Christopher Rugaber

States strain to carry out Trump order on unemployment aid

RICHMOND, Va. (AP) — Governors and state labor department officials were scrambling Aug. 10 to determine whether they could implement President Donald Trump’s executive order to partially extend unemployment assistance payments to millions of Americans struggling to find work in the pandemic-scarred economy. Trump’s order allocates $44 billion in federal dollars from FEMA’s Disaster Relief Fund to boost unemployment aid for the jobless and calls on states to kick in roughly $15 billion. The Trump administration says states can pull from federal coronavirus relief funds already distributed to states earlier in the crisis. But some states have already fully allocated that money for other critical needs. Trump’s actions on unemployment insurance and other relief aid were another expansive flexing of presidential authority that could usurp Congress’s power to approve federal spending. The order extends additional unemployment payments of $400 a week to help cushion the economic fallout of the pandemic. Congress had approved payments of $600 a week at the outset of the outbreak, but those benefits expired Aug. 1 and Congress has been unable to agree on an extension. Many Republicans have expressed concern that a $600 weekly benefit, on top of existing state benefits, gives people an incentive to stay unemployed. The White House described the $400 level as an appropriate compromise, and top administration officials including Vice President Mike Pence on Aug. 10 urged governors in a private call to pressure Democratic lawmakers to come to a deal. But Democrats have dismissed Trump’s executive order as a hollow political gesture — not to mention legally questionable — that could ultimately leave millions of Americans without much-needed aid. Several governors said their states simply couldn’t afford to chip in a quarter of the cost, even with the relief money previously approved by Congress. That share would cost California $700 million per week, Gov. Gavin Newsom said Aug. 10. The state has already allocated 75 percent of the money that came from an earlier congressional package. “There is no money sitting in the piggy bank,” Newsom said. “It simply does not exist.” As Democrats grumbled that Trump’s executive order was unworkable, top administration officials contended that Trump was taking action while House Speaker Nancy Pelosi, D-Calif., and Senate Minority Leader Chuck Schumer, D-N.Y., were sitting on the sidelines — even though the president has not taken any active role in the negotiations. Trump also took to Twitter on Aug. 10 to ridicule Sen. Ben Sasse, calling him a “RINO” — a Republican in name only — after the Nebraska Republican called Trump’s use of executive orders “unconstitutional slop.” White House press secretary Kayleigh McEnany, meanwhile, asserted that the orders were “entirely within the executive capacity of the president” and pointed to statutes she said supports the legal justification to reallocate funding in times of emergency. Some state officials, both Democrats and Republicans, said Trump’s order could prove to be difficult to implement for technical reasons. In Virginia, secretary of finance Aubrey Layne said that timing of the distribution of funds could be an issue. He noted FEMA often takes several months to reimburse emergency costs due to a hurricane, but have reimbursed personal protective equipment-related costs in several weeks. Andrew Stettner, senior fellow at The Century Foundation and an expert on unemployment aid, said that it could take several weeks for jobless claimants to see the enhanced benefit given the states’ difficulties in updating their unemployment systems. “No one’s getting a payment from this in August. If they’re lucky, they’ll get it in September,” he said. The $44 billion that the Trump administration has set aside for the unemployment aid would run out in five or six weeks, Stettner added. State unemployment agencies struggled badly this spring and summer under the crush of tens of millions of applications, and in most cases took weeks to implement the extra $600 payment after it was first approved. For many jobless Americans, the enhanced benefit has been the difference-maker in keeping their heads above water financially. “If I did not have (the $600), I probably would not have been able to make it the past two months,” said Rosa Howell-Thornhill, 62, a freelance audio technician from South Orange, N.J., who has seen work opportunities dry up. In Ohio, the benefit might not take effect for weeks as officials sort out guidance from the U.S. Department of Labor for implementing it, said Dan Tierney, a spokesman for Gov. Mike DeWine, a Republican. Tierney said software changes may be required for the state’s unemployment compensation computer system. Many states also questioned whether they could afford the additional $100 per week in the face of sharply reduced tax revenue. McEnany told reporters that the statute requires 25 percent of the unemployment benefit be provided by states. Treasury Secretary Steve Mnuchin reiterated the 25 percent requirement in a White House call with governors Monday, but also sought to assure governors that the Trump administration would find a way to cover money that states allocate for unemployment through future legislation. “We realize that some of you want to use those funds for other things,” said Mnuchin, according to audio of the call obtained by The Associated Press. “And as part of legislation, if you do use those funds for UI, we will agree to make you whole.” In North Carolina, officials questioned whether it was sound policy to use FEMA funds set aside for natural disasters like hurricanes and tornadoes at a moment when forecasters are predicting a busy hurricane season. “States shouldn’t be forced to choose which disaster victims to help,” said Dory MacMillan, press secretary for Democratic Gov. Roy Cooper. Democratic governors said Trump was attempting to skate around the difficult work of negotiating — something the president as a candidate touted as a natural skill from his real estate career. Maine Gov. Janet Mills, a Democrat, said the orders “appear to subordinate real relief for unemployed Americans to partisan gamesmanship, making Maine families a pawn in a cruel political game.” Officials in several Republican-leaning states praised Trump for working around Congress to try to help their state’s workers, but some said they were still trying to figure out if the executive order will be workable. Arkansas Gov. Asa Hutchinson, a Republican, said it would cost an estimated $265 million and “would be challenging and would take some time” to sort out. The North Dakota Job Service, which handles unemployment claims, said in a statement that it had yet to determine “how or when we might be able to implement the actions outlined in the Executive Order and are awaiting further details.” In Georgia, GOP Gov. Brian Kemp praised Trump for taking action amid the congressional gridlock. But Kemp, a Trump ally, offered no details on whether Georgia will contribute state funds toward the $400 weekly unemployment payment. “We’re digging in on that issue,” said Kemp, who said his office is in talks with Georgia’s labor department and budget planning office.

