Connect with us

Federal Reserve Chairman Jerome Powell holds a press conference following a two day Federal Open Market Committee policy meeting in Washington, January 30, 2019.

Leah Millis | Reuters

With pretty much everyone convinced that the Fed is going to be cutting interest rates at some point this year, the central bank faces one rather pressing question: Why wait?

After all, the market already is pricing in at least reductions this year and probably three. Though the Federal Open Market Committee meets next week, there is little expectation of a move then.

Not moving next week essentially comes down to three factors, according to Fed watchers: The looming G-20 summit at which the U.S. and China, at least theoretically, could reach a trade agreement; a desire not to be seen as overly influenced by the financial markets and President Donald Trump’s hectoring; and the desire to avoid making December’s rate hike look like a policy mistake.

“They don’t want to be seen as cowing to any sort of pressure, be it political from the White House or from the market,” said Lindsey Piegza, chief economist at Stifel. “The Fed is going to look at the data, they’re going to look at what their models say. To them, it doesn’t matter what the markets say.”

‘No cuts this year is hard to believe’

Wall Street, though, is clamoring for a cut.

Futures pricing Friday afternoon in the fed funds market showed a 21% chance of a move at the June 18-19 meeting, down from 30% earlier in the day on some stronger-than-expected economic data. The chance of a July cut remained at 85%, while the market was figuring a 61% probability for three moves in total by the end of the year.

As things stand currently among Chairman Jerome Powell and his fellow Fed officials, no moves are indicated. That is likely to change when FOMC members submit their economic projections at the June 18-19 meeting, which include the “dot plot” of individual members’ expectations of where rates are headed over the next few years.

“I can’t imagine what they are going to do with the dots,” Jeffrey Gundlach, founder of DoubleLine Capital, said in a webcast Thursday. He noted the “big divergence” between the market and Fed projections and said, “No cuts this year is hard to believe.”

In May, Gundlach recommended a straddle options trade that benefited from wide fluctuations in interest rates. The trade recently had netted a 22% gain.

Fed officials have been under intense pressure from more than the markets. Trump has been a continuous nemesis to the central bank, most recently repeating his demand for lower rates and saying he’s “not happy with what [Powell has] done” as Fed chair.

Along the same lines, the Fed has its credibility to worry about.

Trump and a growing number of market participants view the December rate hike — the fourth of the year — as a policy mistake that came amid several pivots and missteps that caused Powell and other officials to change their public statements to assuage investors’ nerves.

‘A verbal intervention’

From October to March, the Fed went from being “a long way from neutral” on rates and with a balance sheet reduction on “autopilot,” both in Powell’s words, to adopting a “patient” stance on policy and finally laying out a timetable to end the balance sheet program by September. Officials also cut the forecast level of rate hikes from two to zero, and now are in the position of having to convey a likelihood of cuts, if that is the way the FOMC members see things unfolding.

“It’s a difficult transition for the Fed now from two rate hikes this year to the pause and now moving closer and closer to rate cuts,” said Quincy Krosby, chief market strategist at Prudential Financial.

Krosby points to two pivotal events recently that signaled yet another change in policy — remarks from Powell and Vice Chairman Richard Clarida earlier in June that set the groundwork for potential cuts. In Powell’s case, it was a pledge to “act as appropriate to sustain the expansion” while for Clarida it was a vow to adapt policy to keep the economy “in a good place.”

“You can’t dismiss the comments from Powell and Clarida. That was orchestrated. They were laying the groundwork. That’s what the Fed does,” Krosby said. “It came across as verbal intervention and they didn’t even have to do anything. The market reacted.”

Indeed, stocks have been on a solid run lately, with the Dow Jones Industrial Average up more than 5% in June after a brutal May. That equity strength gives the Fed another pillar to rest on if it chooses not to cut this month, though that hasn’t always been enough to stop easing in the past.

But if the market strength holds up and the U.S. and China come to a trade agreement, it at least could lower the level of expectations for cuts.

Tom Porcelli, chief U.S. economist at RBC, said a client survey showed that if a trade deal gets one, 85% of clients “would not react negatively to the Fed taking a pass” on a July rate cut.

Source link

World

North Korea says denuclearization off negotiating table with US

Published

on

U.S. President Donald Trump meets with North Korean leader Kim Jong Un at the demilitarized zone separating the two Koreas, in Panmunjom, South Korea, June 30, 2019.

Kevin Lamarque | Reuters

North Korea’s ambassador to the United Nations said on Saturday that denuclearization is off the negotiating table with the United States and lengthy talks with Washington are not needed.

Ambassador Kim Song’s comment appeared to go further than North Korea’s earlier warning that discussions related to its nuclear weapons program, the central focus of U.S. engagement with North Korea in the past two years, might have to be taken off the table given Washington’s refusal to offer concessions.

Kim said in a statement that the “sustained and substantial dialogue” sought by the United States was a “time-saving trick” to suit its domestic political agenda, a reference to U.S. President Donald Trump‘s 2020 reelection bid.

