Fed policy under fire at Jackson Hole conference

Federal Reserve Board Chairman Ben Bernanke testifies before a Senate Banking, Housing and Urban Affairs Committee hearing on ''The Semiannual Monetary Policy Report to the Congress'' on Capitol Hill in Washington July 18, 2013.

Credit: Reuters/Kevin Lamarque

By Pedro da Costa and Alister Bull

WASHINGTON | Fri Aug 23, 2013 6:30pm EDT

WASHINGTON (Reuters) - What a difference a year makes.

Federal Reserve Chairman Ben Bernanke used the 2012 meeting in Jackson Hole as a platform to make his case for a third round of bond buys. This year, with the Fed chief absent, the tone was starkly different as featured research papers questioned the value and efficacy of the central bank's unconventional stimulus policies.

Robert Hall of Stanford University argued that unconventional monetary policies have been largely ineffective because of the constraints posed by official interest rates that are already effectively at zero. He also dismissed the beneficial effects of the central bank's attempt to provide "forward guidance" to financial markets.

"Both quantitative easing and forward guidance, as implemented by the Fed, are obviously weak instruments," he said, pointing to the failure of the U.S. economy to rebound strongly despite prolonged easy monetary policy as evidence.

Another paper questioned the Fed's presumptions about how its asset purchases work, claiming that the effects are much narrower than the central bank has claimed. In particular, Arvind Krishnamurthy of Northwestern University found the Fed's bond buying affects only the markets that it targets, not interest rates more broadly.

"It does not, as the Fed proposes, work through broad channels such as affecting the term premium on all long-term bonds," the paper stated.

Still, there were few calls for an immediate pullback on monetary stimulus. Indeed, Stanford's Hall argued that the biggest mistake the Fed could make would be raising interest rates too soon.

"The central danger in the next two years is that the Fed will yield to intensifying pressure to raise interest rates and contract its portfolio well before the economy is back to normal," Hall wrote.

Christine Lagarde, managing director of the International Monetary Fund, had a similar message for rich-country central banks more generally: "The IMF does not suggest a rush to exit," she said during a keynote luncheon speech.

OFFICIALS PUSH BACK

Predictably, current and former Fed officials took issue with the research findings.

James Bullard, president of the St. Louis Fed, said Krishnamurthy's focus on market impact immediately following policy announcements was misleading.

"I just wanted to push back against this conclusion that you get an effect in one single market and then there's not that much (impact) over a variety of assets," Bullard said.

Donald Kohn, a former Fed vice chair, was also skeptical.

"The findings do not comport very well with the experience of the last couple of months," said Kohn.

Another former Fed vice chair, Alan Blinder, was even more blunt regarding the idea that Treasury sales would not have a major market impact: "You don't want to retract that, given what happened recently?"

U.S. Treasury 10-year note yields have risen sharply in the last two months to two-year highs above 2.80 percent following hints from the central bank that it may begin winding down its asset-buying stimulus program, known as quantitative easing.

QUESTION OF WHEN

Policymakers speaking to various television networks at the conference offered few hints on the likely timing of an eventual pullback in asset purchases.

"I would be supportive in September as long as the data that comes in between now and then basically confirm the path we're on," Dennis Lockhart, president of the Atlanta Fed, told CNBC.

The St. Louis Fed's Bullard was more dovish, emphasizing a low rate of inflation as buying policymakers more wiggle room, in an interview with Fox Business.

"Current low inflation gives us flexibility to think about how we want to approach the tapering issue," he said. As for interest rates, Bullard called for incorporating the dangers of low inflation into the Fed's rates guidance.

"One thing that we could do is firm up our forward guidance by saying that we won't raise rates if inflation is running below 1.5 percent," he said.

Most economists agree that the Fed's crisis interventions were key to rescuing the financial system from disaster. But, as this year's conference shows, doubts about the efficacy and potential downside of bond-buying have been rising.

Even the Fed's own research has signaled growing distaste for the policy internally. Prominently, a recent paper from San Francisco Fed President John Williams emphasized the dangers of pushing a relatively untested policy too far.

Instead, policymakers appear keen to rely more heavily on "guidance" such as the Fed's current indication that, as long as inflation is in check, it will keep rates near zero until the jobless rate falls to 6.5 percent.

"The Fed has made the determination that the benefits of additional QE have gone down," Vincent Reinhart, chief U.S. economist at Morgan Stanley, said on the sidelines of the meeting. "They have a new toy, the thresholds to send signals, they never as a group particularly had much confidence in it."

