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Highlights
HILSENRATH'S TAKE: WHAT IF THIS IS AS GOOD AS IT GETS?
The International Monetary Fund's spring meetings are turning into a depressing affair. By April every year in the wake of the financial crisis, it seems the world's top finance officials and central bankers are busy revising down expectations for annual growth and navigating some brewing financial storm. And so it is in 2015. Washington's cherry blossoms are in full bloom and so is economic angst and frustration.
Greece is replaying its annual role of Eris, the goddess of chaos and discord. (Eris is also a "dwarf planet" in the solar system, something like Greece in the euro area.) European Central Bank officials spent much of the past few days complaining privately to others that Prime Minister Alexis Tsipras and Greece's left-wing Syriza party are not up to the impossible task they face in the weeks ahead. Default and withdrawal from the eurozone loom.
As dramas go, the U.S. seems to be following a script from the 1997 film, "As Good As it Gets," starring Academy Award winner Jack Nicolson. Mr. Nicholson, portraying a cranky and unlikeable writer named Melvin Udall, cruelly asks a group of depressed psychiatric patients, as they sit in a doctor's office hoping for healing, "What if this is as good as it gets?"
Our Melvin Udall is Harvard University professor Lawrence Summers. He scores points for his "secular stagnation" thesis every time the Federal Reserve and IMF are forced to revise down their growth forecasts or when global interest rates fall further. Mr. Summers has a new edge in his case for the economy's lack of momentum with a first quarter economic slowdown.
America's neighbors remain relatively optimistic. Agustin Carstens, head of the Bank of Mexico, and Stephen Poloz, head of the Bank of Canada, told me independently they thought the U.S. first quarter slowdown was a blip. But other U.S. trading partners aren't so sure. "This virtuous cycle --where everybody believes that everything is going to be alright so they start investing, then investment creates jobs, jobs create demand and demand creates investment -- that virtuous cycle is just not happening," Raghuram Rajan, governor of the Bank of India, told me.
Economic policy makers are arguing the world's problem is insufficient demand. Some point more specifically to insufficient investment. There is something incongruous here -- why would you expect business to invest if it doesn't see sufficient underlying demand? Perhaps government should fill the void. But look at what happened to China when it sought to ramp up demand and investment in the wake of the 2008 financial crisis. It got a housing glut and industrial overcapacity. Moreover, what are the limits of government debt in developed economies to fuel this needed investment? And what are the risks associated with the low interest rates meant to help do the job?
It's a good thing the IMF meeting is over, so we can all stop talking about the disappointing global economy.
-By Jon Hilsenrath
MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD
China's Central Bank May Take a Page from Europe's Playbook. China's central bank is considering expanding on its efforts to free up credit by taking a page from Europe's financial-crisis handbook. Under deliberation at the People's Bank of China is a move that could allow Chinese banks to swap local-government bailout bonds for cash as a way to bolster liquidity and boost lending, say people familiar with the talks. In recent months, China's leaders have directed the central bank to try to beef up bank lending and lower borrowing costs as the economy slows and capital leaves the country.
For the People's Bank of China, Bond Buying Is Both Easy and Hard. China's central bank has long been critical of the bond-buying programs adopted by its counterparts in developed countries. Now, it's pondering its own version of such easing and a close look at its balance sheet shows it has room to do just that.
China Central Bank Cuts Banks' Reserve-Requirement Ratio. China's central bank reduced the amount of reserves commercial banks are required to hold, freeing up about $200 billion for lending in the latest easing measure to shore up the world's second-largest economy. The People's Bank of China's one percentage point cut in the reserve requirement, announced Sunday, is a larger-than-usual reduction. It is the second cut in banks' reserve requirement in less than three months and comes after the economy decelerated to 7% year-over-year growth in the first quarter, the slowest pace in six years.
Economists React.
China's PBOC to Inject Over $60 Billion Into Two State Banks. China's central bank was set to inject more than $60 billion from nation's foreign-exchange reserves into two state policy banks, Caixin magazine reported Monday. The local business publication, citing unnamed sources, said the People's Bank of China would inject $32 billion into the China Development Bank and $30 billion in the Export-Import Bank of China--Dow Jones Newswires.
Foreign Central Banks Don't See Yuan Devaluation on Horizon. Global central bankers don't expect Chinese officials to devalue their currency as part of a widening campaign to boost output in the world's second largest economy. Weak demand has led to talk in financial markets about the broad risk in financial markets of currency wars and the more specific possibility of currency devaluation by Chinese officials to boost exports. "I don't think any country, including China, would pursue that kind of policy," said Zeti Akhtar Aziz, Governor of the Bank Negara of Malaysia, in an interview with The Wall Street Journal, echoing those of other central bank chiefs in Washington, D.C. over the weekend for meetings of the International Monetary Fund.
