Market Commentary - Focus

Vital information about the markets, the economy, rates, and more.

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Basel III Proposed Regulatory Capital Changes Webinar

FinSer is pleased to provide a replay of a webinar we held jointly with the Accounting Firm of Fisher, Herbst & Kemble in September 2012 on the proposed changes to

Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital, Capital Adequacy and Transition provisions 

Regulatory Capital Rules: Standardized Approach for Risk-Weighted Assets; Market Discipline and Disclosure Requirements

To view the replay select this link.

Economic Outlook - FEBRUARY 2015

During the second half of 2014, the FOMC stayed on message: the Fed was on track to raise rates in 2015, the rate hiking cycle would be well telegraphed to the markets, and it would be gradual. The policy statement following the January 27-28, 2015 FOMC meeting did add “international developments” to the list of factors the Committee would consider. The overall tone suggested that the Fed seemed confident the trajectory of growth would remain positive and would necessitate an increase in the fed funds target range this year.

While giving a nod toward negative developments overseas, the FOMC seemed upbeat on the U.S. economy’s performance. They upgraded their assessments of the economy to “solid” from “moderate” and employment to “strong” from “solid,” also adding that the declines in energy prices have “boosted household purchasing power.” The inflation commentary seemingly acknowledged both the risk of deflation and dismissed the deterioration in the headline data. The slippage in headline inflation was more emphatically attributed to oil, with the word “largely” replacing December’s “partly.” The Committee noted the substantial decline in “market-based inflation compensation,” and said “Inflation is anticipated to decline further in the near term,” although they still expect it will rise toward the 2 percent target gradually “over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate."

However, the minutes of that meeting, released three weeks later, suggested seeds of uncertainty were sprouting underneath the surface. The minutes noted that “several participants” on the Committee feared the Fed would fall behind the curve if it waited too long to normalize rates, but that “many participants” worried about the consequences of a premature tightening. This seemed to be at odds with Fedspeak and the policy statement. While heightened geo-political risks seemed to play a role, Committee members also noted that since the last meeting inflation had continued to drift lower and nominal wage growth had remained stagnant. Clearly, the low inflation picture remains worrisome. In January, CPI registered its third consecutive monthly decline, an eye-opening -0.7 percent. What’s more, it is not just energy prices, but other goods and services as well.



To be sure, the Committee’s internal debate at the meeting took place before the Labor Department released another strong jobs report. The January employment report provided further evidence of a strong job market, while a surprisingly large 0.5 percent increase in average hourly earnings provided a hint that progress is being made against wage growth stagnation, and maybe assuaged some of the Committee’s angst regarding lackluster growth in income. However, in addition to the deflationary risks, the Committee also highlighted the fact that the housing recovery remains somewhat slow. This notion was supported by January’s housing starts and home sales data, even though poor weather may have played a hand in the pullback. Also in contrast to the jobs reports, other data including output measures have stepped back a bit, suggesting the economy appears to have lost some steam toward the end of last year and during the first month of 2015.

The apparent discrepancy between public statements, the policy statement and the minutes heightened the importance of Fed Chair Yellen’s semi-annual mandated Congressional testimony on February 24th. In that testimony Yellen raised the significance of too low inflation as a factor in the outlook for monetary policy, against that backdrop of a much improved, but still healing, labor market. While the economic data supports further sustained gains for the labor market, including wages, it needs to be clear to the Committee that the factors that have held down inflation measures, such as low energy prices, have abated and that there needs to be something concrete in the upcoming data pointing to a turn in inflation. This part of the testimony was consistent with the minutes:  “Provided that labor market conditions continue to improve and further improvement is expected, the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when, on the basis of incoming data, the Committee is reasonably confident that inflation will move back over the medium term toward our 2 percent objective.”

Yellen also made it clear the Fed wants maximum flexibility and does not want to be bound by date-dependent language. Before the Fed raises rates, forward guidance will be altered and “patient” will be removed. Once that key word is removed, the Fed will be evaluating the data on a meeting-by-meeting basis. Upcoming data takes on added significance in light of Yellen’s testimony, to the point of leaving the door open to rate lift-off as early as June, even though she has not shown any plans to walk through it.


The Fed continues to face a conundrum in its policy decisions, thus keeping it particularly cautious. On one side, it has to keep a wary eye on the disinflationary trend and make sure it doesn’t morph into a deflationary threat, similar to what is clearly overhanging Europe and Japan. That, in turn, argues for an easy monetary policy, one that keeps interest rates lower for longer. On the other side, however, the Fed is keenly aware of the gathering strength in the job market, where its target unemployment rate is close to being met. There is also the concern that “too low for too long” would contribute to, if not create, market imbalances or a bubble in asset prices. This, in turn, argues for a more vigilant posture. The continued improvement in the labor market and subsequent wage growth may set the stage for the Fed to raise rates in the second half of this year, even as other moderating economic data has the markets betting that the lift-off will be slower and, perhaps, later than previously thought.