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Clarida, Rosengren Warn That Central Banks Will Have Limited Scope to Cut Rates in Next Downturn
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Good day. Fed Vice Chairman Richard Clarida highlighted how the success of the Fed and other central banks in reducing inflation reduces their ability to cut rates to boost growth in a future downturn. Boston Fed leader Eric Rosengren struck a similar note, issuing a warning about the limited firepower of central banks to react the next time the economy turns south.
Now on to today’s news and analysis.
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Clarida: Lowering Inflation Created New Challenges for Central Banks
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PHOTO: ANDREW HARRER/BLOOMBERG NEWS
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The success of the Federal Reserve and other central banks in reducing inflation and holding it at low levels has limited the scope for monetary policy to combat future downturns, a top Fed official said in a speech set for delivery Tuesday.
Fed Vice Chairman Richard Clarida highlighted how both lower global bond yields and the successful response of the U.S. central bank to combat the high inflation spells of the 1970s and early 1980s have laid the groundwork for new challenges.
“These two phenomena, taken together, have resulted in sovereign bond yields that are substantially lower than the precrisis experience, and thus substantially closer to the effective lower bound for the policy rate than they were before the crisis,” said Mr. Clarida in remarks prepared for a policy conference in Zurich.
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Boston Fed President Warns Central Banks Have Limited Tool Kits
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Boston Fed leader Eric Rosengren warned many top central banks have a limited tool kit to deal with the next downturn, and added efforts to roll back bank regulations may be exacerbating risks to the financial sector.
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“With rates this low, there is very little room to reduce short-term rates should the economy stumble, as the Fed normally cuts rates well over 4 percentage points during a recession,” Mr. Rosengren said in the text of a speech to be delivered at a conference in Norway on Monday.
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Derby's Take: Research Explores Role of Central Banks in Climate-Change Policy
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Papers presented at a first-of-its-kind Federal Reserve conference on climate change last week helped flesh out the risks and issues central bankers would face in the years to come.
What the papers did not do, however, was make a case for the Fed, or other central banks, to undergo some sort of major shift in how they conduct monetary policy to influence their respective economies. Read More.
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Key Developments Around the World
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BIS Taps Two Fed Officials for Leadership Roles
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The Bank for International Settlements announced Monday that Federal Reserve Chairman Jerome Powell has been appointed as chairman of the Global Economy Meeting and the Economic Consultative Committee at the BIS, effective Feb. 1. Mr. Powell succeeds Mark Carney of the Bank of England. New York Fed leader John Williams has been named chairman of the BIS Consultative Council for the Americas, for a two-year term starting on Jan. 9. (Michael S. Derby)
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Selloff in Complex Investments Flashes Warning for Junk Bonds
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Some securities in the $680 billion market for collateralized loan obligations lost about 5% in October, reflecting worries about rising risk in the complex-investment vehicles. The declines were a rare stumble for the CLO market.
The trouble could be a sign that the trillion-dollar market for high-yield bonds is headed for a rough patch too. In recent years, CLOs have bought more than 60% of newly issued leveraged loans, according to S&P Market Intelligence.
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Financial Regulation Roundup
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McKinsey Bankruptcy Unit Faces Criminal Probe
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Federal prosecutors have launched a criminal investigation into whether McKinsey’s bankruptcy unit improperly failed to disclose investment interests in companies it was advising in bankruptcy and clients that had ties to those cases, according to people familiar with the matter.
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UBS Fined for Misleading and Overcharging Wealthy Clients
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UBS Group overcharged and misled wealthy clients for a decade without detection, Hong Kong’s securities regulator said as it fined the bank 400 million Hong Kong Dollars ($51 million) and sought HK$200 million in customer compensation.
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Credit Suisse Shakes Up Management at Investment Bank
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Credit Suisse Group AG said it had appointed new leadership to head its investment banking and capital markets division, as the Swiss bank struggles to boost revenue from its businesses advising on mergers and acquisitions and helping clients go public.
