Bloomberg News

Roughed-Up Treasury Market Must Now Reckon With Supply Shifts

Sat, January 15, 2022

Meanwhile, the Treasury Department, which reduced the size of coupon-bearing dsebt auctions in November for the first time in five years to bring them in line with lower-than-anticipated government expenses, is expected to do so again in February, regardless of the Fed’s plans...
The prospect of the Fed allowing some of its Treasury holdings to mature probably won’t forestall auction size cuts in February, but it makes subsequent reductions less likely, said Lou Crandall, chief economist at Wrightson ICAP LLC.


The Fed’s biggest challenge this year: Learn to speak in English

Mon, January 13, 2020

After quickly reversing the direction of monetary policy by cutting short-term rates three times and expanding its balance sheet in 2019, the Federal Reserve is not likely to change its policies very much this year, says Lou Crandall, chief economist at Wrightson ICAP and the winner of the Forecaster of the Month contest for December.

But that doesn’t mean the Fed is complacent or satisfied with how it tries to manage the economy, Crandall says. One big challenge is to explain their actions in plain English.

The New York Times

Fed Focuses on Repo Market Exit Strategy After Avoiding Year-End Crunch

Mon, January 06, 2020

Another challenge for Fed officials: Deciding just how big the central bank's balance sheet, which is currently about $4 trillion, should be.

"There are people at the Fed who have a preference for the smallest possible balance sheet, and we just don't know how much their views have evolved," said Lou Crandall, chief economist at Wrightson ICAP, a research firm.


Absolutely no economic reason for a recession, but ‘we’ll probably have one anyway’

Tue, September 10, 2019

There’s absolutely no economic or financial reason for a U.S. or global recession to occur in the next year or two, but we’re likely to experience one anyway because of political risks, says Lou Crandall, chief economist for Wrightson ICAP and the winner of MarketWatch’s Forecaster of the Month contest for August.

“Recessions are always hard to predict,” says Crandall, who’s been watching the Fed and the economy for three decades. But after looking deeply into the economic data, he concludes that “there’s no reason” for the economy to topple into recession. The usual suspects are missing. For instance, there’s no inventory overhang, nor is monetary policy too tight.


Fed Debt Unwind End Is Set. So Treasury’s Looking at What’s Next

Fri, April 12, 2019

This all matters to the overseers of America’s debt because additional Treasury purchases by the Fed would reduce how much the government needs to tap from the the public to meet its funding needs. The Fed’s decision also factors into what maturities Treasury decides to issue. The central bank’s portfolio is about $4 trillion, including around $2.2 trillion of Treasuries and $1.6 trillion of agency mortgage debt. 

“It’s obviously a critical question for the Treasury,” said Lou Crandall, chief economist at Wrightson ICAP. “The Treasury should have a sense of what one of the biggest players in the market is going to do.”

Crandall expects the Fed will eventually tilt its Treasury purchases toward bills, as it seeks to align the maturity of its debt holdings with the average maturity of the public debt.  Currently, the weighted average maturity of the Fed’s Treasury investments is about 8 years. That compares with 5.8 years for the market.


Rate-Hike Patience May Leave Fed in a Bind If Inflation Softens

Mon, March 18, 2019

If price gains would slow down even as U.S. economic growth more broadly held up, it could put the central bank in a tough spot. Officials have already placed interest-rate hikes on hold amid muted price pressures and looming global risks. They could
extend that pause, pledging to keep rates low until faster price gains materialize. But economists said actually lowering rates on an inflation miss seems unlikely, because it could signal undue pessimism.

“The hurdle for a policy inflection point is fairly high,” said Lou Crandall, chief economist at Wrightson ICAP in New York. “If you ease, you trigger the, ‘what does the Fed know that we don’t?’ trade.”

The stakes are significant. The Fed hasn’t hit 2 percent inflation on a sustained basis since formally adopting it in 2012. Officials had been hopeful that this would be the year in which they finally clinched their objective.


Eye-Popping Surge in Repo Rate Blamed on Rules Instead of Funding Stress

Wed, January 02, 2019

A combination of factors, including the impact of regulation and banks’ increased presence within the repo market, helped to fuel Monday’s “eye-popping” move, according to Lou Crandall, an economist at Wrightson ICAP in New York. A decline in the level of bank balances held at the Federal Reserve means that financial institutions have in general increased the amount they lend in the repo market as they seek somewhere safe and liquid to park money that enables them to meet regulatory obligations. One complication is that these same banks tidy their balance sheets at year-end when regulatory surcharges are calculated. As part of their bid to lessen these regulatory imposts, banks tend to pare their exposure to repo, which in turn makes it more expensive for borrowers.