Susan Collins, an economics professor at the University of Michigan, questioned markets' conventional wisdom that a September reduction in bond buys was a certainty.

"I think September is too soon. I don't think it's a done deal," she said.

(Editing by Dan Grebler)

View the original article here

This post was made using the Auto Blogging Software from WebMagnates.org This line will not appear when posts are made after activating the software to full version.

Fed policy under fire at Jackson Hole conference

Federal Reserve Board Chairman Ben Bernanke testifies before a Senate Banking, Housing and Urban Affairs Committee hearing on ''The Semiannual Monetary Policy Report to the Congress'' on Capitol Hill in Washington July 18, 2013.

Credit: Reuters/Kevin Lamarque

By Pedro da Costa and Alister Bull

WASHINGTON | Fri Aug 23, 2013 6:30pm EDT

WASHINGTON (Reuters) - What a difference a year makes.

Federal Reserve Chairman Ben Bernanke used the 2012 meeting in Jackson Hole as a platform to make his case for a third round of bond buys. This year, with the Fed chief absent, the tone was starkly different as featured research papers questioned the value and efficacy of the central bank's unconventional stimulus policies.

Robert Hall of Stanford University argued that unconventional monetary policies have been largely ineffective because of the constraints posed by official interest rates that are already effectively at zero. He also dismissed the beneficial effects of the central bank's attempt to provide "forward guidance" to financial markets.

"Both quantitative easing and forward guidance, as implemented by the Fed, are obviously weak instruments," he said, pointing to the failure of the U.S. economy to rebound strongly despite prolonged easy monetary policy as evidence.

Another paper questioned the Fed's presumptions about how its asset purchases work, claiming that the effects are much narrower than the central bank has claimed. In particular, Arvind Krishnamurthy of Northwestern University found the Fed's bond buying affects only the markets that it targets, not interest rates more broadly.

"It does not, as the Fed proposes, work through broad channels such as affecting the term premium on all long-term bonds," the paper stated.

Still, there were few calls for an immediate pullback on monetary stimulus. Indeed, Stanford's Hall argued that the biggest mistake the Fed could make would be raising interest rates too soon.

"The central danger in the next two years is that the Fed will yield to intensifying pressure to raise interest rates and contract its portfolio well before the economy is back to normal," Hall wrote.

Christine Lagarde, managing director of the International Monetary Fund, had a similar message for rich-country central banks more generally: "The IMF does not suggest a rush to exit," she said during a keynote luncheon speech.

OFFICIALS PUSH BACK

Predictably, current and former Fed officials took issue with the research findings.

James Bullard, president of the St. Louis Fed, said Krishnamurthy's focus on market impact immediately following policy announcements was misleading.

"I just wanted to push back against this conclusion that you get an effect in one single market and then there's not that much (impact) over a variety of assets," Bullard said.

Donald Kohn, a former Fed vice chair, was also skeptical.

"The findings do not comport very well with the experience of the last couple of months," said Kohn.

Another former Fed vice chair, Alan Blinder, was even more blunt regarding the idea that Treasury sales would not have a major market impact: "You don't want to retract that, given what happened recently?"

U.S. Treasury 10-year note yields have risen sharply in the last two months to two-year highs above 2.80 percent following hints from the central bank that it may begin winding down its asset-buying stimulus program, known as quantitative easing.

QUESTION OF WHEN

Policymakers speaking to various television networks at the conference offered few hints on the likely timing of an eventual pullback in asset purchases.

"I would be supportive in September as long as the data that comes in between now and then basically confirm the path we're on," Dennis Lockhart, president of the Atlanta Fed, told CNBC.

The St. Louis Fed's Bullard was more dovish, emphasizing a low rate of inflation as buying policymakers more wiggle room, in an interview with Fox Business.

"Current low inflation gives us flexibility to think about how we want to approach the tapering issue," he said. As for interest rates, Bullard called for incorporating the dangers of low inflation into the Fed's rates guidance.

"One thing that we could do is firm up our forward guidance by saying that we won't raise rates if inflation is running below 1.5 percent," he said.

Most economists agree that the Fed's crisis interventions were key to rescuing the financial system from disaster. But, as this year's conference shows, doubts about the efficacy and potential downside of bond-buying have been rising.

Even the Fed's own research has signaled growing distaste for the policy internally. Prominently, a recent paper from San Francisco Fed President John Williams emphasized the dangers of pushing a relatively untested policy too far.

