Receiving Wide Coverage…
It Finally Happened: And in the end it was unanimous. After more than half a decade the Federal Reserve finally raised interest rates, setting the federal fund rate target range to between 0.25% and 0.50%. To raise rates, though, the Fed has come to rely on a new tool, its so-called "overnight reverse repo" program (RRP), the Financial Times notes. Through the RPP, approved counterparties offer cash loans in exchange for Treasuries under a plan in which they return the assets the following day. The Fed has had to rely on this tool because of the currently enlarged state of its balance sheet, which makes its traditional tools that rely on scarce bank reserve funds less useful.
And Markets Reacted: For weeks now, this was the expected result of the latest FOMC meeting, but markets nonetheless were thrown into a tizzy by the news. Gains were seen globally, but perhaps nowhere more pronounced than in Japan, the Wall Street Journal noted. The Nikkei 225 jumped 1.6% Thursday, after already rising 2.6% Wednesday on the news. Those two spikes helped push the index toward an overall increase for the year of 11%, making the Nikkei one of the world's best performing markets. Japanese investors in particular greeted the decision with enthusiasm because it helped to increase the value of the dollar against the yen, which could boost profits for Japanese exporters. Meanwhile, gold prices tumbled as a result of the decision as expected, as the dollar's gain sapped investor demand. But already, some are eying the move with skepticism as to its continued positive effect on markets. In an op-ed for the Journal, Cato Institue senior fellow and for Federal Reserve vice president Gerald O'Driscoll, Jr., notes that the Fed's choice to use forward guidance over a monetary rule will likely add uncertainty and volatility to markets, since it does not compel the Fed to act in the future even if it says it will. There are also concerns that the Fed's move will expose risks long pent-up in some markets, particularly the bond market where there is precedent for troubling sell-offs in the wake of a rate increase.
What's Next for the Fed?: As to be expected, the immediate question on observers minds following the Fed's announcement was, "What's next?" In deciding to raise interest rates, the Fed put forward an initial, unanimous front, but the Financial Times argues that future decision-making may not be so harmonious. Indeed, many officials sitting on the committee have long been open about their wariness of a rate increase, and those individuals may want to see stronger signs of inflation reaching its target before they approve of another rate hike. And for Janet Yellen herself, Wednesday's move added another responsibility to her job, according to the New York Times: risk management. She may now find that weaker global fundamentals will still put a strain on the U.S. economy. But perhaps she had to act for fear of allowing the U.S. economy to overheat without a rate rise to let out some steam. Nevertheless, she's already performing a difficult balancing act: the Fed has set out a forecast for future increase, but Yellen was quick to note that any changes in the economy's health would give regulators pause and could force them to revise their forecast. This rate increase will also test the effectiveness of the federal funds rate as a tool to raise interest rates overall, the Financial Times writes. While the fed funds rate in the past saw high demand, with daily volumes coming in on average around $350 billion before the crisis, today that's not the case. These days, the fed fund market only sees volumes of around $50 billion a day, meaning that using this as a way to push interest rates elsewhere might not have the intended effect. Additionally, as the Fed is forced to use new tools to manipulate interest rates, its strategies could fail or produce unintended consequences.
And in Other News…: Swiss regulator Finma has decided to ban six former UBS employees from financial services amidst global investigations into foreign-exchange rate manipulation. The bans will last between one and five years for the various individuals implicated, the Journal reports. The regulator launched proceedings against 11 UBS employees tied to the manipulation case back in Nov. 2014, when regulators fined six major banks for their role in the rigging scandal. The forex market remains bruised from the past year's investigations. Investors continue to put pressure on banks and market markers to end, or at least to rationalize, so-called "last look" policies, which banks like Barclays have been accused of abusing. Overall, a spotlight is being cast on how forex markets work and the algorithms that underpin them, as regulators and investors alike aim to determine whether the scandals of the last year have produced meaningful change or merely scratched the surface of a complex and problematic market.
Wall Street Journal
State Street will reimburse clients after an internal review reviewed that the financial service company overbilled by $200 million over nearly two decades. The review spanned the period for which it has accessible records and studied $400 million in invoices for asset-servicing clients, the paper reported. State Street plans to fully reimburse any client affected by the overbilling, including interest. The bank also plans to revise its billing procedures to address these past failings.
Can you image an industry calling for more federal regulation? Observers say that may just happen among manufacturers in response to consumer concerns over the chemicals in products ranging from baby bottles to furniture. Chemical makers, the paper reports, are asking the government to make it easier to regulate many of the chemicals in question. Doing so, they hope, might help to appease consumer activists, who have successfully pushed for more stringent state regulations and persuaded major retailers to stop selling products based on their own standards.
Barclays may soon make a full or partial exit from Africa, based on concerns the bank's new chief Jes Staley has over the region that comprises one of the bank's four main divisions. The African division, Barclays Africa Group Limited, is 62% owned by the bank and listed on the Johannesburg, South Africa, stock exchange. While net profits for the division rose 10% over the past year, higher than the overall return, that's not been enough to quell certain worries. For starters, Barclays fears the risk of the division, since it's on the hook for all of the Africa business' liabilities even though it only takes in 62% of profits as a partial owner. Additionally, the South African rand has depreciated against the British pound, stunting performance. Barclays also struggles to control the division with only a minority of board seats and ownership capped at 75% due to laws in South Africa governing black empowerment. But while it makes sense to sell the business, some argue that Barclay should wait until a higher point in the cycle, so that it gets a real premium for the division given its underlying strength.