March T-Bills in Focus as Budget, Debt Limit Set to Collide

Wed, January 17, 2018

Congressional leaders faced with the expiration of current spending authorizations at the end of the week released a stopgap spending bill to keep the government operating through Feb. 16. That would bring the next deadline to avert a government shutdown perilously close to the Treasury’s so-called drop-dead-date to avoid a default, which experts forecast may be as soon as early March.

Wrightson ICAP economist Lou Crandall on Tuesday pulled forward his forecast for when America will exhaust it’s borrowing capacity to early March, saying the Treasury’s latest monthly statement of the public debt shows “much less remaining headroom” at the end of December than initially projected. That may limit the amount the government can borrow in the coming weeks, potentially forcing the Treasury to cut short-term bill auctions further. It has already scaled back the size of its one-month bill sale, lowering it by $5 billion this week to $45 billion.


Fed's Future Tightening Fraught with Recession, Political Risks

Fri, January 05, 2018

“The Fed may not have the luxury of a simple monotonic
glide path back to equilibrium,” said Lou Crandall, chief
economist at Wrightson ICAP LLC in Jersey City, New Jersey.
“They’re going to have to objectively tighten monetary policy in
order to increase unemployment and stabilize inflation at their

That’s important because the central bank is more likely to
make a policy mistake and inadvertently push the economy into a
recession if it is actively seeking to curb credit and boost
joblessness, rather than just removing monetary accommodation
from the financial system, as it is now.

Bloomberg Government

Spring 2018 Likely for Next Debt Vote but Election Season Possible

Fri, September 08, 2017

Crandall is a veteran debt limit watcher and analyzes federal cash flows to help predict Treasury borrowing policy in the massive market for Treasury debt securities. He said his most likely forecast still calls for Treasury to run out of borrowing room in late March or early April, but getting to mid-April—and the flood of incoming individual and corporate receipts that accompany that—is not out of the realm of possibility.

“There is a small but real chance that extraordinary measures might meet the Treasury's needs through the April 15 tax date. If that happens, the debt ceiling debate could stretch all the way to August or even September,” Lou Crandall, chief economist with analytical firm Wrightson ICAP, told Bloomberg BNA.

The post "Spring 2018 likely for next debt vote but election season possible" appeared first on Bloomberg Government.


Fed’s Cut in Bond Holdings May Be Messier Than Yellen Hopes

Mon, May 01, 2017

... some Fed watchers argue that the Treasury Department will have a greater say than the Fed in determining the impact of a reduction in the central bank’s $2.5 trillion portfolio of U.S. government securities.

If the government issues more bills, it would effectively be a “freebie” for the financial markets and the economy, according to Lou Crandall, chief economist at Wrightson ICAP LLC. Short-term interest rates would remain anchored by the Fed and so wouldn’t be much affected by the added supply of bills.

But if the Treasury opts to issue more longer-dated securities instead, that would put upward pressure on Treasury and corporate bond yields and mortgage rates, with implications for the housing market and the broader economy.


Yellen Patience on Timing of Next Hike Justified by Jobs Report

Tue, February 07, 2017

January’s U.S. employment report gives the chair plenty of room to defer while policy makers wait for evidence of how new measures from the Trump administration are affecting the economy. That’s the message she’ll probably convey during congressional testimony on Feb. 14-15.

...Some indicators of labor-market slack also increased, which should push away inflation concerns. The underemployment rate, which includes people stuck in part-time work who want a full-time job, rose to a three-month high of 9.4 percent.

“We are clearly not generating much wage pressure,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “This report didn’t challenge the call for three rate increases in any way. However, it did not create any urgency for March either.”


Fed Officials Leaning Toward Bigger Is Better on Balance Sheet

Thu, December 08, 2016

While nearly all eyes are on the Federal Reserve’s likely decision to raise short-term interest rates next week, investors in the world’s biggest debt market say central bankers have already signaled a major change in another policy tool.

Fed officials have indicated they may make their super-sized balance sheet of bond holdings and $2 trillion in excess reserves created during the last financial crisis a more permanent feature of the way they interact with financial markets.

…“The large balance sheet has become the status quo,” said Lou Crandall, chief economist for Wrightson ICAP LLC in Jersey City, New Jersey. “It is no longer experimental.”