Instead, policymakers appear keen to rely more heavily on "guidance" such as the Fed's current indication that, as long as inflation is in check, it will keep rates near zero until the jobless rate falls to 6.5 percent.

"The Fed has made the determination that the benefits of additional QE have gone down," Vincent Reinhart, chief U.S. economist at Morgan Stanley, said on the sidelines of the meeting. "They have a new toy, the thresholds to send signals, they never as a group particularly had much confidence in it."

Susan Collins, an economics professor at the University of Michigan, questioned markets' conventional wisdom that a September reduction in bond buys was a certainty.

"I think September is too soon. I don't think it's a done deal," she said.

(Editing by Dan Grebler)

View the original article here

This post was made using the Auto Blogging Software from WebMagnates.org This line will not appear when posts are made after activating the software to full version.

Fed policy under fire at Jackson Hole conference

Federal Reserve Board Chairman Ben Bernanke testifies before a Senate Banking, Housing and Urban Affairs Committee hearing on ''The Semiannual Monetary Policy Report to the Congress'' on Capitol Hill in Washington July 18, 2013.

Credit: Reuters/Kevin Lamarque

By Pedro da Costa and Alister Bull

WASHINGTON | Fri Aug 23, 2013 6:30pm EDT

WASHINGTON (Reuters) - What a difference a year makes.

Federal Reserve Chairman Ben Bernanke used the 2012 meeting in Jackson Hole as a platform to make his case for a third round of bond buys. This year, with the Fed chief absent, the tone was starkly different as featured research papers questioned the value and efficacy of the central bank's unconventional stimulus policies.

Robert Hall of Stanford University argued that unconventional monetary policies have been largely ineffective because of the constraints posed by official interest rates that are already effectively at zero. He also dismissed the beneficial effects of the central bank's attempt to provide "forward guidance" to financial markets.

"Both quantitative easing and forward guidance, as implemented by the Fed, are obviously weak instruments," he said, pointing to the failure of the U.S. economy to rebound strongly despite prolonged easy monetary policy as evidence.

Another paper questioned the Fed's presumptions about how its asset purchases work, claiming that the effects are much narrower than the central bank has claimed. In particular, Arvind Krishnamurthy of Northwestern University found the Fed's bond buying affects only the markets that it targets, not interest rates more broadly.

"It does not, as the Fed proposes, work through broad channels such as affecting the term premium on all long-term bonds," the paper stated.

Still, there were few calls for an immediate pullback on monetary stimulus. Indeed, Stanford's Hall argued that the biggest mistake the Fed could make would be raising interest rates too soon.

"The central danger in the next two years is that the Fed will yield to intensifying pressure to raise interest rates and contract its portfolio well before the economy is back to normal," Hall wrote.

Christine Lagarde, managing director of the International Monetary Fund, had a similar message for rich-country central banks more generally: "The IMF does not suggest a rush to exit," she said during a keynote luncheon speech.

OFFICIALS PUSH BACK

Predictably, current and former Fed officials took issue with the research findings.

James Bullard, president of the St. Louis Fed, said Krishnamurthy's focus on market impact immediately following policy announcements was misleading.

"I just wanted to push back against this conclusion that you get an effect in one single market and then there's not that much (impact) over a variety of assets," Bullard said.

Donald Kohn, a former Fed vice chair, was also skeptical.

"The findings do not comport very well with the experience of the last couple of months," said Kohn.

Another former Fed vice chair, Alan Blinder, was even more blunt regarding the idea that Treasury sales would not have a major market impact: "You don't want to retract that, given what happened recently?"

U.S. Treasury 10-year note yields have risen sharply in the last two months to two-year highs above 2.80 percent following hints from the central bank that it may begin winding down its asset-buying stimulus program, known as quantitative easing.

QUESTION OF WHEN

Policymakers speaking to various television networks at the conference offered few hints on the likely timing of an eventual pullback in asset purchases.

"I would be supportive in September as long as the data that comes in between now and then basically confirm the path we're on," Dennis Lockhart, president of the Atlanta Fed, told CNBC.

The St. Louis Fed's Bullard was more dovish, emphasizing a low rate of inflation as buying policymakers more wiggle room, in an interview with Fox Business.

"Current low inflation gives us flexibility to think about how we want to approach the tapering issue," he said. As for interest rates, Bullard called for incorporating the dangers of low inflation into the Fed's rates guidance.

"One thing that we could do is firm up our forward guidance by saying that we won't raise rates if inflation is running below 1.5 percent," he said.

