Thursday, May 18, 2006

 

Inflation, Basel II Worries The Fed

Some Fed news. "The Federal Reserve is less likely to suspend its interest-rate increases after a report yesterday showed consumer prices rose more than expected, according to Richmond Fed President Jeffrey Lacker. 'The inflation outlook is at the borderline of acceptable and perhaps moving beyond,' Lacker told reporters. 'In circumstances like that, containing inflation has to be the primary focus.'"

"Lacker spoke minutes before a report from the Philadelphia Fed showed an index of prices paid by manufacturers for energy and other commodities jumped to a seven-month high. Inflation is off to the worst start to a year since 1990, a government report showed yesterday, rising at an annual rate of 5.1 percent in the first four months."

"The Fed is challenged by rising metals and oil prices just three months into Chairman Ben. S. Bernanke's term. 'Core CPI is clearly running near or above the upper end of the FOMC's comfort zone,' former Fed governor Laurence Meyer said yesterday in a note to clients. 'We now expect the committee to move to 5.25 on the funds rate' in June."

"Federal Reserve Chairman Ben Bernanke urged bankers to bear with growing pains associated with new global bank capital standards, which he said would improve bank supervision. The Basel II bank capital accord would more closely link capital requirements with risk and keep regulators abreast of rapid changes in the financial services industry, he said."

"'As we proceed toward the implementation of this framework, success will require that bank regulators, the banking industry, the Congress, and other relevant parties engage in an ongoing and frank dialogue, and that policymakers be open-minded, flexible, and ready to make needed adjustments,' Bernanke said."

"U.S. bank regulators in March issued draft rules to guide domestic implementation of Basel II. In publishing the rules, bank oversight agencies sought to assure the industry and the public that banks would be required to maintain prudent capital cushions and set conservative steps for U.S. adoption of the agreement. The proposal sets out safeguards that require continual regulatory review and a multi-year transition that includes capital floors to keep capital from declining too quickly or too far."

"The March draft came after a test-run of the standards yielded a surprising drop in capital at U.S. banks. That pushed Congress to call for a reevaluation and led regulators to delay implementation even though banks elsewhere in the world moved ahead."

News from Iceland. "Iceland's central bank raised its key interest rate sharply on Thursday in its latest bid to cool its overheating economy after a dramatic jump in inflation in the last few weeks."

"It raised its policy interest rate by three quarters of a percentage point to 12.25 per cent, the highest level for at least 15 years, and the second consecutive 75 basis points increase since the end of March."

"Icelandic inflation has surged from 4.5 per cent to 7.6 per cent since the end of March on the back of a consumption boom, rocketing house prices, wage rises and a sharp weakening of the Icelandic krona amid global foreign exchange turbulence."

"'Inflation is now three times the bank's target rate of 2.5 per cent,' said Arnór Sighvatsson, central bank chief economist. The bank warned further rate rises, after 14 in two years, would almost certainly be needed to counter inflationary expectations."

"The krona hit a low at the end of April and has since recovered some lost ground. Ingólfur Bender, head of research at one of Iceland's biggest banks, said he expected Icelandic interest rates would peak at around 13 per cent in September. Glitnir expects inflation to rise to 9 per cent at the end of the year but believes the economy will cool and the krona rise in 2007."

"'This should mean that inflation falls near to the bank's target by the end of next year,' Mr Bender said. The Icelandic stock market has fallen about 18 per cent from its peak on February 16."

Comments:
Inflation over 5%. Now we see double digit interest rates in Iceland, warnings on LatAm currencies, and a new regulatory regime that failed in a pilot launch.
 
so what's the deal with currenices? stay away from latam, iceland and other "emerging markets" and keep with the yen, euro and other more stable currencies except the dollar?
 
John,
Personally I prefer currency that has some gold behind it, so that makes a short list. I have read that the Euro has some, but can't confirm it. One I am looking at is Norway, which has a fully funded pension program due to the oil. I'll let you guys know what I find out.
 
swiss franc?
 
Holy smokes! So now the FED is starting to worry about inflation? Welcome to the party guys and the possible realization that you have painted yourself into a corner. What to do, what to do? Looks to me like it's Stagflation here we come. Old Greasepan passed the batton just in the nick of time, he goes out a hero, and the new guy gets to chew on the ever present conundrum. I don't trade in currencies, but I'd stay away from the Latin American money, to many nut jobs-running the show, and they can turn on a dime!JMO
 
John,
I am starting to feel better about the SF. It is moving in the right direction again. For those that may not know, the Swiss central bank sold a lot of gold last year and lowered rates. SFs didn't move with the gold price for much of the last runup.
 
what about the more stable commodity currencies- ie not the real, argentine peso- stuff like the canadian dollar and the currencies of australia and new zealand?

I don't know if people realize, brazil is having a tough time with gangs right now, that could be a reason for the fall of the latin currencies. it doesn't seem like they distinguish between brazil, argentina or mexico. when they flee one currency they seem to flee them all.
 
The "Basel II" requirements are designed to prevent a banking system collapse in the event of widespread withdrawal (ie: a run on the banks).

Oh that's good. I feel safer now knowing that our banks are suddenly planning for some "hypothetical" financial panic in the future.
 
> "Personally I prefer currency that has some gold behind it, so that makes a short list. I have read that the Euro has some, but can't confirm it."


Ben,

Below is a list of nations and their gold reserves in tons:

USA: 8139

Germany: 3469

IMF: 3217

France: 3025

Switzerland: 2590

Italy: 2452


Source: http://www.galmarley.com/framesets/fs_commodity_essentials_faqs.htm
 
(Looks like the above table was last updated about a year ago, so I'm not sure how accurate that is...)
 
In a previous column, I tried facetiously to speculate on the existence of a "plunge enforcement team".
By "plunge enforcement" I really meant "hammer down" in case a certain commodity spike got out of hand and needed correction.
One mechanism would be central bank sales, to which "thejdog" repled that he thought that central banks supplies were dangerously low. This table speaks otherwise.
My question for you guys is how much US treasury gold is auctionable? How much has liens on it? I don't expect anybody to know this but has anybody thought of this?
 
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