Kashkari: Federal Reserve Doesn’t Need to Protect Investors

Another Federal Reserve president has spoken out on interest rates. Neel Kashkari says there is no need for interest rate hikes right now but that the US Federal Reserve does not exist to protect investors.

Though the stock markets are exhibiting “nervousness,” says Kashkari, investors have to figure out what to do next.

We are not here to protect investors from losses. This is a capitalistic economy we live in and if investors take risks, they should bear the consequences of those risks.

But, says the Minneapolis Federal Reserve chief:

We pay attention to the stock market.

No Reason to Apply Economic Brakes

Kashkari, echoing Atlanta Federal Reserve President Raphael Bostic’s recent comments, believes it’s time to stop interest rate hikes:

I don’t see any reason that we need to tap the brakes pre-emptively on the economy, let’s let the job market continue to strengthen and wages and inflation pick up and we can always raise rates then.

Bostic said last week that, amidst uncertainty:

The appropriate response is to be patient in adjusting the stance of policy and to wait for greater clarity about the direction of the economy and the risks to the outlook.

After a slew of interest rate hikes in 2017 and 2018 and a declining equities markets at the end of 2018, the US Federal Reserve took the pressure off the markets early this January. Federal Reserve Chair Jerome Powell said:

We will be patient as we watch to see how the economy evolves.

The markets responded, with five days of consecutive gains.

S&P 500 (Blue) Dow Jones Industrial Average (Red) and Nasdaq (Yellow) Performance Over the Last Year | Source: Trading View

Federal Reserve United and Independent

Federal Reserve Vice Chairman Richard Clarida has since said the Federal Reserve could be “very patient.”

Kashkari’s comments on investors come in defense of US President Donald Trump’s attacks on the central bank. He says the Federal Reserve is “united” in its independence and focus on data.

Federal Reserve Chair Powell knocked back Trump’s criticisms as the market struggled in late 2018, saying he would not resign. The Federal Reserve is an independent body, and despite Trump’s comments, he cannot fire Powell or force him to quit.

With further interest rate hikes in the near future now very unlikely, investors appear more confident despite other concerns. The Dow Jones Industrial Average ended the day up 141 points or 0.59%.

Author: Melanie Kramer  
Image Credit:  Featured Image from Flickr/ProPublica

Federal Reserve Blames Altcoins for Dragging Down the Bitcoin Price

The Federal Reserve Bank of St. Louis has released an article today about Bitcoin. In it, the bank notes that the price of Bitcoin has three potential futures: indefinite, infinite appreciation; zero; or somewhere in between. They believe it will be somewhere in between.

The authors, David Andolfatto and Andrew Spewak, conclude that one of the factors dragging down the price of Bitcoin is an ever-expanding supply of alternatives. Bitcoin is an inherently speculative and volatile asset. A fixed supply doesn’t mean an ever-increasing value. Demand determines value, after all. Other tokens are frequently launched which have properties attractive to a portion of the market. If Bitcoin was still the only cryptocurrency, something which was only the case for a very brief time in its history, this money would probably go into Bitcoin.

Bitcoin Maximalists Ignore Important Realities

However, the Bitcoin maximalist argument that Bitcoin will simply usurp any improvements by other tokens has never come to fruition. There are even fewer dApps and users of dApps via Bitcoin’s blockchain than much later entrants like Tron.

The Federal Reserve economists write:

Consider the following thought experiment. A restaurant selling meals for $10 will happily accept payment in the form of one Hamilton bill ($10) or two Lincoln bills ($5). That is, the nominal exchange rate between Hamilton and Lincoln bills is 2:1. Now, suppose that the supply of Lincoln bills is increased but the supply of Hamilton bills remains the same. The exchange rate remains unaffected […] That is, the increase in the supply of Lincoln bills has led to a decline in the purchasing power of both Lincoln bills and Hamilton bills, even though the supply of Hamilton bills has remained fixed. Might an expansion in the supply of Altcoin have a similar depressing effect on the price of Bitcoin?

There are other complicating factors to the price of Bitcoin. On the one hand, it is the cryptocurrency with superior liquidity. This makes it the on-ramp and off-ramp for many other cryptocurrencies. Does anyone remember when ICOs were primarily conducted for Bitcoin? Nowadays Ethereum performs that function. Importantly, ICOs fueled demand for Ethereum through 2017 and 2018. Ethereum has a large supply and may never stop producing new units. Therefore, its lower values make sense: the more available something is, the less value it is.