“We do not need to have lengthy talks with the U.S. now and denuclearization is already gone out of the negotiating table,” he said in the statement made available to Reuters.

The U.S. State Department did not immediately respond to a request for comment.

Tensions have risen ahead of a year-end deadline set by North Korea, which has called on the United States to change its policy of demanding Pyongyang’s unilateral denuclearization and demanded relief from punishing sanctions.

North Korean leader Kim Jong Un has warned he could take an unspecified “new path” next year, raising fears this could mean a return to the nuclear bomb and long-range missile testing suspended since 2017.

On Tuesday, North Korea’s Foreign Ministry repeated a call for Washington to change its “hostile policies” and said it was up to Washington to decide what “Christmas gift” came at the end of the year.

Kim Song also hit out at a statement this week from EU members of the U.N. Security Council criticizing recent short range launches by North Korea, calling it a “serious provocation” against Pyongyang and saying they were playing the role of “pet dog” of the United States.

Trump and Kim Jong Un have met three times since June 2018, but talks have made little progress and recent days have seen a return to the highly charged rhetoric that raised fears of war two years ago.

In 2017, the two leaders famously engaged in a war of words, with Trump calling Kim Jong Un “Rocket Man” and North Korea slamming the U.S. president, now 73, as a “dotard.”

On Tuesday, Trump once again called Kim “Rocket Man” and said the United States reserved the right to use military force against North Korea. Pyongyang said any repeat of such language would represent “the relapse of the dotage of a dotard.”

In spite of Trump’s reprise of the Rocket Man meme, he still expressed hope that Kim Jong Un would denuclearize. On Friday the U.S. ambassador to the United Nations said the United States had not yet decided whether to have a U.N. Security Council meeting to discuss North Korean human rights abuses that has angered Pyongyang.

On Friday, South Korea said Trump and South Korean President Moon Jae-in held a half-hour phone discussion on ways to maintain diplomacy with North Korea.

It said the two leaders agreed that the situation has become “severe” and that “dialogue momentum should be maintained to achieve prompt results from denuclearization negotiations.”

Source link

Continue Reading

World

Trump thanks Iran for releasing American grad student: ‘We can make deal’

Published

on

U.S. President Donald Trump hosts a roundtable discussion with small business owners and members of his administration in the Roosevelt Room at the White House December 06, 2019 in Washington, DC.

Chip Somodevilla | Getty Images

President Donald Trump on Saturday thanked Iran for releasing an American graduate student who had been imprisoned in Tehran for over three years on charges of espionage in exchange for a prisoner held in the U.S.  

“Taken during the Obama Administration (despite $150 Billion gift), returned during the Trump Administration,” the president wrote on Twitter. “Thank you to Iran on a very fair negotiation. See, we can make a deal together!”

 

Xiyue Wang, 38, was a Princeton University doctoral student doing research in Iran when he was arrested there in August 2016 and sentenced to 10 years in prison over suspicion of being a spy.

U.S. officials have repeatedly denied that Wang, who was held in Evin Prison on two counts of espionage, was a spy.

Wang was released in Switzerland in exchange for Iranian citizen Massoud Soleimani, who was being held in an Atlanta jail over charges of violating American trade sanctions against Iran. Soleimani was expected to be released as early as January under a plea agreement.

Wang was among at least four other Americans being held in Iran.

The swap comes amid growing tensions between Iran and the U.S. and massive protests in Iran. Trump has placed significant economic sanctions on Iran and withdrew from the Obama-era Iran nuclear deal.

The protests erupted across Iran in November in response to a 50% increase in gas prices. U.S. officials believe the demonstrations have left as many as 1,000 people dead and 7,000 imprisoned, drawing widespread global criticism. 

Secretary of State Mike Pompeo said Saturday that “The United States will not rest until we bring every American detained in Iran and around the world back home to their loved ones.”

The White House confirmed the trade on Saturday with a statement from Trump, and Iran’s foreign minister, Mohammad Javad Zarif, also confirmed the deal on twitter.

Source link

Continue Reading

World

Managing China is NATO’s biggest challenge yet

Published

on

China’s President Xi Jinping inspects People’s Liberation Army soldiers at a barracks in Hong Kong on June 30, 2017.

Dale De La Rey | AFP | Getty Images

China has emerged as the most formidable challenge that has ever faced NATO. That is true as well for the North American and European economies upon which NATO rests, which account for roughly half of global GDP.

Most media focused on the theatrics of this week’s 70th anniversary summit of NATO’s now-29 members. The biggest news – though woefully underreported – was that NATO, history’s most enduring and successful alliance, for the first-time defined China as a strategic challenge.

That news was drowned out by French leader Emmanuel Macron, who came into town having declared NATO brain dead; by Turkish leader Recep Tayyip Erdoğan, who responded that it instead was the French leader’s brain that was lifeless; by Canadian leader Justin Trudeau, who was caught mocking President Trump during allied cocktail hour; and by President Trump, who shrugged in response that the Canadian was two-faced.

