Group 1 : IMF and Europe

Formed in 1944 and made by 189 countries in the world, the International Monetary Fund (IMF) is an international organization created to oversee the financial stability, facilitate international trade, promote high employment and sustainable economic growth around the world. It always had a notable presence in Europe in providing financial advice and technical assistance.

RESPONSIBILITIES IN EUROPE

The IMF provides economic analysis and policy advice as part of its standard surveillance process for individual advanced and emerging European economies that culminates in regular (usually annual) consultations with individual member countries and, if relevant, EU institutions such as the ECB and EC. The bilateral surveillance staff reports for these consultations include assessments of the economic outlook, and economic and financial stability.

In addition to its policy discussions with the 19 individual members of the euro area, IMF staff also holds consultations annually for the euro area as a whole, similar to those held for other currency unions. Here, IMF staff exchange views with counterparts from the ECB, the EC and other European institutions in a number of areas, including monetary and exchange rate policies and regional fiscal policies, financial sector supervision and stability, trade and cross-border capital flows, as well as structural policies. The final staff report includes an overall assessment of the economic outlook, external and fiscal position, and financial stability of the euro area as a whole. As part of the euro area consultation, the IMF’s views on the economic outlook and policies of the euro area are presented to the Eurogroup, comprising the 19 finance ministers of the euro area.

INTERVENTIONS IN EUROPE

IMF and Brexit

THE IMF intervention have drawn an angry response from leave campaigners who have already said the fund should not interfere in the UK’s democratic process. The leave camp has also attacked its record on economic forecasting.

Responding to the latest IMF remarks, Matthew Elliott, chief executive of Vote Leave said: “The IMF has chosen to ignore the positive benefits of leaving the EU and instead focused only on the supposed negatives. If we vote leave, we can create 300,000 jobs by doing trade deals with fast growing economies across the globe. We can stop sending the £350m we pay Brussels every week. That is why it is safer to vote leave.”

The IMF said that Brexit could spark a stock market crash and a steep fall in house prices. In a report to conclude its annual assessment of Britain’s economy, it added that a leave vote would tie the UK up in trade negotiations that could drag on for years.

The resulting uncertainty would hit spending and financial markets, it said, estimating that even under a relatively benign scenario in which the UK negotiated a trade status similar to that between Norway and the EU, output would fall by 1.5% by 2019, compared with where it would be under continued EU membership.

Under that scenario, the UK would fall into recession in 2017, IMF officials said. “The implication would be negative growth in 2017,” said one official briefing reporters in a conference call.

In a baseline scenario in which the UK remains in the EU, growth would be expected to recover in late 2016, as the effects of the referendum waned. But the IMF’s experts also forecast various threats to the UK economy beyond the closely fought vote.

https://l.facebook.com/l.php?u=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DXpgS4h2wlVs&h=ATMw1PZryubi3H0NYLR8fasmKpwZ6WihqmAQfXMcLfFFGr2fkZhO2QMXKxrtczlLvNItsJXSFtCes2dZGv73gYlWfuFyAvQjrl02CWKz_TstpCdrMwWaH5X8PPdKE2EUrwu0yTZlDl9Amg

Sources :

http://www.imf.org/en/About/Factsheets/Europe-and-the-IMF.

https://www.theguardian.com/business/2016/jun/18/imf-says-brexit-would-trigger-uk-recession-eu-referendum.

https://en.wikipedia.org/wiki/International_Monetary_Fund#Function_and_policies.

Group 3: IMF and Greece its impact on Greece

                                                       

IMF threatens to pull out of Greek rescue

Christine Lagarde issues warning in letter leaked three days before eurozone finance ministers discuss help for Athens

Greek prime minister Aleixis Tsipras addresses Syriza parliamentarians in Athens on Friday.
Hopes of an end to the impasse between Greece and its creditors have appeared to evaporate after a surprise intervention from the International Monetary Fund.

In a letter – leaked three days before eurozone finance ministers are scheduled to discuss how best to put the crisis-plagued country back on its feet – IMF chief Christine Lagarde issued her most explicit warning yet: either foreign lenders agree to restructure Greece’s runaway debt or the Washington-based organization will pull out of rescue plans altogether.

“For us to support Greece with a new IMF arrangement, it is essential that the financing and debt relief from Greece’s European partners are based on fiscal targets that are realistic because they are supported by credible measures to reach them,” she wrote, lamenting the lack of structural reforms underlying Athens’ abortive adjustment programme so far.

Six years have elapsed since Greece, revealing a deficit that was four times higher than previously thought, received its first loans from a bailout program that has since exceeded more than €240bn (£190bn) in emergency funding. Since a third €86bn bailout last summer, talks have been largely deadlocked.

Laying bare the differences of view prevailing among those consigned to keep the insolvent nation afloat, Lagarde said it was imperative that a lower primary surplus goal was achieved.

“We do not believe it will be possible to reach a 3.5% of GDP primary surplus [in 2018] by relying on hiking already high taxes levied on a narrow base, cutting excessively discretionary spending and counting on one-off measures as has been proposed in recent weeks.”

The IMF managing director’s intervention came after the surprise decision of the leftist-led government in Athens to put unpopular pension and tax changes to a vote on Sunday.

The prospect of such controversial measures being passed so urgently unleashed a wave of civil unrest with a 48-hour general strike by private and public sector unions bringing Greece to a standstill. Unionists said the measures were a “barbaric” eradication of hard-won rights and would be “the last nail in the coffin” for workers whose salaries have already been savaged by relentless rounds of grueling austerity.

“They are the worst so far,” said Odysseus Trivalas, president of the public sector union ADEDY. “At some point, Greeks won’t be able to take any more and there will be a social explosion.”

Rallies are planned to protest against measures that include instituting a national pension of €384 a month, raising social security contributions and increasing income tax for high earners. The overhaul of the pension system is among the most contentious reforms to date.

