Canada releases interest-rate announcement
8:30 p.m.: Bank of Japan’s Harada gives speech to business leaders in Oita, Japan
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Private and Central Bank Digital Currencies
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Facebook’s Libra was a major topic of discussion at a workshop recently hosted by the Atlanta Fed, writes Larry Wall, a director for the bank’s Center for Financial Innovation and Stability. “Although no one is certain of the public's interest in using Libra, policy makers around the world have taken considerable interest in the potential implications of Libra for monetary policy and financial regulation,” Mr. Wall writes, adding that a possible response to Libra is the introduction of digital currency by central banks. In discussing a paper by Itai Agur, Anil Ari and Giovanni Dell'Ariccia from the International Monetary Fund, Mr.
Wall writes: “The key concern from a public policy perspective is that the more CBDC [central bank digital currency] operates like bank deposits, the more it will depress bank credit and output.” In addition, “if the CBDC operates too much like paper currency, then it could supplant paper currency and eliminate a payments method that some individuals prefer.”
The paper from the IMF economists proposes that CBDC be designed to look more like currency to minimize the extent to which CBDC replaces bank deposits, Mr. Wall says. “The problem then becomes how to avoid CBDC reducing the usage of cash to the point where cash is no longer viable...The way the paper proposes to keep CBDC from being too attractive relative to cash [is] by applying a negative interest rate to the CBDC.”
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Why Lagarde Shouldn’t Touch Monetary Policy—for Now
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It’s easy to see why Christine Lagarde could be tempted to seek to change the eurozone's accommodating monetary policy, Pierre Briançon writes for MarketWatch. "German public opinion has become estranged from the ECB, business confidence seems to have come back slowly after months of pessimism, and it would be natural for a new ECB president to be eager to put her mark on policy." But Mr. Briançon offers three reasons for inaction. While Germany's popular press is loudly critical of the ECB, its policy makers will give Ms. Lagarde the benefit of the doubt. Europe's economy remains weak. And Ms. Lagarde herself is still learning the ropes.
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Manufacturing’s Lingering Malaise
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"The good news is that the manufacturing sector ought to start doing better soon. The bad news is that it isn’t doing better already," WSJ's Justin Lahart writes. "On Monday, the Institute for Supply Management said its manufacturing index came in at 48.1 in November, down from October’s 48.3 and below the 49.4 economists expected. Anything below 50 indicates a contraction in manufacturing activity, and November marked the fourth month in a row the index was below that mark." Mr. Lahart concludes: "The best bet is that November was just a temporary setback, and that data in the coming months will make it clear that the bleeding in manufacturing has been stanched. But until the data actually show it, there
is reason to be nervous."
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French Finance Minister Bruno Le Maire said the European Union would strike back against the U.S. if President Trump follows through on a plan to impose tariffs on French imports, in what could develop into a trans-Atlantic tit-for-tat on trade.
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The Trump administration is considering scaling back intellectual-property protections for big drugmakers to help win Democratic support for a new trade pact with Mexico and Canada, according to people familiar with the matter.
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Economists polled in November by the Bank of Mexico cut their economic growth estimate for 2019 to zero, from plus 0.2% in October, in line with the central bank's recently updated forecast. The median GDP estimate for 2020 among the 39 analysts slipped to 1.1%, from 1.2% in October. Inflation is seen ending this year at 2.95%, picking up to 3.5% in 2020. (Dow Jones Newswires)
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Brazil's trade surplus widened in November as imports declined more than exports, the country's economy ministry said. The ministry reported a surplus of $3.43 billion, up from a surplus of $1.21 billion in October. (Dow Jones Newswires)
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