Lagging Growth Plagues Economic Policy Makers. Six years after tackling the global financial crisis, the world's finance ministers and central bankers are struggling to exit crisis-management mode and lift growth out of a long-term funk. Troubles including low inflation, heavy debt loads, high unemployment and financial turmoil have dogged the global economy for years, keeping growth hovering at modest levels. Those strains, including a potential default in Greece and emerging threats such as a deeper slowdown in China, are putting officials back on high alert as they brace for potential trouble.
Draghi Rejects Talk of Greek Exit. European Central Bank President Mario Draghi on Saturday rejected speculation that Greece may be forced to abandon the euro, reiterating that the single eurozone currency is irrevocable. At a press conference during meetings of the international Monetary Fund, Mr. Draghi said he stood by a comment he made in August 2012 that the euro "cannot be reversed."
Nowotny: ECB Can't Fund Greek Banks Long-Term. European Central Bank governing council member Ewald Nowotny said Friday the central bank's emergency-lending program can't become a long-term financing mechanism for Greek banks. "Due to the legal structure, the ECB isn't in the situation to substitute long-term financing, that's a political decision, " Mr. Nowotny said in Washington, D.C.
ECB's Weidmann: QE Already Had 'Significant Effects' on Capital markets. Jens Weidmann, a member of the European Central Bank's executive board said the ECB's new bond-buying program, known to many as quantitative easing or QE, has stimulated capital markets. But, he said, the benchmark for its effectiveness is price stability, and it is not the market reaction. --Dow Jones Newswires
Canadian, Mexican Central Bankers See Bounce in U.S. Growth. America's neighbors think its economy is poised to bounce back after a disappointing first quarter. Bank of Canada Governor Stephen Poloz and Bank of Mexico Governor Agustin Carstens in separate interviews wrote off the first quarter U.S. growth slowdown to bad weather, the effects of west coast port strikes and a hit to investment from rapid oil price declines. Many economists estimate U.S. output expanded at an annual rate near 1% in the first three months of the year, well below the near-3% pace many Fed officials were expecting for 2015. But they see it turning around soon.
Bank of Japan Chief Says He Sees Progress On Higher Inflation. The Bank of Japan's leader said his institution is making real progress in its efforts to raise Japanese inflation back toward desired levels. Gov. Haruhiko Kuroda, in a speech Sunday, said based on recent data, "there is no doubt that the underlying trend of inflation has improved markedly" since the central bank began aggressive efforts to stimulate the economy. The policies are having their "intended effects and the economy is making steady progress in conquering low inflation," he said.
BOJ Considering Lowering Inflation Forecast. The Bank of Japan is considering cutting its near-term inflation projection in a report due later this month, people close to the central bank said, as the economy's recovery continues to be hampered by lackluster consumption. In its semiannual outlook report on growth and prices, due for release at the next policy meeting April 30, the BOJ's policy-setting board may lower its current projection that the annual inflation rate will average 1.0% in the current fiscal year ending March 2016, the people said, though they added that such a move wouldn't automatically trigger more easing steps by the bank - Dow Jones Newswires.
(MORE TO FOLLOW) Dow Jones Newswires
April 20, 2015 06:54 ET (10:54 GMT)
G-20 Warns of Threats to Global Economic Recovery. The world's top finance leaders warned Friday that currency volatility, low inflation and high debt levels threaten to undermine an already uneven global economic recovery. In an official statement after two days of meetings, finance ministers and central bankers from the Group of 20 largest economies backed more easy-money policies in wealthy nations as critical accelerants for growth.
Consumer Prices Tick Up, in Latest Sign of Emerging Inflation. Underlying U.S. inflation appears to be firming despite slower economic growth, a potentially reassuring sign for the Federal Reserve as it weighs when to start raising interest rates. U.S. consumer prices increased for the second consecutive month in March after falling through much of the winter, the Labor Department said Friday.
Fed's Mester Calls March CPI a 'good report.' The March consumer price index was a "good report," showing inflation has stabilized and is moving in the right direction, Cleveland Fed President Loretta Mester said Friday. In an interview with Bloomberg Radio, Mester said that she thinks the economy is "resilient" and the slowdown was caused by transitory factors such as the cold weather and the strike at West Coast ports.