Fed launches second lending program to ease credit flows

WASHINGTON (AP) — The Federal Reserve on March 17 announced its second emergency lending facility in an effort to smooth the flow of credit to businesses and households struggling amid the virus outbreak. The facility, like the previous program the Fed launched earlier March 17, is a revival of a financial-crisis era program launched in March 2008, known as the “primary dealer credit facility.” It essentially allows a wider range of financial institutions to access short-term loans from the Fed — in this case investment banks and securities trading divisions of large banks — and allows them to pledge a wider range of collateral in return for the loans. In the Fed’s other short-term lending programs, which were ramped up to roughly $1 trillion per week last week, banks could only use Treasury securities as collateral. The program was first used by the Fed during the 2008 financial crisis to unclog a short-term lending market for what is known as “commercial paper.” Large businesses issue commercial paper, essentially IOUs, to raise cash to meet payrolls and cover other short-term costs. “An improved commercial paper market will enhance the ability of businesses to maintain employment and investment as the nation deals with the coronavirus outbreak,” the Fed said in a statement. Borrowing rates in the commercial paper market have been spiking as more companies have sought to raise cash in the expectation that their revenue will plunge. At the same time, money market funds, among the largest buyers of the short-term loans, are seeking to sell commercial paper themselves. They need to raise money because they expect large institutional investors to withdraw funds, and they need cash to cover those withdrawals. All that activity has made it harder for banks and other companies to raise the cash they need. “The goal is to prevent a larger catastrophe that includes soaring bankruptcies, unemployment and underemployment,” said Joe Brusuelas, chief economist at tax advisory firm RSM. “While we are encouraged by this policy step, the Treasury will need to step up with other funds and bridge loans” that can help companies with lower credit ratings. Only companies with top credit ratings are eligible to borrow from the Fed’s new facility. In its announcement, the central bank said it set up the investment vehicle to buy commercial paper with the approval of the Treasury Department. The Treasury has also committed to guarantee up to $10 billion of the loans to prevent the Fed from taking losses. Companies that borrow through the facility will pay a small fee and interest. “The economic disruption and uncertainty created by COVID-19 has created challenges for the commercial paper market, constraining access to short-term credit for American businesses,” Mnuchin said. The Fed action comes after the central bank unleashed a massive program of stimulus March 15, when it cut its benchmark short-term interest rate to near zero and said it would purchase $700 billion in bonds. The Fed also allowed banks to lend from cash reserves that it had previously required banks to hold. Many analysts say they expect the Fed to revive other financial-crisis-era programs in the coming days, including one known as the term auction facility, or TAF. This facility allows a wider array of banks to borrow from the Fed and to pledge a range of collateral, such as corporate bonds, rather than just Treasuries.