Federal Reserve on the Intrinsic Value of Cryptocurrencies

The article also speaks to “intrinsic value.”

Consider now the bearish case for Bitcoin. This outlook is based on the view that Bitcoin has no fundamental value and that sooner or later the market will recognize this fact. In our view, one can accept that Bitcoin trades above its fundamental value without claiming that its fundamental value is zero. In fact, many securities trade above what might be considered their fundamental value. Gold, for example, trades above its value as measured by its industrial applications.

As noted before, Bitcoin’s actual utility is a secure digital store of value and transfer of the same. Other blockchains have taken and dominated the “blockchain” aspect of cryptocurrency. Despite the global chaos, demand for cryptographically secure payment systems isn’t necessarily popping. But it is feasible that people will come into contact with blockchain technologies through banking applications as well as other decentralized applications. Such things will generate demand for tokens that underpin those blockchains. Tokens like Ethereum, TRON, NEO, Aelf have a long-term technical proposition that Bitcoin has long been lagging on.

Smart Contracts Change The World

Bitcoin as a smart contract platform is probably a dream at this point. For one thing, it’s significantly more expensive to use. For another, at this point, other platforms simply do it better. The trend of alternatives taking up more and more of the total cryptocurrency market capitalization is likely to continue. Bitcoin maximalists rest on flawed arguments such as “network effect.” These arguments conveniently ignore historical examples where superior technology and marketing overtook dominant networks.

Bitcoin is likely not to trend downwards toward zero. The economists acknowledge this as well. But the odds are that an increasing amount of cryptocurrency market capitalization will enter through and be invested in alternatives with growing demand based on their usefulness.

After ten years, Bitcoin remains more a speculative asset and store of value than anything. The trend the Federal Reserve economists identify is representative of that. There are numerous factors that go into an actual downturn in the price of Bitcoin. A good percentage of holders will not sell at a loss. Another good percentage will not sell at all. These people hold the coin’s price at a certain level. But active trading can eventually reduce the price without regard to these people’s philosophical or strategic holding patterns.

No One Knows the Actual Value of Bitcoin

The Bitcoin price, at the time of writing, was $3,641, but what is the asset really worth?

Bitcoin and all other cryptocurrencies very much remain in a price discovery phase. Some believe Bitcoin was overbought in the hype bubble of 2017, which inherently raised the price of nearly every other crypto available. Others believe it was just a fluke. Institutional money is still only just entering the picture. The utility of Bitcoin is only one aspect of its value, but it will play an increasingly important role as others develop more advanced and attractive feature sets.

As the Federal Reserve economists said:

We think the future price path is more likely to remain bounded between these two extremes.

Zero? No. Endless incline without significant change to the demand climate? Certainly not. Look out, Bitcoin. The 2000s called and they want their basic crypto design back. The era of smart contracts is dawning. Whoever does it best will see the most demand. It’s probably that simple.

Disclaimer: The views expressed in the article are solely those of the author and do not represent those of, nor should they be attributed to, CCN.

Author: P. H. Madore
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Currency Crisis = Bitcoin’s Boon?

In Turkey, Google searches for “Bitcoin” have doubled since the local currency crashed. With every new currency crisis, more people turn to crypto as a safe haven to protect their wealth.
If the difficulties continue, Erdoğan’s government will be forced to impose capital controls and stem the outflow of capital from the country. Estimates place the debt burden on corporations and financial institutions at some $220 billion.

Our prediction: Should Turkey decide on capital controls, expect Bitcoin to trade at a significant premium on the country’s OTC markets.
This permissionless, censorship-resistant and decentralized form of money is exactly what’s needed to combat a currency crisis, deeply rooted in an aging system. Especially in Turkey, where politics and money are centrally managed and authoritarian, decided by a cabal of unelected officials.

But we’ve seen this all before.
It’s a consequence of the decades-old practice by central banks, which drives interest rates to near-zero … starves financial institutions of the yield that they need to keep operating … and makes mincemeat of the income that retirees depend upon.
What’s worse, artificially low interest rates encouraged individuals and institutions to take on huge risks. Low rates have forced capital to seek returns elsewhere — leading them to invest in places that would normally be considered too volatile, or pose great speculative risks.

Governments glance nervously at one another, wondering which will be the next to fall. This is a systemic issue in a monetary system held hostage to interest-rate decisions, which are often made by academics with no personal experience navigating global capital markets.

