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Yahoo
5 days ago
- Business
- Yahoo
Powell's Successor May Struggle to Deliver the Rate Cuts Trump Wants
(Bloomberg) -- Close Federal Reserve watchers have a message for anyone who thinks the next leader of the US central bank will deliver lower borrowing costs on a silver platter: Don't count on it. Are Tourists Ruining Europe? How Locals Are Pushing Back Can Americans Just Stop Building New Highways? Singer Akon's Failed Futuristic City in Senegal Ends Up a $1 Billion Resort Denver City Hall Takes a Page From NASA Philadelphia Trash Piles Up as Garbage Workers' Strike Drags On While it's an unlikely outcome, some investors have staked out positions in futures markets that will profit if interest rates drop immediately after Jerome Powell's term as chair ends in May 2026. The trade has been fueled by President Donald Trump's pledge to nominate 'somebody that wants to cut rates.' Those investors have targeted futures contracts linked to the Secured Overnight Financing Rate, or SOFR, which closely tracks the benchmark federal funds rate. They've sold off contracts that expire prior to Powell's exit and piled into contracts that expire just after the expected arrival of a Trump-appointed chair. It's a trade that takes a chance on Trump getting his way, shrugging off how the central bank goes about setting rates. A chair 'can't act like a dictator,' said Mark Gertler, an economics professor at New York University who has co-authored papers with former Fed Chair Ben Bernanke and former Vice Chair Richard Clarida. 'He can't call in the Marines or anything like that.' Adjusting rates, Gertler pointed out, requires the support of a majority on the Federal Open Market Committee. Nineteen policymakers participate in FOMC meetings and 12 vote. In other words, the new chair will have to win over their colleagues with a reasonable case for cutting. So far this year, Fed officials have agreed to hold borrowing costs steady in a range of 4.25% to 4.5%. But, as rate projections reveal, policymakers appear split over the outlook for cuts over the rest of the year, largely over differing views on how Trump's tariffs might affect inflation. Ten policymakers — those more inclined to see the impact of tariffs on prices as temporary — expect two or three cuts by year's end. Two others see just one cut as appropriate and seven expect the benchmark rate to stay where it is. For next year, the range widens, with the upper boundary of the federal funds rate projected to finish 2026 anywhere from 2.75% to 4.25%. The projections, being anonymous, can't be linked with certainty to individual policymakers. 'It's obviously a concern that the Fed will be less independent, certainly,' said Michael Feroli, chief US economist at JPMorgan Chase & Co. 'Whether one person, even if that's the chair, can immediately get the committee to agree to a big change in policy, I think that might be more difficult.' Lining Up Votes Trump's pick to replace Powell won't be the only person inclined to support his call for cuts. Fed Governor Michelle Bowman — whom Trump placed on the board in 2018 and promoted to the central bank's top regulatory job last month — has so far this year supported holding rates steady, but recently said it might be appropriate to cut later this month. So, too, has Governor Christopher Waller, another Trump appointee. The president may use the vacancy created in January when Fed Governor Adriana Kugler's term expires to place his pick for chair on the Board of Governors. He'll then get one more opening to fill if Powell resigns from his underlying post as a governor. That's what outgoing chairs typically do, but Powell has declined to say whether he'll exit altogether. But even if Powell departs, that doesn't add up to enough votes to make additional cuts. Whether others go along with lowering rates will depend more on what actually happens in the economy. And it could be difficult to peel away other policymakers one-by-one. Dissents aren't especially rare, but in an institution that values broad-based agreement, especially when policy shifts, votes are rarely deeply split. 'At the end of the day it's a committee decision, and whoever the next chair is, he is going to have to build a consensus,' said Brett Ryan, US senior economist at Deutsche Bank Securities. Will Trade War Make South India the Next Manufacturing Hub? 'Our Goal Is to Get Their Money': Inside a Firm Charged With Scamming Writers for Millions 'Telecom Is the New Tequila': Behind the Celebrity Wireless Boom Pistachios Are Everywhere Right Now, Not Just in Dubai Chocolate SNAP Cuts in Big Tax Bill Will Hit a Lot of Trump Voters Too ©2025 Bloomberg L.P.