Fed leaves key rate unchanged at low level amid global risks

WASHINGTON (AP) — The Federal Reserve kept its key interest rate unchanged at a low level on Jan. 29 amid an economy that looks solid but faces potential global threats, including from China’s viral outbreak. The Fed sketched a mostly bright picture of the U.S. economy in the statement it released after its latest policy meeting. Yet it also cautioned that it would “monitor” the world economy, which could be slowed by China’s coronavirus — a risk that Chairman Jerome Powell mentioned at the start of a news conference. Stock and bond markets have gyrated in the past week over fears about the virus. The central bank said it would hold short-term rates in a range of 1.5 percent to 1.75 percent, far below levels that have been typical during previous expansions. Powell and other Fed officials have indicated that they see that range as low enough to support faster growth and hiring. Stock prices rose modestly after the Fed issued its statement. Bond yields were mostly unchanged. The Fed’s statement, which the 10 policymakers approved unanimously, was nearly identical to the one it issued after its December meeting, though it described consumer spending as rising at only a “moderate” rather than at a “strong” pace. That change likely reflects relatively modest spending by Americans over the winter holidays. Last year, the Fed cut its benchmark interest rate three times after having raised it four times in 2018. Powell and other Fed officials credit those rate cuts with revitalizing the housing market, which had stumbled early last year, and offsetting some of the drag from President Donald Trump’s trade war with China. Many economists and investors had hoped that U.S. and global growth would pick up this year, now that the U.S. and China have signed a preliminary trade deal that removed some tariffs on Chinese goods. Indeed, the International Monetary Fund said last week that low interest rates and reduced trade tensions would likely buoy the global economy over the next two years and help nurture steady if modest growth. But China’s viral outbreak has injected fresh doubts into that outlook. The coronavirus has in effect shut down much of that nation and seems sure to slow the Chinese economy — the world’s second-largest — which had already been decelerating. The virus has now infected more people in China than were sickened in the country by the SARS outbreak in 2002-03. Major companies across the world have responded by suspending some operations in China. Starbucks said it plans to close half its stores in China, its second-largest market. British Airways has halted all flights to China, and American Airlines suspended Los Angeles flights to and from Shanghai and Beijing. Hotels, airlines, casinos and cruise operators are among the industries that have suffered the most immediate repercussions, especially in countries close to China. Apple CEO Tim Cook said the company’s suppliers in China have been forced to delay the re-opening of factories that have closed for the Chinese New Year holiday until Feb. 10. Investors seem increasingly to believe that the Fed will feel compelled to cut rates again later this year. The chances of a cut by September’s Fed meeting have risen to about 56 percent, according to the Chicago Mercantile Exchange’s FedWatch tool, up from 37 percent just a month ago. Still, the Fed will likely wait to see how last year’s rate cuts play out. Among other benefits, the cuts have helped drive down mortgage rates and led home buyers to bid up prices on a dwindling number of available properties. Home sales jumped in December and were nearly 11 percent higher than a year earlier. Since they last met in December, Fed officials have presented a nearly unified front in support of keeping rates unchanged, possibly for the rest of this year. That contrasts with last year, when both “hawks,” who tend to favor higher rates, and “doves,” who typically lean toward lower rates, occasionally dissented from the Fed’s rate decisions. The Fed’s decision came a day after President Donald Trump urged Fed chair Jerome Powell to cut rates in a tweet, arguing it would make U.S. interest rates “competitive with other Countries.” Yet the Fed hopes to avoid the ultra-low and negative interest rates that exist in much of Europe and Japan, which they — and most analysts — see as evidence of weak economies. Most analysts think the Fed would be more willing to cut rates if there were clear signs of a sharp economic slowdown. Still, some Fed watchers say they foresee a rate cut by the summer or after November’s elections. One reason for a potential future cut is that inflation remains chronically low. According to the Fed’s preferred inflation gauge, prices rose just 1.5 percent in November from a year earlier, below the central bank’s 2 percent annual target. Since the Fed adopted that target in 2012, inflation has failed to consistently reach that high, to the surprise of the Fed and most economists.

