90 seconds at 9 am: Fed to unwind quantitative easing

Federal Reserve to unwind quantitative easing; NZD up on latest poll; US home resales down; British retail sales surge; RBA says opaque home loan pricing an impediment to competition; UST 10yr yield at 2.24%; oil up, gold down; NZ$1 = 73.3 US¢, TWI-5 = 75

21st Sep 17, 8:05am by Jenée Tibshraeny

Here's my summary of the key events overnight that affect New Zealand.

The Federal Reserve has committed to unwinding its quantitative easing programme, announcing it will start rolling off its US$4.5 trillion balance sheet in October. The move by the world’s most influential central bank marks a clear retreat from the support operations policymakers around the world implemented after the global financial crisis.

Furthermore, the Fed has also kept interest rates on hold, keeping the door open to a further rise this year, three next year, and two in 2019. The Fed has reduced its outlook for inflation, which means it now believes it won’t reach its 2% target until 2019.

Both Hurricane Harvey and a supply shortage have seen US home resales in August fall to a one-year low. The third monthly decline in sales also follows data showing a drop in homebuilding activity, suggesting housing will weigh on the economy in the third quarter. An economist has told Reuters he believes housing is the one area of the economy that hasn’t fully recovered from the recession.

Over to the UK, sterling has jumped on the release of data showing British retail sales surged unexpectedly in August. At 1%, the monthly pick-up was the fastest it’s been since April and above forecasts of 0.2% growth. The data puts pressure on the Bank of England to lift interest rates.

The Reserve Bank of Australia has come out saying opaque home loan pricing is an ‘impediment’ to competition. It says banks offering cut-price home loan interest rates through unadvertised discounts, stifles competition because it leaves customers unaware if they are getting a good deal. The RBA also backs the view of smaller banks that their higher funding costs have constrained the intensity of competition since global financial crisis. This funding advantage enjoyed by the major banks has diminished recently because of measures including a major bank tax.

In New York, the UST 10yr yield is stable at 2.24%.

The price of crude oil has risen to just over US$50 a barrel, while the Brent benchmark is just over US$56.

The price of gold has slipped again to US$1,301/oz.

The New Zealand dollar has made some solid gains overnight to 73.3 US cents, 91.7 AU¢, and 61.8 euro cents. The TWI-5 index has risen to 75.6.

Last night’s political opinion poll, putting National ahead of Labour, saw the NZ dollar jump, but the Fed’s announcement dented this strength. Looking forward, ANZ economists expect the market to remain more attuned to the Fed, with any NZD strength being dampened by the central bank’s moves.

If you want to catch up with all the changes yesterday we have an update here.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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16 Comments

by Hardly | 21st Sep 17, 8:30am 1505939417

If the Fed sells those bonds - $4.5trillon, where do the proceeds go? My understand the money to purchase was created out of noting, and the interest earned goes to the federal government - subsidising their interest bill on their debt (since a large portion are treasury bills they are essentially paying themselves). Two possibilities:

• Assets are sold and money decreated - impact is the federal government loses the income from those assets, raising the deficit.

• Assets are sold and the federal government banks the proceeds - impact is the federal government receives income reducing the deficit/debt.

I'm interested how it works since this was a novel arrangement.

by Boatman | 21st Sep 17, 9:41am 1505943663

@Hardly , Here's an off-the -wall idea send the proceeds to China to pay them for the Trillions of Dollars of US debt they hold

Basically , the US could simply fill up a ship with paper US$ and send it to China , and tell the Chinese ...... "Okay we are squared up "

This will weaken the US$ due to an oversupplied market , but the disruption will not last too long , and the Chinese would be holding a whole lot of paper

by Stephen Hulme | 21st Sep 17, 10:45am 1505947505

I'm interested how it works since this was a novel arrangement.
Try this primer.

If the Fed sells those bonds - $4.5trillon, where do the proceeds go?

The Federal Reserve's ~$1.5 trillion circulating currency liabilities have to be collateralised on the balance sheet with US government debt. Moreover, sales of the remaining $3.0 trllion bonds will be tempered by outstanding private bank reserve assets, Fed liabilities, created by original QE purchases, which amount to ~$2.6 trillion.

