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Fed’s bond-buying timeline: roaring entry, boring exit?

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November 2, 2021

By Ann Saphir

(Reuters) – It is hardly a secret by now that the Federal Reserve is going to reduce its support for the U.S. economy soon: starting this month it will likely begin to pare its monthly asset purchases by $15 billion each month until ending them by mid-2022.

That, at least, is the roadmap suggested by the Fed’s post-meeting statements, minutes of its meetings, and remarks from Fed Chair Jerome Powell. It is expected to be spelled out when this week’s policy meeting wraps up Wednesday, although officials may keep options open for speeding or slowing the taper to suit economic needs.

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But overall, the Fed has telegraphed what Philadelphia Fed President Patrick Harker says will be a “boring” exit from what is now $120 billion in monthly bond buys.

That is despite the fact that the reductions this time will proceed at about twice the pace as the last time the Fed ended a bond-buying program, in 2014.

It is also a stark contrast to March of 2020, when U.S. authorities were first shutting down parts of the economy to prevent the spread of COVID-19. In response the Fed abruptly cut interest rates to zero, rolled out a raft of emergency lending programs, and began hoovering up trillions in Treasuries and mortgage-backed bonds.

The bond-buying is credited with helping stabilize the financial system and, later, to bolster demand and foster a faster recovery from the sharpest downturn in decades.

More recently some Fed policymakers have questioned its effectiveness and even raised the alarm over its potential harms amid an economy marked by rising inflation and too much demand relative to pandemic-constrained supply. They all agree it should be pared back soon, minutes from the Fed’s last meeting show.

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Here is a look back at the arc of the Fed’s pandemic bond-buying program – what policymakers said, what the central bank did, and what’s likely to lie ahead.

(GRAPHIC: In with a boom, out with a … – https://graphics.reuters.com/USA-FED/byvrjrggbve/chart.png)

A CRACK, AND THEN THE FLOODGATES

Fed Chair Powell issued a terse and unusual statement Feb. 28, 2020, as stock markets plunged amid reports of the rapid spread of the novel coronavirus. The Fed, he said, is “closely monitoring developments and their implications for the economic outlook” and “will use our tools and act as appropriate to support the economy.”

Three days later policymakers cut interest rates by half a percentage point. On March 15, they slashed the rate to near-zero, where it has stayed since, and promised to buy “at least” $500 billion of Treasuries and $200 billion of mortgage-backed securities in coming months. Eight days later they shifted to an open-ended pledge to continue buying “in the amounts needed” to smooth markets and aid in monetary policy transmission.

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By the end of April and the two-month recession, the Fed’s weekly accountings show they had added $1.4 trillion of Treasuries, and $234 billion of mortgage-backed securities. The central bank’s balance sheet stood at $6.7 trillion, up from $4.4 trillion before the pandemic.

THE STEADY STREAM

By June 2020, the Fed’s bond-buying had settled into a slower rhythm: $80 billion in Treasuries and $40 billion in housing-backed bonds each month, Powell noted at his regular news conference. In its statement the Fed promised “over coming months” to continue to buy bonds “at least at the current pace” to sustain smooth markets and help transmit monetary policy. In September it kept that language and added that the purchases would “help foster accommodative financial conditions” and keep credit flowing to households and businesses.

SETTING THE TEST FOR TAPER

In December 2020, with its balance sheet at $7.4 trillion, the Fed started the clock on the end to its bond buying, promising to keep up the $120 billion a month pace “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”

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This language remained unchanged for the statements issued in January, March, April and June of this year.

NEARING THE BAR FOR TAPER

July’s statement acknowledged that “the economy has made progress toward these goals,” and in August Powell said the bar had been met for inflation, and “clear progress” had been made toward maximum employment; it could, he said, be appropriate to start reducing bond buying this year. In its September post-meeting statement the Fed went further: “if progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.” Powell went still further in the news conference that followed, saying the employment test is “all but met” and “we could easily move ahead at the next meeting,” with policymakers supporting a pace of reduction that “will put us having completed our taper around the middle of next year.”