Federal Reserve minutes reveal declining fear of recession

WASHINGTON (AP) — The Federal Reserve’s policymaking committee saw much less risk of recession at its meeting last month, when it kept interest rates steady after three straight cuts and signaled that it expected to keep low rates unchanged through this year. Minutes of the December meeting, released Jan. 3, showed that Fed officials favored keeping rates in a low range of 1.5 percent to 1.75 percent to cushion the U.S. economy from slow global growth and the Trump administration’s trade conflicts. Officials were also concerned that inflation still hadn’t reached the Fed’s target level of 2 percent. Still, many Fed policymakers at the Dec. 10-11 meeting expressed the view that the risks of a U.S.-China trade war had diminished along with the probability of a disruptive Brexit. The meeting occurred two days before the Trump administration and Beijing reached a preliminary trade deal, though press reports had already suggested that an initial agreement was near. At their meeting last month, Fed officials noted that the U.S. economy was “showing resilience” despite the trade fights and a weak global economy, the minutes said. A rise in long-term rates also “suggested that the likelihood of a recession occurring over the medium term had fallen noticeably in recent months.” Since last month’s meeting, though, tensions have escalated in the Middle East as the Trump administration has confronted Iranian-backed forces in Iraq. On Jan. 3, stocks sank on Wall Street and oil prices jumped after U.S. forces in Iraq killed a top Iranian general. Yet many analysts say higher oil prices could potentially benefit the U.S. economy because of the sharp increase in the past decade in U.S. oil production. Higher oil prices encourage energy companies to invest in drilling wells, which boosts demand for steel pipe and other equipment from U.S. factories and creates jobs. Those trends increasingly offset the drag on consumer spending exerted by higher gas prices. Joe Brusuelas, chief economist at the tax advisory firm RSM, suggested that the risks to the U.S. economy “are, for now, contained.” “As a result, we do not expect any action by the Federal Reserve,” Brusuelas said. “There would need to be a much greater disruption to oil supply from the Persian Gulf to warrant a rate cut by the Fed in the near term.” But should Iran respond to the attack and military action escalates, the danger to the U.S. economy could increase, economists said. “The wild card is whether turmoil in the Middle East triggers a sustained sell-off in equities, depressing business and consumer confidence to the point where labor market and inflation concerns become secondary,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. Though the Fed’s policymaking committee voted unanimously last month in favor of keeping rates unchanged, several members voiced concerns about the long-term consequences of very low rates. Keeping rates ultra-low could fuel excessive risk-taking on Wall Street, a few participants warned, which could lead to dangerous asset bubbles. If those bubbles were to burst, it “could make the next recession more severe than otherwise.” But a greater number of Fed officials felt that the job market could still strengthen and draw more people off the sidelines into jobs, without sending inflation up too much. That sentiment would favor keeping rates low to further reduce unemployment and stimulate economic growth. Chairman Jerome Powell echoed that view in the post-meeting news conference, signaling that the Fed was comfortable with keeping rates low for the foreseeable future. “We have learned that unemployment can remain at quite low levels for an extended period of time without unwanted upward pressure on inflation,” Powell said at the news conference. Fed officials also expressed concern that Americans’ expectation for future inflation “was too low.” Inflation expectations, some argue, can become self-fulfilling: If workers expect low inflation, they’re less likely to demand higher pay, which, in turn, allows companies to keep a lid on prices. Low inflation expectations are another reason for the Fed to keep rates down, in hopes that they will eventually boost inflation. In comments since the December meeting, Fed officials have remained upbeat about the economy’s prospects. In remarks titled “Is a Recession Around the Corner,” Thomas Barkin, president of the Federal Reserve Bank of Richmond, said he was concerned about the weakness in business investment, which he attributed to uncertainty caused by factors ranging from rising Middle East tensions to the outcome of trade talks with China. But he said there were reasons to be optimistic, including the benefits of the Fed’s three rate cuts last year. “While there is always the risk of a shock, the Fed has done a lot to support the economy’s continued expansion and to provide buffers against the downside,” Barkin said in comments to a bankers’ association meeting in Baltimore. ^ AP Economics Writer Martin Crutsinger contributed to this report.