Public sales of these bonds in return for cash will allow the Fed to extinguish a portion of it's government security holdings and return cash to the original QE sellers of the bonds, hence extinguishing the Fed reserve liabilities owned by them. It nets out across the system.

by scarfie | 21st Sep 17, 2:00pm 1505959215

All good except for the US taxpayer I take it?

by bw | 21st Sep 17, 8:39am 1505939989

"Janet Yellen said: "I can't say I can easily point to a sufficient set of factors that explain this year why inflation has been as low."
How about.....'We got it wrong. We should never have gone beyond QE1, and the fact we have artificially manipulated the markets ever since is why inflation is dead".
QE 1 was supposed to be all we needed, and a tad more, and it didn't work! Why we are where we are now, by 'giving it another 2 or 3 or 4 goes, is both a concern, intellectually, and frightening economically....

by Stephen Hulme | 21st Sep 17, 9:03am 1505941417

Exactly.

If it wasn’t perfectly clear before, and it really was, there is no way it isn’t now. The Fed is not in any way data dependent. The data on the economy remains in some category of insufficient, longer-term stuck much too far in the direction of atrocious. Yet, the central bank will exit anyway because there is nothing left for them here in the present. Read more

by Ralph | 21st Sep 17, 10:35am 1505946901

"The Fed is not in any way data dependent"

I think a lot of fun could be had with this quote taken out of context.

by ham n eggs | 21st Sep 17, 9:44am 1505943853

and yet I think we will see more QE before too long ... anything it takes to stop this sucker going down
some nice charts here...
https://seekingalpha.com/article/4108057-chasing-dragon
"..central bankers have been desperately trying to use liquidity to offset the prior excesses. However, this is not a liquidity problem, it is an insolvency problem"

Growth and capitalism is dead.

by Alter Ego | 21st Sep 17, 9:17am 1505942233

Would anyone like to buy a dollar, I have a couple left, perhaps you could frame them....they will be worth a mint..one day......(A POLO THE MINT WITH THE HOLE).......for all you Brits....out there.

by Yvil | 21st Sep 17, 10:10am 1505945436

"The Federal Reserve has committed to unwinding its quantitative easing programme"
Can't wait to see the outcome after 1 year, in October 2018

by iconoclast | 21st Sep 17, 10:18am 1505945903

Been a long time coming - remember Bernancke promised he would cease QE and begin unwinding when unemployment got down to 6.5% - that's long past and unemployment is now down to 4.5%

by iconoclast | 21st Sep 17, 10:19am 1505945996

The magnitude of multi-national tax avoidance

Australia's one-time favourite son is being chased for $1 billion by the ATO tax office
http://www.smh.com.au/business/mining-and-resources/bhp-billiton-willin…

That's $1 billion for one outfit without touching the sides with RIO and XTA or any of the Tech giants

by Ralph | 21st Sep 17, 10:18am 1505945907

And yet Apple survived their ATO audit without penalty.

https://www.businessinsider.com.au/apple-says-it-has-survived-an-austra…

by iconoclast | 21st Sep 17, 10:21am 1505946118

read on - that was after the event
The ATO was looking at Apple’s transfer pricing structure, a method sometimes used to shift profits offshore to a country with a lower tax rate. In Apple’s case, a $58.3 million tax adjustment was applied, which the company has paid

by Ralph | 21st Sep 17, 10:32am 1505946763

Well an audit would be nature look at all types of avoidance, transfer pricing included. Especially in IT, transfer pricing is a big issue. That's the huge takeaway, nothing found.

To find an 58.3M 'adjustment' is nothing in the context. My experience is it is the very nature of audit to find mistakes - even if they don't exist. The principle is, if you pay them a bunch of money to audit, what use are they if they find absolutely nothing??

For this reason if you are subject to audit never try to "clean up" your books. Let them find the mistakes (which must always exist until the robots take over). Because if you present perfection they will start to split hairs and make stuff up, that's their job.

by Didge | 21st Sep 17, 10:25am 1505946325

We will now start to see how much our money is really worth, especially that promised to be repaid. I suspect much of it will be erased via massive inflation along with a collapse of equities, especially NZ housing. Businesses will need good cash flows and an ability to keep raising prices.