Fed’s Rosengren Highlights Growing Tensions Inside FOMC

Fri, September 23, 2016

The president of the Federal Reserve Bank of Boston took direct aim at Janet Yellen’s argument for keeping interest rates unchanged this week, shedding more light on pressures confronting the Fed chair as she tries to coax the U.S. economy through a period of slow growth and deep uncertainty.

Eric Rosengren, who dissented from the decision by the Federal Open Market Committee on Wednesday, said in a statement Friday the Fed’s failure to get back to a strategy of gradual rate increases may threaten the economic recovery.

…Rosengren has “very, very clearly demonstrated that he is not an inflation nutter,” said Lou Crandall, chief economist at Wrightson ICAP LLC, in Jersey City, New Jersey. He has “laid out the dovish case for a rate hike,” and claiming prudence in central banking “is always an attempt to take the higher ground.”


July interest rate hike not far-fetched, close examination of Fed voters’ stance shows

Wed, June 15, 2016

The Federal Reserve is expected to keep interest rates unchanged on Wednesday as a result of the weak May jobs report but a hike as soon as July is not far-fetched, based on a close examination of where officials stand.

…Lou Crandall, chief economist at Wrightson ICAP, said after the jobs report, three things are needed to get a majority to back a July rate hike.

There could be no “serious” financial market dislocations from the Brexit referendum, the May job report has got to be shown as not the start of a trend and there can’t be any more deterioration in inflation expectations.

“Everyone is in the same camp they were in, but they are data contingent,” Crandall said.


Economists See Two ’16 Fed Rate Hikes, Unsure on Timing of First

Fri, June 10, 2016

Wall Street economists are more inclined than traders to see the Fed raising interest rates twice this year, though they’re less certain on the timing of the first increase.

…One reason investors are pessimistic on the central bank’s own policy rate forecast is that pushing the benchmark higher in a time of very low or even negative rates around the world could lead to a dollar rally, causing disinflation at home, said Lou Crandall, chief economist at Wrightson ICAP LLC.


Debt King Trump, Bridge Builder Clinton Equal Bigger Deficits

Mon, May 23, 2016

The U.S. looks set to rack up bigger budget deficits in the coming years, no matter who is elected president.

With Donald Trump declaring himself the "king of debt" and Hillary Clinton promising to "build tomorrow’s economy," the next administration seems likely to put more emphasis on fiscal largesse than on financial rectitude.

If it occurs, it would bolster the confidence of Federal Reserve policy makers in the staying power of the expansion and make it more probable they’ll raise interest rates by a full percentage point next year, according to Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. Central bank officials in March penciled in four quarter-percentage point rate increases for next year after two planned for 2016.

Financial Times

US Treasury debates new-for-old bond swap

Wed, May 04, 2016

Investors value owning these fresh issues, also known as ‘’on-the-run’’ securities, because they trade more frequently. Bolstering the size of current benchmarks, with a focus said to be on the 10-year note, could improve market liquidity.

The US Treasury would then buy older, less liquid and therefore cheaper debt across the market, which could in theory then be reissued at a lower yield. In recent months, yields on older issues have risen more than those for recently sold debt, suggesting a deterioration in liquidity.

"Dealers would be in a better position to provide liquidity to customers looking to sell off-the-runs if there was a known buyback schedule that would allow them to unload the position," said Lou Crandall, economist at Wrightson Icap.


Yellen Outsources U.S. Monetary Policy to the Financial Markets

Wed, March 30, 2016

The Federal Reserve looks to have outsourced monetary policy to the financial markets -- and that may not necessarily be bad.

Fed Chair Janet Yellen told the Economic Club of New York on Tuesday that policy makers had scaled back the number of interest rate increases they expect to carry out this year after investors did the same.

...“That’s a good thing,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, commenting on the sequence of actions. “Monetary medicine gets into the blood stream faster if the public can anticipate what the Fed’s response to an economic shock will be.”

Financial Times

Trade failures of US bonds hit $456bn

Thu, March 24, 2016

However, some analysts and investors say that a slow and steady uptick in failed trades over the past few years is a consequence of the pressures on bank balance sheets.

Banks complain that increasing capital requirements makes them less willing to facilittate trading in US Treasuries, so it becomes harder for dealers and investors to find securities and trade failures increase.

"We have always had periodic, issue-specific increases in fails," said Louis Crandall, chief economist at Wrightson ICAP. "This one was large but the upward march ... we have seen over the past few years is a different phenomena and definitely worth keeping an eye on."


Fed's March Policy Message May Be Crimped by Muscular ECB Move

Thu, March 10, 2016

Dramatic action by the European Central Bank is raising questions about how far the Federal Reserve can diverge from its peers.