In a repeat of the drama that dominated the euro zone last year, Athens faces the specter of default if its fails to honor maturing European Central Bank bonds and IMF loans in July.

Long overdue rescue loans worth €5bn are at stake. Receipt of the funds depends on completion of a first progress report, or evaluation, of the economy that has been drawn out for the past nine months and has stalled over lender disagreement. With discord over Athens’ ability to achieve fiscal targets, creditors recently upped the ante, demanding an additional contingency package of €3.6bn, the equivalent of 2% of GDP.

“While creditors fight this out, the political and social situation in Athens will deteriorate,” said Mujtaba Rahman, head of European analysis at risk consultancy Eurasia Group. “Time is running out for creditors to come to an agreement.”

The Greek prime minister, Alexis Tsipras, unexpectedly called Sunday’s vote before the conclusion of the negotiations in order to placate creditors and increase his bargaining power at Monday’s meeting of eurozone finance ministers.

Greek prime minister says IMF has criminal role in the economic situation of greece: (let’s watch the video to see what the situation is)

 

Sources:

 

https://www.theguardian.com/world/2016/may/06/imf-threatens-greece-eurozone-christine-lagarde

GROUP 20 : IMF: Responsibilities and intervention in Europe

Let start by a video defining what is the IMF ! 

The Role of the IMF in Europe and Beyond : (Responsibilities) 

Is the role of the IMF in the Greek crisis and elsewhere in Europe consistent with the IMF’s mission? My answer is yes for four reasons.

First, the IMF is a cooperative international organization with near-universal membership. Its mission is to promote sustainable global growth and financial stability.

Second, all members of the Fund should be eligible to borrow from the institution under appropriate conditions. The availability of IMF financial assistance along with advice on reform or adjustment programs is in the interests of all countries because all countries benefit from sustained, balanced growth and global financial stability.

Third, the Fund carries out its mission through its surveillance, policy advice, and lending programs. Those three mechanisms are, and should be, available to all members even if the wealthiest IMF members have not availed themselves of IMF lending facilities since the 1970s.

Fourth, IMF lending operations have not been limited to developing countries in recent years. In November 2008, Iceland embarked on an IMF-supported economic reform program. Its estimated per capita GDP on a purchasing power parity basis in 2010 is estimated still to be 25 percent more than Korea’s, which borrowed from the IMF in 1997 and was the world’s 11th largest economy at that time.5 Moreover, the IMF, in cooperation with the European Union, is already supporting economic reform programs in Hungary, Latvia, and Romania. The wealthiest of those countries, Hungary, has an estimated GDP per capita that is less than half the GDP per capita of Korea. True, these countries are members of the European Union but are not part of the euro area. In retrospect, the euro area versus non-euro area distinction diverted the Europeans from acting promptly in Greece. The distinction primarily reflects the pride of the political elite in the countries using the euro as their currency. For reference, within the euro area, Greece’s per capita GDP is approximately the same as Korea’s, as is Spain’s, but Portugal’s is 25 percent lower.

IMF threatens to pull out of Greek rescue : (Intervention) 

Hopes of an end to the impasse between Greece and its creditors have appeared to evaporate after asurprise intervention from the International Monetary Fund.

In a letter – leaked three days before eurozone finance ministers are scheduled to discuss how best to put the crisis-plagued country back on its feet – IMF chief Christine Lagarde issued her most explicit warning yet: either foreign lenders agree to restructure Greece’s runaway debt or the Washington-based organisation will pull out of rescue plans altogether.

“For us to support Greece with a new IMF arrangement, it is essential that the financing and debt relief from Greece’s European partners are based on fiscal targets that are realistic because they are supported by credible measures to reachthem,” she wrote, lamenting the lack of structural reforms underlying Athens’ abortive adjustment programme so far.

Six years have elapsed since Greece, revealing a deficit that was four times higher than previously thought, received its first loans from a bailout programme that has since exceeded more than €240bn (£190bn) in emergency funding. Since a third €86bn bailout last summer, talks have been largely deadlocked.

Laying bare the differences of view prevailing among those consigned to keep the insolvent nation afloat, Lagarde said it was imperative that a lower primary surplus goal was achieved.

“We do not believe it will be possible to reach a 3.5% of GDP primary surplus [in 2018] by relying on hiking already high taxes levied on a narrow base, cutting excessively discretionary spending and counting on one-off measures as has been proposed in recent weeks.”

The IMF managing director’s intervention came after the surprise decision of the leftist-led government in Athens to put unpopular pension and tax changes to a vote on Sunday.

The prospect of such controversial measures being passed so urgently unleashed a wave of civil unrest with a 48-hour general strike by private and public sector unions bringing Greece to a standstill. Unionists said the measures were a “barbaric” eradication of hard-won rights and would be “the last nail in the coffin” for workers whose salaries have already been savaged by relentless rounds of gruelling austerity.

“They are the worst so far,” said Odysseus Trivalas, president of the public sector union ADEDY. “At some point, Greeks won’t be able to take anymore and there will be a social explosion.”

Rallies are planned to protest against measures that include instituting a national pension of €384 a month, raising social security contributions and increasing income tax for high earners. The overhaul of the pension system is among the most contentious reforms to date.

In a repeat of the drama that dominated the eurozone last year, Athens faces the spectre of default if its fails to honour maturing European Central Bank bonds and IMF loans in July.

Long overdue rescue loans worth €5bn are at stake. Receipt of the funds depends on completion of a first progress report, or evaluation, of the economy that has been drawn out for the past nine months and has stalled over lender disagreement. With discord over Athens’ ability to achieve fiscal targets, creditors recently upped the ante, demanding an additional contingency package of €3.6bn, the equivalent of 2% of GDP.

“While creditors fight this out, the political and social situation in Athens will deteriorate,” said Mujtaba Rahman, head of European analysis at risk consultancy Eurasia Group. “Time is running out for creditors to come to an agreement.”