Remember when the Federal Reserve drove interest rates to zero? That was done to stimulate domestic inflation, in a move aimed at fighting the specter of deflation that harangued the U.S. economy following the 2008 collapse.
There is, however, one very serious problem: The U.S. dollar is the world reserve currency.
So, what happens when dollars are cheap to borrow? Emerging markets like Turkey were flooded with capital from pension funds chasing higher yield.

They would have stuck around indefinitely as long as U.S. rates continued at near-zero levels. But, now, the Federal Reserve is raising rates and pulling the plug.
Argentina is another calamity in the making. The peso has continued to fall steadily from about five cents to three and a fraction — all since the beginning of this year.
The monetary system is in flames.
Citizens of Turkey and Argentinians understand this. They’ve experienced their fair share of currency collapses before. So, they get why Bitcoin and other cryptocurrencies are imperative to preserving their wealth.

They rarely ask whether to buy crypto or not. Instead, they just want to know where and how fast they can get their hands on it.
It will not stop. The cracks are widening.
Whether it’s the Fed’s reckless rate reductions that sent capital fleeing to higher-yield, high-risk countries … their latest policy of raising rates, currently driving emerging-market currencies into the floor …

Or whether it is the European Union’s money-printing euros to help prop up the weaker member-states …
There is a growing realization that something’s broken.
Fiat money is not working.
Eventually, people will abandon the perceived safety of government-sanctioned money and move toward a system that is freer, more transparent and equitable for all.

Turkey’s currency collapse, now considered the exception, could become the norm.
A long list of countries is set to follow. Every time another currency sinks, more people will migrate into crypto. Once they buy in, they will be reluctant to leave.
A loud chorus of demands will rise from the fiat-money chaos. They will demand fair treatment of cryptocurrencies by central banks. They will demand that the remaining fiat currencies provide the same level of transparency and accountability. And if their demands are not promptly met, still more will flee.
It won’t happen overnight. It will take place in stages over long periods of time. But ultimately, cryptocurrencies will become the world’s new financial standard.

Here at Dollar Destruction, we endeavour to bring to you the latest, most important news from around the globe. We scan the web looking for the most valuable content and dish it right up for you! The content of this article was provided by the source referenced. Dollar Destruction does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products or other materials on this page. As always, we encourage you to perform your own research!

Author: Juan M. Villaverde
Image Credit: iStock/ratpack223

Peoples Token

US Federal Economic Database Adds Crypto Data, Brings More Legitimacy to the Market

The Federal Reserve Economic Data (FRED) database, a governmental database, is reported to have added four cryptocurrencies to it.


FRED Introduces Coinbase Data to Its Database

On June 19th, a FRED publication noted that cryptocurrency data compiled from Coinbase, with data originating from 2014 to the current day, will be added to the U.S-based database, reports Quartz.

The announcement from FRED noted that data will be updated daily, specifically for the prices of Bitcoin, Ethereum, Litecoin, and Bitcoin Cash, or the four cryptocurrencies which Coinbase currently offers.  It is likely that the operators of the database will add more cryptocurrencies in the future, in direct correlation with additions of other cryptocurrencies on Coinbase’s exchange service.

Although this is nothing significant in terms of widespread cryptocurrency adoption, this little nod by an important governmental organization shows how the cryptocurrency industry has gained some form of legitimacy.

The FRED database, maintained by the St. Louis Fed, has become a resource for economists and journalists worldwide, providing unique data points on a variety of geoeconomic topics. The information contained on the database includes gross domestic product (GDP). exchange rates, and everything in between.

Jared Bernstein, chief economist to Joe Biden, acknowledged his love for the resources which FRED offers, stating:

“To say ‘I love FRED’ is too weak, too glib. I depend on FRED. I count on FRED to help provide a better future for economic policy.”

The addition of cryptocurrency data, albeit rather limited, shows how the industry has evolved from underground assets to an important (and growing) factor in the overall economy.

This isn’t the first time that FRED has acknowledged cryptocurrencies, as researchers published five cryptocurrency and blockchain-based articles earlier this year. These topics, seemingly aimed at ‘no-coiners’ included an intro to Bitcoin, blockchain, and cryptocurrencies as a whole.

Cryptocurrency Gains Traction with Worldwide Governments

Despite declining prices, cryptocurrencies have still been gaining traction, finding occasional common ground with certain governments and organizations, based on traditional systems.