As entertaining as all that was, more significant was that NATO allies have belatedly focused on the most significant challenge to world democracies and their market-driven economies in our new era of major power competition. However, although the closing NATO summit statement required unanimity, even more revealing is the ambiguity of its language, reflecting disagreement over whether Beijing is more of an economic opportunity than fundamental challenge.

“We recognize that China’s growing influence and international policies present both opportunities and challenges that we need to address together as an alliance,” it said.

That’s soft stuff considering that this authoritarian, state capitalist country has already become a global center of gravity – the world’s largest by population, ranking second only to the United States in military spending and, depending on what measure you like, is already or will soon be the largest economy on Earth.

The language was also muted compared to new outrage and legislative action in the United States and elsewhere regarding the reported repression of China’s Uighur Muslim minority, following weeks of Hong Kong protests and local elections supporting their cause, and in the face of continued concerns regarding Huawei’s 5G telecom dominance.

One also didn’t have to look far in the news this week to see new evidence of China’s growing partnerships with Russia, NATO’s primary focus for many years, ranging from a new 1,800 mile-long gas pipeline connecting both countries, to Huawei’s expanded relations with at least eight top Russian universities and research institutes.

Writing for Defense One, the Atlantic Council’s Barry Pavel and Ian Brzezinski have usefully called upon NATO to create a NATO-China Council that would collectively engage China on areas of concern. It would be a structural mechanism for dialogue with Russia to raise concerns, avoid misunderstandings and, where possible, foster cooperation.

The list of matters it would deal with is already a lengthy one, write the authors: Huawei’s targeting of European and North American digital infrastructure; increasing ownership of major European seaports critical to NATO; joint exercises with the Russian military, including in the Nordic-Baltic region; and cyber espionage and intellectual property theft.

During the last world leadership transition, common Western purpose was less necessary because the US was displacing the United Kingdom, and both had similar value systems. As China rises, common purpose among Western allies will be more crucial.

A London financier friend, who has enough business in China to remain anonymous, lays out the case for why democracies around the world need to get their act together soon to address [Beijing’s] still-underestimated challenge.

Over time, he argues, China will have the largest human, economic and technological resources of any single country.

“The government has more successfully fostered economic development in a strategic fashion than any other communist or totalitarian regime in history,” he says, “successfully managing the tension (so far) between central control and harnessing the power of capitalist and market-based incentives and structures. Rising per capita incomes and the power of compounding means it will become the largest economy on the planet. Period.”

Nothing could be more confounding for those who thought history had determined that democratic rule was the flavor of the future. Unlike previous communist and authoritarian states, China has combined political control with innovation and development resulting from decentralized markets. In startling manner, China has managed to become a technological leader as well, and its closed system is feeding its advancement using big data and Artificial Intelligence.

“China has been smart about building strength without projecting strength,” says my London financier friend. “Many of its totalitarian predecessors lacked that discipline. And it will likely continue. It can further its rise until the discipline is no longer required.”

At that point, he reckons it will all become about one thing: what is China’s intent and how will it use its power. On this point, it would be unlikely to foster freedom of speech, dissent and discourse, rule of law, or democratic elections and decision making – everything NATO was created to defend.

So, it then comes down to degrees and modes of conflict or competition, which is what a concerted Western strategy would be designed to discuss and steer.

If you play the world forward, the resources still available to the US and its allies are formidable. They include the global financial system and the world’s reserve currency, which is critical to maintain. The U.S. also has the world’s most advanced innovation engine, though that’s no longer secure.

The NATO summit was also a good reminder of the value in pooled resources, not just for military purposes but perhaps more importantly to promote economic strength. However, at a time when unity of purpose is most required, new trade skirmishes broke out last week with Brazil, Argentina and with France.

History may still force transatlantic allies together to better manage China’s rise collectively. During the last world leadership transition, common Western purpose was less necessary because the US was displacing the United Kingdom, and both had similar value systems. As China rises, common purpose among Western allies will be more crucial.

Hong Kong protests have been a useful reminder that human desire for freedom is universal. Pluralism and democracy have proven to be the most resilient systems over time. Yet even optimists have got to worry about the costs of mismanaging this period of history.

It’s a good thing that NATO called out the challenge this week. Now alliance leaders should replace mocking and name calling with strategic planning and purpose.

Frederick Kempe is a best-selling author, prize-winning journalist and president & CEO of the Atlantic Council, one of the United States’ most influential think tanks on global affairs. He worked at The Wall Street Journal for more than 25 years as a foreign correspondent, assistant managing editor and as the longest-serving editor of the paper’s European edition. His latest book – “Berlin 1961: Kennedy, Khrushchev, and the Most Dangerous Place on Earth” – was a New York Times best-seller and has been published in more than a dozen languages. Follow him on Twitter @FredKempe and subscribe here to Inflection Points, his look each Saturday at the past week’s top stories and trends.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.



Source link

Continue Reading

Trending