Fed Ends Third Round of QE as Planned; Sees 'Solid Job Gains' with Lower Unemployment Oct 29, 2014 02:01PM

(Updated - October 29, 2014 2:01 PM EDT)

Fed ends third round of QE as planned. Sees 'solid job gains' with lower unemployment.

Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee's longer-run objective. Market-based measures of inflation compensation have declined somewhat; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.

The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Loretta J. Mester; Charles I. Plosser; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Narayana Kocherlakota, who believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset purchase program at its current level.


Fed Ends Third Round of QE as Planned; Sees 'Solid Job Gains' with Lower Unemployment Oct 29, 2014 02:01PM

(Updated - October 29, 2014 2:01 PM EDT)

Fed ends third round of QE as planned. Sees 'solid job gains' with lower unemployment.

Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee's longer-run objective. Market-based measures of inflation compensation have declined somewhat; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.

The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Loretta J. Mester; Charles I. Plosser; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Narayana Kocherlakota, who believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset purchase program at its current level.


ECB Stress Test Shows EUR 25B Shortfall at 25 European Banks (DB) (NBG) (IRE) Oct 27, 2014 09:24AM

ECB’s in-depth review shows banks need to take further action

  • Key results of comprehensive assessment of 130 largest euro area banks:

    • Capital shortfall of €25 billion detected at 25 participant banks

    • Banks’ asset values need to be adjusted by €48 billion, €37 billion of which did not generate capital shortfall

    • Shortfall of €25 billion and asset value adjustment of €37 billion implies overall impact of €62 billion on banks

    • Additional €136 billion found in non-performing exposures

    • Adverse stress scenario would deplete banks’ capital by €263 billion, reducing median CET1 ratio by 4 percentage points from 12.4% to 8.3%

  • Exercise delivers high level of transparency, consistency and equal treatment

  • Rigorous exercise is milestone for the Single Supervisory Mechanism starting in November


The European Central Bank (ECB) has today published the results of a thorough year-long examination of the resilience and positions of the 130 largest banks in the euro area as of 31 December 2013.

“This unique and rigorous exercise is a major milestone in the preparation for the Single Supervisory Mechanism, which will become fully operational in November,” said Vítor Constâncio, Vice-President of the ECB. “This unprecedented in-depth review of the largest banks’ positions will boost public confidence in the banking sector. By identifying problems and risks, it will help repair balance sheets and make the banks more resilient and robust. This should facilitate more lending in Europe, which will help economic growth.”

The comprehensive assessment—which consisted of the asset quality review (AQR) and a forward-looking stress test of the banks—found a capital shortfall of €25 billion at 25 banks. Twelve of the 25 banks have already covered their capital shortfall by increasing their capital by €15 billion in 2014. Banks with shortfalls must prepare capital plans within two weeks of the announcement of the results. The banks will have up to nine months to cover the capital shortfall.

The AQR showed that as of end-2013 the carrying values—or book values—of banks’ assets need to be adjusted by €48 billion, which will be reflected in the banks’ accounts or prudential requirements. Furthermore, using a standard definition for non-performing exposures (any obligations that are 90 days overdue, or that are impaired or in default), the review found that banks’ non-performing exposures increased by €136 billion to a total of €879 billion.

The comprehensive assessment also showed that a severe scenario would deplete the banks’ top-quality, loss-absorbing Common Equity Tier 1 (CET 1) capital—the measure of a bank’s financial strength—by about €263 billion. This would result in the banks’ median CET1 ratio decreasing by 4 percentage points from 12.4% to 8.3%. This reduction is higher than in previous similar exercises and is a measure of the rigorous nature of the exercise.

“This exercise is an excellent start in the right direction. It required extraordinary efforts and substantial resources by all parties involved, including the euro area countries’ national authorities and the ECB. It bolstered transparency in the banking sector and exposed the areas in the banks and the system that need improvement,” said Danièle Nouy, Chair of the Supervisory Board. “The comprehensive assessment allowed us to compare banks across borders and business models, and the findings will enable us to draw insights and conclusions for supervision going forward.”

Since the announcement of the exercise in July 2013, the largest 30 participating banks have undertaken various measures, including capital raising to an amount of €60 billion, to strengthen their balance sheets by a total of more than €200 billion. These frontloaded measures are part of the overall successful outcome of the exercise. Some of the measures taken in 2013 reduced the insufficiencies detected by the comprehensive assessment; some measures adopted in 2014 may count toward the coverage of the capital shortfall.

Comprehensive assessment

The comprehensive assessment—which joined up the AQR and the stress test components—was aimed at strengthening banks’ balance sheets, enhancing transparency and building confidence. The 130 banks that were examined accounted for assets of €22 trillion, which represents 82% of total banking assets in the euro area. It was performed under the current EU Capital Requirements Regulation and Directive (CRR/CRDIV), which include certain national discretions. These national discretions can lead to differences in, for example, the definition of capital. These differences will gradually diminish over the coming years as transitional arrangements in the relevant regulation are phased out. The ECB recognises the need to improve the consistency of the definition of capital and the related quality of capital. ECB Banking Supervision will address this as a matter of priority.

AQR

The AQR conducted by the ECB and national competent authorities (NCAs) examined whether assets were properly valued on banks’ balance sheets as on 31 December 2013. It made banks comparable across national borders by applying common definitions for previously diverging concepts and a uniform methodology when assessing balance sheets. More than 6,000 experts across the Single Supervisory Mechanism examined more than 800 individual portfolios in detail, among other things thoroughly analysing the quality of the credits of 119,000 debtors of banks. The review provides the ECB with substantial information on the banks that will fall under its direct supervision and will help its efforts in creating a level playing field for supervision in the future.

Stress test

The stress test was performed by the participating banks, the ECB and NCAs in cooperation with the European Banking Authority (EBA). The EBA also designed the stress test methodology, while the adverse scenario was developed by the European Systemic Risk Board (ESRB) in cooperation with the NCAs, the EBA and the ECB. Banks were required to maintain a minimum CET1 ratio of 8% under the baseline scenario (as for the AQR) and a minimum CET1 ratio of 5.5% under the adverse scenario. The stress test is not a forecast of future events, but a prudential exercise to test banks’ ability to withstand weakening economic conditions; participating banks were encouraged to make conservative projections, which were challenged according to strict quality assurance requirements. A novel element was that information acquired from the AQR was incorporated in banks’ balance sheet starting points and in related stress test projections.

Bank-by-bank disclosures

In the 130 individual bank templates, the ECB distinguishes between capital shortfalls identified in the AQR and those identified under the baseline and adverse scenarios of the stress test. In the comprehensive assessment, the two items are joined up. The templates also provide important additional information on each bank, such as the issuance of capital instruments already undertaken in 2014. The full results of the stress test are also published by the EBA. The aggregate report on the full outcome of the exercise for all banks can be found at: http://www.ecb.europa.eu/ssm/assessment/html/index.en.html.


David Tepper Recommends Shorting Euro at RH Conference Oct 21, 2014 03:48PM

David Tepper of Appaloosa Management recommended shorting the euro at today's Robin Hood conference, according to Bloomberg.


Bank of England says CHAPS electronic payment system is working again Oct 20, 2014 11:08AM

Bank of England says CHAPS electronic payment system is working again, according to Bloomberg headlines.


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