Fmr. Fed Governor Mishkin: CPI data should be taken with a grain of salt, here's why
Frederic Mishkin, former Fed Governor and Columbia Business School professor, joins 'Closing Bell' to discuss why investors should take CPI with a grain of salt,
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Yahoo
an hour ago
- Yahoo
Effort to strip Fed of interest paying power seen likely to bring upheaval to markets
By Michael S. Derby NEW YORK (Reuters) -A Republican senator's plan to take away the Federal Reserve's power to pay banks interest on cash they park on central bank books could cause chaos for monetary policy implementation if it were implemented, market participants said. In recent days, Senator Ted Cruz of Texas has been speaking about this power and his desire to see it ended as part of what he views as an effort to save money by the federal government. Stripping the Fed of the longstanding power would save the government $1 trillion, Cruz said in a CNBC interview last week. The senator said then that he did not know if it was likely his effort would work but that it was certainly possible. On Wednesday, Bloomberg reported that Cruz had also lobbied President Donald Trump, who has long been at odds with the Fed, as well as Republican colleagues, about his idea. 'We're agonizing trying to find a $50 billion cut here and there. This is over a trillion dollars, big dollars in savings,' Cruz told Bloomberg, saying of the payments, 'half of it is going to foreign banks, which makes no sense.' Cruz's office did not respond to a request for comment. The Fed declined to comment. Cruz's effort is being treated cautiously by Senator Tim Scott, the Republican from South Carolina who chairs the Senate Finance Committee. "While the desire to return to pre-crisis monetary policy operating procedures is understandable," the matter must be considered under normal Senate procedures, Scott said in a statement. Any move on this must start with a hearing, Scott said, adding, "this is not a decision to be rushed – it must be carefully considered and openly debated." The Fed's power to pay banks interest, granted by Congress, took effect in 2008 as the financial crisis dawned. It quickly gained prominence as part of a large-scale overhaul of the monetary policy architecture, as the Fed confronted the greatest economic downturn since the Great Depression. As it now stands, the Fed pays deposit-taking banks 4.4% for reserves. It uses another tool called the reverse repo facility to take in cash from money market funds and others, paying them 4.25%. Together, the two rates are designed to keep the federal funds rate, the central bank's main tool for influencing the economy, within the desired range. Paying financial firms for de facto loans of cash is essential for interest rate control due to the very large amount of liquidity created by bond buying stimulus efforts. During the COVID-19 pandemic, the Fed more than doubled the size of its balance sheet to a peak of $9 trillion, with asset purchases providing support to the economy beyond what the then near-zero short-term rates could deliver. If the Fed did not have the power to pay interest on deposits, the still substantial amount of liquidity sloshing around in markets would prevent it from controlling short-term rates. That said, concerns have long existed, even among some former central bankers, that paying banks money to deposit cash at the Fed is effectively a subsidy to banks. The other issue with paying interest on reserves is that it has led the Fed into an unprecedented period of loss-making. The Fed has been operating in the red because the interest rate it now has in place outstrips the income it earns off bonds it owns. Most analysts expect the loss-making to occur for some time to come. Fed losses mean that it is not handing over profits back to the Treasury, as it is required to do when it is in the green. Sums handed back to the Treasury over recent years contributed modestly to lowering deficits. Experts believe Cruz's plan would completely fail to achieve its goals and would instead cause huge upheaval in money markets. Barclays Capital economists said on Tuesday that ending the power would simply push the cash into the reverse repo facility, which means the central bank would still be paying lots of interest to financial firms, thus negating any deficit savings. J.P. Morgan strategists said in a note last week that under Cruz's plan, 'the Fed's ability to control money market rates may be compromised, complicating its efforts to guide broader financial conditions via the fed funds rate and other money market rates.'
Los Angeles Times
an hour ago
- Los Angeles Times
Wall Street ticks closer to its record after Oracle rallies
NEW YORK — U.S. stock indexes ticked higher on Thursday following another encouraging update on inflation across the country. The Standard & Poor's 500 rose 0.4% to pull back with 1.6% of its record. The Dow Jones Industrial Average added 101 points, or 0.2%, and the Nasdaq composite gained 0.2%. Oracle pushed upward on the market after jumping 13.3%. The tech giant delivered stronger profit and revenue for the latest quarter than analysts expected, and CEO Safra Catz said it expects revenue growth 'will be dramatically higher' in its upcoming fiscal year. That helped offset a 4.8% loss for Boeing after Air India said a London-bound flight crashed shortly after taking off from Ahmedabad airport Thursday with 242 passengers and crew onboard. The Boeing 787 Dreamliner crashed into a residential area near the airport five minutes after taking off. The cause of the crash wasn't immediately known. Stocks broadly got some help from easing Treasury yields in the bond market following the latest update on inflation. Thursday's said inflation at the wholesale level wasn't as bad last month as economists expected, and it followed a report on Wednesday saying something similar about the inflation that U.S. consumers are feeling. Wall Street took it as a signal that the Federal Reserve will have more leeway to cut interest rates later this year in order to give the economy a boost. The Federal Reserve has been hesitant to lower interest rates, and it's been on hold this year after cutting at the end of last year, because it's waiting to see how much President Donald Trump's tariffs will hurt the economy and raise inflation. While lower rates can goose the economy by encouraging businesses and households to borrow, they can also accelerate inflation. The yield on the 10-year Treasury fell to 4.35% from 4.41% late Wednesday and from roughly 4.80% early this year. Besides the inflation data, a separate report on jobless claims also helped to weigh on Treasury yields. It said slightly more U.S. workers applied for unemployment benefits last week than economists expected, and the total number remained at the highest level in eight months. That could be an indication of a rise in layoffs across the country. 