Coinbase recently opened up a custody service directly targeted for institutional investors, specifically for cryptocurrency balances worth a minimum of $10 million. With this new program, Coinbase hopes to entice institutional money to invest in the market, providing extremely secure cold storage for crypto assets.

Brian Armstrong, figurehead and the CEO of Coinbase said:

“Over 100 hedge funds have been created in the past year exclusively to trade digital currency. By some estimates there is $10b of institutional money waiting on the sidelines to invest in digital currency today…”

It is likely that institutional investors would use a service like Coinbase Custody to secure their crypto assets, providing layers of nearly impenetrable protection through the use of unique verification techniques.

The common ground doesn’t end there, as governments have begun acknowledging this growing industry, by implementing rules and regulations on cryptocurrencies.

Governments, like those in South Korea and Japan, have recently implemented cryptocurrency exchange rules that are reminiscent of regulations seen with banks.  Although regulation has traditionally been viewed as a negative action, it still shows how cryptocurrencies are beginning to seep into classic financial systems, with cryptocurrencies intrusion on these systems causing regulatory bodies to treat cryptocurrencies as a legitimate asset.

Here at Dollar Destruction, we endeavour to bring to you the latest, most important news from around the globe. We scan the web looking for the most valuable content and dish it right up for you! The content of this article was provided by the source referenced. Dollar Destruction does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products or other materials on this page. As always, we encourage you to perform your own research!

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New US Banking Rules Might Push People to Cryptocurrencies, Weiss Ratings Says

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Following the Federal Reserve’s meeting to rewrite some of the Volcker rules for banks, Weiss Ratings considers that Americans may be inclined to purchase cryptocurrencies to ride out any potential resulting financial crisis.

On May 30, the Federal Reserve will meet to discuss the modification of the Volcker rule, which stops banks from trading in volatile markets for profit using funds that are protected by deposit insurance.

Weiss Ratings is raising the alarm on this particular meeting, saying that “US banking regulators are getting ready to water down the Volcker rule,” and that this might provoke more Americans to invest in cryptocurrencies as savings instruments.

“They want to make it easier for megabanks to take big risks with other people’s money—our money. They want to give banks the green light to trade more of the same kinds of assets that helped cause the 2008 debt crisis.”

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Both Martin Weiss and Juan Villaverde—Weiss Ratings’ crypto guru—believe that this could lead to instability in American financial markets like that in 2008 when banks attempted to profit from subprime loans due to incentives that came under the guise of “affordable housing for everyone” that were passed in the 90s.

After the housing bubble burst and prices started crashing, the banks made major losses and the Federal Reserve had its hands tied. It had to either bail them out or let a large part of the global financial system collapse.

“There was, and still is, an over-reliance on megabanks—not only as depository institutions and custodians, but also as a major source of liquidity for global capital markets,” Weiss and Villaverde added.

The solution to this, according to them, is a movement towards cryptocurrencies as a means for savings.

“Cryptocurrencies do such a fundamentally better job as a safe depository, it’s difficult to envision a world in which this technology does not become a game-changer for money and banking,” they said.

This is much in line with the opinion of a majority of American millennials, 65% of which consider Bitcoin a safer investment than personal savings accounts offered by banks.

Despite all of the red flag waving, however, banks have historically found the Volcker rule to be confusing. The Fed’s meeting on May 30 could simply result in a rewrite of some of the restrictions that results in clarification.

A complete or even partial repeal of the rules isn’t likely, as the 2008 global crisis is still fresh in the minds of regulators, many of whom were present when Lehman Brothers floundered.

Here at Dollar Destruction, we endeavour to bring to you the latest, most important news from around the globe. We scan the web looking for the most valuable content and dish it right up for you! The content of this article was provided by the source referenced. Dollar Destruction does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products or other materials on this page. As always, we encourage you to perform your own research!

Author Miguel Gomez
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‘We Welcome Anonymous Cryptocurrencies’ : US Federal Reserve Breaks Down Bitcoin in New Study

The Federal Reserve Bank of St Louis, one of 12 regional Reserve Banks that make up the United States’ central bank, has conducted a study asking some of the biggest questions in cryptocurrency today – and they may have found some real answers.

Their researchers investigated the control structure of various currencies and looked into whether central banks will adopt cryptocurrencies as a form of payment.

Commodity, Cash, or Digital?

