The stimulus schemes will stress the financial system

2020 ◽  
Keyword(s):  
Interest Rates ◽  
Euro Area ◽  
Federal Reserve ◽  
Financial Stability ◽  
Asset Prices ◽  
Yield Curve ◽  
Corporate Debt ◽  
Content Type ◽  
Negative Interest Rates

Significance While the Federal Reserve (Fed) rejects negative interest rates, and instead considers yield-curve control, even the prospect of negative US rates is accentuating distortions in asset prices and fuelling concerns about global financial stability after the pandemic. Impacts The Fed’s decision to start buying corporate debt has led to a surge in bond issuance; many firms may struggle as the stimulus is unwound. Beyond Japan, the euro-area is nearest deflation; the ECB chief economist warns that demand will be low for some time. The VIX Index, a measure of upcoming US equities volatility, remains above its long-term average, but will be prone to spikes.

Implications of Central banks’ negative policy rates on financial stability

2018 ◽  
Vol 10 (2) ◽  
pp. 310-320
Author(s):  
Benjamin S. Kay
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Financial Stability ◽  
Global Economy ◽  
Content Type ◽  
Interest Rate Policy ◽  
Trade Offs ◽  
Negative Interest Rates ◽  
Rate Policy ◽  
Negative Interest Rate Policy

Purpose While central bankers have widely discussed the trade-offs of negative interest rates on monetary policy, the consequences of negative rates on financial stability are less well understood. The purpose of this paper is to examine the likely and possible financial stability consequences of a negative rates policy with particular focus on banks, short-term funding markets, foreign exchange markets, asset managers, pension funds and insurers. Design/methodology/approach It draws from international experience with negative interest rates to identify financial stability threats posed to any economy by negative interest rates, and it also highlights where the US experience is likely to differ. Findings In time, financial market threats and other logistical issues of a negative interest rate policy can be managed or overcome. Even cumulatively, these threats are likely to be small as long as the rates remain only modestly negative. However, if the rates remain negative for long periods or they become more sharply negative, the rewards of avoiding negative rates increase. Originality/value Does the negative interest rate policy directly or through these challenges of implementation present a substantial obstacle to achieving financial stability objectives? As policy rates go negative in a greater share of the global economy, the financial stability consequences remain poorly understood and under discussed.

scholarly journals COVID-19 and Fiscal Policy in the Euro Area

2020 ◽  
Author(s):  
F. Busetto ◽  
Alfonso Dufour ◽  
Simone Varotto
Keyword(s):  
Fiscal Policy ◽  
Interest Rates ◽  
Euro Area ◽  
Financial Stability ◽  
Yield Curves ◽  
Fiscal Constraints ◽  
Debt Levels

In this chapter we document fiscal policy developments in the main euro area economies over the last two decades and highlight the dramatic changes triggered by the COVID-19 pandemic. We analyse how euro area yield curves respond to COVID-19 related expectations of fiscal expansion. We show how fiscal constraints may affect interest rates. Upward pressure on national yields from higher debt levels could compromise fiscal and financial stability in the long-term.

Adoption of yield-curve control could aid US recovery

2020 ◽  
Keyword(s):  
Interest Rates ◽  
Yield Curve ◽  
Balance Sheet ◽  
Quantitative Easing ◽  
Government Bonds ◽  
Content Type ◽  
Forward Guidance ◽  
Reserve Bank ◽  
The Us

Subject Yield-curve control. Significance The US Federal Reserve (Fed) is contemplating yield-curve control (YCC), a policy pursued by the Bank of Japan (BoJ) and Reserve Bank of Australia (RBA) alongside quantitative easing (QE) and forward guidance. A central bank does this by capping the yields on government bonds of a chosen maturity through unlimited bond purchases. This supports the economy by reducing borrowing costs for financial institutions, households and businesses. Impacts By providing transparency over a central bank’s actions, YCC would be likely to reduce the volatility of long-term interest rates. YCC adds to the Fed balance sheet; the Fed will need a credible exit strategy to cut market volatility and the risk of Fed capital losses. A sharp uptick in inflation may put upward pressure on long-term yields, necessitating higher Fed purchases to maintain its targeted peg.

US Fed faces long-term COVID-19 challenges

2020 ◽  
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Balance Sheet ◽  
Donald Trump ◽  
Current Form ◽  
Content Type ◽  
Debt Overhang ◽  
Negative Interest Rates ◽  
Do So

Significance In responding to COVID-19, the Fed, working with the Treasury, is making massive fiscal interventions. Congress has also appropriated 3 trillion dollars in aid so far. Impacts The HEROES Act will not pass the Senate either in its current form, or before June 2020, given debt concerns. President Donald Trump has suggested the Fed introduce negative interest rates, but it is unlikely to do so. The debt overhang from Fed balance sheet expansion will shape monetary policy for a decade.