The Greek prime minister, Alexis Tsipras, unexpectedly called Sunday’s vote before the conclusion of the negotiations in order to placate creditors and increase his bargaining power at Monday’s meeting of eurozone finance ministers.

In a first, the ministers are to discuss Greece’s debt load – which at more than 180% of GDP by far the highest in Europe – in addition to fiscal adjustment measures that could amount to 5% of GDP if contingency reforms are taken. The extra policies, as yet unspecified, will only be enacted if targets are not reached but, with its narrow three-seat majority, the Greek government has argued they will never get through parliament.

“Tsipras is looking to demonstrate to Greek voters that he and his government have done their part, and that the ball, namely that of debt relief, now lies squarely with the Europeans,” said Rahman.

“The subliminal message to creditors [in Sunday’s ballot] is therefore this: if you insist on contingency measures, you will end up with the collapse of my government and early elections.”

Along with Britain’s 23 June referendum on EU membership, that could end up being a “big headache” for Europe, he added.

International Monetary Fund: responsibilities and intervention in Europe

  • Euro area integration :

    The IMF pays considerable attention to progress in fostering integration within the euro area to ensure the effective operation of the monetary union. The first-ever EU wide Financial Sector Assessment Program (FSAP), in March 2013, argued for a Single Supervisory Mechanism (SSM). In addition, the IMF published papers making the case for a  Banking Union to strengthen the EU financial oversight and sever bank-sovereign linkages; a Fiscal Union to address gaps in the euro area’s architecture; and a more effective Economic Governance framework to better incentivize structural reforms.

  • Providing financing : 

Since the start of the global financial crisis, a number of emerging and advanced European countries have requested financial support from the IMF to help them overcome their fiscal and external imbalances. Access to IMF resources for Europe was provided through Stand-By Arrangements(SBA), the Flexible Credit Line (FCL), the Precautionary and Liquidity Line (PLL), and the Extended Fund Facility (EFF)

Most of the first wave of IMF-supported programs in 2008-09 was for countries in emerging Europe. The IMF also provided financing to Iceland when its banking system collapsed in late 2008. Starting in 2010, credit was also provided to euro area members – Greece, Ireland, Portugal and Cyprus. Credit outstanding to these members peaked in July 2014 at SDR 66.3 billion, but has declined to about SDR 29.7 billion as of September 16, 2016, due in part to early repayments by Portugal and Ireland

 As of September 16, 2016, the IMF had active arrangements with 6 emerging market countries in Europe (see table) with commitments totaling about EUR 33.9 billion or $38 billion. Total credit outstanding to European members was around EUR 49.4 billion or around US$ 55.4 billion.

  • EXAMPLE OF IMF’S INTERVENTION IN EUROPE: EURO CRISIS :

[youtubehttps://www.youtube.com/watch?v=mNhLotX8ss8[/youtube]

  • Assessing individual countries and the euro area :

The IMF provides economic analysis and policy advice as part of its standard surveillance process for individual advanced and emerging European economies that culminates in regular (usually annual) consultations with individual member countries and, if relevant, EU institutions such as the ECB and EC. The bilateral surveillance staff reports for these consultations include assessments of the economic outlook, and economic and financial stability.

In addition to its policy discussions with the 19 individual members of the euro area, IMF staff also holds consultations annually for the euro area as a whole, similar to those held for other currency unions. Here, IMF staff exchange views with counterparts from the ECB, the EC and other European institutions in a number of areas, including monetary and exchange rate policies and regional fiscal policies, financial sector supervision and stability, trade and cross-border capital flows, as well as structural policies. The final staff report includes an overall assessment of the economic outlook, external and fiscal position, and financial stability of the euro area as a whole. As part of the euro area  consultation, the IMF’s views on the economic outlook and policies of the euro area are presented to the Eurogroup, comprising the 19 finance ministers of the euro area.

 

http://www.imf.org/en/About/Factsheets/Europe-and-the-IMF

GROUP 20 (TOPIC 3) – FED FEDERAL DISCOUNT RATE

A Brief Introduction:

 

The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility–the discount window. The Federal Reserve Banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. All discount window loans are fully secured.

 

A tight link between the equilibrium rate and growth is common in theoretical models. The Ramsey model relates the safe real rate to a representative consumer’s discount factor and expected consumption growth. So, too, does the baseline New Keynesian model, whose generalization is central to much policy and academic work. Thus these familiar models tie the equilibrium rate to the trend rate of growth in consumption and thus the economy. In those models, shifts in trend growth will shift the equilibrium rate. I…)

In other words, the equilibrium rate may be time varying. Such time variation is at the forefront of the policy debate.

The federal funds rate over time:

The effective federal funds rate is the interest rate at which depository institutions—banks, savings institutions (thrifts), and credit unions—and government-sponsored enterprises borrow from and lend to each other overnight to meet short-term business needs. The target for the federal funds rate—which is set by the Federal Open Market Committee—has varied widely over the years in response to prevailing economic conditions.

 

Comparing The Fed Funds Rate With The Primary Credit (Discount) Rate Over The Past Decade

Much has been said about the 25 basis point Discount Rate rate hike announced on Thursday. Some suggest that this was fully expected, priced in, and that to the Fed this is merely a technicality which will not impact the Fed Funds rate in the least. Others, such as Macro-Man, take a decidedly more pragmatic approach, and ask the simple question: if it really means nothing, why do it? « He » also goes on to suggest some possible trade ideas as a result of this action: we suggest checking out his post for further information.

