Aurelia Butler

WASHINGTON (Reuters) – The U.S. Securities and Exchange Commission (SEC) will on Sept. 14 propose draft rules reforming how U.S. Treasuries are traded and cleared, according to a notice published by the agency on Wednesday. U.S. regulators have been working on reforms to the structure of the $23 trillion Treasury market following a number of liquidity crunches, including a meltdown in the market as the COVID-19 pandemic shut down the U.S. economy in March 2020. That episode prompted the U.S. Federal Reserve to step in and start buying up Treasury securities. As Treasury debt continues to grow and Treasury dealers’ market-making capacity remains limited, the Treasury market remains highly vulnerable to further dysfunction under stress, regulatory experts including former Treasury Secretary Tim Geithner warned in a report this year. With the Fed kicking off “quantitative tightening” in June, letting its Treasury bonds reach maturity without buying more, the market has experienced wild price swings, Reuters reported last month. The Treasuries market is the world’s largest bond market and serves as a global benchmark for a swathe of other asset classes, making its price gyrations especially worrying.The SEC notice said the agency would consider amendments to certain clearing rules for Treasury market participants, without providing details. Central clearing involves sending trades to a clearing house, which demands both counterparties put up cash to guarantee the trade’s execution in the event either defaults. SEC chair Gary Gensler has in the past advocated for expanding centralized clearing of Treasury securities on the basis it increases resilience by bringing additional capital into the market during times of stress. More

FRANKFURT (Reuters) – The European Central Bank will raise interest rates again on Thursday to fight runaway inflation and, with a big move and a record one under consideration, the only question is by how much.Concerned that sky-high inflation is getting increasingly entrenched, policymakers are scrambling to keep a lid on the bloc’s most damaging bout of price growth in nearly half a century as it eats up household savings and weighs on business output.Ultimately, the choice will be between a 50 and a 75 basis point increase in the zero percent deposit rate. The latter would be the biggest ever hike of the ECB’s benchmark rate, but regardless of the outcome the bank’s direction of travel will be clear. More hikes are factored in for coming months as price pressures already expected to usher in a winter recession consistently exceed even the most pessimistic forecasts.Buoyed by hawkish comments from conservative policymakers, markets have now nearly priced in a 75 basis point hike. A slim majority of economists polled by Reuters are also predicting the larger increase.”We think it is a very close call, with good arguments on each side, but ultimately think those advocating for a larger hike will prevail as September offers the best opportunity to send a clear signal of determination,” Morgan Stanley (NYSE:MS) economist Jens Eisenschmidt said.”Be it 50 or 75 basis points, … we see the ECB hiking cycle ending at 2% in March.”The decision also encapsulates a policy dilemma.Updates to ECB forecasts are certain to show sharply higher inflation and significantly weaker economic growth.Sky-high energy prices will sap purchasing power and almost certainly plunge the bloc into a recession that could be exacerbated by an aggressive ECB, especially with borrowing costs rising for governments as they try to help those most affected.A big hike after a decade of ultra-low rates also goes against the ECB’s guidance for gradualism and several policymakers, including board member Fabio Panetta and Greek central bank chief Yannis Stournaras, have made the case for a smaller move. Central banks are also powerless against inflation driven by supply-side disruptions, and rate hikes now will affect the economy years down the road, when inflation is abating on its own.CREDIBILITY However, timid action now could push up long-term inflation expectations from already high levels, weakening the ECB’s inflation-fighting credibility and challenging the very framework of its mandate.Headline euro zone inflation is over 9% while its underlying rate is 4.3%, more than twice the ECB’s target, indicating that more and more of the energy-driven price pressures are seeping into the broader economy.A smaller move would also weaken the euro as the U.S. Federal Reserve is clearly raising rates faster, which would in turn further fuel inflation as energy is denominated in dollars. That is why nearly a half dozen policymakers have publicly backed putting a 75 basis point option on the table, giving the debate a hawkish momentum. The coming recession also makes the case for frontloading rate hikes as moving aggressively once the downturn takes hold will be difficult to communicate. Some policymakers may even welcome a shallow recession that, with the bloc’s labour market is increasingly tight, could provide relief to firms now struggling to find workers.”We expect rate hikes of 75, 50 and 25 basis points in the forthcoming meetings this year, taking the deposit rate into neutral territory as the economy slows, and another three 25 basis point hikes next year,” Societe Generale (OTC:SCGLY) economist Anatoli Annenkov said.On top of the rate announcement, the ECB will likely debate changing how it pays interest on excess reserves parked by commercial banks, which are now set to enjoy a risk-free windfall on trillions of euros worth of cash circulating in the financial system.The ECB may also discuss whether to start reducing its balance sheet as part of its policy normalisation process.However, no decision is expected in either of these areas.The ECB announces its policy decision and presents the new economic projections at 1215 GMT, followed by President Christine Lagarde’s news conference at 1245 GMT. More

