Aurelia Butler

NEW YORK (Reuters) -Eurodollar futures, which reflect the outlook for U.S. interest rates over the next few years, have started to price in an incremental easing of monetary policy by the Federal Reserve in 2024. If that plays out, it would be just two years after what is expected to be the start of a Fed tightening next month. The U.S. central bank is widely anticipated to raise its policy rate at its upcoming meeting in March by a quarter of a percentage point from about zero currently. The money markets’ odds on a 50 basis point-hike the last few sessions have dwindled from as high as 80% to 37% on Friday.Market pricing for the December 2023 eurodollar contract showed an implied yield of 2.235%, which traders said can be a proxy for the federal funds rate, the rate banks charge each other for overnight loans to meet reserves required by the U.S. central bank. That is looking likely to be the peak of the Fed rate-hike cycle, or the so-called “terminal rate,” analysts said, with implied yields declining to 2.18% in the March 2024 contract, 2.125% in June, 2.095% for September, and 2.085% for December.Fed officials estimate the long-term neutral rate, which is neither constricting nor stimulating economic growth, is 2.5%.”If you look at the (yield) curve out around ’23-’24 it starts to flatten out and invert, which would argue for pricing in rate cuts,” said Jim Caron, portfolio manager and head of global macro strategies for the global fixed income team at Morgan Stanley (NYSE:MS) Investment Management.”The long end of the curve is basically telling you the same thing. It’s telling you the more they hike now, and the more they slow down growth now, the more they are going to steal it from the future, and therefore long-term growth prospects aren’t very high either.” The roughly 220 basis points of anticipated interest rate increases over the next two years suggest a faster pace of Fed tightening that may include one or two half percentage point hikes in that period, analysts said.Dan Belton, fixed income strategist, at BMO Capital in Chicago, pointed out that at the beginning of the month, “futures markets priced a much later peak of the Fed’s hiking cycle, closer to 2028 or 2029.” He added that the market had also been looking for a “much shallower path of Fed hikes too, with the peak rate being closer to 1.82%” than it is now.EURODOLLAR CURVE INVERSIONWith the implied yield on the eurodollar futures’ 2024 contracts lower than those in 2023, the curve has inverted, typically an ominous sign.Normally, yield curves slope upward with nearer maturities yielding less than dates further out in time. Longer-term debt typically carries greater risk because of the higher probability of inflation or default, demanding a greater return. For instance, the spread between the December 2023 contract and the June 2025 contract , collapsed to around -14 basis points on Friday. A year ago, that curve was steeper and the spread was at 74 basis points.”It’s as if traders in the eurodollar futures market think the Fed is going to overdo it next year and then have to reverse course and push rates back down,” said Brian Reynolds, chief market strategist at Reynolds Strategy, and former money market portfolio manager for an investment firm.The eurodollar curve has inverted a few times in the past.In June 2018, the inversion suggested the Fed would have to cut interest rates at a time when it was in a tightening mode. Indeed, after hiking rates in December 2018, policymakers reversed course the following July with a rate cut.In 2020, the central bank cut the benchmark overnight lending rate to near zero as the coronavirus pandemic caused economic devastation around the world. More

