Aurelia Butler

NEW YORK (Reuters) -The Federal Reserve’s internal debate over the fate of its balance sheet reduction effort is set to quicken at its March policy meeting, with policymakers first setting the stage for how they’ll likely slow the drawdown, likely deferring a decision on when to stop the process altogether to a later date. Minutes of the central bank’s Jan. 30-31 Federal Open Market Committee meeting, released on Wednesday, showed “many participants” were eager to kick off “in-depth discussions” at their March 19-20 meeting on how they will conclude what has been a steady reduction in the Fed’s bond holdings. Officials reckoned with cash draining steadily out of a key central bank tool known as the overnight reverse repo facility -it’s viewed as a proxy for excess financial sector liquidity -the time is close at hand for managing an endgame that will keep financial markets unruffled. To get there, officials are ready for a full-scope debate over how to eventually slow the process commonly referred to as quantitative tightening, or QT, at their March FOMC meeting. While there’s uncertainty whether all the cash will drain out of the reverse repo facility, wherever it stabilizes means bank reserves will start falling quickly. This overall tightening in liquidity means the Fed must be prepared to shift the QT process. Some Fed officials said at the January meeting that amid uncertainty over how much liquidity the financial system needs, slowing the pace of the contraction is a good first step. The minutes also said “a few” policymakers believe QT can proceed “for some time” even after the Fed starts cutting its short-term interest rate target.Fed Chair Jerome Powell flagged the upcoming debate at the press conference following last month’s FOMC meeting. The minutes also echo views of policymakers who have started debating how the Fed can complete QT smoothly. ENDGAME IN SIGHTThe Fed more the doubled the size of its holdings starting in March 2020 to a peak of nearly $9 trillion by the summer of 2022, using bond purchases to stabilize markets and provide stimulus beyond the near zero federal funds rate then in place. The current size of the Fed’s balance sheet is $7.7 trillion.The Fed has been reducing the size of its holdings since 2022. It is allowing up to $95 billion in Treasury and mortgage bonds to expire each month and not be replaced. With a QT slowdown, or taper, officials would likely lower that cap to buy the central bank time on deciding when to stop altogether. The QT process complements Fed rate hikes aimed at cooling high levels of inflation. With price pressures heading back to the 2% target Fed officials are openly weighing when they can lower the federal funds target rate from its current 5.25% to 5.5% level. “March is the first time they’ll do a deep dive into how to taper,” said Derek Tang, an analyst at forecasting firm LH Meyer. “The end point will take a lot more work to suss out since it hinges on things outside of their control like market sentiment and regulatory reform.” Tapering the drawdown is important because both inside and outside the Fed there is great uncertainty over the level of liquidity that’s needed to afford the central bank control over its short-term rate target while allowing for acceptable levels of volatility in money markets. When the Fed last engaged in a QT process it unexpectedly withdrew liquidity to such a level in September 2019 that it was forced to start adding it back in large amounts to restore stability to short-term markets. The Fed doesn’t expect a replay of that in part due to new tools, but even so, most believe it doesn’t want to test the market by withdrawing liquidity too aggressively. “We believe the Fed does not want to repeat its past errors with quantitative tightening, which led to a disruption in the repo market,” which makes the case for starting the process with a taper, said Ryan Sweet, U.S. economist with Oxford Economics. “Ending QT does not appear on the horizon and tapering soon would allow the process to last longer.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Pakistan’s traditional political power-brokers have unveiled a new coalition government, breaking a two-week impasse following elections, but the incoming administration will be quickly tested by the country’s dire economic circumstances.The Pakistan Muslim League-N of three-time former prime minister Nawaz Sharif and the Pakistan People’s party, led by Bilawal Bhutto Zardari, announced late on Tuesday they had agreed to form a government. The parties, which have historically dominated Pakistan’s politics, came second and third in the February 8 elections, when independent candidates loyal to imprisoned former prime minister Imran Khan shocked observers by winning the most seats despite suffering a military crackdown.The new government will be led by Shehbaz Sharif, Nawaz’s brother, while Zardari’s father Asif Ali Zardari, the husband of slain former prime minister Benazir Bhutto, has been put forward for the mostly ceremonial role of president.The administration will be forced immediately to contend with Pakistan’s acute economic plight, after Islamabad narrowly averted default last year with the help of an emergency IMF lending agreement. That programme is due to expire in April, meaning the country’s new rulers are expected to need to return to the fund for more support. The populist Khan’s Pakistan Tehreek-e-Insaf party, meanwhile, has claimed that its candidates were robbed of a majority by vote rigging and vowed to topple any rival coalition, raising the prospect of more political instability that could derail any economic recovery.Fitch Ratings warned this week that finalising a new IMF deal was “likely to be challenging”, but Pakistan had little choice: “Failure to secure it would increase external liquidity stress and raise the probability of default,” the credit rating agency said.Pakistan’s debt has soared since 2007 as authorities failed to invest borrowing from international bondholders and countries, including China, into productive sectors. “Debt accumulation has been overwhelmingly used to continue fostering a consumption-focused, import-addicted economy,” according to Tabadlab, a think-tank in Islamabad.This means the government has had to borrow even more in order to meet its existing debts.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.As a result, most government revenues now go to repaying interest, while Pakistan’s foreign reserves, at $8bn, are only enough for around six weeks’ worth of imports. Tabadlab warned on Sunday that this vicious cycle had become “unsustainable”.“Unless there are sweeping reforms and dramatic changes to the status quo, Pakistan will continue to sink deeper, headed towards an inevitable default,” it said.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.One reason for this is weak growth. Unlike in nearby India or Bangladesh, Pakistan has been unable to sustain growth levels and suffered regular boom-and-bust cycles, with the economy contracting in 2023. Asad Sayeed, an economist at the Collective for Social Science Research in Karachi, said this was unlikely to change until Pakistan increased exports and boosted tax collection enough to fund badly needed government investment. “Unless you resolve [this], you’re not going to grow,” he said.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The most painful manifestation of Pakistan’s economic crisis has been inflation, which peaked at 38 per cent last year and remains near 30 per cent.Pakistan’s import-dependent economy was hit by the surge in commodity prices following Russia’s full-scale invasion of Ukraine in 2022. Subsequent cuts to fuel subsidies — a condition of the IMF lending — exacerbated the pain.Sayeed said he thought the worst was over, unless the new government succumbed to pressure to increase spending, such as offering additional subsidies. “If the new government starts behaving badly again . . . then [inflation] will increase further.”You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.One consequence of Pakistan’s tepid growth is that it is not able to create enough jobs. More than half of the country’s population is under the age of 30, and the majority of working-age women do not participate in the country’s labour force due to lack of opportunities and entrenched patriarchy. Improvements in living standards have also stalled, with poverty increasing.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The economic malaise has fuelled popular anger towards the government, which Shehbaz Sharif headed in 2022 and 2023 after Khan was ousted by parliament. It also increased the appeal of the PTI.Analysts said Pakistan needed both a new IMF programme and painful economic reforms to avoid a debt restructuring. But while a new government will offer some certainty, it may struggle to improve Pakistan’s parlous finances.“The good thing [would be] that there’s a government,” said Bilal Gilani, a political scientist. “The bad thing is that the government might be much weaker.” More

