Turkish lira crashes as much as 14% after the firing of the head of the central bank sparks market turmoil

GettyImages 1014049930
A foreign exchange office in Istanbul, Turkey.

  • Turkish President Recep Tayyip Erdogan fired the head of the central bank after he raised interest rates last week.

  • The lira fell by as much as 14% against the dollar as foreign investors fled Turkish assets
  • The government says it will continue to follow a free-market and liberal foreign exchange regime.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The Turkish lira fell as much as 14% on Monday, after President Recep Tayyip Erdogan sacked the head of the central bank, Naci Agbal. Investors fled Turkish assets after Agbal’s departure, whose appointment had increased confidence and trust in the country’s monetary and macroeconomic policies.

Since Agbal’s appointment in November 2020, the lira had regained some strength and stability, as domestic and foreign investors responded well to his more traditional macroeconomic policies. Previously, Turkey’s unconventional approach to monetary policy had made many investors cautious and the lira suffered as a result.

Agbal raised interest rates to 19% from 17% on Thursday. The rate hike boosted the currency, but went against Erdogan’s belief that higher interest rates raise inflation. Agbal’s replacement, Sahap Kavioglu, shares this opinion.

“Mr Agbal’s replacement, Sahap Kavcioglu, is a little-known business school professor who shares President Erdogan’s economics theories and is, unsurprisingly, associated with the ruling party. Turkey will be an interesting example of what EM can expect if inflation fears rise markedly, with markets nervous about inflation in developed countries and punishing asset classes accordingly,” Jeffrey Halley, senior market analyst at OANDA, said on Monday.

Turkish finance minister Lütfi Elvan has however stated the country will continue to follow a policy of free markets and a liberal foreign-exchange regime. A statement by Kavioglu also said the Turkish central bank “will continue to use the monetary policy tools effectively in line with its main objective of achieving a permanent fall in inflation”.

The falling lira dragged on the benchmark Borsa Istanbul 100 index, which tumbled by as much as 9% on Monday, as investors fled the domestic market.

The heightened nervousness of fixed income investors was also reflected in the stark price fall of the benchmark Turkish 10-year bond. Its yield rose by as much as 300 basis points to around 16%, on Monday, its highest since August 2019. Yields move inversely to prices.

Growing concerns over economic and currency instability following Agbal’s dismissal, especially relating to shifts in interest rates and inflation, have raised the risk associated with Turkish assets and led investors to pull out of Turkish markets across the board on Monday.

The long-term strength of the Turkish economy and the lira are now in jeopardy, Rabobank senior emerging-market strategist Piotr Matys said.

“Essentially, the risk that the CBRT could make the same policy mistake as in 2019/2020 is high. To reiterate the point we have made on numerous previous occasions, Turkey cannot afford to have negative real interest rates when inflation is substantially above the official 5% target,” Matys said.

Read the original article on Business Insider

The Fed will end a pandemic-era capital break it gave to Wall Street banks

Federal Reserve
  • The Fed will end a pandemic-era rule that eased banks’ capital requirements on March 31.
  • The policy allowed major banks to hold less cash against Treasurys and was meant to spur lending.
  • The announcement fueled a short jump in Treasury yields and dragged bank stocks lower.
  • See more stories on Insider’s business page.

A rule change that eased capital requirements for major banks will expire as planned on March 31, the Federal Reserve said on Friday.

The pandemic-era policy to give banks relief from what is formally called the supplementary leverage ratio allowed Wall Street firms to keep less cash on hand against Treasurys than usual. The rule aimed to free up banks’ abilities to lend during the downturn, as well as cut down on bond-market froth. By no longer counting Treasurys and central bank deposits when calculating the amount of reserves needed, banks would have more cash to lend out to struggling businesses and households.

The SLR relief was slated to expire at the end of the month, yet investors had been looking to the Fed to clarify whether it would extend the rule. While banks’ quarterly reports showed a robust recovery through 2020, some had expected the relief would continue as part of the Fed’s ultra-easy policy stance.

That group’s reaction to the Friday announcement was captured in knee-jerk reactions across markets. The 10-year Treasury yield temporarily shot higher before paring most of the sudden gains. Bank stocks faced more permanent losses, with JPMorgan, Goldman Sachs, and Morgan Stanley all tumbling immediately after the open.

The central bank said it will soon seek public comment on adjustments to the SLR. New dynamics in the bond market and the broad economic recovery could warrant additional rule changes, according to the Fed.

“Because of recent growth in the supply of central bank reserves and the issuance of Treasury securities, the Board may need to address the current design and calibration of the SLR over time to prevent strains from developing that could both constrain economic growth and undermine financial stability,” the Fed added in a statement.

Still, such adjustments won’t erode the strength of banks’ capital requirements, the central bank noted.

The SLR was formed in 2014 out of a broader set of capital requirements put in place after the global financial crisis. The international regulations, known as Basel III, seek to mitigate financial-system risk by mandating that banks maintain certain ratios of cash in accordance with their leverage.