In an effort to assign Bitcoin one of the above monetary categories, the researchers concluded that Bitcoin actually defied traditional categorization – it’s none of the above, as shown in the chart below.

There are a number of dimensions used by the bank to categorize money.

The first is representation: Is the currency represented physically or virtually?

The second is transaction handling: Are transactions handled in centralized or decentralized payments?

The third is money creation: Is the production of the currency competitive or monopolized?

These dimensions make it easy to distinguish between commodities like gold, physical currencies like fiat cash, and so on. However, Bitcoin proved elusive when analyzed in the traditional manner.

The researchers pointed out that gold has decentralized transaction handling, a competitive creation process wherein anyone can mine it, and a finite supply – all traits which are shared by Bitcoin. However, it also has an inherent value as a commodity, unlike fiat currency which represents the value of a commodity (like gold, silver, etc). Gold is not a low-liquidity form of money, but it doesn’t require extensive bookkeeping or proof of ownership.

Much like fiat cash, simply being in possession of the gold at the time of transaction is enough to prove ownership. Cash is totally decentralized in this sense, with no oversight or bookkeeping required for it to be spent in most cases. The creation, however, is centralized and monopolized. Electronic cash is also monopolized with an infinite supply.

Commercial bank deposits and central bank electronic money are considered virtual money because they don’t have any physical representation – they exist as records only. On the other hand, physical forms of money like gold and cash often don’t even need a record in order to function in the market.

Which category fits Bitcoin?

The answer, of course, is none of them. Bitcoin takes on traits of all three categories and brings some brand new characteristics as well, making it a unique currency.

Bitcoin is the first virtual money for which ownership rights to the various monetary units are managed in a decentralized network. There is no central authority, no boss, and no management. And yet it still works.

The Bitcoin blockchain is the decentralized accounting system, and the so-called miners are the bookkeepers […] decentralized management of ownership of digital assets is a fundamental innovation. It has the potential to disrupt the current payment infrastructure and the financial system. In general, it could affect all businesses and government agencies that are involved in recordkeeping.

The researchers went on to point out the recognisable traits that Bitcoin does have, before moving on to whether bank-issued virtual money even has a purpose at all.

The special feature of cryptocurrencies is that they combine the transactional advantages of virtual money with the systemic independence of decentralized transaction processing. Furthermore, as with gold, the creation of new Bitcoin units is competitive. Anyone can engage in the creation of new Bitcoin units by downloading the respective software and contributing to the system.

In practice, however, a few large miners dominate the mining process. The reason is that competition has become fierce and only large mining farms with highly specialized hardware and access to cheap electricity can still make a profit from mining.


The Case for Central Bank Electronic Money

The researchers made one of their most important points here, and one that is often overlooked by the die-hard supporters of fiat over Bitcoin, or the reverse.

“Each form of money has its benefits and drawbacks. This is why many forms of money coexist.”

Cash is permissionless and anonymous, with no account and no record needed. There’s no one point of attack (like a payment processing server) that can disrupt the cash system of payment, making it a robust and decentralized system in terms of payment. There’s also no credit relationship or risk involved with cash – transactions are final and done in person, allowing people to trade even if they don’t trust each other. Of course, it’s not viable for long-distance trading such as online purchases, which is a drawback rectified by virtual money which allows for new business opportunities in new, faraway markets.

The researchers point out that cash is the only liquid asset usable for saving outside of the private financial system, and then put forward an interesting theory.

We believe there is great demand for a virtual asset issued by a trusted party that can be used to save outside of the private financial system.

To demonstrate this they tracked Swiss francs in circulation (in the form of cash) as a fraction of GDP from 1980 until 2017 (shown in Figure 2), and found three phases. Phase 1 lasted from 180-95 and marks the time when financial innovations replaced the use of cash as a medium of exchange or store of value. The Swiss population increasingly started to use debit and credit cards for payments.

The second phase is from 1995 until 2008 when card payments and online banking further expanded but, as suggested by Figure 2, the use of cash did not decline further.
The third phase lasted from 2008 until 2017 during an era of increased cash circulation, which the researchers believe is due to the global financial crisis from 2007 onwards.

“We believe that there is a strong case for central bank money in electronic form central bank electronic money satisfies the population’s need for virtual money without facing counterparty risk.”

They didn’t speak so highly of cash, stating that cash is inefficient, expensive, facilitates crime,and limits the bank’s ability to use negative nominal interest rates.

