Minneapolis Fed Chief Would Err on Side of Overtightening; Fed's Cook Sees Debt Loads as Manageable; RBA Hikes After Four-Month Pause

Minneapolis Fed Chief Would Err on Side of Overtightening; Fed's Cook Sees Debt Loads as Manageable; RBA Hikes After Four-Month Pause By James Christie

Good day. Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said in an interview with The Wall Street Journal on Monday that he is concerned price pressures could tick up, and that he would rather tighten policy if needed to return inflation to the Fed's 2% target. Meanwhile, Fed governor Lisa Cook said the debt that U.S. banks, businesses and households are carrying doesn't appear to be a big economic threat. Elsewhere, the Reserve Bank of Australia raised interest rates today in response to stubbornly high inflation, ending a four-month pause and diverging from other major central banks that have signaled they might have price pressures under control.

Now on to today's news and analysis.

Top News Fed's Neel Kashkari Not Convinced Rate Hikes Are Over

A top Federal Reserve official said he would err on the side of overtightening monetary policy rather than not doing enough to bring inflation down to the central bank's 2% target.

"Undertightening will not get us back to 2% in a reasonable time," Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said in an interview with The Wall Street Journal on Monday.

Fed's Cook Says Debt Not a Big Threat Yet to U.S. Economy

Households, businesses and banks are in pretty good financial health and don't appear to pose a big threat to the U.S. economy, a senior Federal Reserve official said Monday. "In my view, our financial system is substantially more resilient than it was in the mid-2000s," Fed governor Lisa Cook said in a speech at Duke University. Household debt such as car loans, credit cards and mortgages "remains at modest levels," she said. In addition, most of the debt is owned by those with "strong credit histories or considerable home equity, " she said. (MarketWatch)

Fed Survey Finds Banks Continue to Tighten Loan Standards

Banks continued to tighten standards for business loans in the third quarter, according to a survey of loan officers conducted by the Federal Reserve. In addition, a "significant" number of banks tightened lending standards for credit-card, automobile and other consumer loans. Banks tightened standards on loans to firms of all sizes, and tightening was accomplished in premiums for riskier loans, spreads of loan rates over the cost of funds and costs of credit lines. There was weaker demand for loans from firms of all sizes. Many banks reported that the number of inquiries from potential borrowers dropped sharply. Demand also weakened for consumer loans. (MarketWatch)

U.S. Economy These Funds Offer a Way to Lock In High Bond Yields

Defined-maturity exchange-traded funds have surged in popularity recently. As their name suggests, the bond funds mature and liquidate on a specific date, similar to how an individual bond pays back its principal.

Turning Empty Offices Into Apartments Is Getting Even Harder

Cities hoping to convert emptying office buildings into apartments are running into financing issues, stagnating rental markets and other challenges that are bottling up their efforts .

Your Next Airbnb Host Could Be a Private-Equity Firm

Private-equity giant TPG has started buying single-family homes in Florida vacation markets, where it is renting them out nightly as alternatives to hotels and short-term rentals on websites like Airbnb.

Key Developments Around the World Australia Thought It Was Done Raising Interest Rates. It Wasn't.

The Reserve Bank of Australia lifted its official cash rate to 4.35% from 4.10%, representing its highest level in more than a decade. The move was widely expected by economists after inflation in the three months through September showed prices of services, fuel, and rents climbing again.

"Inflation in Australia has passed its peak but is still too high and is proving more persistent than expected a few months ago," Governor Michele Bullock said on Tuesday after chairing her second meeting.

China's Exports Tumble Again in Fresh Sign of Economic Trouble

China's exports fell for the sixth straight month , adding to pressure on Beijing to boost spending at home as a big rise in global interest rates and wars in Ukraine and the Middle East weigh on the world economy.

Bond Selloff at Another China Property Giant Spurs Authorities to Action IMF Boosts China Economic Growth Forecast (MarketWatch) Wall Street CEOs Flocked to Hong Kong-and Kept Quiet on China How China Became the World's Top Development Financier Argentina's Next President Will Face an Economy in Crisis

As Argentines prepare to choose a new president later this month, the once-prosperous nation is grappling with its most debilitating economic crisis in a generation. And it is only getting worse .

Tesla Raises Wages for German Workers Amid Union Pressure

Car maker Tesla is boosting factory worker pay in Germany amid an aggressive unionization drive , a move that comes as Chief Executive Elon Musk may face similar organizing attempts in the U.S.