Implementation of the new rules in 2009 gave the Fed a new tool with which to ease monetary conditions during the coronavirus recession.

Read the original article on Business Insider

Monetary stimulus will remain in place well into economic recovery, Fed Chair Powell says

jerome powell fed mask
  • Federal Reserve Chairman Jerome Powell reiterated Thursday that the central bank is far from tapering its asset purchases or raising interest rates.
  • “Now is not the time to be talking about an exit” from easy monetary policy, the central bank chief said in a virtual discussion.
  • The comments come after various Fed officials suggested that inflation could pick up faster than expected and, in turn, prompt an early rate hike.
  • Powell rebuffed fears of an unexpected policy shift, noting the central bank will notify the public “well in advance” if it is considering changes to its policy stance.
  • Visit Business Insider’s homepage for more stories.

Those worrying the Federal Reserve will prematurely rein in monetary stimulus have little to fear, Fed Chairman Jerome Powell said Thursday.

As COVID-19 vaccines roll out across the country, investors and economists have looked to Fed officials for any hints as to when its extremely accommodative policy stance could reach its conclusion. The central bank is currently buying $120 billion worth of Treasurys and mortgage-backed securities each month to ease market functioning, and its benchmark interest rate remains near zero to encourage borrowing.

An unexpected reversal from such easy monetary conditions risks spooking financial markets and cutting into the country’s bounce-back. Powell emphasized on Thursday that the central bank remains far from adjusting monetary conditions and that markets need not worry about a surprise policy shift.

“Now is not the time to be talking about an exit,” the central bank chief said in a virtual discussion hosted by Princeton University. “I think that is another lesson of the global financial crisis, is be careful not to exit too early. And by the way, try not to talk about exit all the time if you’re not sending that signal.”

Read more: ‘Vastly technically disconnected’: A market strategist breaks down the 3 indicators that show Tesla is overpriced – and says it’s due for a 17% correction in the next 6 weeks

The messaging mirrors past statements from Fed policymakers. Early in the pandemic, Powell told reporters the central bank wasn’t “thinking about thinking about” lifting interest rates. The Federal Open Market Committee noted last month that changes to its policy stance won’t arrive until “substantial forward progress” toward its inflation and employment objectives is made.

Still, recent commentary from some officials has stoked some fears that the Fed could cut down on the pace of its asset purchases sooner than expected. Kansas City Fed President Esther George said Tuesday that inflation could reach the Fed’s target “more quickly than some might expect” if the economy’s hardest hit sectors quickly recover.

A swifter-than-expected rebound could prompt an interest-rate hike as early as mid-2022 Atlanta Fed President Raphael Bostic said Monday. The projection stands in contrast with the FOMC’s general expectation for rates to remain near zero through 2023.

Powell reassured that, when the Fed starts considering a more hawkish stance, messaging will come well before action is taken. Treasury yields responded in kind, with the 10-year yield climbing nearly 4 basis points to 1.127 and the 30-year yield rising about 6 basis points to 1.874.

“We’ll communicate very clearly to the public and we’ll do so, by the way, well in advance of active consideration of beginning a gradual taper of asset purchases,” the Fed chair said.

Read more: Morgan Stanley says to buy these 26 economically sensitive stocks poised to outperform as oil prices spike 10% by year-end

Read the original article on Business Insider

Stocks are in a ‘rational bubble’ as long as investors remain confident in continued Fed support, economist Mohamed El-Erian says

Mohamed El-Erian
  • Mohamed El-Erian told CNBC stocks are in a “rational bubble” and asset prices will continue to rise as long as the Federal Reserve signals to investors that it will continue to support the markets. 
  • “It’s rational because the Fed and the ECB keep on signaling that they will continue to inject massive liquidity, and as long as the market is confident that that’s the case, it will drive prices higher,” the Allianz chief economic adviser said. 
  • El-Erian said that the US will continue to see a contrast between what the market is doing and what the broader economy is indicating because of the liquidity in the market.
  • Visit Business Insider’s homepage for more stories.

Mohamed El-Erian told CNBC on Wednesday stocks are in a “rational bubble” at the moment and asset prices will continue to rise as long as the Federal Reserve signals to investors that it will continue to provide support for the markets.

“This is not an irrational bubble. This is a rational bubble,” the Allianz chief economic adviser said. “It’s rational because the Fed and the ECB keep on signaling that they will continue to inject massive liquidity, and as long as the market is confident that that’s the case, it will drive prices higher.”

Typically, a stock market bubble is created when asset prices surge to levels that greatly exceed the their intrinsic value. Legendary investor Jeremy Grantham said on Tuesday that the stock market is in a  “fully-fledged epic bubble,” driven by extreme overvaluations, explosive price increases, frenzied issuance, and “hysterically speculative investor behavior.” 

For El-Erian, there is a rational reason why stock prices keep going up, and it’s investor confidence in support from the Federal Reserve.