The bank believes cryptocurrencies are a viable alternative to cash and will be able to outperform cash when issues like scalability, high fees, and adoption are solved, citing the Lightning Network as one of the potential solutions to these problems.

The bank proposes the issuing of central bank electronic money for all as another solution, saying that this practice would help discipline commercial banks and force them to incentivize users to participate with higher interest rates to compensate for higher volatility. The St Louis researchers believe that this would simplify monetary policy by promoting the widespread use of central bank accounts with the interest rate as the main policy tool.

Because the market would be desegregated, the interest rates would be low, and because a central bank cannot become illiquid there is no counterparty risk, unlike with commercial banks. Because no credit is available for central bank electronic money, virtually no monitoring is required at all, making it very low maintenance.

In fact, the central bank wouldn’t even have to scale the infrastructure to provide everyone with central bank electronic funds and accounts – legislation could obligate commercial banks to integrate central bank accounts and store customer funds externally with the central bank, making the funds off limits in the event of the commercial bank going bankrupt, protecting customer funds.


“Naive” to Expect Central Bank Cryptocurrencies

“it makes little sense for central banks to issue cryptocurrencies even though it would be straightforward from a technological point of view to do so”.

The researchers state that no reputable central bank has a high enough incentive to issue branded cryptocurrencies in case that currency were to become linked to a crime of some sort, unfairly associating the bank with the crime and damaging the bank’s business.

“Once we remove the decentralized nature of a cryptocurrency, not much is left of it. As shown in Figure 1, virtual money that is centralized and issued monopolistically by a central bank is electronic central bank money.”

The bank feels that it is naive to expect a central bank to issue a cryptocurrency given the logistical problems and unnecessary risks involved. Because of the option of complete anonymity, the bank would risk facilitating money laundering and other crimes which commercial banks are obligated by law to take measures against.  The researchers acknowledge the benefits of allowing anonymous transactions in situations where a government is oppressing citizens, but feel that it is not appropriate for any government authority to actively facilitate anonymous transactions due to their obligation to collect tax and prevent money laundering.

“On the one hand, governments can be bad actors and, on the other hand, some citizens can be bad actors. The former justifies an anonymous currency to protect citizens from bad governments, while the later calls for transparency of all payments. The reality is in between, and for that reason we welcome anonymous cryptocurrencies but also disagree with the view that the government should provide one.”

Here at Dollar Destruction, we endeavour to bring to you the latest, most important news from around the globe. We scan the web looking for the most valuable content and dish it right up for you! The content of this article was provided by the source referenced. Dollar Destruction does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products or other materials on this page. As always, we encourage you to perform your own research!

Author: Conor Maloney

Fed Minutes Signal Greater Confidence in Reaching 2% Inflation

Central bankers at last month’s policy meeting believed the economy would run hot for the next few years

Federal Reserve officials at their meeting last month expressed greater confidence inflation would rise to their 2% target over the coming year, a development that could affect how much they raise interest rates in coming years.

They also debated the costs and benefits of allowing the economy to run hot and discussed how they might need to later raise rates to a level that would deliberately slow growth, according to minutes of their March 20-21 meeting, which were released Wednesday.

The minutes highlight just how much Fed officials’ outlook has changed since last fall, when surprisingly slow inflation raised questions about the need for continued rate increases.

Fed officials last month believed the economy would run hot, or grow faster than its sustainable rate, for the next few years, the minutes said.

In March, “all participants agreed that the outlook for the economy beyond the current quarter had strengthened in recent months,” the minutes said. In addition, “all participants expected inflation on a 12-month basis to move up in coming months.”

The outlook has shifted since late last year because Congress and the White House approved tax cuts and a boost in federal government spending for this year and next. The economy hasn’t often had such fiscal stimulus when unemployment is so low.

Last year, falling unemployment supported the case for rate increases. The jobless rate has held at 4.1% since last October, near an 18-year low.

But inflation pressures softened last year, bolstering arguments in favor of slowing the pace of rate rises. At the time, top Fed officials said they expected the slowdown would prove transitory, and inflation pressures have firmed up in recent months.

Officials noted the potential benefits of letting the economy run hot, such as drawing more Americans into the workforce from the sidelines and speeding inflation’s return toward the central bank’s 2% goal. The policy makers also noted potential costs: “An overheated economy could result in significant inflation pressure or lead to financial instability,” the minutes said.

The Fed seeks to keep inflation at 2% because it views that level as consistent with an economy with healthy demand for goods and services.