Fed’s Powell sees steady growth, signals pause in rate cuts

WASHINGTON (AP) — Federal Reserve Chairman Jerome Powell said Nov. 13 that the Fed is likely to keep its benchmark short-term interest rate unchanged in the coming months, unless the economy shows signs of worsening. But for now, in testimony before a congressional panel, Powell expressed optimism about the U.S. economy and said he expects it will grow at a solid pace, though it still faces risks from slower growth overseas and trade tensions. “Looking ahead, my colleagues and I see a sustained expansion of economic activity, a strong labor market, and inflation near our symmetric 2 percent objective as most likely,” Powell said before Congress’ Joint Economic Committee. Fed policymakers are unlikely to cut rates, Powell said, unless the economy slows enough to cause them to make a “material reassessment” of their outlook. The Fed cut short-term rates last month for the third time this year, to a range of 1.5 percent to 1.75 percent. “It now looks increasingly likely that the Fed will move to the sidelines for an extended period,” said Andrew Hunter, an economist at Capital Economics, a forecasting firm. Still, when asked if he expected rates to remain unchanged over the next year, Powell said, “I wouldn’t say that at all.” Powell’s testimony came a day after President Donald Trump took credit for an “economic boom” and attacked the Fed for not cutting interest rates further. Powell and other Fed officials, however, argue that their rate cuts, by lowering borrowing costs on mortgages and other loans, have spurred home sales and boosted the economy. Powell was asked about negative interest rates, which Trump also called for Nov. 12, and responded that they “would certainly not be appropriate in the current environment.” Negative rates occur “at times when growth is quite low, and inflation is quite low, and you really don’t see that here,” Powell said. Other Fed officials have also questioned whether cutting rates below zero has actually succeeded in boosting growth in places like Europe and Japan, where central banks have pushed rates into negative territory. Despite Trump’s attacks, both Republican and Democratic lawmakers took a largely respectful approach to Powell. Several complimented him for the “Fed Listens” events the central bank has held around the country, which have sought input from a range of groups, including unions and nonprofits, on ways the Fed could update its monetary policy framework. Powell repeatedly demurred when Sen. Ted Cruz, R-Texas, pressed him on how higher tax rates would affect the economy, including wealth taxes that have been proposed by Democratic presidential candidates Elizabeth Warren and Bernie Sanders. But Powell did concede, under questioning from Cruz, that a ban on fracking would “not be a good thing for the economy.” Some Democrats have called for a fracking ban over environmental concerns about the controversial method for drilling for oil and gas. Recent data suggests that growth remains solid if not spectacular. The economy expanded at a 1.9 percent annual rate in the July-September quarter, down from 3.1 percent in the first three months of the year. The unemployment rate is near a 50-year low of 3.6 percent and hiring is strong enough to potentially push the rate even lower. Inflation, according to the Fed’s preferred gauge, is just 1.3 percent, though it has been held down in recent months by lower energy costs and most Fed officials expect it to move higher in the coming months. Yet Powell reiterated that higher tariffs from the Trump administration’s trade war with China and uncertainty over potential future duties have caused many businesses to delay or cut back on their spending on large equipment and buildings. That has slowed economic growth. Powell also urged Congress to lower the federal budget deficit so that lawmakers would have more flexibility to cut taxes or boost spending to counter a future recession. Other Fed officials have voiced similar concerns. Patrick Harker, president of the Federal Reserve Bank of Philadelphia, said Nov. 12 that the large deficit, and the constraints it imposes on Congress in the event of a recession, “is one of the things I do lose sleep over.” Powell also noted that with the Fed’s benchmark rate at historically low levels, the central bank is considering whether it needs new tools to help boost growth whenever the next downturn arrives. “Central banks around the world are going to have less room to cut in this new normal of low rates and low inflation,” he said. The Fed is exploring an alternative policy framework, Powell said, that it hopes will provide more flexibility. In typical recessions, the Fed cuts short-term rates by roughly 5 percentage points. Powell reiterated that the Fed believes the unemployment rate could fall further without necessarily pushing inflation higher, a view that suggests the central bank is a long way off from hiking rates. “The data is not sending any signal that the labor market is so hot or that inflation is moving up,” he said in response to a question from New York Rep. Carolyn Maloney, a Democrat and vice chair of the Joint Economic Committee. “What we have learned … is that the U.S. economy can operate at a much lower level of unemployment than many thought.” Historically, super-low unemployment has been seen as likely to push up inflation, as workers push for higher pay and companies offer greater salaries to find and keep workers. Most analysts forecast that the Fed will hold rates steady when it meets next month. But some economists expect growth will slow in the coming months and the Fed will likely have to cut again next year. ^ AP Economics Writer Martin Crutsinger contributed to this report.