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LONDON (Reuters) – The World Bank warned that high borrowing costs have “changed dramatically” the need for developing nations to boost sluggish economic growth.The multilateral lender’s latest warning comes as international bond sales from emerging market governments hit an all-time record of $47 billion in January, led by less risky emerging economies such as Saudi Arabia, Mexico and Romania. However, some riskier issuers have started to tap markets at higher rates. Kenya recently paid more than 10% on a new international bond – the threshold above which experts often consider borrowing unaffordable.”When it comes to borrowing, the story has changed dramatically. You need to grow much faster,” Ayhan Kose, deputy chief economist of the World Bank, told Reuters in an interview in London on Tuesday, though he declined to comment on individual countries. “If I had a mortgage with a 10% interest rate, I would be worried,” he added. Kose added that faster growth, especially a real growth rate higher than the real cost of borrowing, could prove elusive. The World Bank warned in its Global Economic Prospects report, published in January, that the global economy was set for the weakest half-decade performance in 30 years during 2020-2024, even if recession is avoided. Global growth is expected to slow for a third consecutive year to 2.4%, before ticking up to 2.7% in 2025. Those rates are still well below the 3.1% average of the 2010s, the report showed. The growth slowdown is particularly acute for emerging economies, around a third of which have seen no recovery since the COVID-19 pandemic and have per capita income below their 2019 levels. Kose said this throws many education, health and climate spending goals into question. “I think that it’s going to be difficult to meet those objectives, if not impossible, given the type of growth we have seen,” Kose said. An escalation of the Middle East conflict is a further downside risk, adding to concerns over tight monetary policy and weak global trade. “Trade has been a critical driver of poverty reduction, and obviously for emerging markets economies, a critical source of earnings,” Kose said.DEBT RESTRUCTUREIf growth remained low, some emerging economies might face having to restructure debt, Kose added, by reprofiling maturities or agreeing haircuts with creditors. “Sooner or later you need to restructure the debt and you need to have a framework,” he said. “That has not happened in the way the global community was hoping for.”G20 nations launched the Common Framework in 2020, when the pandemic upended nations’ finances. The programme aimed to speed up and simplify the process of getting overstretched debt-distressed countries back on their feet. But the process has been beset by delays, with Zambia locked in default for more than three years. “If growth remains weak and financing conditions remain tight, you will not see an easy path out of this problem. But if growth magically goes up, it’s like a medicine.” More

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