The most newsy point from NY Fed president William Dudley’s speech today was his call for a change in exit strategy, urging the central bank to reinvest in its mortgage portfolio. But there was a lot more going on in the speech: Mr Dudley put a dovish spin on the Fed’s inflation target. He said bank regulation may be driving down neutral interest rates, and he put markets on notice that how they price bonds will decide how the Fed changes interest rates.
(1) Inflation is coming
Mr Dudley’s tone on inflation was different to the isn’t-it-worringly-low type of remarks that Fed officials have tended to make recently. Instead, he expects inflation to head upwards, and seemed to be testing arguments for why Fed policy should not react.
“With respect to the outlook for prices, I think that inflation will drift upwards over the next year, getting closer to the FOMC’s 2 percent objective for the personal consumption expenditure deflator . . . That said, I see little prospect of inflation climbing sharply over the next year or two. There still are considerable margins of excess capacity available in the economy—especially in the labor market—that should moderate price pressures.”
Today’s consultation document on financial regulation places the Bank of England at the heart of financial regulation and establishes an interim Financial Policy Committee to identify and reduce system-wide risks to the UK financial system, known in the jargon as macroprudential regulation.
The document is months late. That does not matter and it is clear that it has benefited from considerable thought about how the new Bank of England will work. The new Bank will maintain its objectives for monetary and financial stability, while adding banking supervision to its duties, and the new FPC will also have some, as yet undefined, powers to direct the PRA and the new Financial Conduct Authority (which we had known as the Consumer Protection and Markets Authority). These directions will aim to damp speculative credit bubbles when they emerge.
The FPC’s toolkit is broad and ranges from speeches and warnings to the possibility of higher bank capital ratios, higher risk weights for certain assets and direct limits on loan-to-value ratios or other collateral in lending.
But there are two significant problems with the new regulatory structure and the members of the FPC, much discussed outside the Bank, but not addressed in the consultation document at all. Read more
Basel policymakers, beware: higher capital requirements for banks can increase systemic risk. Although risks are lower for each bank individually, “systemic linkage” between the banks is higher. Depending on the banks’ balance sheets, this can mean higher systemic risk.
Researchers at the Dutch central bank explain: Read more
Are structured products more accurately valued now than in 2008? If you are an investor or auditor, the Financial Stability Board wants to hear your answer to this question. Read more
The overhaul of the US financial sector cleared its last big hurdle in Congress on Thursday as 60 senators voted in favour of the legislation, which introduces a raft of restrictions on banks to curb risk.
More than a year after the mammoth legislative effort began, Democrats managed to persuade three Republican senators to support the Dodd-Frank bill, enough for the 60-vote supermajority needed to bring debate to a close. Read more
Irish banks might never be the same. New bank regulation legislation was passed yesterday, 69-65. The bill is now off to the upper house, the Seanad.
The Central Bank Reform Bill would merge the central bank with the regulator, giving the regulator’s consumer information roles to the national consumer agency. The new integrated central bank and regulator would be called the Central Bank Commission. Read more
Fed officials are watching the markets, trying to get to the bottom of the sudden plummet this afternoon and the various “fat finger”/programme trade theories for what happened. But across the nation – at the regional Fed headquarters as well as in DC – they have also kept an eye on C-Span and the “audit the Fed” amendment on Capitol Hill.
Right now Bernie Sanders, the independent, self-proclaimed “socialist” senator from Vermont, is preparing for the vote on his audit amendment, which would broaden the scope of the things Congress is allowed to investigate inside the central bank. The Fed has seen this as an existential threat – possibly ending almost 100 years of independence from political control. Read more