I am borrowing this phrase from a Bloomberg Radio interview Thursday in which bond reporter Alexandra Harris (my daughter) used these phrase to discuss the speech today delivered by FOMC Governor Lael Brainard titled, “Safeguarding Financial Resilience Through the Cycle.” Alex noted that the tone of Brainard’s speech was spattered with references to the concept of LEAN or CLEAN. The binary analysis of monetary policy analyzed by BIS Chief Economist William White, led to White criticizing Chair Greenspan in a speech at Jackson Hole in 2003.
The recent flattening of the yield curves in the U.S. has precipitated discussion that the FED is moving too fast in raising rates with the market action predicting an impending recession. The discussion has been centered around recent FED speeches utilizing the White use of countercyclical capital buffers (CCyB) to slow the increase of leverage in the financial by having banks build up capital ratios to insure increasing financial vulnerabilities.
In a previous post I noted how this language had appeared in another Brainard speech. Governor Brainard noted that the recent action by Congress to invoke a fiscal stimulus in times of above-trend growth has few “historical episodes of similar pro-cyclical fiscal stimulus to draw upon as we assess the outlook. But in the few cases where resource utilization has been near the levels we may soon be approaching, there have been heightened risks either of inflation,in earlier decades,or of financial imbalances more recently.”
From this situation, Brainard draws out concern about financial vulnerabilities: “asset valuations and business leverage.” Because of the increase in vulnerabilities the Fed Governor believes this is no time to embark upon policies that could aggravate the present economy in a pro-cyclical manner.
- “At this point in the cycle, it is premature to revisit the calibration of core capital and liquidity requirements for the large banking institutions”;
- “If cyclical pressures continue to build and financial vulnerabilities broaden, it may become appropriate to ask the largest banking organizations to build a countercyclical buffer (CCyB) of capital to maintain an adequate degree of resilience against stress”; and
- Countercyclical capital requirements can lean against rising financial vulnerabilities at a time when the degree of monetary tightening that would be needed to achieve the same goal would be inconsistent with the dual mandate goals of full employment and price stability.”
Tags: Fed, Greenspan Put, Jerome Powell, Lael Brainard, U.S. Dollar, yield curves
April 19, 2018 at 7:51 pm |
Amen on the hope that Powell has suspended the Greenspan put. I may also remind readers, that there is (in our new tax bill) a hidden “counter-cyclical buffer” on corporate leverage. That limit on interest deductions for calculation of income to be taxed will begin to bite hard and fast for those highly levered companies that either used floating rate debt, or were borrowing at the short end of the curve, and will have significant maturities to refinance in 2019 through 2022. Amazing how this stuff has more tentacles reaching through the maze of money than a convention of cephalopods!
April 19, 2018 at 7:59 pm |
Professor—good to hear from you and a great insight on the coming implications of the new tax bill for the LIBOR impacted forward earnings
April 20, 2018 at 7:50 am |
In plain English?
April 20, 2018 at 8:46 am |
https://www.aei.org/publication/fed-risks-roiling-global-markets/