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Yahoo
4 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
6 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%