Instead of speculating what the Fed may or may not do (we doubt even the Fed knows – as Krugman points out, the Fed’s action could be a function simply of what political party is currently in charge), we have decided to show a simple comparison of the Discount Rate and the Fed Fund rate over the past 10 years (chart below). A few things jump out: before the crisis started in 2007, the spread between the Fed funds target rate (5.25%) and the primary credit, aka discount rate, which was a 6.25%, was 100 bps. The first notable action that the Fed did vis-a-vis the discount rate was to cut it by 50 bps to 5.25% on the morning of August 17, 2007 (in the heyday of the quant implosion when the market was gyrating like a drunken sailor courtesy of busted quant models at GS Alpha and other core quant shops). The spread was subsequently cut to 25 bps on March 16, 2008, when Bear was unceremoniously handed over to JP Morgan for pennies on the dollar. It remained there until Thursday, when it has again moved to 50 bps.

Looking at the chart demonstrates that there has been not one period over the past decade when there was a substantial widening divergence ever since January 9, 2003, when the current discount rate system (primary, secondary) took over the old system in which adjustment credit, extended credit and seasonal credit were the primary forms of crediting available to depository institutions (which in itself is of course an anachronism – only some of the current Discount Window institutions are, in fact, depository institutions, but that is the topic of another rant). We encourage readers to take a look at 12 C.F.R. Part 201 and Part 204, which was the final ruling for conversion to the current discount rate system, it is a rather interesting analysis (not to mention the fact that prior to 2003, the discount rate was inside the Fed Funds rate, thereby allowing banks to arb the Fed once again, only in a different manner). But in summation, any increase in the primary credit rate has always been followed in parallel, or shortly thereafter, by an increase in the fed funds rate. Just how different will this time be?

As Stone McCarty points out « It is also probably not an accident that the announcement of tomorrow’s discount rate hike (and next month’s shortening of loan maturities) comes just after the release of the January 26-27 FOMC minutes. The discussion in those minutes further serves to underscore the technical, as opposed to policy, nature of today’s move. » Yet we think that there is more to this, as the Fed will sooner or later be forced to come face to face with a broken monetary system, in which it stands to lose all control should it not tighten in advance of a potential monetary supply explosion which would lead not only to hyperinflation (should the Fed gets its way, and consumers finally start borrowing), but also to full loss of the Fed’s control over the American monetary system. Keep a close eye on this chart: we are confident that the Fed Funds will be hiked before there is another unsymmetrical increase in the discount rate. Alas, the economy is far too weak to sustain a tightening posture at this point. As to what kind of aberrations in the market this action could lead to, we will investigate in the coming days and weeks. Even though the point of this work is to analyse the FED federal discount rate in those past 10 years, it is important to go further back to understand what happened before 2007. Between May 2000 and December 2001, the rate was decreased 11 times, falling from 6,5% to a low 1,75%. This created a flow of cheap liquidity now available for banks to borrow to households, thus laying the foundations of what would be know as the subprime crisis in 2008.

It became apparent in August 2007 that the financial market could not solve the subprime crisis on its own and the problems spread beyond the United State’s borders. The interbank market froze completely, largely due to prevailing fear of the unknown amidst banks. Northern Rock, a British bank, had to approach the Bank of England for emergency funding due to a liquidity problem. By that time, central banks and governments around the world had started coming together to prevent further financial catastrophe.

The subprime crisis’ unique issues called for both conventional and unconventional methods, which were employed by governments worldwide. In a unanimous move, central banks of several countries resorted to coordinated action to provide liquidity support to financial institutions. The idea was to put the interbank market back on its feet. The Fed started slashing the discount rate as well as the funds rate, but bad news continued to pour in from all sides. Lehman Brothers filed for bankruptcy, Indymac bank collapsed, Bear Stearns was acquired by JPMorgan Chase (NYSE:JPM), Merrill Lynch was sold to Bank of America, and Fannie Mae and Freddie Mac were put under the control of the U.S. federal government.

By October 2008, the Federal funds rate and the discount rate were reduced to 1% and 1.75%, respectively. Central banks in England, China, Canada, Sweden, Switzerland and the European Central Bank (ECB) also resorted to rate cuts to aid the world economy. But rate cuts and liquidity support in itself were not enough to stop such a widespread financial meltdown.

The U.S. government then came out with National Economic Stabilization Act of 2008, which created a corpus of $700 billion to purchase distressed assets, especially mortgage-backed securities. Different governments came out with their own versions of bailout packages, government guarantees and outright nationalization. The bill was, and still is highly controversial; it was seen by many as a ‘bailout’, and affected much of the American population through greater taxes. This has also caused a general distrust of banks, with many considering them ‘too big to fail.’

The Equilibrium Real Funds Rate: Past, Present and Future, by James D. Hamilton, University of California at San Diego and NBER – March 1, 2015

 

Sources:

 

www.federalreserve.gov

 

The 2007-08 Financial Crisis In Review | Investopedia http://www.investopedia.com/articles/economics/09/financial-crisis-review.asp#ixzz4a0WNxVFk

http://www.investopedia.com/articles/economics/09/financial-crisis-review.asp

Investopedia on Facebook

http://www.zerohedge.com/article/comparing-fed-funds-rate-primary-credit-discount-rate-over-past-decade

 

Group 16–The Fed’s discount rate of the past 10 years

Why Interest Rates Have Been Low for So Long (GS, JPM)

By Sean Ross | June 8, 2016 — 4:00 PM EDT

Interest rates in the United States are extremely low by historical standards. They have remained low for years, fixed by frustrated central bankers dedicated to performing monetary experiments on the economy. The Fed normally offers academic and theoretical explanations for super-low interest rates, but practical reality and political interests also play their parts.

Very Low for a Very Long Time

As of May 19, 2016, the effective federal funds rate was at 0.37%, almost exactly midway inside the Federal Reserve’s target range of 0.25 to 0.5%. A 0.37% nominal rate is low, yet this is the highest realized rate since late 2008. That is when the Fed established a target range and moved away from a specifically set fed funds rate. The Fed used to peg overnight loans at 1, 5 or 15%. Starting in December 2008, the Fed moved from a 1% set rate to a target rate between zero and 0.25%.

The Fed had never set interest rates at 0% before, as it worried that this might panic money markets. Money market fees would almost certainly exceed paid interest with a 0% fed funds rate, scaring away participants in a very large market. The new target range increased flexibility to coordinate with money market dynamics.