TAPER TIME

“I do think it’s time to taper.” That’s how Powell put it on Oct. 22, leaving little doubt for the outcome of this week’s meeting. Minutes from the September meeting showed policymakers thought reducing Treasury securities purchases by $10 billion each month and mortgage-backed securities by $5 billion each month would be “straightforward and appropriate.” At that pace, if the taper begins in November, purchases would be phased out completely by June. On Oct. 27 the Fed’s balance sheet stood at $8.6 trillion; at the expected tapering pace, it will be just over $9 trillion when the program ends, twice its pre-pandemic size.

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(GRAPHIC: Fed balance sheet by era – https://graphics.reuters.com/USA-FED/TAPER/xmpjolmanvr/chart.png)

WHAT’S NEXT?

At some point the Fed is expected to take the next step back to monetary policy normalcy by raising rates, although policymakers are currently divided on whether that will happen in 2022 or 2023.

As for the fate of the balance sheet, even less is known. Fed Governor Christopher Waller says the Fed should let its balance sheet shrink over the next few years by letting maturing securities roll off, rather than use the proceeds to buy replacements as it did for years after it ended its post-financial crisis bond-buying program. It’s unclear how widely his view is shared at the Fed.

(Reporting by Ann Saphir; Editing by Dan Burns and Andrea Ricci)

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Asia braces for China data, oil nears 2021 highs

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January 17, 2022

By Wayne Cole

SYDNEY (Reuters) – Asian share markets got off to a cautious start on Monday as the U.S. earnings season loomed large and a slew of Chinese economic data were expected to show the deadening effect of coronavirus restrictions on activity.

A holiday in the United States made for thin trading, but that did not stop Brent crude from extending its bull run toward last year’s peak of $86.70 a barrel.

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MSCI’s broadest index of Asia-Pacific shares outside Japan was little changed, while Japan’s Nikkei bounced 0.8% after losing 1.2% last week

S&P 500 futures were flat, while Nasdaq futures slipped 0.1%.

The main feature of the market recently has been a rotation into value stocks and away from growth, particularly technology. The S&P 500 information technology sector, which accounts for nearly 29% of the index, has shed 5.5% this year.

With valuations still high, earnings will have to be strong to stop further losses. Overall S&P 500 earnings are expected to climb 23.1% this season, according to Refinitiv IBES, while the tech sector is seen up by 15.6%.

Companies reporting this week include Goldman Sachs, BofA, Morgan Stanley and Netflix.

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The market will be spared speeches from Federal Reserve officials this week ahead of their Jan. 25-26 policy meeting, but there has been more than enough hawkish comments to see the market almost fully price in a first rate hike for March.

There was also talk the Fed will start trimming its balance sheet earlier than previously thought, draining some of the excess liquidity from world markets.

Yields on cash 10-year Treasuries climbed to their highest in a year at 1.8%, while futures implied yield of 1.83% early on Monday.

“The implications of quantitative tightening continue to occupy markets as an earlier Fed balance sheet runoff looms,” noted analysts at Barclays.

“Meanwhile, new COVID lockdowns in China could re-aggravate global supply bottlenecks, while in both Europe and the U.S. the near-term growth outlook is now weaker and the 2022 inflation profiles higher.”

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Data out of China due on Monday are expected to show retail sales and industrial output slowed further in December. The economy is forecast to have grown 1.1% in the fourth quarter, though the annual pace is seen slowing to 3.6% from 4.9%.

BEWARE THE BOJ

A Bank of Japan (BOJ) policy meeting this week will bear watching given talk it will revise up its outlook for growth and inflation, while sources told Reuters policy makers were debating how soon they could start telegraphing an eventual interest rate hike.

While a move is unlikely this year, financial markets may be under-estimating its readiness to gradually phase out its once-radical stimulus programme.

This was one reason the yen has rallied, with the dollar slipping 1.2% last week to last stand at 114.29 but still well above major chart support at 112.52. [FRX/]

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The euro also gained 0.5% last week as the dollar eased broadly and was last changing hands at $1.1408. The dollar index was a shade firmer at 95.231, after touching a 10-week trough at 94.626 on Friday.

“We continue to think that the greenback will strengthen again before long, as we expect strong cyclical price pressures in the U.S. to mean the Fed tightens by more and for longer than investors currently discount,” argued Joseph Marlow, an economist at Capital Economics.