Fast growth will support Central European asset prices

2018 ◽  
Keyword(s):  
Emerging Markets ◽  
Financial Markets ◽  
Euro Area ◽  
Asset Prices ◽  
Bond Market ◽  
Bond Markets ◽  
Monetary Policies ◽  
Content Type ◽  
Central European

Subject The muted impact on Central Europe’s financial markets of this month’s sharp declines in asset prices in Russia and Turkey. Significance Much harsher US sanctions on Russia, together with Turkey’s continued loss of policy credibility, have led Russian and Turkish stocks to plunge by nearly 12.0% and 7.5%, respectively, in dollar terms since the start of April. This contrasts with rises in Polish (5.5%), Czech (3.3%) and Hungarian (2.0%) equities, and a slight decline for the MSCI Emerging Markets (EM) index. Central Europe’s vulnerability is rather to the recent slowdown in growth in the euro-area; the ECB’s ultra-loose monetary policies are providing support to the region’s bond markets. Impacts The VIX Index ‘fear gauge’ is back below its long-term average and is at its lowest level since the outbreak of volatility in late January. The latest reading from Germany’s ZEW Index shows a majority of investors now expecting the country’s economic prospects to deteriorate. Turkey’s high-yielding local bond market has managed to attract nearly 900 million dollars of foreign inflows so far this year.

Asset Valuation

2019 ◽  
pp. 111-120
Author(s):  
Alan N. Rechtschaffen
Keyword(s):  
Interest Rates ◽  
Federal Reserve ◽  
Yield Curve ◽  
Market Demand ◽  
Asset Valuation ◽  
Federal Funds ◽  
Yield Curves ◽  
Federal Funds Rate ◽  
The Great Recession

This chapter begins with a discussion of the use of interest rates in asset valuation. During the Great Recession, the Federal Reserve has navigated U.S. interest rates lower by first reducing the target for the federal funds rate to zero, and then engaging in a process of quantitative easing by purchasing longer-term securities. The effect of the Federal Reserve's actions has been to lower interest rates that affect valuation models across all assets and investments. The chapter then discusses interest rate yield curve, covering the types of yield curves, why the yield curve may be flat or inverted, the increase in market demand for long-term securities, and long-term yield affected by Federal Reserve monetary policy.

Equilibrium Investment and Asset Prices under Imperfect Corporate Control

2005 ◽  
Vol 95 (3) ◽  
pp. 659-681 ◽  
Author(s):  
James Dow ◽  
Gary Gorton ◽  
Arvind Krishnamurthy
Keyword(s):  
Interest Rates ◽  
Cash Flow ◽  
Asset Prices ◽  
Yield Curve ◽  
Dynamic Equilibrium ◽  
Corporate Control ◽  
Free Cash Flow ◽  
Financial Friction ◽  
And Control ◽  
Important State

We integrate a widely accepted version of the separation of ownership and control—Michael Jensen's (1986) free cash flow theory—into a dynamic equilibrium model, and study the effect of imperfect corporate control on asset prices and investment. Aggregate free cash flow of the corporate sector is an important state variable in explaining asset prices, investment, and the cyclical behavior of interest rates and the yield curve. The financial friction causes cash-flow shocks to affect investment, and causes otherwise i.i.d. shocks to be transmitted from period to period. The shocks propagate through large firms and during booms.

scholarly journals Monetary Policy Surprises over Time

2018 ◽  
Vol 08 (01) ◽  
pp. 1840002 ◽  
Author(s):  
Marcello Pericoli ◽  
Giovanni Veronese
Keyword(s):  
Monetary Policy ◽  
Financial Markets ◽  
Interest Rates ◽  
Euro Area ◽  
Yield Curve ◽  
Sovereign Spreads ◽  
Definition Of ◽  
Term Premia ◽  
The Impact ◽  
Over Time

We document how the impact of monetary surprises on euro-area and US financial markets has changed from 1999 to date. We use a definition of monetary policy surprises, which singles out movements in the long-end of the yield curve — rather than those changing nearby futures on the central bank reference rates. By focusing only on this component of monetary policy, our results are more comparable over time. We find a hump-shaped response of the yield curve to monetary policy surprises, both in the pre-crisis period and since 2013. During the crisis years, Fed path-surprises, largely through their effect on term premia, account for the impact on interest rates, which is found to be increasing in tenor. In the euro area, the path-surprises reflect the shifts in sovereign spreads, and have a large impact on the entire constellation of interest rates, exchange rates and equity markets.

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