The Fed’s Zero Interest Rate Policy and Excess Reserves

Ben Bernanke, then chairman of the Fed, justified the zero interest rate policy (ZIRP) in 2008 as a mechanism for boosting spending, borrowing and investment. This is classic Keynesian monetary theory: discourage savers by lowering rates, forcing them to spend, encourage spenders to spend even more through cheap borrowing costs and drive investments from safer assets, such as Treasurys and certificates of deposit (CDs), into riskier equities or junk bonds.

The ZIRP era of 0 to 0.25% lasted seven years, between December 2008 and December 2015, until the Federal Open Market Committee (FOMC) finally increased its target fed funds rate. The Fed emphasized, « The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2% inflation. »

Seven years of ZIRP also coincided with a brand new policy; the Federal Reserve began paying interest to big banks if they parked excess reserves at the Fed bank. In 2015, 93% of Fed bank reserves were excess. The Fed paid more than $100 million to Goldman Sachs Group Inc.. (NYSE: GS) in 2015, while JPMorgan Chase & Co. (NYSE: JPM) received more than $900 million. When the Fed hiked the rate range from 0.25 to 0.5%, it also doubled the rate paid on excess reserves.

Keynesian theory says more spending and more debt are stimulative, thanks to the circular flow model of the economy. If this is the reasoning behind ZIRP, why pay interest to banks on excess reserves? After all, the Fed made it more profitable for banks not to make overnight loans to each other. It was also far safer to not make loans to the public or invest in a speculative market.

The Fed offered two explanations for interest payments on excess reserves. The first explanation was that it worried that too much bank lending would make the money supply hyperactive, triggering very high inflation; and second, that it wanted a firmer, non-zero floor on short-term interest rates. Ostensibly, this could have been better accomplished by raising the target rate from 0.25 to 0.5% in 2008, rather than from 0% to 0.25%.

Practical and Political Reality

There are more practical and less romantic explanations for low rates and excess reserve payments, but they call into question the Fed’s oft-touted independence. The first explanation surrounds the U.S. government’s enormous debt. By the fourth quarter of 2015, nearly two-thirds of the national debt was serviced by government bonds with a duration under one year. Ultra-low interest rates help the Treasury afford its bills. ZIRP also inflates the stock market, something sitting politicians and wealthy investors desire.

Second, the Federal Reserve has a very cozy relationship with major banks. Private banks choose six of the nine directors for the Federal Reserve banks. A rotating employment door exists between many Fed branches and major financial institutions. In 2011, Congress forced a partial audit of the Fed and found $16 trillion in previously unknown allocations to corporations and foreign banks. The Fed has heavily resisted calls for further audits.

Results Have Been Poor

Results from easy money, debt and spending policies have been underwhelming, regardless of the reasons. Empirically, the policies employed by the Federal Reserve were unsuccessful by their own standards and stated goals, though proponents offer a counterfactual defense along the lines of « things might have been even worse » without these efforts.

After nearly a decade of ultra-low interest rates, buoyed by enormous government deficit spending, the U.S. economy found itself with the slowest recovery in its history. Policymakers have been very hesitant to change, however, and very few expect a different course anytime soon. The net effects for average Americans have been disappointing, but theoretical, practical and political pressures for low rates are still in place.

Janet Yellen and the Fed Raise Interest Rates for First Time in 2016

By Chris Matthews, Dec. 4th, 2016

The Federal Reserve’s interest-rate setting committee on Wednesday said that it would raise interest rates by a quarter of a percentage point to between 0.50% and 0.75%. It is only the second time the U.S. central bank has raised interest rates since 2006, when the economy was yet to be hit by the financial crisis.

The move was widely expected, as a falling unemployment rate and rising wages signaled to the Federal Open Market Committee (FOMC) members—the Fed’s interest rate policy-making body—and the market that overall price increases would soon meet and potentially surpass the central bank’s goal of 2% per year. Markets in particular have begun to change their minds on the topic of inflation. The election of Donald Trump has convinced many that deregulation of business and higher government deficits will lead to faster growth and rising prices.

As the chart above shows, differences between the yields on U.S. government bonds and inflation-protected bonds indicate that investors believe higher inflation will soon be on the way. That said, inflation expectations remain well below historical norms, and even below levels seen a few years ago when the economy was weaker. This reinforces the Fed’s slow approach to further increases. « The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate, » the Fed’s statement reads. « The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. »

The decision to raise rates was unanimous, indicating that Janet Yellen has been successful in satisfying both FOMC members who want rates to go up faster to blunt inflation and those who believe interest rates should be kept low to nurse the convalescent economy.

Though the Fed appears to still want to take things slow, there were signs it could move faster if the economy continues to improve. Data released along with the Fed announcement showed that the majority members of the FOMC now forecast three rate hikes in 2016, up from two in September. Shortly after the meeting, bond yields rose on the prospect of faster rising interest rates in 2017.

On the other hand, stock markets fell shortly after the decision, underscoring the general uncertainty among market participants as to whether the Fed is striking the right balance between heading off inflation and providing adequate stimulus for the economy.

