Coming to a 2016 campaign near you: New fiscal cliff?

Mon, July 06, 2015

Surging tax receipts are likely to push off the deadline to raise the nation’s debt limit, once thought to come as soon as October, until around December and maybe even beyond....

Lou Crandall, chief economist at the research firm Wrightson ICAP, who also tracks the issues, says he expects the deadline to come during the first week of December.

The Wall Street Journal

A Rare Win for Economic Forecasting: The Atlanta Fed Almost Nails Its First-Quarter Growth Estimate

Wed, April 29, 2015

The U.S. economy’s sharp slowdown in the first three months of the year may have caught almost all Wall Street forecasters off guard. But it didn’t surprise the Federal Reserve Bank of Atlanta.

...The Atlanta Fed wasn’t the only one to be right about growth, but it had little company. In a Wall Street Journal survey, financial firm Raymond James predicted a 0.2% rise, while research company Wrightson ICAP forecast a 0.4% gain.

The Wall Street Journal

Grand Central: Here's What the Pros Are Saying About the Fed Ahead of Policy Meeting

Wed, April 29, 2015

The Federal Reserve’s two day policy meeting concludes today. Here is a rundown of market commentary that preceded the decision, with our take on it:

Louis Crandall, of Wrightson ICAP, notes this week’s Fed policy statement will mark a milestone in Fed interest rate guidance. “The Fed will finally retire its calendar-based forward guidance and make the transition to a data-dependent, meeting-by-meeting approach. That inevitably implies greater uncertainty about the outcome of individual meetings, but does not necessarily imply greater overall uncertainty about the medium-term outlook for Fed policy.” OUR TAKE: The Fed left the last remnant of calendar-based guidance in its March statement, saying it wouldn’t act in April. Now it is gone and we live in a data-dependent world.


Treasury Repo Rates Surge to 2012 High on Quarter-End Moves

Tue, March 31, 2015

The rate for borrowing and lending Treasuries surged as banks reined in collateral lending to shore up balance sheets and those needing financing at quarter-end were forced to pay higher prices.

The peak level Tuesday for financing Treasuries overnight in the repurchase-agreement market, relative to unsecured lending rates, reached the widest since July 2009, according to Barclays Plc. The average cost for this funding, known as general collateral repo, averaged its highest in the morning trading since October 2012, according to ICAP Plc.

...The allotment at the central bank’s overnight fixed-rate reverse-repurchase program Tuesday morning was $202.2 billion at a rate of 0.05 percent. The Fed had previously announced that its one-day agreements would take place in the morning, as opposed to the typical afternoon timing.

...“You had complications also because the Fed was doing its overnight reverse repos early in the morning on quarter-end,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “There was the perception that people had to pre-emptively lock-in early in the morning as much funding as they might possibly need before the Fed. So market participants that needed funding decided that they had to take it at any price.”


The Fed Still Needs to Figure Out How to Raise Rates

Wed, March 25, 2015

For all the talk about when Federal Reserve policy makers are going to raise interest rates, they haven’t quite figured out how to do it.

...Camp, along with money-market economists such as Lou Crandall of Wrightson ICAP LLC, says the Fed will need to more than triple the use of its main tool, known as the reverse-repo program, to at least $1 trillion from the current $300 billion per day limit.

...“It will take somewhat greater use of the Fed’s tools to get the funds rate into the middle of a 25 to 50 basis-point range than it does to keep it in the middle of a 0 to 25 range,” said Crandall, chief economist at Wrightson ICAP in Jersey City.


Once-Disparaged Fed Rate Forecasts Now Seen as Crucial Guidance

Thu, March 19, 2015

Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, wondered how long Yellen’s embrace of the dot plot would last.

“The Fed chair will highlight the dots if and only if they serve to illustrate the particular policy narrative she wants to deliver,” he said in a note today to clients.

This week, they performed that task. A year ago, they did not. Back then the rate projections rose at the same time that the Fed was seeking to assure investors that it would keep credit ultra-easy for a considerable time.

“The challenge for the FOMC at this point is to strengthen the dot-plot forecast process in order to make it a better reflection of the committee’s expectations,” Crandall said.


Rising Dollar Makes It Hard for the Fed to Go Its Own Way

Wed, March 18, 2015

Federal Reserve officials are finding it harder than they first thought to decouple U.S. monetary policy from the rest of the world.

...Not only is the dollar’s rise reducing price pressures, making it harder for the Fed to tighten, it’s also acting as an “economic headwind reducing the need to tighten,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.


