Category Archives: investing

Let the US Fiduciary Rule Go Ahead

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The quantity of financial regulation is not quite as important as the quality.  One must get the details right.  The case of the US “fiduciary rule” strongly suggests that President Trump will not get the details right.

Could Dodd-Frank be improved?

Earlier this month, amid the flurry of tweets and other executive orders, the new occupant of the White House issued an executive order directing a comprehensive rethinking of the Dodd-Frank financial reform of 2010.

One can imagine various ways to improve the current legislation.   The most straightforward would be to restore many of the worthwhile features of the original plan that Republicans have undermined or negated over the last seven years.  (Most recently, the House this month voted to repeal a Dodd-Frank provision called “Publish What You Pay,” designed to discourage oil and mining companies from paying bribes abroad.  Score one for the natural resource curse.)

In theory, one might also attempt the difficult and delicate task of modifying, for example, the Volcker Rule, so as to improve the efficiency tradeoff between compliance costs for banks and other financial institutions, on the one hand, and the danger of instability in the system, on the other hand.  Some in the business community are acting as if they believe that Trump will get this tradeoff right.  I see no grounds whatsoever for thinking so.

In particular, the financial system has been strengthened substantially by such features of Dodd-Frank as higher capital requirements for banks, the establishment of the Consumer Financial Protection Bureau, the designation of Systemically Important Financial Institutions, tough stress tests on banks, and enhanced transparency for derivatives.  If these features were undermined or reversed, it would raise the odds of a damaging repeat of the 2007-08 financial crisis down the road.

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No, Japan Does Not Intervene in FX These Days

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There has been recent speculation that the Japanese authorities might intervene to push down the yen.  One can see the reasoning.  The yen has appreciated against the dollar by about 9 per cent this year, even though the fundamentals have gone the other way: weak growth and renewed easing of monetary policy.

Saturday’s Financial Times even cites BNY Mellon as saying of the Bank of Japan, “Since mid-1993, they have on average intervened once every 20 trading days in dollar-yen.”   But this is misleading.  The period of frequent intervention was in the 1980s and 1990s.  The Japanese have rarely intervened in the foreign exchange market since 2004.  The last time was in 2011, in cooperation with the US and others, to dampen a strong appreciation of the yen that came in the aftermath of the Tohoku earthquake and tsunami.

The G-7 partners in February 2013 agreed to refrain from foreign exchange intervention, in a US-led effort to short-circuit fears of competitive depreciation (a sort of truce in the supposed “currency wars”).   Intervention will return some day.  But it strikes me as unlikely that the Bank of Japan would intervene now without the cooperation of the US (and other G-7 partners); and unlikely that the latter would agree at the current juncture.

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Did the Markets Overlook Fed Bullishness in the March 16 FOMC Statement?

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Financial markets reacted to the outcome of the Federal Open Market Committee meeting on Wednesday, March 16, as if what the Fed had revealed was highly dovish, that is, diminishing expectations regarding future interest rates.   Dollar down, stocks and bonds up…  According to Goldman Sachs, the markets reacted as if this were among the top 4 surprises in Fed dovishness since the turn of the century (not counting reactions to the GFC).

The markets were looking at a shift in the “dots plot.”  The shift formally rescinds the Fed members’ previous forecast that supposedly they would raise interest rates four times in 2016.  (Now it says twice.)  Furthermore, Chair Yellen in her press conference said, “Most Committee participants now expect that achieving economic outcomes similar to those anticipated in December will likely require a somewhat lower path for policy interest rates than foreseen at that time.”

But this is old news. It reflects developments at the start of the year, such as the Commerce Department report that GDP growth had been weak in the 4th quarter and the global financial market volatility in January and early February (especially related to China).  Everyone knew all this a month ago.

The new news pertains to what has happened since mid-February.  A lot of trends that had appeared to be negative have reversed in the last month.  Statistics on US domestic final sales in January suggest that GDP will likely be stronger in the first quarter. Meanwhile, job gains were back up to 242,000 in February, reaching a record six-year-long streak of private employment growth.  And globally, downward pressure on the renminbi, the US stock market, and commodity prices — which had so worried investors – all abated in February-March.

So did the Fed recognize these signs of economic strength in its statement Wednesday?  Yes, it did.   Gone was the January sentence “…economic growth slowed late last year.”   In its place was a note that “economic activity has been expanding at a moderate pace…”   (Also “Inflation picked up in recent months.”)  Unless I am mistaken that language wasn’t there before, only the longstanding positive language about employment.  It seems to me that the markets this week may have missed an acknowledgement from the Fed that things have turned around since the first six weeks of the year.

[Comments can be posted at the Econbrowser version.]

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