Fed Might Raise Rates Relatively Soon

By Joana Taborda, Feb. 2nd, 2017
The US economy is expected to continue to expand at a moderate pace and wait too long to raise rates would be unwise, Fed Chair Yellen said in prepared remarks to the Congress. However, the economic outlook and fiscal policy face uncertainty and monetary policy is not on a preset course thus any changes will depend on incoming data, Fed Chair added.
Excerpts from Fed Chair Yellen Testimony Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C. February 14, 2017:
My colleagues on the FOMC and I expect the economy to continue to expand at a moderate pace, with the job market strengthening somewhat further and inflation gradually rising to 2 percent. This judgment reflects our view that U.S. monetary policy remains accommodative, and that the pace of global economic activity should pick up over time, supported by accommodative monetary policies abroad.
As always, considerable uncertainty attends the economic outlook. Among the sources of uncertainty are possible changes in U.S. fiscal and other policies, the future path of productivity growth, and developments abroad.
At its December meeting, the Committee raised the target range for the federal funds rate by 1/4 percentage point, to 1/2 to 3/4 percent. In doing so, the Committee recognized the considerable progress the economy had made toward the FOMC’s dual objectives. The Committee judged that even after this increase in the federal funds rate target, monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.
At its meeting that concluded early this month, the Committee left the target range for the federal funds rate unchanged but reiterated that it expects the evolution of the economy to warrant further gradual increases in the federal funds rate to achieve and maintain its employment and inflation objectives. As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession. Incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to 2 percent, consistent with the Committee’s expectations. At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.
That said, the economic outlook is uncertain, and monetary policy is not on a preset courseFOMC participants will adjust their assessments of the appropriate path for the federal funds rate in response to changes to the economic outlook and associated risks as informed by incoming data. Also, changes in fiscal policy or other economic policies could potentially affect the economic outlook. Of course, it is too early to know what policy changes will be put in place or how their economic effects will unfold. While it is not my intention to opine on specific tax or spending proposals, I would point to the importance of improving the pace of longer-run economic growth and raising American living standards with policies aimed at improving productivity. I would also hope that fiscal policy changes will be consistent with putting U.S. fiscal accounts on a sustainable trajectory. In any event, it is important to remember that fiscal policy is only one of the many factors that can influence the economic outlook and the appropriate course of monetary policy. Overall, the FOMC’s monetary policy decisions will be directed to the attainment of its congressionally mandated objectives of maximum employment and price stability.

http://www.investopedia.com/articles/markets/060816/us-interest-rates-why-rates-have-been-low-long-time-gs-jpm.asp

http://fortune.com/2016/12/14/fed-interest-rates-6/

http://www.tradingeconomics.com/articles/02142017152714.htm

GROUP 5: Federal discount rate

Firstly, what’s means exactly the interest rate and how it’s used?

  • Firstly, the interest rate may borrow funds directly from a Federal Reserve bank. Banks whose reserves dip below the reserve requirement set by the Federal Reserve’s board of governors use that money to correct their shortage. The board of directors of each reserve bank sets the discount rate every 14 days. It’s considered the last resort for banks, which usually borrow from each other.
  • The Fed uses the discount rate to control the supply of available funds, which in turn influences inflation and overall interest rates. The more money available, the more likely inflation will occur. Raising the rate makes it more expensive to borrow from the Fed. That lowers the supply of available money, which increases the short-term interest rates. Lowering the rate has the opposite effect, bringing short-term interest rates down.

 

Furthermore, the Federal Reserve has done just what it signaled it would do: Nothing. At the end of a two-day meeting on Wednesday, the Fed’s rate-setting committee left the target for the federal funds rate unchanged at 0.50 percent to 0.75 percent. That decision is a reprieve, perhaps temporarily, for interest rates on home equity lines of credit and credit cards, which jumped after the Fed raised its benchmark rate in December 2016.

Policymakers noted in a statement that labor conditions and household spending look positive, and that « measures of consumer and business sentiment have improved of late, » perhaps a nod to the new Trump administration. Although the central bankers offered no clues as to when the next rate hike might happen, they bolstered language in their statement suggesting they would be looking closely for evidence inflation is picking up.

« The Fed knows the inflation numbers are going to start looking different; the key is if inflation moves up any faster than the Fed expects, » says Greg McBride, CFA, Bankrate’s chief financial analyst. « If that happens, the Fed has to raise interest rates more aggressively. Both the bond market and the stock market will take it on the chin. »

Still, the move to stand pat is unsurprising. This was the first gathering since the December meeting, when the Federal Open Market Committee raised rates for the first time in a year and just the second in the last decade. It was also the first meeting since President Donald Trump, who has vowed to shake up employment and tax policy, took office.

« I don’t see the justification for another increase at this time, right after increasing a month ago, » says Alan MacEachin, chief corporate economist at Navy Federal Credit Union. « There is a significant amount of uncertainty out there with regard to the magnitude, scope and potential impact of any Trump administration fiscal plan. All is up in the air. »

Increase set for March?

The Fed next meets March 14-15, where speculation already has begun about whether that meeting will produce the first rate hike of 2017. The March meeting also will mark the first of the year in which Federal Reserve Board Chair Janet Yellen is expected to hold a post-meeting press conference. The CME Group FedWatch Index suggests there’s a roughly 20 percent chance the Fed will increase rates at its next meeting. The probability improves to close to 50 percent that by July the FOMC will have increased rates by a quarter percentage point.

Since the Fed’s December meeting, central bankers repeatedly have stressed they intend to boost rates gradually, forecasting three quarter-point hikes for the year spread out over eight meetings.

But any rate changes will be predicated on several things:
1.) Signs that economic conditions continue to improve.
2.) An uptick in inflation.
3.) Better projections about how the Trump administration’s planned stimulus program and trade policies will impact growth.

McBride doubts the Trump administration will have adequately answered its fiscal policy questions in time for the next Fed meeting.

« They’re keeping their options open, » McBride says of FOMC members. « Realistically, I don’t see how we get any clarity on fiscal policy changes until mid-March. »

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Indeed, the economy continues to show modest gains, with the U.S. unemployment rate standing at 4.7 percent — or close to full employment — the inflation rate has ticked up to 1.7 percent, close to the Fed’s 2 percent goal.

That’s the good news. The bad news is the overall economy grew just 1.6 percent in 2016, the slowest since 2011.

