Gaming the Fed's Bank Rescue Program; Cash Is Far From Dead; Median CPI May Be Misleading

Gaming the Fed's Bank Rescue Program; Cash Is Far From Dead; Median CPI May Be Misleading By James Christie

Good day. An emergency lending program the Federal Reserve created during the 2023 banking crisis has turned into easy money, as a dramatic reversal in rate expectations in recent months has changed the math. Meanwhile, in today's Pro Take, Bob Fernandez takes a look at how social isolation didn't quash demand for cold hard cash. The "transaction motive" for cash is disappearing with electronic-based payments, but holding cash as a financial safety net in times of turmoil has been as strong as ever. And WSJ's Justin Lahart writes that the Cleveland Fed's median CPI might be giving the wrong message on inflation.

Now on to today's news and analysis.

Top News Banks Are Gaming the Fed's Bank Rescue Program

Borrowing from the Fed's bank term funding program has increased to new highs in recent weeks, a strange consequence of the market's flip to forecasting multiple Fed rate cuts over the coming 12 months. The rate banks pay to use the program is tied to future interest-rate expectations. Now that investors have priced in a series of rate cuts this year, banks are able to pocket the difference between what they pay to borrow the funds and what they can earn from parking the funds at the Fed as overnight deposits.

Fed Will Let Emergency Loan Program Expire, Barr Says (MarketWatch) Pro Take: Cash in Circulation Has Surged by Over $500 Billion Since the Pandemic By Bob Fernandez

Cash is far from dead. The monetary value of greenbacks and coins circulating in the economy has surged 28% to $2.3 trillion since the onset of the pandemic, even as homebound shoppers charged up a storm with plastic and consumers feared handling Covid-tainted cash. Read more.

U.S. Economy This Inflation Measure Is Running Hot. It's Probably Wrong.

For a reason to worry that inflation might not be cooling all that fast, look no further than the Federal Reserve Bank of Cleveland's median consumer-price index. But look under the median CPI's hood, and that worry can quickly fade away, writes WSJ's Justin Lahart .

Spending Bill Won't Be Done in Time, Senate Republicans Warn

Congress may need to pass another short-term bill to avoid a partial government shutdown, potentially forcing House Speaker Mike Johnson (R., La.) to break a vow he made to GOP colleagues swearing off such measures.

Government Has New Test for Who Should Be on Payroll

The Biden administration issued a new rule intended to put more contractors on company payrolls, a change that could reverberate across a range of industries, including healthcare, restaurants, construction and transportation.

Who's Getting Big and Small Raises in 2024

After a few years of hefty pay increases, American workers can expect solid but not spectacular raises in 2024, as a cooling job market and easing inflation are giving companies cover to moderate pay increases.

Key Developments Around the World Global Economy to Slow This Year After Resilient 2023: World Bank

The global economy managed to weather the effects of inflation and geopolitical tensions better than expected last year, but don't look for a strong recovery this year, the World Bank said. In its semiannual "Global Economic Prospects" report, the multilateral lender said the world economy is estimated to have grown 2.6% during 2023, down from 3% in 2022 but stronger than the 2.1% growth it projected in June. Global growth, however, is expected to slow to 2.4% this year.

ECB Is Likely To Cut Rates Before Fed, BNP Paribas AM Says

"Inflation rates are pretty similar in the eurozone and the U.S., but there was probably a recession in the eurozone in the fourth quarter," Daniel Morris , chief market strategist at BNP Paribas Asset Management told Dow Jones Newswires.

Poland's Central Bank Keeps Key Rate at 5.75%

Poland's central bank on Tuesday kept its key interest rate at 5.75%, in line with expectations as the annual rate of inflation remains far above its target. The annual rate of inflation fell to 6.1% in December from 6.6% in November, according to figures released Friday. That was a sharper fall than had been expected, but left the rate of inflation well above the central bank's target, which is a range of one percentage point above or below 2.5%. (Dow Jones Newswires)

Norway Can Consider Looser Policy as Core Inflation Eases

Norway's central bank is unlikely to raise interest rates any further as price inflation now looks stable, economist Bradley Saunders at Capital Economics writes in a note. Core inflation in December eased to 5.5% from 5.8% a month earlier, figures show Wednesday, while the headline rate stayed stable at 4.8%. Norges Bank last month surprised markets by lifting rates a quarter of a point to 4.5%, with governor Ida Wolden Bache arguing that inflation remained too high. But December's inflation levels show that prices pressures have eased and will continue to do so, Saunders says. (DJN)

Importers Face Surging Shipping Costs as Red Sea Diversions Pile Up

Western importers are reporting a steep rise in ocean-shipping rates and weekslong delays as carriers divert ships from the Red Sea to avoid Houthi rebel attacks.