U.S. central bankers meet next week and while investors foresee almost no chance of an interest rate increase, how the Fed shapes expectations about its next move will be the big story when the meeting concludes on March 16.

...“Sustained exchange rate movements do affect the geography of production over time,” said Lou Crandall, chief economist at Wrightson ICAP LLC, and that can have a “disproportionate influence on U.S. manufacturing.”


Fed Debuts Interest-Rate Plan B as Longtime Benchmark Fades

Tue, March 01, 2016

After eight years of unprecedented intervention in financial markets, the Federal Reserve has taken the first baby steps in a long-term mission to extract itself. But it’s good to have a backup plan just in case that doesn’t work out.

That’s one way to look at the new “overnight bank funding rate” the New York Fed unveiled Wednesday. The rate is intended to shore up the calculation that comprises the federal funds rate, a once-robust gauge of inter-bank borrowing costs that serves as the U.S. central bank’s monetary policy target, but has lost its significance as a barometer of underlying economic activity since the 2008 financial crisis.

...“There are lots of paths the money markets and the Fed together could go down, and there are enough where it would be very nice to have a spare reference rate on the shelf that this is a very worthwhile endeavor,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “As to whether or not fed funds do ever come unhinged, that’s hard to say. It’s not impossible, but it’s certainly not inevitable.”


Fed's Unexpected Partner to Manage Rates: Foreign Central Banks

Thu, January 21, 2016

"The idea of the domestic RRP facility is to build more of a floor under market rates and this is an opportunity to extend that in a different direction," said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

The New York Fed raised the rate it pays on overnight borrowings through RRPs with foreign central banks to 0.09 percent on average over the first nine months of 2015 from 0.03 percent during the same period of 2014, according to the U.S. central bank’s latest quarterly financial statements. During the same period the Federal Open Market Committee held the RRP rate paid to domestic money-market funds at 0.05 percent.

Crandall, a former Fed economist, said foreign central bank reserve managers are probably utilizing Fed RRPs as a liquidity cushion, because they are easier to liquidate than U.S. government debt holdings at short notice.

"In the 1990s, it wasn’t uncommon to see the RRP pool pop during periods of foreign exchange turbulence for precisely that reason: that funds would be positioned there, ready for use," he said.


With Liftoff Done, the Fed Revisits a $4.5 Trillion Quandary

Fri, January 15, 2016

Federal Reserve officials who spent months debating their first interest-rate increase in almost a decade are turning next to the thorny question of what to do with a balance sheet equivalent to the size of Japan’s economy.

... The Fed’s balance sheet swelled to $4.5 trillion in 2014 from about $900 billion in 2008 on purchases of Treasuries and mortgage-backed securities, during three stages of a strategy known as quantitative easing.

The Fed keeps its assets at that level by reinvesting the proceeds of maturing debt, a tactic it pledged to end when rate hikes are “well under way.” Some private economists define that as a federal funds rate, currently in a range of 0.25 percent to 0.5 percent, of at least 1 percent, and probably higher. Dudley said there shouldn’t be a “numerical tripwire” for ending the program, and economic conditions should shape the decision.

... “Well under way’ doesn’t mean one or two rate hikes,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “The expected trajectory of rate hikes has gotten flatter and that means 2017, not 2016” for allowing run-off to begin, he said.

Financial Times

No easy way for the Fed to reverse course

Fri, December 18, 2015

The Federal Reserve has just embarked on its first interest rate-raising cycle for a decade, but that does not mean it is too soon to think about how it would resuscitate the economy if a new recession unexpectedly struck.

...Lou Crandall, chief economist at Wrightson ICAP, said the strategy was logical. The Fed has “two dimensions along which it can tighten,” he said — one by allowing its balance sheet to shrink as assets mature and run off, and one by lifting rates.

If the US economy stalls, it would be simpler for the Fed to cut rates back than to restart asset purchases to bulk up its balance sheet. “Politically it is much harder to start [Quantitative Easing] again,” he said.

Financial Times

US bond sell-off puts squeeze on swaps trade

Tue, October 13, 2015

Now the efforts of regulatory reformers are being challenged by a potent combination of emerging market weakness and strict capital standards for banks that have long dominated trading in US interest rate swaps.

Matters intensified last month as the end of the third quarter dawned, a period when banks focus on paring their balance sheets.

“It’s a sign of a market bogging down,” says Lou Crandall, chief economist at Wrightson Icap. “People have month-end and quarter-end reporting requirements. That’s where the window dressing takes place.”