CALGARY, Alberta (Reuters) -Canada said on Friday it will halt any further public funding for the Trans Mountain oil pipeline expansion, after the government-owned company behind the project said costs had surged 70% to C$21.4 billion ($16.8 billion).Trans Mountain Corp (TMC) also delayed the finish date of the expansion by a further nine months, dealing another blow to a project already best by regulatory delays and opposition.With the latest cost overrun, the government has told TMC to secure the necessary financing from public debt markets or financial institutions, Finance Minister Chrystia Freeland said.”I want to assure Canadians that there will be no additional public money invested in TMC,” Freeland added.The government has engaged BMO Capital Markets and TD Securities to provide financial advice and Freeland said the two advisers confirmed the project remains commercially viable and public financing for the project is a feasible option. The expansion project is underpinned by 20-year shipper commitments.TMC blamed the higher cost on the impact of the COVID-19 pandemic and extreme weather in British Columbia, which temporarily shut down flows on the existing Trans Mountain pipeline in November.The company now expects to finish the expansion in the third quarter of 2023, when it will nearly triple the capacity of the pipeline running from Alberta to the Pacific Coast to 890,000 barrels per day. That would be a boost for Canada’s oil producers, which are keen to export more crude.But since the start, the project has faced several challenges, including opposition from indigenous peoples and environmentalists. In 2018, the Canadian government bought it for C$4.5 billion to help it get finished.”While like everyone we are disappointed… we remain fully supportive of this world-class infrastructure project which is vital to Canada’s long-term economic success and energy security,” said Mark Little, chief executive of Suncor Energy (NYSE:SU), one of Canada’s largest oil companies and a shipper on the line.The previous cost estimate, made in February 2020, was C$12.6 billion, while in 2017 it was pegged at C$7.4 billion. The new estimate includes the cost of all known enhancements, changes, delays and financing. The Canadian government does not plan to be the long-term owner of the pipeline, and expects to launch a sale process in due course.TMC said Chief Executive Ian Anderson will retire from the company and its board, effective April 1. He said the progress made over the two years was “remarkable” considering the global pandemic, wildfires and flooding in British Columbia.”This project was crazy from a climate perspective when it was supposed to cost C$7.4 billion, but at C$21.4 billion and rising it is now economic madness,” said Keith Stewart, a strategist for Greenpeace Canada.”It’s time to cut our losses on this white elephant.” ($1 = 1.2749 Canadian dollars) More

New York (Reuters) -When the Federal Reserve tacked to a new brand of monetary policy 18 months ago it thought it could deliver low unemployment and tame inflation.It may end up with neither, five top bank and academic economists wrote in a critique released on Friday.Their paper envisions a scenario in which Fed Chair Jerome Powell and his colleagues are unable to control rising prices and forced to raise interest rates so high the economy slows and unemployment rises, hurting the very people they aimed to help.”Avoiding downturns is as important as any gains” that workers might enjoy during a “hot economy”, one of the authors, Deutsche Bank (DE:DBKGn) Securities chief economist Peter Hooper said at a symposium where the paper was presented. It was released at a time of flux in Fed policy, with the Fed expected to begin raising interest rates in March in response to high inflation, but still debating how aggressive it may need to be.One Fed official responding to the paper said it was still likely inflation will ease over time without putting the recovery at risk.”I see our current policy situation as likely requiring less ultimate financial restrictiveness compared with past episodes and posing a smaller risk,” Chicago Fed president Charles Evans said. “We don’t know what is on the other side of the current inflation spike… We may once again be looking at a situation where there is nothing to fear from running the economy hot.” But others were skeptical that the new approach, dubbed the “Powell paradigm” by the writers, would work in its approach of using looser policy and allowing slightly higher inflation to encourage stronger employment.The perceived benefits were valid, the authors found, with periods of low unemployment helping narrow the persistent gaps between, for example, white, Black and Hispanic workers, and between those with more education versus those with less.But the COVID-19 pandemic and the policy responses to it have now “upended some of the premises” on which the new approach rested and left the Fed facing inflation not seen since the 1980s, wrote Hooper, Morgan Stanley (NYSE:MS)’s Seth Carpenter, Bank of America (NYSE:BAC)’s Ethan Harris, University of Chicago professor Anil Kashyap, and University of Wisconsin professor Kenneth D. West.They said the Fed may be able to lower the pace of price increases with steady but ultimately modest increases to its benchmark overnight interest rate, from near zero to around 3% between now and 2024, without triggering big changes in the unemployment rate – the ideal scenario for policymakers.Favorable public psychology, with firms and households acting as if inflation will remain under control, does “most of the work … Therefore, the Fed neither has to be pre-emptive in heading inflation off nor does it have to crush the economy” to win back control, the group wrote.But under some of the simulations they developed the Fed could be forced to raise interest rates perhaps twice as high, see inflation remain elevated, and the unemployment rate get lodged between 5% and 6% for several years.That would be a blow to Fed hopes for a “broad and inclusive” recovery in the U.S. labor market, with the higher unemployment rate falling hardest on racial and ethnic minorities and less educated Americans.The results “raise some questions for the Federal Reserve going forward” if, after promising it could deliver stable inflation and low unemployment, policymakers again have to make a choice.”Either outcome, exacerbating inequality or accepting years of high inflation, is fraught with political risk,” they concluded.BROADENING INFLATIONThe Fed is due to hike interest rates at its March 15-16 policy meeting. Yet minutes of the central bank’s most recent discussion in January acknowledge the gamble officials took by leaving ultra-loose monetary policy, of near-zero interest rates and monthly purchases of bonds, in place as long as it did.Inflationary forces that had been seen as “transitory” were now broadening through the economy, the minutes noted, and had begun influencing business investment and wage decisions in ways that could persist. That’s the sort of dynamic that Carpenter, Harris and the other authors noted could force the Fed into tougher policy choices: If recent inflation experience informs what businesses or households expect to happen in the future and how they invest and spend as a result, it might require more aggressive rate increases – and worse employment outcomes – to reverse that thinking.The emphasis on jobs “has potentially earned the Fed some good will,” the authors said. “But when the next recession comes and inequality rises … what will be the fallout?” More

