Analysts say that the Federal Reserve appears ready to make another tweak that will slow the rise of a key short-term interest rate by the end of the year, the Wall Street Journal reported. The central bank, in a move that would be largely technical in nature, could lower the interest rate it pays banks to park reserves on its books relative to the top end of its benchmark federal-funds rate. The fed-funds rate target range now stands at 2 percent to 2.25 percent, while its interest on excess reserves (IOER) rate is set at 2.2 percent. Until the Fed’s June meeting, IOER was set to define the top end of the fed-funds target range. The Fed bumped IOER down a touch in June because the fed-funds rate, which floats within the range and is set by market forces, had been grinding up near the top end of the target rate range. The change in IOER aimed to push the fed-funds rate back toward the middle of the range.
The Federal Reserve reported yesterday that consumer borrowing rose by a seasonally adjusted $10.9 billion following a jump of $22.9 billion in August, the Associated Press reported. The August gain had been the strongest increase in nine months. The September advance was below economists' expectations for a $16.5 billion gain. The category that covers auto loans and student loans increased $11.2 billion. The category for credit cards fell by $311.6 million after having risen $4.6 billion in August.
Securities lending by investment funds has reached its highest level in a decade, as demand for corporate bonds surged more than 30 percent over the past 18 months, Reuters reported. Global money managers generated nearly $6 billion in revenue during the first half of the year, loaning out stocks and bonds that often land in the hands of short-sellers such as hedge funds. It was the best performance since the start of the global financial crisis in 2008 and current volatility trends are expected to keep the upswing going, according to research firm IHS Markit. New regulatory disclosure rules that took effect last year and fresh academic research show, however, that there can be a bigger downside to securities lending than previously thought. For one, mutual funds may overweight high-demand stocks and bonds because they generate higher fees from short-selling hedge funds. Securities lending, especially for money managers keeping a bigger portion of the fees from fund investors, could distort stock-picking behavior and hurt performance, said Travis Johnson, a professor at the University of Texas at Austin.
The Chinese government imposed a tariff on American soybeans in response to the Trump administration’s tariffs on Chinese goods. The latest federal data, through mid-October, shows American soybean sales to China have declined by 94 percent from last year’s harvest, the New York Times reported. President Trump sees tariffs as a tool to force changes in America’s economic relationships with China and other major trading partners. His tough approach, he says, will revive American industries like steel and auto manufacturing that have lost ground to foreign rivals. But that is coming at a steep cost for some industries, like farming, that have thrived in the era of globalization by exporting goods to foreign markets. Like most successful American exports, soybeans are produced at high efficiency by a small number of workers using cutting-edge technologies, like tractors connected to satellites so the optimal mix of fertilizers can be spread on each square foot of farmland. The United States exported $26 billion in soybeans last year, and more than half went to China.
The construction workforce, estimated at roughly 33,000 before Hurricane Maria, will need to double to keep up with demand to rebuild roads, houses and other infrastructure damaged in last year’s storm season, said Emilio Colon-Zavala, president of the Puerto Rico Builders Association, the Wall Street Journal reported. Cement sales, a proxy for construction activity, increased for eight months straight after Hurricane Maria to 33 percent above pre-storm levels. Puerto Rico’s building industry is booming, fueled by federal disaster-relief dollars and insurance proceeds together projected to total $82 billion over time. The influx has turned construction into a bright spot for an island economy racked by population loss, a declining manufacturing base and the largest municipal bankruptcy in U.S. history. Since the hurricane, federal agencies have obligated $4.8 billion for recovery work in Puerto Rico through last August, according to the Center for a New Economy, a San Juan-based think tank. While financial planners don’t know the exact scale of federal assistance over the next decade, the U.S. government has made some firm commitments already, including an $18.5 billion grant for rebuilding housing stock and other infrastructure. Meantime, the construction industry is reckoning with rising costs. Not only have wages increased, but material costs have risen since the Trump administration imposed tariffs on steel and aluminum from Canada, Mexico and the European Union and on Chinese products like home appliances, electrical equipment and other materials critical to Puerto Rico’s rebuilding efforts.