Financial Times

Treasury auction sees US join 0% club

Tue, October 06, 2015

The lowest bid permitted for a US bill auction is zero per cent but ahead of the sale, four week and three-month bills have been trading at negative yields in the secondary market. This reflects a sharp decline in Treasury bill issuance in recent months as the US political system faces another tussle over raising the country’s debt ceiling.

In trading on Tuesday, the four-week bill was quoted at minus 3 basis points and the three-month bill was at minus 1bp.

“Our current forecasts assume that the debt limit will be raised in the first week of November and that the Treasury will start to ramp up issuance aggressively the following week,” said Wrightson Icap, the research company. “We could see the four-week offerings return to $40bn within a couple of weeks after Congress acts. However, there is no guarantee that the end-game will play out that neatly.”


Bond Market’s $2.46 Trillion Dilemma Isn’t So Bad After All

Sun, August 16, 2015

For bond investors worried about what might happen when the Federal Reserve starts whittling down its $2.46 trillion of Treasuries, there’s good news.

You’ll barely even notice.

...“It would not have an impact, and that’s the news here,” said Lou Crandall, chief economist at Wrightson ICAP LLC, a research firm that specializes in analyzing Fed policy and Treasury financing. “Letting Treasuries run off is a freebie.”

The Age [Melbourne]

Reserved Yellen Sharpens Focus on Inflation

Sun, July 16, 2017

Dr Yellen on Thursday (AEST) said slowing inflation was only "partly the result of a few unusual reductions" in parts of the consumer price index, a less confident wording than the Fed has used in the recent past.

"When the Fed makes a deliberate change in its phraseology, it matters," said Lou Crandall, chief economist at Wrightson Icap. "It shows the Fed is getting a little less prepared to give inflation the benefit of the doubt."

The subsequent questioning of the Fed chief over two days did little to dispel the market's view that she was providing ammunition to the doves. While prices were likely to rise eventually given the robust US jobs market, the central bank was "watching inflation very carefully", Dr Yellen admitted to the assembled lawmakers.


Veteran Bond Analyst Stands by Call for More 30-Year Treasuries

Tue, May 02, 2017

Lou Crandall is sticking with his call that
the U.S. is about to increase the amount of 30-year bonds it
sells as a prelude to adding a new ultra-long maturity.
The prediction came in the latest version of Crandall’s
weekly report on U.S. Treasury finance, The Money Market
Observer, which has been landing on clients’ desks every Monday
for almost 40 years. This week’s edition lit up his phone and
email box.

The chief economist at Wrightson ICAP in Jersey City, New
Jersey, forecast that the Treasury Department, which at 8:30
a.m. in Washington on Wednesday will announce the sizes of the
next batch of quarterly auctions, will boost 10-year note and
30-year bond sales by $2 billion apiece. He sees the move as
laying the groundwork for the Trump administration’s eventual
introduction of a new, ultra-long security


Yellen’s message today? Rate hikes are coming

Wed, June 17, 2015

By September, there could be some signs of wage pressure, said Lou Crandall, chief economist at Wrightson ICAP.

“Even though many Fed officials would clearly like to get the first rate hike out of the way, a lot of things have to break just right in order to allow them to do so by September,” he said.


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.


Negative T-Bill Rates Persist as Supply Shortage Seen Worsening

Mon, June 22, 2015

The mismatch between supply and demand may worsen if wrangling over the U.S. debt borrowing limit at the end of the year causes the Treasury to have to cut its shortest-maturity debt. If the government drags it feet on dealing with what’s known as the debt ceiling, Treasury could be forced to pay off $200 billion of bills between mid-September and the end of November, according to Wrightson ICAP LLC....

“Debt-ceiling constraints could lead to a massive pay-down in the bill sector over the final four months of this year,” wrote Lou Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey, in a note Monday. “The net redemption would come at a time when the migration of money fund assets from prime to government-only funds is likely to be accelerating, which would make the bill squeeze even more severe.”

The Wall Street Journal

Yellen Leaves Key Details of Fed Exit Plans a Mystery

Wed, June 17, 2015

Right now, reverse repos tests are capped at $300 billion a day for one-day transactions, but some have speculated that cap will have to be much higher to achieve the control over interest rates Fed officials want. Lou Crandall, chief economist with Wrightson ICAP, said the Fed may need to provide more than $500 billion in reverse repos at the start, while noting that estimate can change depending on a number of different, complex factors.

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.