LONDON (Reuters) – Britain’s new Prime Minister Liz Truss on Wednesday readied the final details of a plan to tackle soaring energy bills, which looks likely to cool inflation but add more than 100 billion pounds ($115 billion) to the country’s borrowing.On her first full day as Britain’s leader after replacing Boris Johnson, Truss told parliament she would support businesses and households who are bracing for a recession that is forecast to start later this year.Sterling fell to its lowest level against the U.S. dollar since 1985, in part due to worries among investors about the scale of debt that Britain will have to sell to fund the energy support plan, and the tax cuts that Truss has also promised.A source familiar with the situation told Reuters that Truss was considering freezing energy bills in a plan that could cost towards 100 billion pounds, a major turnaround from her rejection of “handouts” during the early stages of the Conservative Party leadership campaign. Deutsche Bank (ETR:DBKGn) said the energy price support and the promised tax cuts could cost 179 billion pounds, or about half Britain’s historic pandemic spending push which dealt a blow to the country’s public finances.Truss ruled out demands by the opposition Labour Party that she fund some of the spending by raising taxes on energy firms.”I am against a windfall tax. I believe it is the wrong thing to be putting companies off investing in the United Kingdom,” Truss told lawmakers.She is due to give details of the energy support plan in parliament on Thursday.MORE BORROWING Her finance minister Kwasi Kwarteng, also on his first full day in the job, said borrowing would be higher in the short term to provide support for households and businesses and fund the tax cuts.”We need to be decisive and do things differently. That means relentlessly focusing on how we unlock business investment and grow the size of the British economy, rather than how we redistribute what’s left,” he told business leaders.The pound sank its lowest level against the dollar since 1985 at $1.1407 and was down almost 1% against the euro too.While the fall in sterling could add to the inflation pressures in the economy, the expected price freeze plan was likely to help ease the cost-of-living squeeze on consumers which had been shaping up to be the most severe in decades.BoE Chief Economist Huw Pill said the plan could slow inflation – which surpassed 10% in July – although it was too soon to say what the implications for the central bank’s run of interest rate increases would be.The BoE forecast in August that inflation would exceed 13%, and some economists have said it recently could top 20% if gas prices – pushed up by Russia’s invasion of Ukraine – stay high.Pill also said the BoE would not allow the surge in government spending to fuel demand in the economy to the point where it pushed up inflation.Nonetheless, investors scaled back their bets on a 75-basis-point rate hike at the BoE’s next scheduled monetary policy announcement on Sept. 15 to 60% from almost 80% earlier on Wednesday. Two-year British government bond yields also dropped.Kwarteng met BoE Governor Andrew Bailey and told him that “independence is really a cornerstone of how we see managing the economy,” comments that seemed aimed at reassuring investors that the new government would not pressure the central bank.Early in the Conservative Party leadership campaign, Truss said the government should set a “clear direction of travel” for monetary policy although she subsequently struck a less interventionist tone.Kwarteng said he and Bailey would meet regularly, initially twice a week, to coordinate economic support.($1 = 0.8721 pounds) More