Read more:Deutsche Bank says buy these 14 beaten-down financial stocks poised for a bullish recovery from 2020’s ‘savage sell-off’ – including one that could rally 30%

Stock prices ballooned in 2020: the S&P 500 gaining 16%, while the tech-heavy Nasdaq soared 43%. El-Erian said there’s so much liquidity “sloshing around the system,” that stock prices will continue to move higher this year.

The result is that stock prices continue to rise despite political and economic turmoil outside of Wall Street.  On Wednesday as protesters stormed the US Capitol building, the stock market remained unbothered. The Dow Jones closed at a record high, while the S&P 500 closed up 0.5%. 

El-Erian said that the US will continue to see a contrast between what the market is doing and what “conditions on the ground” are saying because of the liquidity in the market.

Also on Wednesday, the ADP monthly employment report revealed that the US lost 123,000 private payrolls in December. The reading marks the first contraction in nationwide hiring since April. El-Erian said that the report was a “big miss” and demonstrates the “power of liquidity.” 

 

 

Read the original article on Business Insider

Joe Biden can help remake the Federal Reserve so that it actually helps America’s workers

joe biden
President-elect Joe Biden

  • The Federal Reserve is finally starting to take the concerns of average workers more seriously in its monetary policymaking.
  • In order to cement this commitment to workers and full employment, President-elect Joe Biden should nominate Fed Board members with a background in organized labor.
  • There have been a vanishingly small number of labor leaders at the Fed over its long history, this needs to change.
  • Kaleb Nygaard is a graduate student at Yale’s School of Management studying Systemic Risk. He is the Editor in Chief of the central banking education website Centralverse and the host of The Bankster Podcast.
  • This is an opinion column. The thoughts expressed are those of the author.
  • Visit Business Insider’s homepage for more stories.

It’s time for someone to truly represent the voice of workers at the Federal Reserve.

The health and economic one-two-punch of COVID-19 has had a particularly devastating effect on working-class families. It has also made it clear that policymakers need to focus their efforts on helping those families. 

Despite this, not a single person with a background in organized labor has had a vote on the Federal Reserve’s all-important Open Markets Committee (FOMC), past or present. Since it was formalized in the 1930s Banking Acts, there have been 179 people who have served on the committee. 

Adding someone with a background in labor to the leadership of the Fed would help ensure these working-class families have representation at the most important macroeconomic decision-making-table in the country. 

To repeat, not a single one has had a background in Labor. 

In January, President Biden should change that.

A seat at the table and a voice at the Fed

There are two types of participants on the FOMC: seven Governors who work from the Fed office in Washington DC and 12 Presidents who head the Reserve Banks spread across the country. How they are chosen and who does the choosing is very different for the two types. 

The seven Governors are nominated by the US President and confirmed by the Senate in the same fashion that Cabinet Secretaries or Supreme Court Justices are chosen. 

By law, the Governors are supposed to consist of “a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the country”. 

One of the seven seats sits empty at the moment. On day one, President Biden should nominate someone with a background in labor to fill the seat, and whichever party controls the Senate should confirm the nominee. 

The selection process for the 12 Presidents is more complicated. Each Reserve Bank is overseen by a nine-member Board of Directors. Three are bankers, elected by banks in the area. Three are non-bankers, elected by banks in the area. And three are non-bankers, appointed by the seven Governors in Washington DC. The six non-bankers are the ones responsible for choosing the Reserve Bank President. 

By law, the non-banker-directors are supposed to consist of “the interests of agriculture, commerce, industry, services, labor, and consumers.” So although the process is more complicated and less democratic for the selection process of the Reserve Bank Presidents, the legal foundation upon which it sits explicitly includes Labor representation.

In the full 106-year history of the Fed, only 45 representatives of labor have been on the Board of Directors of the 12 Reserve Banks. 

Chart 1

And when you look at it as a percentage of the non-banker directors, the lack of labor representation is even more paltry.

Chart 2

Less than 20% of the labor representatives were elected by banks. The remaining 80% plus were appointed by the Governors in Washington DC. The total per district also varies greatly. The Federal Reserve Bank of New York has had the most with nine, and the Federal Reserve Bank of Atlanta has not had a single one. 

Chart 3

In August, the Fed announced the conclusion of their first-ever-public framework review. There were many changes made because of the review, but the overall thrust of the changes was to give greater attention to improving the employment situation of average Americans, with the greatest impact of the changes going to working-class families. 

This focus on the labor market and working families even showed up in 2019, when the Fed made a sharp turnaround and reversed the interest rate increases they had made in the previous few years. They admitted they’d missed the mark on full employment. As Chairman Jay Powell said at the time: “We really have learned that the economy can sustain much lower unemployment than we originally thought without troubling levels of inflation”.

To confirm the spirit of both the Fed’s 2019 admission of misreading the employment situation and the 2020 policy changes, President Biden should nominate someone with a background in labor to fill the empty Governor seat. Going forward, this would ensure that the voices of the tens of millions of working-class families who are struggling through the effects of the pandemic, are heard in the decision-making room of our country’s central bank.

For the same reasons, the Reserve Bank Board of Directors should consider candidates with a background in Labor for future Reserve Bank President positions. 

Read the original article on Business Insider