Most economists agree that the Fed's crisis interventions were key to rescuing the financial system from disaster. But, as this year's conference shows, doubts about the efficacy and potential downside of bond-buying have been rising.

Even the Fed's own research has signaled growing distaste for the policy internally. Prominently, a recent paper from San Francisco Fed President John Williams emphasized the dangers of pushing a relatively untested policy too far.

Instead, policymakers appear keen to rely more heavily on "guidance" such as the Fed's current indication that, as long as inflation is in check, it will keep rates near zero until the jobless rate falls to 6.5 percent.

"The Fed has made the determination that the benefits of additional QE have gone down," Vincent Reinhart, chief U.S. economist at Morgan Stanley, said on the sidelines of the meeting. "They have a new toy, the thresholds to send signals, they never as a group particularly had much confidence in it."

Susan Collins, an economics professor at the University of Michigan, questioned markets' conventional wisdom that a September reduction in bond buys was a certainty.

"I think September is too soon. I don't think it's a done deal," she said.

(Editing by Dan Grebler)

View the original article here

This post was made using the Auto Blogging Software from WebMagnates.org This line will not appear when posts are made after activating the software to full version.

Under siege, JPMorgan to quit physical commodities

A sign stands in front of the JPMorgan Chase & Co bank headquarters building in New York, March 15, 2013.

Credit: Reuters/Lucas Jackson

By David Sheppard and Jonathan Leff

NEW YORK | Fri Jul 26, 2013 10:01pm EDT

NEW YORK (Reuters) - JPMorgan Chase & Co is exiting physical commodities trading, the bank said in a surprise statement on Friday, as Wall Street's role in the trading of raw materials comes under unprecedented political and regulatory pressure.

After spending billions of dollars and five years building the banking world's biggest commodity desk, JPMorgan said it would pursue "strategic alternatives" for its trading assets that stretch from Baltimore to Johor, and a global team dealing in everything from African crude oil to Chilean copper.

The firm will explore "a sale, spinoff or strategic partnership" of the physical business championed by commodities chief Blythe Masters, the architect of JPMorgan's expansion in the sector and one of the most famous women on Wall Street. The bank said it will continue to trade in financial commodities such as derivatives and precious metals.

Pressured by tougher regulation and rising capital levels, JPMorgan joins other banks such as Barclays PLC and Deutsche Bank in a retreat that marks the end of an era in which investment banks across the world rushed to tap into volatile markets during a decade-long price boom.

But JPMorgan is the first big player to exit physical commodities entirely and attention will now turn to Morgan Stanley and Goldman Sachs, which face similar pressures.

Friday's announcement follows a week of intense scrutiny of Wall Street's commodity operations, with U.S. lawmakers questioning whether banks should own warehouses and pipelines, and the U.S. Federal Reserve reviewing a landmark 2003 decision that allowed commercial banks to trade in physical markets.

JPMorgan's own review, which began in February, concluded that the profits from the business were too slight to be worth the risks and costs of dealing with regulators in multiple jurisdictions, according to one person familiar with the matter.

Although the commodity division's $2.4 billion in reported revenue last year surpassed those of long-time rivals Goldman Sachs Group Inc and Morgan Stanley combined, some have queried its profitability due to the costs of running a huge logistical operation. One analyst estimated that physical trade accounted for half or more of overall commodities revenue.

A sale could help JPMorgan Chief Executive Jamie Dimon make good on his promise to put the bank back on course after a series of costly and embarrassing trading moves and regulatory run-ins, including a potential $410 million settlement over alleged power market manipulation.

But securing a sale may not be straightforward. Several other large energy trading operations are also on the block, at a time when tough new regulations and low volatility have dampened interest in commodity trading. Rival investment banks are unlikely suitors.

Morgan Stanley, which said it had its worst quarter in commodities in decades in the fourth quarter of 2012, has been trying to sell its business since last year. Goldman has looked at divesting its metal warehouse unit Metro since March.

"Where just a few years ago the bulge bracket (banks) were expanding and hiring at a breakneck pace, now retrenchment is the order of the day," said George Stein, managing director of New York-based recruiting firm Commodity Talent LLC.

The news will also bring questions about the future for Britain-born Masters, who started as an intern on JPMorgan's London trading floor two decades ago. After long lagging rivals, she transformed JPMorgan's commodity arm into a global powerhouse in less than five years.

JPMorgan spokesman Brian Marchiony said the bank had "considered many different factors" before deciding to exit the business, "including the impact of potential new rules and regulation."

