Fed Holds Rates Steady as Trade War Rages On

The benchmark lending (or Policy) rate has been kept steady at a range of 4.25% to 4.5% ("Fed Funds Target Range"). This rate is influenced through monetary policy decisions and is used by banks to lend money overnight. It is set by the FOMC (Federal Open Market Committee).

Once set, the Fed steers the rate into the target range, through various mechanisms. 

The Fed has flagged a risk of stagflation - involving higher unemployment and higher inflation - a toxic combination. The US struggled with this in the 1970s and early 1980s; toxic because you need to prioritize which issue to address first. Paul Volcker, in his time, chose to fight inflation. The Fed has a dual mandate to manage both, and its current target is maximum employment at 2% inflation.

Fed Berates Management of Silicon Valley Bank

The Fed berated management of Silicon Valley Bank (henceforth SVB) which went spectacularly bust in March 2023 leading Federal regulators to seize control of it on March 10.

They did not adequately manage interest rate or liquidity risk - they asserted.

The UK business was sold to HSBC. 

SVB was founded in 1983 to focus on the needs of start-up companies.

RBA then Fed Cuts Rates in Bid to Provide Stimulus in Wake of Coronavirus

The Fed has lowered its benchmark rate by 50 bps to provide a "meaningful boost" to the economy, in words of Chair Jerome Powell. US President Donald Trump has tweeted support and called for "more easing and cutting". The Fed's last emergency rate cut was in 2008. Australia and Malaysia have also cut rates, with the RBA declaring a 25bp rate cut to 0.50 percent, and saying "The Board is prepared to ease monetary policy further to support the Australian economy".

Arg Peso Crisis As Pres Macri Invokes Austerity as Leliq Rate Rises to 60%, Brazil Struggling

Argentina has announced sweeping reforms to kill the budget deficit in the wake of the peso crisis and to create conditions to enable a $50bn funding opportunity from the IMF. 2018 has seen the peso slide to 50% of its value against the dollar. The raising of USD interest rates has made it harder for certain countries, Argentina included, to pay its dollar-denominated debts. Argentina's central bank  (BCRA - Banco Central de la Republica Argentina) also raised its benchmark Leliq rate to 60% at the end of August to stablise the currency. With the Turkish lira down 44% against the dollar talk of an emerging market contagion is worrying investors. The Brazilian real is the third-worst performing EM currency down 20% against the dollar.

The Fed has a New Future Boss - Jerome Powell

Jerome Powell has been chosen by President Trump to head up the Federal Reserve, replacing Janet Yellen from February 2018 or thereabouts.

The Fed conducts American monetary policy and promotes a stable financial system.

Jerome Powell is a former partner in the Carlyle Group. He is currently a member of the Federal Reserve Board of Governors. His undergraduate degree was in Politics at Princeton. He also has a JD from Georgetown, the second largest law school in the United States.

Fed Slashes Rates to Near-Zero

US Fed cut its rate target to a range of 0-0.25% from 1%, a drastic measure championed by Ben Bernanke to stave off the impact of recession. This brings the overnight lending benchmark rate, the Federal Funds Rate, to its lowest ever. Note that the Fed has specified a range of rates, not an exact rate. This may suggest they are unable to control tightly the market interest rate any longer.

The Fed is combining the rate-cut strategy with buying up bad assets from banks. The last time something as drastic in terms of policy shift has been done by the Fed was 1979, under Paul Volcker (MA Political Economy, Harvard). A that time the Fed initiated a severe recession while trying to fight the inflation which had built up in the aftermath of the Vietnam War, which ended in 1975.

Fed's Beige Book Shows Further Weakening of US Economy

The Beige Book, a report published eight times a year, showed further weakness in the US economy for November, with falls in retail and vehicle sales. All the Fed's districts send in data covering everything from sale of electronics goods to gasoline prices and discounting behaviour. Vacancy rates for commercial property in NY and SanFran increased but results in the city of St Louis were mixed.

Further $800bn Stimulus from the Fed!!!

Henry Paulson declares move is to make more lending available to consumers. $600bn will be used to buy up MBS and $200bn to unfreeze the consumer credit market. Does it make sense?

Have Bailouts worked in the past? Find out here.
http://news.bbc.co.uk/1/hi/business/7648330.stm

Crisis at Citigroup, Stock Crushed, Senior Departure and Nomura to Raise Capital

Pop quiz: How much did Citi CEO Vikram Pandit make from the sale of Old Lane to Citigroup? (hint: 20% of the total deal value)

Citi's shares lost 20% on Friday, giving it a value $20.5 bn (less than a quarter of JPM Chase). The board is considering a sale of the business and the position of Vikram Pandit.

Vikram Pandit, from Nagpur in Central India, moved to the US in the 1970s to study at Columbia University where he obtained four degrees. His PhD thesis was entitled "Asset Prices in a Heterogeneous Consumer Economy".

1983 and Vikram joined Morgan Stanley following a period consulting for the bank. He gained a reputation as a "driven banker" and "prudent risk manager".

After a battle at Morgan Stanley, Mr Pandit founded Old Lane, a hedge fund that was sold to Citi in 2007 for $800m. Mr Pandit earned $165m from the deal. In early 2008, Old Lane was closed down for poor results. He took charge of Citi's hedge fund business and was promoted to head of the securities division. Following the ousting of Chuck Prince, he became CEO, backed by Citi power brokers like Robert Rubin, former US Treasury Secretary, and Sandy Weill, the former CEO.

In Asia, Citi's India CEO Sanjay Nayar, has moved to KKR after 23 years with the giant.

In addition to considering a sale of the business, Citi was also locked in talks with the Treasury (can the bank survive without a capital injection?) Chairman Sir Win Bischoff met with Federal Reserve officials and the US Treasury department. (Sir Win was previously at Schroders and moved to Citi following the acquisition of Shroders corporate advisory business).

Tokyo newspapers announced Nomura is likely to issue subordinated loans and other products to financial firms to bolster its capital base.

Emerging markets bank Standard Chartered (formed in 1969 from the merger of Standard Bank and Chartered Bank) announced a $3-4bn rights issue to boost its capital reserves. Sovereign wealth fund Temasek will underwrite part of the rights issue. Temasek is Standard Chartered's biggest shareholder.