At the same time, some officials warned they eventually could need to lift rates to a level that would deliberately restrict growth.

Some officials said they might need to acknowledge in future postmeeting policy statements that interest rates eventually would rise from a low level that spurs growth “to being a neutral or restraining factor for economic activity,” the minutes said.

After holding its benchmark federal-funds rate near zero for seven years, the Fed has raised it six times since late 2015, most recently last month to a range between 1.5% and 1.75%. Officials also penciled in two more quarter-percentage-point rate increases in 2018 and three such moves in 2019.

The Fed isn’t likely to raise rates at its next meeting, May 1-2, but investors largely expect another quarter-percentage-point increase at the following meeting in June. Investors have focused more attention on whether the Fed will feel pressure to add a fourth rate increase this year. The answer largely turns on inflation.

Of the 15 Fed officials at March’s meeting, 12 penciled in either three or four rate increases for 2018, and they were equally divided between those two paths. Most officials also penciled in at least three rate increases for 2019.

If Fed officials grow more confident that inflation is rising toward their 2% target over time, they could stick to their tentative plan for three rate increases this year. But if it looks like new federal spending, tax cuts, a weaker dollar and lower unemployment will lead to an acceleration in price pressures, policy makers could act more aggressively.

Consumer prices excluding volatile food and energy items rose 2.1% in March from a year earlier, according to the so-called core consumer-price index, released by the Labor Department Wednesday. That was the strongest reading since February 2017.

Economists at JPMorgan Chase estimate the Fed’s preferred inflation gauge, produced by the Commerce Department, will show annual core inflation of 1.9% in March when it is released later this month. In February, it was 1.6%.

Annual inflation is expected to rise in coming months because the weak monthly readings of last March and April will no longer be included in year-over-year comparisons, the minutes said.

This upturn is “widely expected and, by itself, would not justify a change in the projected path for the federal-funds rate,” the minutes said.

While the minutes show Fed officials are optimistic about economic growth, the prospect of trade fights loomed as one significant concern.

“A strong majority” of Fed officials saw the prospect of retaliatory trade actions by other countries as a risk for the U.S. economy, the minutes said. Officials’ contacts in the agriculture industry reported “feeling particularly vulnerable to retaliation.”


Here at Dollar Destruction, we endeavour to bring to you the latest, most important news from around the globe. We scan the web looking for the most valuable content and dish it right up for you! The content of this article was provided by the source referenced. Dollar Destruction does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products or other materials on this page. As always, we encourage you to perform your own research!

Author: Nick Timiraos 
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US annual budget deficit forecast to hit $1 trillion

The US is heading for an annual budget deficit of more than $1 trillion (£707bn) by 2020 following tax cuts and higher public spending, according to the Congressional Budget Office.

It said that while the measures will temporarily boost the US economy, they will exacerbate its long-term debt.

The agency said US debt could rise to a level comparable to World War II and the financial crisis.

It warned that it would have “serious negative consequences” for the US.
The CBO’s report has been revised to incorporate the effects of a new $1.3 trillion government spending bill and the $1.5 trillion in Republican-led tax cuts approved last year.

It lifted its economic growth forecast for this year and next to 3.3% and 2.4% respectively.
However, the non-partisan CBO said the deficit – the difference between what the government spends and what it receives through tax receipts – is expected to rise to $804bn in 2018 from $665bn in the previous year.

The budget deficit is then expected to grow to $1 trillion by 2020.

Rising debt

The agency said it now expects America’s cumulative deficit over the next decade to grow to $11.7 trillion compared to a previous forecast of $10.1 trillion.

It added that debt would hit $28 trillion, or about 96% of GDP, by 2028.
The figure would be even larger if the tax cuts for individuals and families do not expire as scheduled.

The CBO said that “such high and rising debt would have serious negative consequences for the budget and the nation,” which would include limiting the government’s flexibility to introduce new policies and making it vulnerable to fiscal shock.

The report is expected to fuel concerns that China could use its position as America’s largest foreign creditor to its advantage during the current trade dispute.
Democrats seized on the report to criticise Republicans, who have previously championed fiscal responsibility.

Senator Chuck Schumer of New York said the report “exposes the scam behind the rosy rhetoric from Republicans that their tax bill would pay for itself” and warned that Republicans will now use the rising debt to call for cuts to welfare programmes such as Social Security.


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Author BBC News

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