Financial Regulation Roundup Big Banks Cook Up New Way to Unload Risk

U.S. banks have found a new way to unload risk as they scramble to adapt to tighter regulations and rising interest rates. JPMorgan Chase, Morgan Stanley, U.S. Bank and others are selling complex debt instruments to private-fund managers as a way to reduce regulatory capital charges on the loans they make.

Washington Eases Path to Scrutinize Hedge Funds

Federal regulators say they have growing concerns that some hedge funds could be making bets that put the economy at risk. Now, they have a new tool to clamp down . On Friday, the Financial Stability Oversight Council finalized changes that will make it easier for them to designate hedge funds, private-equity firms and other nonbank financial companies as systemically important financial institutions or SIFIs. The designation, which has most often applied to banks, subjects companies to Federal Reserve oversight and potential capital and liquidity requirements. (Barron's)

Forward Guidance Tuesday (all times ET)

8:30 a.m.: U.S. trade for September

9:15 a.m.: Fed's Barr speaks at DC Fintech Week in Washington

9:50 a.m.: Kansas City Fed President Schmid speaks at Energy and the Economy: Reshuffling the Energy Deck conference

10 a.m.: Fed's Waller speaks on economic data at St. Louis Fed conference

11 a.m.: New York Fed's third-quarter household debt and credit report

12 p.m.: New York Fed's Williams in moderated discussion organized by Economic Club of New York

3 p.m.: U.S. consumer credit for September

Wednesday

4:30 a.m.: Release of text of Bank of England's Bailey speech to Central Bank of Ireland's Financial System Conference

9:15 a.m.: Fed's Powell gives opening remarks at research conference in Washington

10 a.m.: U.S. wholesale trade sales and inventories for September

1:30 p.m.: Bank of Canada summary of monetary policy deliberations

1:40 p.m.: New York Fed's Williams speaks at Research and Statistics at 100: A Look at the Past, Present, and Future conference

2 p.m.: Fed's Barr speaks on Community Reinvestment Act at NAAHL conference in Washington

4:45 p.m.: Fed's Jefferson gives closing remarks at research conference in Washington

Research Reserve Bank of Australia's Cash Rate Has Likely Peaked

Goldman Sachs continues to expect the Reserve Bank of Australia to maintain a 4.35% policy rate until a gradual easing cycle commences from 4Q 2024. There are risks to this central scenario in both directions, with heightened uncertainty around the central bank's reaction function ahead of imminent decisions on both a new RBA deputy governor and legislation to implement institutional changes associated with the RBA review, says Andrew Boak, chief economist at GS. The central bank's softer tightening bias, viewed against the backdrop of the its consistent reluctance to hike this cycle, reinforces the view that rates will now remain on hold, he adds.

-James Glynn

Fed Likely to Cut Rates Below 3%, Making Bonds Attractive Now

Guggenheim Investments thinks investors should look past the carnage in bonds and gear up for the Federal Reserve to pivot to rate cuts. While the investment team expects the Fed to leave its policy rate unchanged at a 22-year high of 5.25% to 5.5% over the next several meetings, they also see a recession as likely in the first half of 2024. That backdrop could spark a quick Fed pivot "to rate cuts, ultimately cutting rates by around 150 basis points next year and more in 2025," said Matt Bush, U.S. economist at Guggenheim, in a client podcast published Monday. "We have them taking the fed funds rate down a bit below 3% and pausing balance-sheet runoff in what we think will be a recession, albeit a mild one," Bush said.

-Joy Wiltermuth

Money Markets Might Be Overpricing ECB Interest Rate Cuts

The fair value for European Central Bank interest rate cuts in 2024 is around 70 basis points, less than the market pricing of almost 100 basis points, says Piet Haines Christiansen, who watches the ECB for Danske Bank Research. "I have my first cut penciled in for June," he writes in a note. Money market forwards price in 20 bps of rate cuts in April and a cumulative 36 bps by June, according to Refinitiv data. Real wage growth of more than 5% is a very important reason why Christiansen doesn't think that the economy is about to collapse, writing that if employees aren't worried about getting fired, they will continue to consume and not cut back on spending.

-Emese Bartha

Commentary It May Be Too Late to Fend Off China's Battery Giants

Having charged up in their massive home market, Chinese electric-vehicle-battery firms are becoming major export players, too. The West's efforts to protect its own markets might prove too little, too late , Jacky Wong writes.

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11-07-23 0716ET