REVERSAL OF FORTUNE

The announcement came just three days after a powerful Senate banking committee heard from experts who said that metals warehouses owned by Wall Street and other commodities traders were distorting markets and even driving up the cost of aluminum cans for beer and soda. Some said allowing them to trade in physical markets was a risk to the financial system.

"This could be good news for consumers and taxpayers," said Senator Sherrod Brown, member of the Senate Banking Committee.

"Banks should focus on core banking activities," he said.

The Department of Justice and the U.S. Commodity Futures Trading Commission have also both launched probes into metal warehousing. When JPMorgan bought the company in 2010, Henry Bath's warehouses were the second largest in the London Metals Exchange system.

JPMorgan's decision is a sharp and unexpected reversal for a bank that has pushed aggressively into the sector since 2008, when it first inherited a host of power trading assets through its acquisition of Bear Stearns during the financial crisis.

That was followed by the acquisition of RBS Sempra Commodities in 2010, allowing the bank to quickly become the largest commodity business on Wall Street, with a global footprint in oil and one of the biggest metal trade desks. Its staff swelled to 600 people across 10 offices.

The bank initially struggled, however, to integrate the entrepreneurial trading unit, and a number of senior traders left. That same year a bad trade in coal markets lost hundreds of millions of dollars, which Masters called a "rookie error."

But it seemed to have found its footing last year, securing new deals and stemming the exodus of talent.

During its short peak, JPMorgan's global commodity operation was considered the largest on Wall Street, supplying crude oil to the biggest refinery on the East Coast and holding enough electricity contracts to power Indiana's 2.8 million homes. It was one of the 10 largest U.S. natural gas traders.

The tide seemed to turn this year.

Already under pressure in Washington following its $6.2 billion "London Whale" loss on derivatives trades last year, in March it learned that the U.S. Federal Energy Regulatory Commission was preparing to charge its power traders with manipulating markets in the Midwest and California.

The bank has since scaled back its power business and sold off half of its power trading contracts, Reuters reported earlier this week. Earlier this month its longtime global oil trading head Jeff Frase left the bank.

TOUGH SALE

The decision to move out of the raw materials trade comes months after Dimon vowed to resolve multiple government investigations and correct problems that regulators have found.

Big banks are taking a more conciliatory stance in general with regulators who continue to impose new rules more than five years after the start of the financial crisis.

The impact of the decision may be modest for the bank as a whole, analysts have said. JPMorgan shares ended down 0.8 percent at $56.05 on Friday.

Overall commodity trading at the bank is around 15 percent of total fixed income, currency and commodity trading revenue (FICC), with physical-related trading around 5 to 10 percent of that, bank stock analyst Matt O'Connor at Deutsche Bank said in a report this week after meeting with Dimon. FICC revenue made up less than 15 percent of total bank revenue in the latest quarter.

Still, getting good value for the commodity business may be tough as the market is already crowded.

Morgan Stanley, facing even tougher regulatory pressure over its vast oil division, has been trying to sell its commodities division without success since last year. It may learn by September whether the Federal Reserve will allow it to keep its business, including the logistics unit TransMontaigne.

Hetco, the physical trading shop half owned by Hess Corp, is also in the midst of being sold as Hess is split up. And the energy trading unit of Omaha, Nebraska-based Gavilon may also be for sale after Marubeni Corp excluded it from its takeover of the grains trader this year.

The value of its Henry Bath warehouses, once considered the crown jewel of Sempra, is said to have slumped as the LME prepares to implement tougher rules that are meant to end the lengthy queues that have helped bolster earnings.

"There are questions about the return on capital now," said a senior executive in the warehousing industry. "I don't see many deploying their money."

Industry executives say that there are two types of buyers for these vast, capital-intensive businesses: private equity groups like Carlyle Group, which have recently moved into the space, and sovereign wealth funds like that of Qatar.

But the group could also be a target for one of several merchant traders looking to quickly expand into metals and energy markets.

Freepoint Commodities, a privately owned merchant founded by the original Sempra team, bought back a metals concentrates business from JPMorgan last year. Swiss-based Vitol and Mercuria, two of the world's largest energy traders, have both expanded into metals in the last year.

(Additional reporting by David Henry and Josephine Mason in New York; Douwe Miedema in Washington; Avik Das and Aman Shah in Bangalore; Editing by Sriraj Kalluvila, Phil Berlowitz and Lisa Shumaker)

View the original article here