Financial Regulation Roundup SEC Blames Hack for Incorrect Post About Bitcoin ETF Approval

The Securities and Exchange Commission's official X account was hacked when the agency posted late Tuesday that it had approved exchange-traded funds holding bitcoin, forcing Chair Gary Gensler and the regulator to disavow the erroneous post.

SEC's Decision on Spot Bitcoin ETFs Could Go a Few Different Ways

Crypto currency enthusiasts think the launch of the first U.S. exchange-traded funds that hold bitcoin is a done deal. But regulatory approval is still no guarantee, especially in the wild world of crypto.

Finra Calls AI 'Emerging Risk' in Annual Regulatory Report

Wall Street's self-regulator has classified artificial intelligence an "emerging risk" in its annual regulatory report, saying that deploying AI in the industry could affect virtually all aspects of a broker-dealer's operations.

Forward Guidance Wednesday (all times ET)

10 a.m.: U.S. wholesale trade for November

12:40 p.m.: Richmond Fed's Barkin presents economic outlook to Virginia Bankers Association and Virginia Chamber of Commerce

3:15 p.m.: New York Fed's Willliams gives 2024 economic outlook

Wednesday

8:30 a.m.: U.S. consumer-price index for December; U.S. weekly jobless claims

Research 'Soft Recession' in Canada to Start This Year

The chief economist at Laurentian Bank Securities expects Canada to experience a "soft recession" in the first half of this year, as households scale back spending due to higher mortgage payments and job losses. Sebastien Lavoie forecasts 0.5% growth for all of 2024, with higher debt payments associated with mortgage refinancing to shave 0.5 percentage point from real gross domestic product growth in both this year and 2025. About C$700 billion in mortgages need to be renewed this year and next. Lavoie also expects Canada's unemployment rate to average 6.4% this year. The rate was at 5.8% in December. Lavoie notes that firms, in a survey, now cite weak domestic demand as the biggest headwind for sales growth. Job losses are likely as firms continue to face higher input costs.

-Paul Vieira

Commentary The Insurance Market Is Healing

Insuring the risk of catastrophic hurricanes and earthquakes risk probably isn't getting cheaper, but at least there might be more coverage coming to relieve the troubled insurance market, Telis Demos writes.

Basis Points The U.S. trade deficit narrowed 2% to $63.2 billion in November after a decline in imports, in a potential lift to gross domestic product in the fourth quarter. Imports fell 1.9% in November to $316.9 billion, the government said. Exports also fell 1.9% in November to $253.7 billion. (MarketWatch) Australia's monthly consumer-price index rose 4.3% in the 12 months to November, slowing from an annual pace of 4.9% in October, the Australian Bureau of Statistics said Wednesday. Canada's goods-trade surplus with the rest of the world narrowed in November as a jump in shipments of energy products drove a rebound in imports, and exports fell for the first time since June. Canada posted a fourth consecutive monthly merchandise-trade surplus of 1.57 billion Canadian dollars, the equivalent of about $1.17 billion, Statistics Canada said. (Dow Jones Newswires) Spain's net debt issuance will decline by 10 billion euros ($10.95 billion) to 55 billion euros in 2024 from 2023, maintaining a declining trend of the past few years, thanks to solid economic growth and the consolidation of public accounts, the Spanish Treasury said. It plans gross debt issuance of 257.6 billion euros for 2024, a 2% increase on the year, due to a rise in government bond redemptions. (DJN) Feedback Loop

This newsletter is compiled by James Christie in San Francisco.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

01-10-24 0715ET