Regulators started rewriting post-crisis swaps-trading rules on Monday, approving a proposal that would loosen requirements for how trades can be executed, the Wall Street Journal reported. By a 4-1 vote, the Commodity Futures Trading Commission proposed changes that would allow more ways to trade swaps on electronic platforms known as swap-execution facilities. The proposal would affect the biggest categories of products — interest-rate and credit-default swaps — that are routed through central clearinghouses. Currently, around 85 percent of those contracts are centrally cleared. The changes have been championed by CFTC Chairman J. Christopher Giancarlo, a Republican, who has long complained Obama-era rules were harming liquidity in swaps markets. He said yesterday that the proposal would bring “daylight to the marketplace” as Congress intended in the 2010 Dodd-Frank financial law. The proposal would require more types of trades — including a host of foreign-currency interest-rate swaps — to occur on the platforms, a change that could lead to as much as a 50 percent increase in daily trade volumes, according to estimates.
Regulators have proposed a softer oversight regime that dials back rules for U.S. banks considered unlikely to pose a threat to the financial system — a step meant to limit the toughest demands only to the largest lenders, Bloomberg reported. Responding to legislation that called on federal agencies to ease compliance burdens for non-Wall Street banks, Federal Reserve governors voted Wednesday on a plan that would separate megabanks from smaller, regional lenders. Under the proposals, banks such as U.S. Bancorp, Capital One Financial Corp. and PNC Financial Services Group Inc. would escape the most stringent capital rules reserved for systemically important institutions. The revamp from the Fed — portions of which will be issued jointly with the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. — would “significantly reduce regulatory compliance requirements” on mid-sized institutions. That will mean an estimated $8 billion less in overall capital for the industry, a liquidity demand lowered by several billion dollars and reduced compliance costs, according to a Fed memo.
U.S. consumer spending rose for a seventh straight month in September, but income recorded its smallest gain in more than a year on moderate wage growth, suggesting the current pace of spending was unlikely to be sustained, Reuters reported. The report from the Commerce Department yesterday also showed the increase in income at the disposal of households was the smallest in 15 months and savings dropped to their lowest level since December last year. “It remains to be seen how long the spending spree can continue,” said Sung Won Sohn, chief economist at SS Economics in Los Angeles. “The stimulus from the tax cut has plateaued. Rising interest rates and volatile stock markets are having a psychological as well as a real effect.” Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.4 percent last month as households bought more motor vehicles and spent more on health care. Data for August was revised up to show spending advancing 0.5 percent instead of the previously reported 0.3 percent gain. Read more.
The Commerce Department today released its initial estimate of third-quarter economic growth showing that the U.S. gross domestic product rose at an annualized rate of 3.5 percent in the third quarter, the New York Times reported. The third-quarter growth rate was down slightly compared to the 4.2 percent rate in the second quarter. Analysts had expected the economy to slow somewhat after the second quarter’s blockbuster data, and the economy remains on track to grow by 3 percent or more this year — the first time it has hit that mark since 2005. The Commerce Department also reported that consumer spending increased by 4 percent, a category that accounts for roughly 70 percent of economic output, and was strong this quarter and last.
A Federal Reserve report released yesterday found that businesses were still optimistic about the economy’s growth trajectory, but indicated concerns that tariffs would continue to push up costs, the Wall Street Journal reported. The majority of the Fed’s 12 districts reported modest to moderate economic growth at the beginning of fall, the Fed said in its latest roundup of anecdotal information about regional economic conditions known as the beige book. The report was based on data collected on or before Oct. 15 and highlighted uncertainties, particularly among manufacturers, regarding the impact of labor shortages and trade disputes. The Trump administration has imposed tariffs on billions of dollars-worth of imports, leading to retaliatory tariffs on U.S. goods. For one trucking contact in the Cleveland Fed district, tariffs have meant price increases for pallet jacks, tires, and packaging material. Many businesses have or expect to pass along tariff-related price increases to customers, but in some cases, are unable to, the report said.