Economic Times
7 days ago
- Business
- Economic Times
Coiled for a comeback: Credit revival likely faster this time due to stronger fundamentals
Two to tango RBI has eased monetary conditions, with MPC members talking of 'the need to support growth'. The focus now shifts to the first step in growth restoration-a revival in credit growth, that is, monetary fast can credit growth pick up, and by how much? Several commentators lament the current weak demand for loans and point to prolonged lags with which credit growth picked up in the monetary-easing episodes of 2002 and 2014. Whereas their concerns and observations hold merit, current conditions are meaningfully different than in prior cycles and so should outcomes. Let us assess four major channels of monetary transmission: rates, credit, asset prices and exchange rates. Exchange rate When interest rates fall, a country's currency tends to weaken, which becomes a growth stimulus (exports become more competitive and import substitution becomes an opportunity), boosting demand for credit. However, given that the rupee is not fully convertible, it is only weakly affected by interest rate differentials, limiting the impact of this channel. Asset price A reduction in interest rates boosts prices of both financial and real assets. Borrowers then feel more emboldened, and lenders have more collateral to lend against. This channel is also not potent here, as the economy is far less financialised than other major economies, and interest rates have, at best, a marginal impact on asset prices. Rates Lower interest rates increase demand for loans. Rates on new loans change in the same direction as policy rates, though the gap between them varies, reflecting transmission lags. For example, interest rates on term deposits (TDs), which account for 60% of funds for banks, would only come down over a year, as 75% of TDs are of greater than one year duration said, most banks have cut interest rates they pay on savings account balances and wholesale funding rates, as measured by rates on certificates-of-deposit (CD) of 12-month duration are down more than 1.75%. Thus, banks are now cutting interest rates on new loans, which should boost loan growth. Credit channel In their 1995 paper, Inside the Black Box: The Credit Channel of Monetary Policy Transmission, Ben Bernanke and Mark Gertler wrote that monetary easing helps credit availability via its impact on borrowers' creditworthiness as well as lender's risk appetite. Given that banks are also businesses, their willingness to take on credit risk also depends on economic momentum. Usually, monetary easing starts when the momentum is weak, like it is now, so naturally at such points banks are less willing to take business is the most potent channel of monetary policy transmission in India. The low debt-to-GDP ratio in India indicates demand for loans far exceeds their supply at all points of time. There is also evidence that the loan slowdown last year was many believe that credit growth slowed last year only due to curtailment of unsecured personal loans (PL), data shows a broad-based slowdown driven by banks de-risking. Unsecured PLs contributed to only a fifth of the growth decline; bigger contributors were bank loans to non-banking finance companies and fact, a 2018 St Louis Fed paper found that in the US, shocks to unsecured firm credit explain more of economic fluctuations than shocks to secured credit, demonstrating how banks' risk appetite affects economic momentum. They found unsecured firm credit is pro-cyclical and tends to lead GDP (meaning growth in risky loans occurs before economic growth), whereas secured firm credit is in 2014 nearly 60% of bank loans were at interest rates higher than 12% (loans at higher rates are considered riskier), today that ratio is just 11%. Over the past year, the banking system curtailed loans at rates above 10%, collectively de-risking further. For these loans to grow again, banks' risk appetite must improve, and that may not occur immediately after the start of monetary expect this to be a gradual process that slowly gains momentum-the first percent point increase in loan growth would improve economic momentum, which, in turn, would affect the demand and supply of higher-interest-rate (riskier) is also likely that improvement should be meaningfully faster than in prior cycles due to three reasons. There is no overhang of unrecognised bad loans, whereas in 2002-04 due to SARFAESI Act, and in the 2014-16 period due to the Asset Quality Review (AQR) and then the new IBC, borrowers as well as lenders were cautious. There is much more capacity to lend and borrow, as lenders are well capitalised and borrowers have low debt-equity ratios. Market share in the banking system has shifted towards the private sector. In the 2002 and 2014 cycles, PSBs held nearly three-fourths of assets and liabilities, but their share is now just half. As private banks have more incentives to take risk, once economic momentum builds, the credit channel of transmission should work faster in this cycle. The first signs of improvement could be visible in a few months. The acceleration thereafter can be faster, as regulatory easing (cuts to risk weights as well as the cash reserve ratio) is likely to amplify the recovery, and bank capital buffers are strong. (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of