“It is essential that policymakers, including the Federal Reserve, plan for the future of the payment system and consider the full range of possible options to bring forward the potential benefits of new technologies, while safeguarding stability,” Brainard said in remarks prepared for delivery to the U.S Monetary Policy Forum in New York. “A U.S. CBDC may be one potential way to ensure that people around the world who use the dollar can continue to rely on the strength and safety of U.S. currency to transact and conduct business in the digital financial system.”Fed policymakers are divided on the need for a central bank digital currency, even as many other central banks globally are pressing ahead on such plans. Brainard has emerged as a supporter of the idea, though in her remarks she emphasized the importance of considering the potential impact of a U.S. CBDC rather than making any outright claims for the need to adopt it. “It is important to consider how new forms of crypto-assets and digital money may affect the Federal Reserve’s responsibilities to maintain financial stability, a safe and efficient payment system, household and business access to safe central bank money, and maximum employment and price stability,” she said Friday. Proponents of a CBDC say it could streamline payment systems, improve financial inclusion and even bolster financial stability, while others worry about the costs, including privacy concerns. On one point Fed policymakers do appear to be in agreement: the Fed will not launch one without clear support from the White House and Congress, policymakers have indicated. More

(Reuters) -New York Federal Reserve Bank President John Williams said Friday there is little need for the Fed to kick off its interest rate hiking cycle with a big move, advocating instead for the central bank to raise rates “steadily” and adjust the pace if needed. His comments push back against those of other Fed officials, including St. Louis Fed President James Bullard, who say the central bank should front load some of its interest rate increases once it begins lifting rates in March from near-zero levels. “I don’t see any compelling argument to taking a big step at the beginning,” Williams told reporters on Friday. “I think we can steadily move up interest rates and reassess.”Williams said policymakers can speed up or slow down the pace of rate increases later on depending on what happens with the economy. A path in which the federal funds rate moves to a range of 2% to 2.5% by the end of next year makes sense, he said. After interest rate increases are underway, the next step would be for the Fed to begin reducing its holdings of Treasury securities and mortgage-backed securities, Williams said during a virtual event organized by New Jersey City University. He expects that process to start later this year. After the event, Williams told reporters that he thinks the Fed will be able to shrink its holdings substantially primarily by letting securities roll off the balance sheet as they mature. He said the Fed may consider selling MBS at some point to achieve its goal of moving to a portfolio that invests mainly in Treasury securities, an approach supported by some other Fed officials as well.Williams said he expects real U.S. GDP to grow by slightly less than 3% this year and for the unemployment rate to drop to about 3.5% by the end of the year. He projects personal consumption expenditures (PCE) price inflation to decline to about 3% and for it to fall further next year as supply challenges improve. More