Investors Snap Up TIPS After Fed Puts Focus on Low Inflation

Thu, February 19, 2015

The Federal Reserve’s primary dealers were left with the least amount of securities on record at a U.S. sale of inflation-protected debt after policy makers highlighted concern that inflation remains too low.

...“The FOMC appears to be conflicted about the TIPS break-evens,” wrote Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, in a report following the release of the minutes. “We would give very little weight to TIPS break-evens in the policy debate. The FOMC, however, isn’t willing to throw TIPS overboard altogether."

The Financial Times

US bonds lag behind Fed rate forecasts

Fri, February 13, 2015

A healthier looking jobs market, however, is not yet sparking inflation. Indeed, the recent slide in energy and commodity prices in conjunction with a rising dollar is seen pushing inflation further below the central bank’s target of 2 per cent.

“The Fed talks about June to September being the window for a move in policy,” says Lou Crandall, economist at Wrightson Icap, who expects a key measure of core inflation followed by the Fed will run at an annual rate of 1 per cent by June, down from the current level of 1.3 per cent.

“The Fed needs a solid basis for forecasting a return to 2 per cent inflation, and it is difficult to see the case for such a forecast coming together as early as June,” he adds.


There Are Now More Than Five Million Job Openings in America

Tue, February 10, 2015

Unfilled positions at U.S. companies climbed in December to an almost 14-year high and hiring accelerated, underscoring a thriving labor market that points to a pickup in wage growth.

...“The fact that you have so many new jobs coming on the market shortens the time that individuals have to spend in unemployment, between jobs,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. Crandall is the second-best forecaster of job openings over the last two years, according to data compiled by Bloomberg.

One aspect “that really sticks out here is the very large number of people who found new jobs in the month,” he said. “Having the confidence to leave a job and look for another one is an important contributor to that.”


Three Reasons Why the ECB's Historic Move Matters For the Fed

Thu, January 22, 2015

European Central Bank President Mario Draghi announced a $1.3 trillion asset purchase program Thursday to revive the region's growth.

...Government bond yields declined from Germany to Spain after the ECB move. The Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index had an effective yield of 1.16 percent as of yesterday, close to the record low of 1.14 percent reached Jan. 19.

The decline in foreign bond yields makes U.S. Treasuries look attractive, and that is helping yields fall here. The U.S. 10-year note is at 1.88 percent, down from 2.14 percent since Fed officials last met.

Even though Fed officials don't want to create a bubble, the decline in long-term borrowing costs is already stoking U.S. housing markets. Refinancing lowers household debt costs, and new home purchases spur the construction sector.

"The U.S. housing sector is a major beneficiary of the European Central Bank's quantitative easing," said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.


Yellen Leaves Greenspan ‘Put' Behind as She Charts Rate Increase

Thu, January 15, 2015

Janet Yellen is leaving the Greenspan “put” behind as she charts the first interest-rate increase since 2006 amid growing financial-market volatility.

The Federal Reserve chair has signaled she wants to place the economic outlook at the center of policy making, while looking past short-term market fluctuations. To succeed, she must wean investors from the notion, which gained currency under predecessor Alan Greenspan, that the Fed will bail them out if their bets go bad -- just as a put option protects against a drop in stock prices.

...U.S. central bankers are counting on supervisory tools, such as their current stepped-up focus on lending standards in the high-yield loan market, and higher levels of bank capital and liquidity to help make the financial system more resilient to shocks.

The so-called Tier 1 capital ratio, a core measure of a bank’s strength comparing capital to risk-weighted assets, more than doubled to 11.6 percent at the end of 2013 for the 30 largest banks compared with the first quarter of 2009, according to the Fed’s most recent stress-test report issued last March.

“They feel they have taken steps so they don’t have to use monetary policy to stabilize the system,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

The Financial Times

Traders bet on delay in US rate rise

Mon, January 12, 2015

US interest rate traders are betting sharply that lower oil prices, falling inflation and faltering wage growth will delay the arrival of Federal Reserve policy tightening this year.

..."We think it is very difficult to construct a scenario in which the Fed would tighten by midyear in the absence of a perceptible pick-up in wage growth," said Lou Crandall, economist at Wrightson Icap. "The Fed has said it would need to be reasonably confident about its forecast of rising inflation over a one- to two- year period in order to justify a rate hike."


Rate Guidance and Inflation Outlook Dominate Fed Agenda

Wed, December 17, 2014

Pace after liftoff: Yellen, in her press conference, is likely to stress that that the Fed’s interest-rate path will depend on how economic data evolves, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

“There is a fairly good chance that she will point out that once the rate hikes begin, that they will definitely not be on the same kind of predetermined schedule that they were on last time,” he said. When the Fed began raising rates in June 2004, it did so at a “measured” pace, which translated into a quarter-point increase at every meeting for the next two years.


