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  • Real Time Economics – Hilsenrath: How the Federal Reserve Could Tweak ‘Considerable Time’
    The Federal Reserve may keep the words “considerable time” in its policy statement, but qualify them, the Journal’s chief economics correspondent Jon Hilsenrath said Tuesday in a webcast previewing the central bank’s two-day policy meeting. The Fed’s policy committee has used those words to explain when it might raise short-term interest rates. The central bank will have to change it in October because the words are attached to its monthly purchases of bonds, which are expected to end next month. The question is how. “Given the economic backdrop, they don’t want to send a signal right now that rate increases are imminent,” Hilsenrath said. “I think what they do, at the end of the day, is they qualify it.” But the Fed is also focusing on its bond-program exit strategy, which is likely a main focus at its meeting Tuesday and Wednesday. “One of the headlines they’re going to come out with I expect to be formalizing some of their exit plan,” Hilsenrath said. “It becomes, in their mind, a lot for the market to digest if they announce their exit strategy and change their guidance at the same time.

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  • Financial Post – Why the coming ‘rates rage’ will wreak havoc across the globe
    The world financial system is at an inflection point as the U.S. and China both switch off monetary stimulus, a form of synchronised tightening by the “G2″ superpowers. Bank of America has warned clients that the glory days of “maximum liquidity” are coming to an end, with sweeping implications for asset markets across the world. The yield on 10-year US Treasuries – the benchmark price of global money – has already jumped 20 basis points to 2.54% since mid-August as it becomes clear that the US economy has survived its winter wobble and is moving into an incipient boom. Growth reached 4.2% in the second quarter, with the ISM manufacturing gauge near 30-year peaks. Bank of America expects yields to jump to 3.1% this year, and 3.75% by the end of 2015 as the Federal Reserve raises rates in earnest. This implies a torrid rally in the U.S. dollar akin to the Fed tightening cycles of the early Eighties and the mid-Nineties, a stress test for the vast edifice of dollar debt in Asia and the developing world. Two Fed papers have rattled the markets this month. One by the San Francisco branch said investors “seem to expect a more accommodative policy” than Fed itself. The other by staff in Washington said the reason why millions of people have dropped out of the work force since the Great Recession is mostly “structural”, the effects of ageing and technology. The implication is that the economy is close to the critical turning point when a shortage of workers starts to set off wage pressures. On cue, average hourly earnings have come back to life, rising 2.1% in August. Even Fed doves are turning twitchy. “We expect the first rate hike in March 2015,” said Paul Ashworth from Capital Economics. Some hope the European Central Bank will step into the breach, launching its own quantitative easing in time to keep the party going. This is wishful thinking. The ECB’s Yves Mersch warned this week that plans to buy private securities “are neither comparable with a broad programme of QE, nor do they represent overtures to that”. Most of the ECB’s euros 800-billion ($1.1 trillion) blitz would be bank loans that offset old loans being repaid. This is not QE. Only a fraction of the stimulus will come as high-octane asset purchases.
  • Zero Hedge – Goldman’s Take On China’s “Stealth QE”
    Goldman Sachs: Domestic media (Sina) reported that the PBOC conducted RMB 500bn of Standing Lending Facility operations with the big 5 commercial banks (ICBC, BOC, BoCOM, CCB, ABC). The reports note that the duration is 3 months and the RMB 500 bn is evenly split among the banks. This amount is roughly the same as a 50 bps cut to RRR for the whole banking system on a static basis (though the impacts of RRR cuts tend to be larger because they have ongoing effects). There is no official confirmation from the PBOC yet. Still, such an easing would be consistent with our expectation that (1) monetary policy will loosened amid the drastic slowdown in activity growth and falling inflation, and (2) full scale RRR and interest rate cuts are unlikely because they would be viewed as aggressive stimulus (see China: Sharp slowdown in activity in August, September 14, 2014). We expect monetary conditions to loosen modestly, which will provide some much needed support for demand growth. Other policies may follow. Front-loading of fiscal expenditure is one possibility–a disproportionate share of fiscal outlays (close to 20%) occurs in the last month of the year– and could reduce recurring criticism of the year-end rush to spend. The government may also step up pressures on government agencies and local authorities to maintain momentum on investment growth. However, we see no indication of these measures yet. Given policymakers have shown a willingness to loosen in the face of weaker data, we believe growth will rebound in the coming months and the government will be able to reach the “around 7.5%” full year GDP growth target for 2014 (after positive effects of the expected GDP methodology adjustment to include R&D).