« The Fed is likely to assess incoming data to see if further rate increases are warranted, but they’re not going to do it until the data confirms the move, » MacEachin says. « The last two increases have been widely signaled in advance, and I don’t think they’re going to be any different. They’re not going to want to move until the markets are mostly expecting this. »


Read more: http://www.bankrate.com/rates/interest-rates/federal-discount-rate.aspx#ixzz4ZulZ1zVb
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Read more: http://www.bankrate.com/financing/federal-reserve/fed-offers-no-surprises-no-rate-hike/#ixzz4ZuoljRH0
Follow us: @Bankrate on Twitter | Bankrate on Facebook

Group 12 – Brexit. How HSBC and Prudential will react?

After the referendum on 23 June 2016, where 52% of the population voted for leaving the EU, the government of the UK started the procedures to withdraw. By 2019 the UK should finally quit the EU. It brings new threats for the UK businesses and citizens which operate in Europe. One of them are HSBC and Prudential

HSBC heading into uncertainty after Brexit

It is a British multinational banking and financial services holding company headquartered in London, United Kingdom. It is the world’s sixth largest bank by total assets with total assets of US$2.410 trillion (as of December 2016).

Strategy:

  • HSBC is planning to move up to 1,000 staff from the UK to Paris due to Britain’s narrow vote to leave the EU. The leading global bank, which has assets worth $2.6 trillion (£1.9 trillion), has said it will relocate the jobs if the UK leaves the single market, a possible outcome of post-Brexit negotiations, according to the BBC.

It is possible the UK could leave the EU but remain a part of the European Economic         Area (EEA), in a model similar to that of Norway, Iceland and Liechtenstein.

  • HSBC to close 62 UK branches as judges stall Brexit vote

The high street bank HSBC has announced that it will shut down 62 branches across the UK on the same day the Supreme court made its decision on the Brexit vote.

The enormous cuts to the branch network could trigger up to 180 job losses, but the bank said it would try and redeploy staff where possible.

  • Concentrate on Asia

Douglas Flint said ‘Concern over the sustainable level of economic growth in China was the most significant feature of the first quarter and, as this moderated, uncertainty over the upcoming UK referendum on membership of the European Union intensified.’

The bank saw demand for credit investment fall as a consequence of uncertainty during the first half of the year, and a chill in equity market activity was exacerbated by factors including a crash in the price of oil.

Analysts said the bank will be more concerned about the impact of China, rather than the EU referendum, as Asia accounted for 83.5 per cent of HSBC’s global profits last year.

The United Kingdom’s Brexit vote has major implications for the insurance and financial sectors, considering their investment yields and income are likely to fall due to the pressure on interest rates. Prudential ‘s ( PRU ) stock fell over 7% following the Brexit vote on June 23 amid increased economic uncertainty and fears of falling investment income owing to subdued interest rates and falling yields.

The new head of Prudential’s M&G fund management arm, Anne Richards, has said it is considering shifting more funds to Dublin and Luxembourg after the Brexit vote.

Richards, who joined in June from Aberdeen Asset Management, said a tenth of M&G’s £255.4bn assets under management were from EU clients. “It’s a very important client base for us.”

Investors spooked by the EU referendum have been withdrawing their money, causing a 10% drop in M&G’s first-half profits. Richards said the firm was considering expanding its Dublin base, where it began building a funds business shortly after the Brexit vote, to maintain access to the EU’s single market.

“What we are trying to do … is give ourselves options so we are in a position to react and adapt,” she said. “Dublin and Luxembourg would potentially be options for us if we decide we want to have additional funds domiciled in Europe.”

This will depend on how the UK’s Brexit negotiations with the EU pan out. Under current rules, investment managers need a base in the EU to sell their funds to continental European retail investors.

Mike Wells, Prudential’s chief executive, said there was no question of leaving the UK behind after the country’s vote to quit the EU. “We like the market, we are succeeding here,” he said, adding that “at group level the immediate impact will not be material”. Prudential generates 80% of its sales and 70% of its profits outside Europe.

M&G’s operating profits dropped 10% to £225m in the first six months of the year, as investors pulled out nearly £7bn in the run-up to the EU referendum. The fund outflows are now slowing, after the Brexit vote triggered a spike in withdrawals.

Sources:

http://www.nasdaq.com/article/how-can-brexit-impact-prudential-cm643996#ixzz4Y0BGwaHX

https://www.theguardian.com/business/2016/aug/10/prudential-may-relocate-m-and-g-funds-brexit-vote

http://www.independent.co.uk/news/uk/home-news/brexit-hsbc-economy-banks-eu-referendum-latest-jobs-single-market-effects-a7104351.html

http://www.dailystar.co.uk/news/latest-news/581495/HSBC-brexit-ruling-supreme-court-bank-UK

Group 10: The reaction and adaptation of Prudential and HSBC after the Brexit announcement

    According to the U.K. newspaper « independent », HSBC is planning to transfer a thousand jobs of jobs from London to Paris because of the Brexit. Indeed, Goldman Sachs warned that it may have to “restructure” its UK operations which currently employ about 6,000 people. So, 1000 jobs at the bank’s offices in London are involved with products covered by EU legislation, which probably need to move to France when the UK leaves the single market.

The CEO of HSBC, Stuart Gulliver said that among the various domain of banking in the UK, it is the investment sector in world markets that would be affected by the exit of the unique market confirmed by the British Prime Minister. Gulliver emphasized that the sector that is expected to be displaced concerns about 20% of the revenues of its investment bank based in UK, adding that foreign exchange, bond and equity markets should not be displaced.

 

   Apart from its market activities, HSBC has two other entities in the United Kingdom, which it will not modify despite Brexit: its global headquarters, which HSBC has decided to maintain in London, and its retail bank specifically responsible for British customers.

 These statements by the Director of HSBC came after the speech of British Prime Minister Theresa May. After several speculations that London would seek to make a « soft Brexit », Theresa May finally pronounced itself for a « hard Brexit” and a complete exit of the single market which pushed HSBC to move on Paris.