Job Openings Point to Sustained U.S. Payroll Gains: Economy

Tue, December 09, 2014

The U.S. labor market continued to show traction in October as job openings held near the highest level in almost 14 years and the number of people quitting and getting hired remained elevated.

...“There’s been a real change in tone in the labor market this year,” said Louis Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey and the best forecaster of job openings over the last two years, according to data compiled by Bloomberg. “A higher degree of turnover is a big plus.”


Fed Mandates Clash as Jobless Drop Vies With Inflation: Economy

Tue, November 18, 2014

Just when Federal Reserve Chair Janet Yellen and her colleagues will be approaching a decision to raise interest rates, their two mandates will probably be pulling them in different directions.

...By the middle of next year, “we will have seen changes in conditions that make a higher inflation forecast still plausible,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “Part of it is that I expect a pickup in wage growth next year.”

Increases in pay mean a forecast for an eventual pickup in prices remains valid, said Crandall. “I’m also guessing that the impulse from the current downturn in commodity prices will have ended, if not turned around, by then.”


Bullard Challenges Fed to Respond To Weakening Inflation

Thu, October 16, 2014

Bullard said the Fed should consider delaying plans to end its bond-buying program at the end of this month to halt a decline in expected inflation. The Fed has tapered purchases to $15 billion a month from $85 billion in December 2012.

...The Fed, which cut interest rates to near zero in December 2008, said last month that asset purchases would probably end after its next meeting, on Oct. 28-29, and reiterated that rates would remain on hold for a “considerable time” after the program ends.

“Ending the asset purchases has been baked in the cake for quite a while,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

...The Fed’s concern over expectations may be muted by considering a wider range of measures, including consumer and business surveys, Crandall said.


Money Funds Zero Pain to Worsen as Fed Maneuvers: Credit Markets

Tue, September 30, 2014

The central bank is working out how best to control short-term rates after its bond buying policies aimed at suppressing borrowing costs and stimulate economic growth flooded the banking system with $2.71 trillion of excess reserves. The Fed, which is forecast to start raising rates next year, surprised market participants earlier this month when it placed a limit on how much cash it will take out of the system each night through its reverse repurchase agreement program.

...To pull that off, the Fed’s repo program might have to be as large at $1 trillion, according to Wrightson ICAP LLC.

“To achieve their goal, they will have to raise the cap,” Lou Crandall, chief economist at Wrightson in Jersey City, New Jersey, said Sept. 18 in a phone interview.

The Financial Times

Treasury bills go negative in quarter-end rush

Wed, September 24, 2014

Investors are pushing rates on Treasury bills into negative territory due to a scarcity of safe assets as funding pressures intensify with the end of the financial quarter.

..."People who want to be invested past September 30 are hoarding Treasury bills pre-emptively," said Lou Crandall, economist at Wrightson Icap.

"Money funds' willingness to lock in term investments at low rates through October 1 now will, if anything, make the quarter-end squeeze in the overnight market on September 30 even more extreme as banks accepting cash are tying up whatever limited balance sheet space they might be wiling to make available over the statement date."


Fed to Conduct Series of Term Deposit Tests Next Month

Thu, September 04, 2014

The Federal Reserve said it plans a series of fixed-rate offerings of term deposits for banks beginning in October as it tests a facility designed to help it eventually raise interest rates.

The term deposits announced today will allow banks to withdraw funds early subject to a penalty, the Fed said. That means they would count as high-quality liquid assets banks are required to maintain to weather a financial crisis.

...The early withdrawal feature for term deposits would make the facility more attractive to banks, according to Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

“Large banks would be able to treat the TDF as overnight cash in their LCR calculations, which would make them much more willing to participate,” he said in an e-mail, referring to liquidity coverage ratio, a measure of a bank’s access to cash and assets that can be quickly converted to cash. That would make it easier for the Fed “to immobilize a larger amount of reserves in ordinary circumstances,” Crandall said.

The New York Times

Boston Fed Chief Warns of Dangers to Repo Market

Wed, August 13, 2014

Wall Street banks continue to rely for billions of dollars in borrowing on a market that dried up suddenly in 2008, sending shock waves through the financial system and the wider economy.

Since the crisis, some steps have been taken to shore up the potentially unstable debt market, known as the repo market. But on Wednesday, Eric S. Rosengren, president of the Federal Reserve Bank of Boston, became the latest prominent regulator to call for a more ambitious overhaul of the repo market. In particular, he suggested that financial institutions making large use of repo borrowing should maintain higher levels of capital.

...Even so, the new rules are prompting broker-dealers to make significant changes to their trading operations, debt market experts say.