They see Fed rates topping 2.5% while the market has priced in a peak around 1.75-2.0%..

The risk of higher rates kept non-yielding gold restrained at $1,817 an ounce, while industrial and energy resources have benefited from resilient demand and limited supplies.[GOL/]

Oil prices have climbed for four weeks straight and such is demand that physical barrels of oil are changing hands at near record high premiums. [O/R]

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Early Monday, Brent had added another 51 cents to $86.57 a barrel and was approaching the 2021 top of $86.70 and the 2018 peak at $86.74. A break there, would take it to heights last visited in 2014.

U.S. crude also firmed 75 cents to $84.57 per barrel.

(Editing by Himani Sarkar)

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Japan machinery orders rise more than expected, govt welcomes pick-up signs

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January 17, 2022

By Daniel Leussink

TOKYO (Reuters) -Japan’s core machinery orders rose for a second straight month in November, government data showed on Monday, a sign that corporate appetite for capital spending remained resilient despite pressure from soaring raw material prices.

The gain in core orders, a key indicator of capital expenditure, could be a relief to policymakers hoping for corporate investment to trigger a private demand-led recovery in the world’s third-largest economy.

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Core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, grew 3.4% in November from October, rising for the second straight month, the Cabinet Office data showed.

It beat economists’ median estimate of a 1.4% rise and followed a 3.8% jump in the previous month.

However, Japanese firms could be cautious about boosting spending due to higher raw material, fuel and transportation costs that are sending wholesale inflation soaring and squeezing corporate margins.

“Firms may postpone capital spending from this quarter into the next fiscal year from April as uncertainty in the global economy has risen,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“Due to a decline in coronavirus cases and an easing of the (global) chip shortage, orders from manufacturers recovered up to November, but the outlook is unclear.”

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A government official confirmed firms’ appetite for capital spending faced risks from rising raw material prices, though he added companies were still likely to spend on investments to strengthen their businesses for the future.

Compared with a year earlier, core orders, which exclude volatile numbers from shipping and electric power utilities, jumped 11.6% in November, the Cabinet office data found.

By sector, orders from manufacturers rose 12.9% month-on-month, offsetting a 0.8% drop in those from non-manufacturers, the data showed.

The government raised its assessment on machinery orders for the first time in six months, saying they showed signs of picking up. Previously, it said a pick-up in orders was showing signs of stalling.

After contracting in the third quarter of last year, Japan’s economy is expected to return to growth in the October-December quarter.

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The economy is forecast to show growth of an annualised 6.5% in that quarter, thanks largely to a projected pick-up in private consumption, which makes up more than half the economy, after an easing of coronavirus curbs.

(Reporting by Daniel Leussink; Editing by Kenneth Maxwell)

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Credit Suisse Chairman Horta-Osorio resigns after board probe into breach of COVID-19 rules

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January 17, 2022

SINGAPORE (Reuters) -Credit Suisse Chairman Antonio Horta-Osorio, who was being investigated by the bank’s board for breaching COVID-19 quarantine rules, has quit with immediate effect and board member Axel Lehmann has taken over the role.

Horta-Osorio’s resignation comes less than a year after he was brought in to clean up a corporate culture marred by Switzerland’s second-largest bank’s involvement with collapsed investment firm Archegos and insolvent supply chain finance firm Greensill Capital.

“I regret that a number of my personal actions have led to difficulties for the bank and compromised my ability to represent the bank internally and externally,” Horta-Osorio said in a statement issued by the bank in the early hours of Monday.

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“I therefore believe that my resignation is in the interest of the bank and its stakeholders at this crucial time.”

In late December, Reuters reported in an exclusive story that a preliminary investigation by Credit Suisse found that Horta-Osorio breached COVID-19 rules a second time.

He attended the Wimbledon tennis finals in July during a visit to Britain when the country’s COVID-19 rules required him to be in quarantine, Reuters cited sources as saying. [L1N2TF08K]

Credit Suisse said Lehmann, the board and the executive board would continue to implement Credit Suisse’s strategy.

(Reporting by Anshuman Daga in Singapore, Shivani Tanna and Maria Ponnezhath in Bengaluru; Editing by Himani Sarkar)

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