Elevate your knowledge and leadership skills at a cost cheaper than your daily tea. Just before the Air India crash, did India avert another deadly mishap? Do bank stress tests continue to serve their intended purpose? Did Jane Street manipulate Indian market or exploit its shallowness? Second only to L&T, but controversies may weaken this infra powerhouse's growth story How Balrampur Chini, EID Parry are stirring up gains amid melting sugar stocks Stock Radar: Poly Medicure stock looks attractive for short-term gains; still down 30% from highs Stock picks of the week: 5 stocks with consistent score improvement and return potential of more than 29% in 1 year Capital market stocks: Some corrections are opportunities, 5 stocks with potential downside to upside from -20% to +24%
Yahoo
7 days ago
- Business
- Yahoo
Opinion - Jerome Powell is competing to be the worst Fed chair in history
By stubbornly refusing to lower interest rates despite ample data urging him to do so, Fed Chairman Jerome Powell is committing his third major policy blunder in six years. If he continues this tight-money path through the July 29 Fed meeting, 'Too Late' Powell will go down as the worst Fed chair in history. It's not like Powell lacks stiff competition. In the 1970s, to boost Richard Nixon's re-election run, uber‑partisan Arthur Burns kept rates too low for too long, triggering a dizzying inflation spiral and a decade-long stagflation. In the 1990s, Alan Greenspan severely underestimated productivity gains from the tech boom, over-estimated inflationary pressures, and needlessly hiked rates — six times between June 1999 and May 2000. This spiked the federal funds rate to 6.5 percent, triggering the dot-com market crash and 2001 recession. A whiplashed Greenspan then slashed rates to rock-bottom levels and held them at 1 percent for a full year — from June 2003 to June 2004 — well beyond what the recovery warranted. This ultra-cheap money fueled reckless lending, a massive housing bubble, and ultimately detonated the 2007–2008 financial collapse. Greenspan's successor, Ben Bernanke, should have seen it coming. But the Princeton don failed to grasp rising systemic risk in mortgage markets. His paralysis turned what might have been a contained correction into a full-blown global financial crisis — only intervening after Lehman Brothers fell, when it was already too late. Now enters Jay Powell. Even though he leads the world's largest economy, he is a lawyer, not an economist — an anomaly among Fed chairs. Since Arthur Burns, every Fed chair has held an economics degree, except for G. William Miller and Powell. Miller was similarly unqualified and endured one of the most disastrous Fed tenures in recent memory spanning just 517 days before being replaced by the esteemed Paul Volcker on August 6, 1979. Powell's audition for 'worst Fed chair' began shortly after his February 2018 appointment. Promising President Trump in the Oval Office a supportive posture to secure his nomination, Powell instead aggressively raised rates into the low-inflation, high-growth Trump economy. Powell wrongly believed Trump's tax cuts and tariffs would spark inflation — they didn't. Nor did Powell understand that Trump's efforts to deregulate the economy and reach energy independence — positive 'supply shocks' in the macroeconomics vernacular — would provide positive deflationary benefits. As Powell's Fed hiked interest rates four times in 2018—despite muted inflation and strong labor market gains — economic momentum slowed sharply. According to the Fed's own September Tealbook, most of the expected GDP slowdown — from over 3 percent to 1.5 percent — was due to Powell's blunder. Trump was justifiably outraged over Powell's first blunder. It would cost the American economy hundreds of thousands of jobs and hundreds of billions of dollars in lost economic output and tax revenues. After Trump left the White House in January 2021, Powell successfully lobbied Joe Biden for a second term. Throughout that year, the Powell-led Fed kept interest rates near zero, even as inflation surged past 5 percent by mid-year. Embracing the Biden-Yellen line that inflation was merely 'transitory,' the pandering Powell refused to act. Despite growing warnings from economists and business leaders, Powell waited until March 2022 — more than a year after inflation had begun accelerating — before implementing the first interest rate hike since 2018. By then, the damage was done. The Fed was forced into one of the most aggressive tightening cycles in history — 11 hikes in 12 months — all to combat the inflation that Powell's inaction had helped unleash. Powell's second major blunder here wasn't just his late policy; it was his silent permissiveness. While a Democrat-controlled Congress passed over $2 trillion in unneeded and wasteful spending bills — in no small part to boost the Biden reelection campaign — Powell failed in his ethical duty to warn the White House and Democrat-controlled Congress that this spending would worsen inflation. Instead, he let loose monetary policy and partisan fiscal profligacy collide, accelerating the very inflation he would soon be forced to chase. Today, with inflation returning to target and disinflation gaining traction, Powell is well on his way to his third blunder with his stubborn