Fed cuts rates for a 3rd time but signals it will now pause

WASHINGTON (AP) — The Federal Reserve cut short-term interest rates Oct. 30 for a third time this year to try to support the economy. But it signaled that it plans no further cuts unless it sees clear evidence that the economic outlook has worsened. For now, Chairman Jerome Powell sounded a bullish note about the economy in a news conference after the Fed’s latest policy meeting. Despite some signs of weakness, the Fed expects growth to continue and the job market to remain strong. Since spring, manufacturing output has stumbled amid trade tensions and slower global growth, while businesses have cut spending on large equipment. But Powell stressed that the Fed doesn’t see those trends weakening the broader economy. Instead, steady hiring is keeping unemployment very low, boosting consumer confidence, and encouraging more spending. “Monetary policy is in a good place,” Powell said. “If developments emerge that cause a material reassessment of our outlook we would respond accordingly. Policy is not on a pre-set course.” Some of the global and trade threats that have been bedeviling the economy have receded, Powell said, thereby reducing the need for future rate cuts. The U.S. and China have reached a tentative truce that has cooled their trade war. And the European Union has agreed to extend the deadline for the United Kingdom’s exit from Oct. 31 to Jan. 31, lowering the likelihood of an economically disorderly “no deal” Brexit. “On both, the risks appear to have subsided,” he said. “That could bode well for business confidence and activity over time.” Investors appeared pleased with Powell’s positive take on the economy. The Dow Jones Industrial Average closed up 115 points, or 0.4 percent. Analysts also noted that the year’s third rate cut had been widely expected and that expectations for another cut at the Fed’s next meeting, in December, were already dim. “He clearly set the bar high for rate cuts in December and January,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. But Bostjancic and some other economists say they expect growth to keep slowing and to eventually force the Fed’s hand. Bostjancic expects growth to decline to just 1.6 percent in 2020, below the Fed’s forecast of 2 percent, and that the policymakers will cut rates sometime next spring. Powell may be too optimistic about a defusing of the China trade and Brexit threats, Bostjancic said. While President Donald Trump and China’s President Xi Jinping are seeking to agree to an initial pact next month, it would likely leave many significant areas of dispute between the two countries unresolved. “He was wearing a little bit of rosy glasses with the trade talks and Brexit,” she said. “Trade tensions are still going to remain.” The Fed’s move reduces the short-term rate it controls — which influences many consumer and business loans — to a range between 1.5 percent and 1.75 percent. The policymakers dropped from their statement a key phrase they had used since June to indicate that a future rate cut was likely. That phrase said they would “act as appropriate to sustain the expansion.” The Fed’s new statement says instead that it will review the latest economic data as “it assesses the appropriate path” for its benchmark interest rate. Two of the Fed’s policymakers dissented from the decision: Boston Fed President Eric Rosengren and Kansas City Fed President Esther George said they preferred to leave rates alone. Both have dissented from all three rate cuts this year. The economy is in its 11th year of expansion, fueled by consumer spending and a solid if slightly weakened job market. By cutting rates, the Fed has tried to counter uncertainties heightened by Trump’s trade conflicts, a weaker global economy and a decline in U.S. manufacturing. The third rate cut of the year has partly reversed the four hikes that the Fed made last year in response to a strengthening economy. That was before rising global risks led the Fed to change course and begin easing credit. Lower rates are intended to encourage more borrowing and spending. Powell has said that the central bank’s rate reductions were intended as a kind of insurance against threats to the economy. Powell has pointed to similar rate cuts in 1995 and 1998 as precedents; in both those cases, the Fed cut rates three times. He and most other Fed officials credit their rate cuts with lowering mortgage rates, boosting home sales and generally keeping the economy on track. The Fed is also weighing the consequences of a decline in expectations for inflation. Lower inflation expectations can be self-fulfilling. This can pose a problem for the Fed because its preferred inflation gauge has been stuck below its 2 percent target for most of the past seven years. In the meantime, Trump, via Twitter, has renewed his attacks on the Fed for not lowering its benchmark rate closer to zero. The president has contrasted the Fed’s actions unfavorably with central banks in Europe and Japan, which have slashed their rates into negative territory. Though Trump has argued that this puts the United States at a competitive disadvantage, most economists regard negative rates as a sign of weakness. The U.S. economy is still growing, and hiring remains steady, though there have been signs of a slowdown in recent data. Americans cut back on spending at retailers and restaurants last month, a worrisome sign because consumer spending is the leading engine of economic growth. Still, consumer confidence remains high, and shoppers could easily rebound in the coming months. Earlier Wednesday, the government estimated that the economy grew at a tepid but steady 1.9 percent annual rate during the July-September quarter. That report showed that businesses cut back on their investment in new equipment and buildings by the most in nearly four years. But it also showed that the housing market helped drive growth for the first time in seven quarters, as home purchases and renovations have increased. Powell credited the Fed’s interest rate cuts for spurring those gains, along with greater spending on cars and appliances.