Fed Releases New Document Detailing Large Bank Supervision. The Federal Reserve released new details about the committee at the center of its bank supervision policy, giving the public its first look at what has become known as the "Triangle Document." The document outlines the structure of the Large Institution Supervision Coordinating Committee, which was formed in 2010 and is now at the heart of the Fed's oversight of the largest U.S. financial firms.
ICYMI: Watch Hilsenrath moderate an IMF/WSJ panel with Fed Vice Chairman Stanley Fischer, ECB executive board member Peter Praet and IMF First Deputy Managing Director David Lipton discussing low inflation.
GRAPHIC CONTENT
By One Measure, Wages for Most U.S. Workers Peaked in 1972. Adjusted for inflation, average weekly earnings for production and nonsupervisory employees--the bulk of the workforce--topped out in October 1972, according to the Labor Department. In today's dollar, that weekly paycheck was the equivalent of about $811, compared with just under $703 a week last month. Data released Friday showed real average hourly earnings for production and nonsupervisory employees fell a seasonally adjusted 0.1% from February to March, and real average weekly earnings decreased by 0.4%, underscoring soft wage gains during this recovery.
FORWARD GUIDANCE
MONDAY
-8:30 a.m. EDT: New York Fed's Dudley speaks in New York
-10:01 a.m. EDT: Reserve Bank of Australia Governor Glenn Stevens speaks in New York.
-1300 GMT (9:00 a.m. EDT) ECB's Constancio speaks in Brussels
TUESDAY
-National Bank of Hungary releases a policy statement
WEDNESDAY
-0830 GMT (4:30 a.m. EDT): Bank of England releases minutes of its April 8-9 policy meeting
-Central Bank of the Republic of Turkey releases a policy statement
THURSDAY
-Central Bank of Egypt releases a policy statement
FRIDAY
-0745 GMT (3:45 a.m. EDT) ECB's Praet speaks in Berlin
RESEARCH
Central Bank Operations and Market Collateral. New York Fed President William Dudley is vice chairman of the Fed's powerful rate-setting Federal Open Market Committee. In his spare time, Mr. Dudley apparently also chairs the Orwellian-sounding Committee on the Global Financial System, which recently published an interesting report on a topic of rising interest for central bankers--whether the confluence of official asset buys, increased safety trades and decreased supply of safe assets could create medium-term disruptions in financial markets. The report, published by the Bank for International Settlements, says that "central banks need to understand the channels through which these effects play out, and they need to consider any effects from their operations for collateral markets as they implement their policies."
COMMENTARY
Why has the U.S. economy downshifted? Because the Fed has already tightened. Fed officials' chatter about raising interest rates this year has helped strengthen the dollar, widen risk spreads and stall the stock market's climb, Greg Ip writes in The Wall Street Journal. This "tightening in financial conditions has already done much of the work that its first interest-rate increase was supposed to accomplish," he says. "This is a good reason to either delay the start of tightening, tighten more slowly, or both," he says, adding, "if Fed officials feel the tightening in financial conditions is excessive, they should change how they talk."
Volcker Calls for Meaningful Financial Reform. "I was, to put it mildly, not born yesterday," former Fed Chairman Paul Volcker writes in the Washington Post. "I have observed, even been a small part of, some of the 20 and more failed efforts under both Republican and Democratic leadership since World War II to redesign the financial regulatory system. But I also know that, after all that has happened, resistance to some fundamental change is hard to justify. We need to make sure we have institutions with clear mandates, adequate financing and dedicated personnel insulated from partisan and particular political pressure."
Roadkill in the Fed's Race to Regulate Shadow Banking. "Instead of protecting banks from competition by seeking to regulate so-called shadow banks, the Fed should consider how insured banks and bank holding companies can be freed from the regulatory straitjackets that have made them uncompetitive," writes the American Enterprise Institute's Peter J. Wallison in The Journal.
BASIS POINTS
- New Zealand's inflation rate is now well below the central bank's target range of 1% to 3% as prices for petrol and audio-visual and computing equipment are significantly lower over the last 12 months.
- Construction in the eurozone fell sharply in February, an indication that despite signs of an accelerating economic recovery, businesses and households are still wary of making new investments.
- The German economy remains in very good shape, but isn't moving at the same pace that growth at the end of last year would suggest, the country's central bank said in a report Monday. The Deutsche Bundesbank said that while two consecutive months of weak industrial data were "disappointing", they didn't signal an "interruption of the recovery process."
- Polish exporters are generating "relatively high profits" despite the latest strengthening of the domestic currency with their zloty pain threshold "quite far" from the current levels, the central bank wrote Monday in its quarterly report on business conditions.
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(END) Dow Jones Newswires
April 20, 2015 06:54 ET (10:54 GMT)
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