Hiking rates: IMF urges US Fed to be cautious | Business News

Hiking rates: IMF urges US Fed to be cautious

1 Nov 2015 | Author: | No comments yet »

Apple earnings extend US stock gains.

The International Monetary Fund (IMF) on Friday urged the Federal Reserve to be cautious on raising rates, warning that tightening too fast could force it to reverse and possibly lose credibility. WASHINGTON • The largest United States banks would face a US$120 billion (S$168 billion) total shortfall of long-term debt under a Federal Reserve proposal aimed at ensuring their failure would not hurt the broader financial system.The Puerto Rican government could run out of cash as soon as Nov. 15, forcing it to order a partial shutdown or reduce working hours for public employees, the island’s budget director told a local newspaper.

‘SCARY GOOD’:While major indices rose over 8% in October after a ‘dreadful’ third quarter, the broad-based surge shifted to a blue-chip rally as the month progressed Banner earnings from Apple, a big drugstore merger and another twist in the US Federal Reserve’s message on interest rates highlighted a week that produced modest gains for US stocks. In a review of the world’s top industrial economies ahead of the G-20 summit in Turkey, the IMF said the US and the global economy face risks tied to the impending rate hike, which would be the first in more than nine years. Banks, such as Wells Fargo and JPMorgan Chase, will be required to hold enough debt that could be converted into equity if they were to falter, according to a Fed rule that was approved by a unanimous vote on Friday. Luis Cruz Batista, executive director of the Office of Management and Budget, said the government is monitoring cash flow and has $150 million in reserves to fund essential services, including schools, police and health care, even if other agencies are reduced or temporarily shuttered.

The gains pushed major indices up more than 8 percent for last month, a “scary good” month after a dreadful third quarter, Briefing.com analyst Patrick O’Hare said. One of the main economic factors for Fed officials when it comes to assessing the right time to start hiking rates is wage growth, tied with the consumer spending that is supposed to follow. While a rate rise could happen “amid large uncertainty about slack in labor markets, the neutral policy rate and the path for inflation and wages.” It said an increase in the Fed’s benchmark rates could spark “abrupt” shifts in global investment portfolios and high market volatility. The proposal, along with other measures regulators have taken to avoid chaotic bank failures, “would substantially reduce the risk to taxpayers and the threat to financial stability stemming from the failure of these firms”, Fed Chair Janet Yellen said in a statement. While the government has repeatedly said it may face a cash flow shortage, Cruz’s comments were the first time the administration of Governor Alejandro Garcia Padilla put a date on a possible partial shutdown. “We’ve avoided a government shutdown and we continue working day-by-day monitoring the cash flow; it’s a daily exercise,” Cruz told El Nuevo Dia in a report published Saturday. “In the worst of the scenarios, there would be an adjustment in some agencies where they’d have to reduce the workday.” Garcia Padilla’s administration is trying to restructure $73 billion in debt by asking creditors to accept a reduction in principal and by delaying principal payments.

The Fed’s proposal, which applies to eight of the biggest US banks, requires debt and a capital cushion equal to at least 16 per cent of risk- weighted assets by 2019 and 18 per cent by 2022. Domestically, the IMF added, “should financial conditions tighten more than warranted by cyclical conditions, it may become a drag to the recovery, and force the Fed to reverse direction.” It could also drive the dollar higher, with more negative consequences for US exports. Analysts were especially pleased with results from China, where sales came in at US$12.5 billion, double the level of the year-ago period and an indicator that conditions in the world’s second-biggest economy are not as bad as feared. The big releases of the day were on personal income, which increased just 0.1 percent in September, missing even the meager consensus estimate of 0.2 percent, and the University of Michigan consumer confidence survey, which, at 90, whiffed as well with its second-lowest reading of the year. The reason for the provision: When a bank fails, regulators want it to have a war chest to fund a new, healthy version of the company – hopefully without a dime from taxpayers.

The market initially swooned at the prospects of a big merger between two big US pharmacy chains, bidding up Walgreens Boots Alliance and Rite Aid on initial reports of an imminent deal. The quarterly release from the Bureau of Labor Statistics showed that compensation costs for nongovernment workers rose just 0.6 percent in the three-month period — about what economists had expected but not much to move the inflation needle. It is an element of the so-called living wills banks must submit to the Fed and Federal Deposit Insurance Corp each year to map out their hypothetical demise. On an annualized basis, compensation costs rose just 2 percent, which actually is a decline from the 2.2 percent increase realized for the same period a year ago. In another sign that dealmaking remains vibrant in healthcare, pharmaceutical giant Pfizer and Botox-maker Allergan said they were in “friendly” merger talks.

Since the financial crisis, the Fed has consistently written rules that have been more stringent than global regulatory accords on capital and liquidity. Another pharmaceutical company in the news was Canada’s Valeant Pharmaceuticals International, which continued to plummet amid questions over its drug-pricing and accounting practices. TLAC is “the final piece of the puzzle in ensuring that the largest banks will be resolvable at no taxpayer cost”, according to Mr Greg Baer, president of the Clearing House Association, which represents the largest banks.

But, he said in an e-mail, the Fed plan “seems to go significantly beyond the types and amounts of loss absorbency required for this purpose, and once again significantly beyond what has been proposed as an international standard”. In Washington, the Fed concluded last month’s monetary policy meeting by keeping benchmark interest rates near zero, but gave a more positive appraisal of the US economy. In other words, the next two payroll numbers mean everything.” Economists currently expect next Friday’s nonfarm payrolls report to show a gain of 180,000 for October, which despite being below trend would indicate an improvement from September’s 142,000 gain. The banks subject to the proposal are Wells Fargo, JPMorgan, Citigroup, Bank of America, Goldman Sachs Group, Morgan Stanley, State Street and Bank of New York Mellon. Fed policymakers expressed more faith in the strength of the economy than expected, brushing over recent weak spots and focusing on what they called “solid” consumer spending and business investment.

They also dropped a warning from September that the global downturn could affect the US, even as worries mount over China’s slowdown and falling commodity prices.

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