Fed plans more Treasury purchases to control lending rates

WASHINGTON (AP) — The Federal Reserve said Oct. 11 that it will buy short-term Treasury bills each month until the second quarter of 2020 to inject cash into the banking system and make it easier to control its benchmark lending rate. The action marks the Fed’s latest response to a shortage of cash reserves that developed last month and caused short-term interest rates to spike, briefly sending the Fed’s benchmark rate above its target range. The New York Fed said its first monthly purchases, starting Oct. 15, will total $60 billion. Future amounts weren’t specified. The Fed also said it will extend a separate short-term lending operation through January that is also intended to boost bank reserves. Chairman Jerome Powell has said these Treasury purchases aren’t intended to stimulate the economy. On Oct. 11, the Fed said its purchases are “technical” and “should not have any meaningful effects on household and business spending decisions and the overall level of economic activity.” Even so, large Fed bond-buying programs typically attract attention from economists and investors because they recall the extraordinary programs the central bank undertook to support the economy during the Great Recession and its economically sluggish aftermath. For several years through 2013, the Fed bought roughly $1.5 trillion of Treasurys and mortgage bonds to try to hold down long-term interest rates and encourage more borrowing and spending. Lower rates also led investors to invest more in stocks. At the time, many critics feared that the purchases, known as “quantitative easing” or QE, would stoke rampant inflation. That fear proved unfounded. Fed officials consider those earlier bond-buying programs to have largely succeeded. Still, some critics charge that by leading more investors to buy stocks, QE contributed to higher stock prices that disproportionately benefited wealthier Americans while leaving lower-income people with measly savings rates. This time, the Fed has stressed that its new bond-buying isn’t intended to affect most interest rates. Instead, they are intended to help the Fed’s tools for setting interest rates work better. “Purchases of Treasury bills likely will have little if any effect on longer-term interest rates, broader financial conditions, or the overall stance of monetary policy,” the Fed said in a written Q&A. Some observers are skeptical. Paul Ashworth, an economist at Capital Economics, notes that $60 billion is three times as large as purchases under the European Central Bank’s recently announced quantitative easing program. “When it swims like a duck and quacks like a duck, it’s hard to prove your intentions aren’t fowl,” Ashworth said. But Ashworth also acknowledged in an email that “The Fed is of course correct that this isn’t the same as QE,” because it isn’t intended to lower longer-term rates. Fed policymakers met by video conference Oct. 4 to approve the new buying operations. The Fed’s benchmark interest rate is now a range of 1.75 percent to 2 percent. Changes in that rate flow through other interest rates, such as those charged on mortgages, to influence borrowing and spending and the broader economy. The central bank keeps its short-term rate in its target range by paying banks interest on the reserves they hold at the Fed. That rate is 1.8 percent. This provides an incentive to banks to lend only at rates above 1.8 percent. But shortages of reserves occurred last month. Most experts blame quarterly tax payments made by many banks as well as auctions of new Treasury securities by the government, which soaked up cash. The reserve shortfall caused rates to spike in several short-term funding markets. If it continued, such spikes could offset the Fed’s efforts to keep interest rates low. The Fed plans to buy Treasury bills of durations between five and 52 weeks, until reserves exceed the level they were at in early September. Reserves at that time were between $1.45 trillion and $1.5 trillion, according to Michael Feroli, an economist at JPMorgan Chase. On Oct. 9, reserves were $1.35 trillion, Feroli said, suggesting that the Fed will need to buy at least $100 billion in Treasurys. But the purchases will likely be much higher: The Fed needs reserves to offset the growth of currency, which rises at about $10 billion per month. And the central bank also wants to eventually replace about $160 billion in short-term loans it has made since the troubles in money markets first surfaced. Stephen Stanley, chief economist at Amherst Pierpont, said the Fed will likely buy about $60 billion a month for the first few months before slowing to roughly the $10 billion a month that is needed to keep up with currency growth.

Q&A: Stocks soar while bonds are signaling gloom. What’s up?

