Are Trump’s Fed tweets working?; repo turmoil may be here to stay

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The new paradigm

The recent turmoil in the short-term money market may indicate “a more fundamental problem with the banking system,” the Financial Times reports. The sharp spike in interest rates and huge demand by banks for repurchase agreements from the Federal Reserve “reflects that bankers now see a greater need to have cash on hand to meet the regulatory requirements imposed on them since the financial crisis. This all means the funding system will be more prone to these kinds of rises than in the past and banks will have less capacity to act as a shock absorber. Instead, the Fed may find it needs to resume some form of asset purchases far earlier than it might feel comfortable with in order to keep lending flowing. Central banks need to get used to the new normal.”

On Thursday the Federal Reserve Bank of New York added another $110.1 billion to the financial system through repos. “Banks asked for $72.75 billion in 14-day cash loans, $12.75 billion more than the amount offered by the Fed. In a second separate operation, banks asked for $50.1 billion in overnight reserves, all of which the Fed accepted.” Wall Street Journal, Financial Times

That other German bank

Commerzbank named Bettina Orlopp, currently in charge of the German bank’s compliance, human resources and legal departments, as its next CFO, effective no later than March 31, 2020. She succeeds Stephan Engels, who is leaving next spring to take on a similar role at Denmark’s Danske Bank.

The move “comes as Germany’s second largest bank is revamping its strategy in response to challenging market conditions. Commerzbank’s supervisory board recently approved a new strategy dubbed Commerzbank 5.0, which is supposed to help the bank navigate negative interest rates, tight margins and a weakness in its corporate clients business.”

The bank also said it “no longer expects a rise in underlying revenue this year.” Its supervisory board “approved plans announced last week to cut thousands of staff and close a fifth of its branches.”

Wall Street Journal

Political pressure

President Trump deserves more credit for pressuring the Fed to lower interest rates than he’s been getting, a new paper published by the National Bureau of Economic Research says. “Even if President Trump does not directly influence Fed decisions, his political pressure can still affect policy indirectly by changing market expectations regarding the Fed,” says the paper, which was written by three university professors. The market impact of the president’s comments “has grown greater since the Fed started lowering its short-term rate target in July,” the authors said.

Good, but not good enough

The housing market has shown some progress lately, the result of lower interest rates and a strong employment market, “but considering the overall economic environment, the improvement still counts as underwhelming. For now, housing looks as if it is going to provide only modest support for the economy. For it to really take off, it seems like the environment would somehow have to become even more benign, with mortgage rates slipping to new historic lows while the job market continues to run strong. That seems like an unlikely combination.”

New York Times

Hot potato

"Banks are attempting to shield themselves from climate change at taxpayers' expense, by shifting riskier mortgages — such as those in coastal areas — off their books and over to the federal government, new research suggests.

"The findings, presented in a paper to be released Monday, represent 'a potential threat to the stability of financial institutions,' according to the authors. They warn that the threat will grow as global warming leads to more frequent and more severe disasters, forcing more loans to go into default as homeowners cannot or would not make mortgage payments."

Quotable

“We find strong evidence that the consistent pressure applied by President Trump to pursue more expansionary monetary policy is manifested in the market expectations of a lower target rate.” A new paper published by the National Bureau of Economic Research, which says that the president’s constant criticism of the Federal Reserve is influencing Fed policy, whether directly or indirectly.

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Succession planning Risk management Interest rates Donald Trump Federal Reserve
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