refusal to lower interest rates now. Powell seems incapable of recognizing that Trumponomics — driven by pro-growth deregulation, productivity-enhancing tax cuts, strategic tariffs, and America First supply chain policies — is again delivering strong GDP growth and low unemployment without fueling inflation, just as in Trump's prosperous first term. Powell's misguided fixation on so-called tariff 'uncertainties' as a rationale for 'prudently' holding rates steady is particularly imprudent. Let's remember clearly: during President Trump's first term, we imposed tariffs strategically and aggressively — and the predicted inflation never materialized. Powell's hesitation reflects a failure to learn from recent economic history, needlessly stifling growth, undermining American competitiveness, and harming millions of Americans. At its next meeting July 29-30, the Fed must immediately begin cutting rates. If Powell won't adjust course, he will indeed have earned the sobriquet of worst Fed chair. Peter Navarro is White House senior counselor for trade and manufacturing. Copyright 2025 Nexstar Media, Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
Forbes
06-07-2025
- Business
- Forbes
Say It Repeatedly, The Fed Isn't Nor Can It Be ‘Independent'
Facade of the Marriner S Eccles building of the United States Federal Reserve, on a bright and sunny ... More day in Washington, DC, United States, July 24, 2017. (Photo by Smith Collection/Gado/Getty Images) The Fed can never be independent. Economists should spare readers of any further commentary calling for what can't be. Long before the Fed existed, and just the same to this day, there were and are all manner of private, profit-motivated sources of credit ready to liquefy financial institutions enduring near-term liquidity problems despite quality assets. Those entities, including combinations of actual banks, also acted and act as regulators par excellence precisely because no private entity lends blithely. Which speaks to the Fed's superfluity. Though created to lend to 'solvent banks,' no solvent bank would ever need the Fed. See the previous paragraph. Which means the Fed exists to suffocate the message of the market. Fed officials are appointed by politicians, frequently after months and years spent courting those politicians. Considering Ben Bernanke alone, eager to prove he was a 'Republican' as a way of currying favor with Republicans who might whisper to then President George W. Bush about his alleged attributes, Bernanke courted countless Republicans in addition to Bush on the way to a spot at the top of Fed. No doubt others, including yours truly, have for years pointed to numerous instances of fighting between politicians (this includes presidents) and central banks as evidence that central banks are 'independent' in name only, but if anything, the commentary was similarly superfluous. The Fed is an outsourced creation of Congress whose officials are appointed by presidents and confirmed by Congress. Of course it's political, and the opposite of independent. After which, see its superfluity yet again relative to market entities that have long and capably filled central bank functions of providing near-term liquidity to the solvent, along with regulation to ensure sound operation based on those loans. Which is just a comment that the Fed is excess by political design, whereby it does what market actors won't do, and have never done. Despite this, economic figures in academia like Alexander Salter continue to write wistfully about so-called central bank independence. That they're writing about it explains the impossibility. What's political in creation quite simply can't be. Yet even if it was? It wouldn't matter. Economists are still economists, which means they're not independent of the myriad fallacies that stalk their profession. The Fed employs more economists than any other entity in the world, and economists believe economic growth causes inflation. Quite the opposite, but 'independent' economists at the Fed expose the central bank to even greater superfluity with their view that credit, which is a productive effect of growth (we borrow money for what it can be exchanged for), must be shrunken when – yes – the economy is growing. That's evidence of a central bank in thrall to a fallacy, and ready to further suffocate actual market signals. And it's not the only one. While money in circulation is always and everywhere a mirror of economic activity, Salter caucuses with a growing crowd of PhDs that believes central banks can and must centrally plan so-called 'money supply' so that they can by extension centrally plan rates of unemployment, national income, and the screaming falsehood that is GDP. These individuals in thrall to monstrous fallacy rooted in central planning describe themselves as 'market monetarists.' That they doth protest too much with their self-description insults understatement. The Fed on auto-pilot? Salter et al have paid lip service to the latter too, but then who writes the code to operate the proverbial robot? The same economists who believe in the same fallacious economic notions? Well, yes. The Fed was created to do for the U.S. political class what market actors would not. Which means the Fed exists to intervene politically where market actors would not. The Fed isn't independent, and can't be.