   This job transfer results from a prudential strategy and can be explain by the fact that the U.K.’s money, the pound, will soon loose a lot of value and so, the great  Britain will face a strong inflation at the end of the following year. HSBC forecasted that inflation could increase by 4 per cent within 18 month after the pound sterling’s Brexit induced collapse.
    The FTSE 100 dropped into the red after the referendum. Its retreat was short lived and Brexit backers have been able to point to its recovery as evidence of Britain’s strength. That’s disingenuous at best. The index is dominated by big multinational companies that make most of their money overseas: mining companies, banks and pharmaceutical outfits with profits largely denominated in dollars or dollar linked currencies. They are thus shielded from the Brexit beat down. The UK is only a small component of their business.

   HSBC is not the only company that wants to move its business. These relocations will be made in order to always have access to the single market of the European Union after Britain announced that it is out of the EU.

Prudential, the largest insurer of UK, said some operations of London such as the M & G fund management division and asset management business should be moved to Dublin or Luxembourg.

One tenth of Prudential M & G’s assets under management, amounting to € 255.4 billion, comes mainly from customers in the EU.

The brexit pushed British insurance to relocate following stock prices that fell sharply.

References: https://www.google.fr/amp/www.independent.co.uk/news/business/news/brexit-latest-news-hsbc-bank-move-20-per-cent-fifth-london-banking-operations-paris-chief-executive-a7532711.html%3Famp?client=safari

http://www.telegraph.co.uk/business/2016/06/30/hsbc-plays-down-chance-of-moving-1000-jobs-out-of-london-on-brex/

http://www.bbc.com/news/business-36629745

http://www.independent.co.uk/news/business/news/brexit-latest-news-eu-referendum-prudential-mg-insurance-fund-management-assets-a7183021.html

https://www.theguardian.com/business/2016/aug/10/prudential-may-relocate-m-and-g-funds-brexit-vote

 

 

Group 8 – Banks in our Pocket : The new turn of the banks!

  • Banking innovation, services and new technology: how are modern banks attracting new customers?

According to the newspaper “Le Parisien” the Banks compete with new ideas and innovations in order to attract customers whose expectations have changed. (http://www.leparisien.fr/economie/business/banques-toutes-les-innovations-numeriques-16-02-2015-4538197.php).

Indeed, it is a brand new digital turning point that the banks decide to adopt.

There is no longer notion of liquidity. The money is now judged as obsolete.

All the heart of the financial world is now revolutionized and attached to digital.

To attract new customers – customers who are always linked to evolution, innovation, development and, above all, more mobile customers than ever before – banks have a duty to offer exclusive, futuristic and completely revolutionary services.

The bank today, as defined by Phillip Jean, has a digital duty (http://www.jphilippe.com/le-devoir-digital/).

Phillip Jean, for whom « technological evolutions (…) should upset our relationship with money » think that  the end of the reign of the banks will arrive if they delay to revolutionize and perfect their services. There is thus a « strategic interest » for banks to innovate.

(http://www.strategie-aims.com/events/conferences/6-xviieme-conference-de-l-aims/communications/1626-peut-on-parler-dinnovation-dans-le-milieu-bancaire-le-cas-dune-banque-de-detail/download)

Competition between banks and banking services reinforces the fight for innovation more and more harshly.

Furthermore, many services have appeared in recent years for 20 years. A banking activity that was until then mainly focused on a traditional link with its clients, a real relationship between a bank agent and a client, tends to disappear.

In fact, customers no longer go to a bank. Instead of this, they establish all their shares from their cell phones. « The progress of NICTs has revolutionized the functioning of banks »

(http://www.strategie-aims.com/events/conferences/6-xviieme-conference-de-l-aims/communications/1626-peut-on-parler-dinnovation-dans-le-milieu-bancaire-le-cas-dune-banque-de-detail/download)

This digital development can exceed the link that customers maintain with their banks.

Moreover, banks act as intermediaries between customers and digital payment / withdrawal systems such as Visa and MasterCard tend to disappear

According to Les Echos, « MasterCard and Visa announce their digital wallet »

(https://business.lesechos.fr/directions-numeriques/digital/mobile-et-nouveaux-ecrans/0202583583451-mastercard-et-visa-annoncent-leur-portefeuille-digital-5039.php)

Therefore, « Online banks and mutual benefit from this mobility to the detriment of commercial banks« .

The attractiveness of banks is the main reason for the development of this mobility. According to Les echos, the main reasons that a customer decides to move from one bank to another:

  • 29%: the quality of  the service is more advanced, more elaborate (« availability and responsiveness of advisors ») for the prices charged by the bank (value for money)
  • 44%: daily banking fees
  • 15%: the mortgage rate
  • 11%: return on savings products

(http://www.lesechos.fr/21/05/2015/lesechos.fr/02184003740_2-millions-de-clients-changent-de-banque-chaque-annee.htm#Tq2LbUJOxiTxykC3.99)

How do banks adapt to our existing unsatisfied needs? And what are the innovations that reflect, unbeknownst to us, the world to which we belong?

(http://www.leparisien.fr/economie/business/banques-toutes-les-innovations-numeriques-16-02-2015-4538197.php)

A large number of innovations can be identified, undoubtedly the bank by smartphone is the most known of them, this also shows that banks have understood the main issue. ‘Today it is possible to open a bank account from your smartphone’. All the banking services are now gathered behind a mobile banking applications including bank transfers, secure online payments, videoconferencing with your banking advisor, scholarship, documents and contracts, etc. Contactless payment is the best mirror of our generation with a prompt payment that tends to save time to customers.

However, digital development goes with some security issues and the development of cybercrime in the 21st century. To fight effectively and radically against this new threat, banks are taking on their responsibilities by financing for your security and safety, by introducing new methods and techniques that limit the risk of being hacked including dynamic cryptogram and biometric security, the most simplistic and safe authentication solution possible .

Ultimately, competition and new entrants are the main principle that affected banks to invest in innovation, they see it as a way to enter new market with a target market shaped by digitalization.