NEW YORK (AP) — Why is the stock market so happy and the bond market so gloomy? Just as the S&P 500 was setting a record high Thursday, bond yields were tumbling to their lowest levels since Donald Trump was elected. The yield on the 10-year Treasury, which influences rates for mortgages and other loans, dropped below 2 percent at one point. It was above 3.20 percent in November. Usually, stock prices rise when investors are feeling confident. Bond yields, meanwhile, often fall when investors are worried about a softening economy. How can both be happening at the same time? In large part, it’s because investors are locking in bets based on expectations for what the Federal Reserve will do with interest rates. The U.S.-China trade war is also playing a role. Here’s a look at how ebullience and trepidation can occur simultaneously: How is the Fed pushing the stock market higher? Most investors expect the Fed to cut interest rates at its next meeting in July for the first time since the economy was swamped under the Great Recession in 2008. Not only that, many investors expect the central bank to cut rates another one or maybe even two times later this year. It’s a sharp turnaround from December 2018, when the Fed raised rates for the seventh time in two years. For stocks, lower rates can goose prices higher because stocks suddenly look more attractive than bonds. Lower rates also can encourage borrowing and more economic activity. “Markets have accepted the new world order where low interest rates are viewed as a huge positive and people buy into the fact that you can afford to pay higher valuations” for stocks, said Nate Thooft, senior portfolio manager at Manulife Asset Management. It’s also not just the Fed. Central banks around the world have shown their willingness to keep interest rates low to invigorate their economies. Why are Treasury yields falling? Short-term yields tend to fall when expectations build for coming rate cuts. Longer-term yields, meanwhile, fall when expectations for inflation are low and worries about the economy are growing. Inflation has remained remarkably tame. Some concerning economic figures, meanwhile, have been popping up around the world. Particularly in manufacturing, countries have seen slowing momentum as the global trade war weighs on trade and business confidence. “The bond market has reacted more powerfully than the equity markets over the last several months, both in anticipation of Fed news and when it comes to global growth worries,” said Thooft. The bond market is usually seen as the more sober one when it comes to assessing economic trends, rather than the stock market, but Thooft said the movement in bond yields may have been overdone. Is the trade war also moving markets? Yes. Optimism is rising that the world’s largest economies can make progress on their trade dispute when the U.S. and Chinese leaders meet at the Group of 20 summit next week. Trump’s tweet announcing the meeting earlier this week helped send the S&P 500 to one of its better days of the year, up 1 percent. Aren’t the two things moving markets mutually exclusive? If the trade war gets resolved, will the Fed still cut rates? If Trump and Chinese President Xi Jinping make so much progress that a deal seems near, Fed policymakers may not cut rates, or at least not in July. But few economists expect much progress will be made. Most analysts say that the most likely outcome is that the two sides agree to schedule talks. It’s not clear whether Trump will suspend his threat to slap more tariffs on the remaining $300 billion in Chinese imports that haven’t yet been taxed. Even if the Trump-Xi meeting goes well, the effects of Trump’s trade fights with Europe and Mexico, as well as China, will likely linger. U.S. farmers have been hurt by retaliatory tariffs imposed on agricultural exports and U.S. business investment has slowed, as companies delay planned expansions amid greater uncertainty. Trade fights “don’t unwind rapidly,” Diane Swonk, chief economist at Grant Thornton, said. There are signs that the U.S. economy is stumbling, and that low inflation is more stubborn than the Fed previously thought, both of which argue for lower rates. “They’re getting the cuts,” said Joe Brusuelas, chief economist at tax advisory firm RSM, referring to stock market investors who bid up shares on anticipation of the Fed slicing rates. “The U.S. domestic economy is decelerating at an accelerating pace.” But the economy is doing well, isn’t it? Yes, for now. Few economists are forecasting a recession. But Brusuelas and others expect growth could come in as low as 1.8 percent this year, sharply below last year’s 2.9 percent. The boost to consumer spending from the tax cuts is fading, Brusuelas said. And while the unemployment rate remains low, hiring is on track to fall to its slowest pace since 2010. Inflation has remained below the Fed’s 2 percent target, which Chairman Jerome Powell said as recently as April was likely a temporary issue stemming from cheaper gas and other factors. But Wednesday, Fed policymakers forecast that inflation would be just 1.5 percent at the end of this year. While lower inflation might sound good, it suggests that wages won’t rise by enough to push prices higher. What if the Fed surprises everyone and doesn’t cut rates at all? The expectation for rate cuts is so deeply entrenched in markets that most investors don’t consider this a likely scenario. Brian Jacobsen, senior investment strategist at the multi-asset solutions team at Wells Fargo Asset Management, is outside the mainstream in saying that the Fed might stand pat. He says China’s slowing economy adds urgency for its leaders to reach a deal, while Trump has seen how much the stock market wants a trade agreement. If next week’s meeting does offer some resolution, expectations for a rate cut will be dashed. But any disappointment could be offset by expectations for more durable economic growth around the world. “Once again, we could be in a position where bond yields rise and stocks rise as well,” Jacobsen said. “We’ll no longer have this divergence.”
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