Time of India
24-06-2025
- Business
- Time of India
The Bernanke consensus on oil shocks is truer than ever
Tired of too many ads? Remove Ads Tired of too many ads? Remove Ads Popular in International If we've seen the worst of the oil price shock from the Israel-Iran conflict , then another ostensible impediment to Federal Reserve interest rate cuts may have just prices plummeted on Monday as Iran's response to US strikes on its nuclear facilities proved much more restrained than the worst-case scenario: A closure of the Strait of Hormuz. Though Iran shot missiles at the largest US air base in the Middle East, they were all intercepted without casualties. President Donald Trump announced that the strikes had been telegraphed and that Israel and Iran had agreed to a tentative ceasefire in their conflict. Provided it holds, the signal from energy markets should allow policymakers to cut rates by course, you could argue that oil doesn't really matter very much for monetary policy — and you wouldn't be wrong. The contemporary economic orthodoxy is that the Fed should look through temporary supply shocks. In an economy with generally low and anchored inflation expectations , economists expect one-time price level changes to come and go without a lasting impact on inflation trends, and responding with higher interest rates could lead to pointless damage to the economy and labor market. In fact, while oil price shocks are historically associated with recessions, a famous paper co-written by former Fed Chair Ben Bernanke found that 'an important part of the effect' comes from ill-advised rate hikes rather than higher oil prices the recent inflationary episode of the pandemic prompted economists to rethink — and possibly overthink — this central question in monetary policy. In a paper presented to policymakers and economics luminaries at a Fed conference last month, researchers Olivier Coibion and Yuriy Gorodnichenko focused on consumer surveys about inflation perceptions and made the argument that inflation expectations were currently and historically unanchored. The paper argued, in a sense, that everything we thought we knew about the Fed and inflation expectations was this case, unanchored means that expectations may be low when inflation is generally low (as in the 2010s) and high whenever realized inflation is high (as in the 2021-2024 period). Consumers and businesses don't have much core faith in their central bank, and their expectations go wherever the wind blows. Since inflation is a self-fulfilling prophecy, unanchored expectations create the conditions for one-off shocks to turn into sustained periods of inflation. The implication of the Coibion-Gorodnichenko paper was that the central bank should reverse the earlier rule of thumb and take action in response to any oil supply shock, using its tools to bring inflation back to target as quickly as the research change a lot of minds on the rate-setting committee? It's hard to know, but it injected enough uncertainty into the equation that it could have led policymakers to wait on rate cuts to be sure that inflation expectations weren't drifting any higher from already somewhat elevated levels. That would have been an unfortunate outcome, because many of the concerns about inflation expectations are based on extremely flawed indexes of consumer beliefs, including the University of Michigan survey. Party-level data from that survey strongly suggest that respondents base their responses on our hyperpartisan discourse and the social-media silos where they get their information. No matter how the Iran conflict unfolds from here, policymakers should keep their analysis focused on the hard data on core inflation , excluding volatile food and energy all, the US economy's relationship with oil is shifting quickly. A couple of decades ago, it would have been unthinkable that the US and Iran would be lobbing missiles and the oil and stock markets would be this unmoved. But the auto industry has been moving toward electrification, combustion vehicles and buildings are more fuel efficient and the shale movement has turned the US into a dominant energy producer in its own right. The US economy and consumer prices were only modestly impacted overall by Russia's invasion of Ukraine, which triggered a much more dramatic spike in West Texas Intermediate above $120 a risk in all this is that we may get so cautious about inflation expectations given the numerous uncertainties around — both geopolitical and trade-related — that we overlook the softening in the labor market. Though tariffs are still widely expected to deliver a bump to prices in coming months, realized inflation has been tame of late. And continuing claims for US unemployment benefits have been drifting higher on a four-week average basis, suggesting that unemployment may be poised to also tick are still an open question, but it's one that should have some resolution by the end of the summer. All in all, the best option for risk-averse policymakers — and the one I suspect Fed Chair Jerome Powell will choose — is to lay the groundwork for a rate cut in September, and potentially earlier if the incoming data supports it.