“It’s not creating particular strain or stress right now, but there are a lot of uncertainties about how the structure of the markets will evolve,” said Lou Crandall, chief economist at Wrightson ICAP.


No-Exit Strategy May Be Fed Burden in Unwinding Stimulus

Fri, August 01, 2014

The Federal Reserve is trying to change as little as possible as it crafts its strategy to exit from record stimulus. The trouble is financial markets have changed so much that the still-developing plan may prove costly and ultimately unworkable.

The approach, sketched out in the minutes of the Fed’s June 17-18 meeting and in officials’ comments since then, retains a focus on the federal funds rate as the central bank’s target. Policy would continue to be conducted mainly through banks rather than via dealings with money-market funds.

“They don’t want to make wholesale changes in the way they interact with markets when they are going to have so many other issues in play” as they raise interest rates, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, who has been watching the Fed for three decades.

…The foreign banks now are borrowing from U.S. federal home-loan banks, which aren’t eligible to earn interest on reserves held at the Fed and so are willing to lend cash in the fed funds market at a lower rate. That rate has averaged 0.08 percent in the past year. Since foreign banks are eligible to earn interest on reserves, they can place the borrowed cash at the Fed and collect a 0.17 percentage point profit on the overnight transactions.

… In what may be a sign of things to come, they “pulled back en masse” from conducting this kind of arbitrage on June 30 to avoid inflating their balance sheets at the end of the quarter, Crandall said in a July 14 note to clients.

The result: Money funds and others had to park their cash with the Fed because they couldn’t lend it to the foreign banks via time deposits, another instrument the banks use to finance the reserves they hold at the Fed. Instead, the money funds loaned a record $339.5 billion to the central bank through reverse repo agreements, more than three times the average daily amount during the rest of the month.

The Wall Street Journal

U.S. Considers Issuing Debt With Maturities of More Than 30 Years

Wed, July 23, 2014

The U.S. government currently sells Treasury bonds maturing in three decades or less to investors. It considered selling longer-term debt as recently as 2011 when the Treasury Borrowing Advisory Committee, a group of banks, investment firms and hedge funds that advise the Treasury on its debt auction lineup, floated the idea. At that time, dealers were concerned demand from investors would be volatile and unpredictable, making it risky for banks to sell and warehouse the securities, said Lou Crandall, chief economist at Wrightson ICAP LLC.

The Financial Times

Bond traders bet the Fed has got it wrong on interest rates

Fri, June 27, 2014

Long-time Fed watcher Lou Crandall at Wrightson ICAP terms the current stand-off between the bond market and the Fed’s forecasts as “dot disbelief.”

He says an improving economy over the summer that is not accompanied by an upward shift in market interest rates will create problems. “The Fed doesn’t want to push intermediate-term rates up prematurely, but it also wants to avoid another violent repricing of market expectations when lift-off becomes unavoidable.”

… “Investors have made a lot of money over the past few years assuming that Fed policy outcomes would ultimately be more accommodative than mainstream FOMC rhetoric implied at the time,” says Mr. Crandall.


Dot plot shows widening split at the Fed

Thu, June 19, 2014

Lou Crandall, chief economist at Wrightson ICAP, noted that in the past few quarters there has been a narrowing of the gap between the 2016 forecast and the neutral level.

“In December, [ the Fed policy committee] thought it would have moved the funds rate less than half-way back to neutral by the end of 2016, and now feels that it will have moved significantly more than halfway back,” Crandall said.

The New York Times

Federal Reserve's Bond-Buying Fades, but Stimulus Doesn't End There

Thu, June 19, 2014

The Fed in recent years has almost completely replaced its inventory of short-term government debt with longer-term securities that do not begin to mature until 2016. It has reinvested just $332 million in Treasuries so far this year, and would need to reinvest just $4 billion in 2015, according to calculations by Lou Crandall, chief economist for Wrightson ICAP, a financial research firm in New Jersey.

Reinvestment of mortgage bonds is also in decline. The Fed received and reinvested about $24 billion a month as borrowers refinanced loans or sold homes in 2013. But as interest rates have ticked upward, prepayments have declined. Reinvestment averaged $16 billion a month during the first six months of 2014, and Mr. Crandall estimates that the volume will stabilize a little below that level next year.

“The numbers are not zero, and it’s still important because they’re very mindful of the signaling effect of their operations,” he said. “But for 2015, it’s largely symbolic.”

That would change, however, in early 2016. Mr. Crandall calculates that $39 billion in Treasuries will mature in February that year, and about $177 billion during the rest of the year. Reinvesting those amounts would have a significant effect, he said.