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ESG Funds Enjoy Record Inflows, Still Back Big Oil and Gas
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Funds with a focus on socially responsible investing are enjoying a record year of inflows. But many such portfolios aren’t as clean as investors might expect. Eight of the 10 biggest U.S. sustainable funds are invested in oil-and-gas companies, which are regularly slammed by environmental activists, according to a review of the funds’ public disclosures.
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3 a.m.: European Central Bank’s Coeuré speaks at ECB workshop on money markets and central bank balance sheets in Frankfurt
3:30 a.m.: ECB’s Mersch speaks on central bank independence in Frankfurt
5:15 a.m.: ECB’s Enria speaks at conference on implementation of Basel III in Brussels
5:30 a.m.: Fed’s Clarida speaks on monetary policy, price stability and bond yields at conference in Rüschlikon, Switzerland
12 p.m.: Richmond Fed’s Barkin speaks on workforce development in Danville, Va.
1 p.m.: Philadelphia Fed’s Harker speaks on the economy and the Fed in New York
6:50 p.m.: Bank of Japan releases corporate goods price index
8 p.m.: Reserve Bank of New Zealand releases policy statement
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8:30 a.m.: U.S. Labor Department releases October CPI
11 a.m.: Fed’s Powell testifies on economic outlook at U.S. Congress Joint Economic Committee hearing in Washington
12:30 p.m.: Richmond Fed’s Barkin speaks on the new environment for monetary policy in Greensboro, N.C.
7:30 p.m.: Philadelphia Fed’s Harker speaks on economic outlook in Wilmington, Del.
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Barclays Lays Out Proposals to Bring Calm to Repo Market
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The Federal Reserve’s effort to add money to the financial system probably won’t be sufficient to solve money-market frictions that have driven the central bank to once again grow its balance sheet with large interventions, according to research by Barclays PLC. The bank says on top of adding reserves to the banking system, the Fed should create a standing repo facility that would allow eligible firms to swap Treasurys for reserves at the central bank, a proposal designed to limit upward rate surges. Barclays believes the Fed could also add new variations to the interest rate it pays for excess reserves parked on its books, and pay a different rate for what it seems “surplus” reserves. The bank says there is a case to be
made for moving the U.S. Treasury’s cash deposits from the Fed to private banks, because large swings in these deposits can upend money-market trading.
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Bank Share Buybacks Are a Limited-Time Offer
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Share buybacks worth a total of $4 billion offer a rare reason to get excited about Europe’s beleaguered banking sector right now. So, investors should enjoy the boost while it lasts, writes Rochelle Toplensky for Heard on the Street. In their most recent quarterly results, Swiss banks UBS and Credit Suisse and Anglo-Asian lenders HSBC and Standard Chartered reaffirmed plans to repurchase $1 billion of stock each this year. Bankers see buybacks as a good deal, Ms. Toplensky writes. In a tough environment, the four banks want to return excess capital to shareholders while keeping their regular dividends at a sustainable level, and offset the dilution effect of dividends paid in
stock.
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Seaborne imports into the largest U.S. gateway for trans-Pacific goods plummeted last month in the latest sign of volatility from the U.S.-China trade war.
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The furniture business is among those industries caught up in the administration’s tariff campaign against China.
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China's short- and long-term interest rates have been rising across the board in recent months, despite Beijing tweaking a reference lending rate and cutting banks' reserve requirement ratios, according to China International Capital Corp. (Dow Jones Newswires)
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Norway's economy rose 0.7% quarter-on-quarter in the third quarter, matching the previous quarter and in line with a WSJ poll. (DJN)
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German industrial output fell 0.6% in September from August in calendar-adjusted terms, a manufacturing purchasing managers index showed. (DJN)
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The U.K. unemployment rate in the three months to September edged down to 3.8%, while employment fell by 58,000, the Office for National Statistics said. Average weekly earnings slowed to 3.6% from 3.8%. (DJN)
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