'We believe that were it not for the uncertainty caused by the tariffs, the combined information coming from the inflation and labor-market data would have compelled the Fed to have resumed cutting its policy rate by now,' according to Thierry Wizman, a strategist at Macquarie. The Fed's next meeting on interest rates is scheduled for next week, but the nearly unanimous expectation on Wall Street is that it will stand pat again. Traders are betting it's likely to begin cutting in September, according to data from CME Group. Trump's on-and-off tariffs have raised worries about higher inflation and a possible recession, which had sent the S&P 500 roughly 20% below its record a couple months ago. But stocks have since rallied nearly all the way back on hopes that Trump will lower his tariffs after reaching trade deals with other countries. Many of Trump's tariffs are on hold at the moment to give time for negotiations, but Trump added to the uncertainty late Wednesday when he suggested the United States could send letters to other countries at some point 'saying this is the deal. You can take it or you can leave it.' On Wall Street, Chime Financial jumped 37.4% in its first day of trading on the Nasdaq. The technology company is trying to be the main financial hub for customers, connecting them with its bank partners. GameStop dropped 22.5% after saying it plans to raise $1.75 billion by borrowing at zero interest rates, though the lenders could choose to be repaid in the video-game retailer's stock instead of cash. All told, the S&P 500 rose 23.02 points to 6,045.26. The Dow Jones Industrial Average added 101.85 to 42,967.62, and the Nasdaq composite gained 46.61 to 19,662.48. In stock markets abroad, indexes were mixed across Europe and Asia amid mostly modest movements. Hong Kong's Hang Seng was an outlier, and it tumbled 1.4% to give back some of its strong recent gains. Hong Kong's index is still up nearly 20% for the year so far, towering over the U.S. stock market's gain of less than 3%. Choe writes for the Associated Press.
Yahoo
an hour ago
- Yahoo
Effort to strip Fed of interest paying power seen likely to bring upheaval to markets
By Michael S. Derby NEW YORK (Reuters) -A Republican senator's plan to take away the Federal Reserve's power to pay banks interest on cash they park on central bank books could cause chaos for monetary policy implementation if it were implemented, market participants said. In recent days, Senator Ted Cruz of Texas has been speaking about this power and his desire to see it ended as part of what he views as an effort to save money by the federal government. Stripping the Fed of the longstanding power would save the government $1 trillion, Cruz said in a CNBC interview last week. The senator said then that he did not know if it was likely his effort would work but that it was certainly possible. On Wednesday, Bloomberg reported that Cruz had also lobbied President Donald Trump, who has long been at odds with the Fed, as well as Republican colleagues, about his idea. 'We're agonizing trying to find a $50 billion cut here and there. This is over a trillion dollars, big dollars in savings,' Cruz told Bloomberg, saying of the payments, 'half of it is going to foreign banks, which makes no sense.' Cruz's office did not respond to a request for comment. The Fed declined to comment. Cruz's effort is being treated cautiously by Senator Tim Scott, the Republican from South Carolina who chairs the Senate Finance Committee. "While the desire to return to pre-crisis monetary policy operating procedures is understandable," the matter must be considered under normal Senate procedures, Scott said in a statement. Any move on this must start with a hearing, Scott said, adding, "this is not a decision to be rushed – it must be carefully considered and openly debated." The Fed's power to pay banks interest, granted by Congress, took effect in 2008 as the financial crisis dawned. It quickly gained prominence as part of a large-scale overhaul of the monetary policy architecture, as the Fed confronted the greatest economic downturn since the Great Depression. As it now stands, the Fed pays deposit-taking banks 4.4% for reserves. It uses another tool called the reverse repo facility to take in cash from money market funds and others, paying them 4.25%. Together, the two rates are designed to keep the federal funds rate, the central bank's main tool for influencing the economy, within the desired range. Paying financial firms for de facto loans of cash is essential for interest rate control due to the very large amount of liquidity created by bond buying stimulus efforts. During the COVID-19 pandemic, the Fed more than doubled the size of its balance sheet to a peak of $9 trillion, with asset purchases providing support to the economy beyond what the then near-zero short-term rates could deliver. If the Fed did not have the power to pay interest on deposits, the still substantial amount of liquidity sloshing around in markets would prevent it from controlling short-term rates. That said, concerns have long existed, even among some former central bankers, that paying banks money to deposit cash at the Fed is effectively a subsidy to banks. The other issue with paying interest on reserves is that it has led the Fed into an unprecedented period of loss-making. The Fed has been operating in the red because the interest rate it now has in place outstrips the income it earns off bonds it owns. Most analysts expect the loss-making to occur for some time to come. Fed losses mean that it is not handing over profits back to the Treasury, as it is required to do when it is in the green. Sums handed back to the Treasury over recent years contributed modestly to lowering deficits. Experts believe Cruz's plan would completely fail to achieve its goals and would instead cause huge upheaval in money markets. Barclays Capital economists said on Tuesday that ending the power would simply push the cash into the reverse repo facility, which means the central bank would still be paying lots of interest to financial firms, thus negating any deficit savings. J.P. Morgan strategists said in a note last week that under Cruz's plan, 'the Fed's ability to control money market rates may be compromised, complicating its efforts to guide broader financial conditions via the fed funds rate and other money market rates.'