WASHINGTON (Reuters) – Federal Reserve officials on Wednesday said they still aren’t convinced the worst of the U.S. inflation scare has passed, in comments that teed up a continuation of the central bank’s aggressive interest rate increases.”We are in this for as long as it takes to get inflation down,” Fed Vice Chair Lael Brainard said in an address to a banking conference, echoing past comments by officials from other central banks to do “whatever it takes” to protect their economies.The chief risk now, Brainard and others said on Wednesday, remains the worst outbreak of inflation since the 1980s.The cure: A steep rise in interest rates meant to slow the economy, clamp down on spending, and bring the demand for goods and services more in line with the economy’s ability to produce or import them. The Fed has raised interest rates at its last four policy meetings by a total of 2.25 percentage points, and is expected to lift its policy rate by another 50 or 75 basis points at its Sept. 20-21 session.Policymakers on Wednesday shied from tipping their hand on that decision. Investors currently expect the larger rate hike to prevail at this point, though monthly inflation data due next Tuesday may influence that outlook.Fed Chair Jerome Powell may also shape expectations about what is to come when he speaks on Thursday, in what are likely to be his final public comments before this month’s policy meeting. Those who spoke on Wednesday noted that even as the economy slows overall, the job market remains by some measures historically tight, and data have provided little sense of relief yet from rising prices. In its most recent “Beige Book” compendium of anecdotal reports about the economy, the Fed noted widespread signs that economic activity was weakening, and “some degree of moderation” of price increases in certain parts of the country.But overall “most contacts expected price pressures to persist at least through the end of the year,” the Fed said in its report.’NEED TO DO MORE’While Brainard, who spoke to the annual conference of The Clearing House and Bank Policy Institute, noted that the risks to growth and jobs may at some point weigh more heavily on the Fed’s deliberations, she said the lesson from past bouts of inflation was clear: Don’t pull back on rate increases too soon.A slowdown in the inflation data for July was “welcome” Brainard said, but “it will be necessary to see several months of low monthly inflation readings to be confident that inflation is moving back down” to the Fed’s 2% target.Annual inflation, using the Fed’s preferred measure, is currently above 6%.In her first policy remarks since taking over as president of the Boston Fed, Susan Collins said “we’ve not yet seen significant declines in prices, and that’s what we’re going to be looking for.””We need to do more,” Collins said in a podcast interview with staff from the regional bank. In separate comments, Cleveland Fed President Loretta Mester said she was concerned higher inflation may already be in train as the full effect of things like rising prices for services and rents is felt. “I’m not even convinced that inflation’s peaked yet,” Mester said in a webcast with Market News International. Services inflation “tends to be much more persistent and rents are still very elevated … It takes a while for rents to show up in underlying inflation. There’s still more that’s going to show up.” More

The U.S. central bank released its latest summary of feedback from business contacts nationwide as it mulls whether to proceed with a third straight 75-basis-point interest rate hike at its Sept. 20-21 policy meeting or go with a still larger-than-usual 50-basis-point rise in its bid to quash high inflation.”Overall labor market conditions remained tight, although nearly all Districts highlighted some improvement in labor availability,” the Fed said in its survey, known as the “Beige Book,” which was conducted across its 12 districts through Aug. 29. “Price levels remained highly elevated, but nine Districts reported some degree of moderation in their rate of increase.”Fed Vice Chair Lael Brainard earlier on Wednesday said the central bank would maintain tight monetary policy “for as long as it takes” to get inflation down but did not address the upcoming policy meeting.Fed Chair Jerome Powell is scheduled to speak at 9:10 a.m. EDT (1310 GMT) on Thursday. A much-anticipated monthly measure of inflation is due on Sept. 13.The Fed has raised interest rates by 225 basis points since March as it lifts its benchmark overnight interest rate to a level consistent with dampening demand across the economy enough to alleviate price pressures and bring inflation back down to its 2% goal.Those moves are filtering through to expectations for the year ahead. “The outlook for future economic growth remained generally weak, with contacts noting expectations for further softening of demand over the next six to twelve months,” the Fed’s report said.RECESSION FEARSInflation has been running at 40-year highs and more than three times the Fed’s target. While there are some positive signs that supply chain issues are improving and tight labor market conditions loosening, policymakers remain fearful higher inflation expectations could become entrenched among businesses and consumers.They have also flagged rising risks that the aggressive series of rate hikes needed to bring inflation down may cause a recession.In the Fed’s Chicago district, those jitters were apparent, with “many” contacts expressing concerns about the potential for a recession, while one staffing firm in the Philadelphia Fed’s district reported a slowdown in orders “approaching levels consistent with prior recessions.”U.S. employers hired more workers than expected in August, the Labor Department reported on Friday in its closely-watched monthly jobs report, but moderate wage growth and a rise in the unemployment rate also suggested labor shortages may be easing.Elsewhere in the Beige Book, the Fed’s stated aim of cooling inflation without causing a sharp spike in unemployment still appeared possible. “Generally softer economic conditions and slight relief from supply disruptions appeared to alleviate some inflationary pressures,” the Cleveland Fed district said. “Though still high, both the share of contacts reporting higher input costs and the share reporting higher selling prices dipped to their lowest levels in more than a year.” More