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The paradigm shift in economic policy continues apace

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This article is an on-site version of Martin Sandbow’s free lunch handout. Participation over here To get our newsletter sent directly to your inbox every Thursday

Expect news from the International Monetary Fund and World Bank annual meetings next week to highlight the deteriorating economic outlook for this winter and next year and the tough decisions facing finance ministers on inflation, energy, cost of living and Ukraine, against economic and fiscal threats. crises in an increasing number of countries.

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But I find the analytical work of the IMF equally important, which, as it were, began to be issued before the meetings. It’s not that the Fund is necessarily right. But her role as guardian of global economic policy orthodoxy means her thinking influences what is passed in order to make responsible policy – watch her unusual public interest in the UK’s tax cut “mini” budget last week.

Interest in the IMF’s research perspective becomes even more important as the doctrine it expresses evolves. and me They wrote In the past, this was a time of intellectual development – if not Revolution: The The return of the active state It is now a home show establishment.

Reading the chapters released so far from this fall’s World Economic Outlook and the Global Financial Stability Report, it seems to me that the Fund’s paradigm shift is not being derailed by current economic storms. The chapters I’ve looked at, which all have handy blog versions for that short period, are TWO WEO On climate and growth policies and on the risks of wage-price spirals (Blog Editions over here And the over here), And the One of GFSR About the risks of open-ended investment funds (Blog Edition over here).

The IMF shows consistency: These chapters reflect, in part, long-standing themes (about climate) and fit a greater desire to shape markets and the outcomes they produce than the old Washington Consensus did. In fact, the chaos that followed the “mini” budget may mean that markets are more comfortable with the Fund’s progressive style than with the views of the new British government in the 1980s. I also detected a nice dip from the fund in some unreconstructed voices in the economic policy debate.

Here are some of my main points:

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Bigger (and faster) is better (and cheaper)

The fund estimates that the costs of cutting carbon emissions enough by 2030 to reach net zero by 2050 are petty to the optimal policy, which consists of budget-neutral carbon taxes, which are set to increase gradually with transfers to households, and subsidies to low. Carbon technologies, lower business taxes. Such a combination of policies would achieve the needed cost reductions of annual growth of 0.05 to 0.2 percentage points for four years in the US, the eurozone, and China. Inflation will be 0.1 to 0.4 point higher in those years. This is in line with Previous fund search, if slightly less optimistic, because she argued that spending on zero-carbon infrastructure could add to growth over the next decade and a half. Presumably, this could offset the small cost of the carbon taxes identified in recent work. Admittedly, this cost of growth is slightly higher in the rest of the world, but this is mostly due to energy-exporting countries that will obviously lose out on significant export revenue as carbon consumption declines.

Hesitation is more expensive: the short-term cost in growth and inflation only gets worse by delaying the procedure. There are two reasons for this. The first is that the longer you wait, the more abrupt the structural changes should be. The other reason is that if governments are reliably committed to decarbonization, the private sector will adjust its behavior in ways that make the process smoother. In contrast, if governments are not believed to be serious about climate change, companies will invest in the wrong capital, at a greater cost to the economy when adjustment finally occurs.

Simply put: sticking now to a carbon tax gradual trajectory enough to reduce carbon use for growth is better than not doing so.

Don’t panic about inflation

The other chapter of the WEO has a very substantive discussion on whether there is a risk that the current price hike will increase wage demands, in turn causing employers to raise their prices etc as everyone expects high inflation to continue. Should we fear such price-wage spirals? The short answer is no.” Fund economists have looked at a range of historical periods of inflation that are similar to the current one—particularly in that price pressures do not arise within the labor market (because real wages are flat or declining). These factors have not led to wage-price vortexes, With modest wage growth, price growth quickly peaked and returned to normal.

The chapter on climate policy contains a “keep calm and go” message on inflation as well. There are concerns about central bankers that making carbon emissions activities more expensive, as net zero requires, makes monetary policy more difficult. But the Fund’s model “shows that this is not so . . . when policies are incremental and credible, the output inflation tradeoff is small. Central banks can choose either to fix a price index that includes [carbon] taxes or allowing the tax to pass completely through prices.” In either case, inflation remains stable and the effects of growth are limited.

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There is a cloud to this silver lining, so to speak. Outcomes depend on central banks keeping inflation expectations in check. So there’s something here for hawks, too.

Brokerage is a scary thing

The sudden collapse in September of UK government bonds (gold bonds) could not have been on the minds of IMF economists when they decided to include a chapter in the Global Financial Stability Report on how open-ended funds can “amplify shocks and destabilize asset prices”. It’s a great time, even if the UK episode is about pension funds. The basic problem was the same as that identified by the International Monetary Fund (and also the reason behind the rapid collapse of US Treasuries at the start of the pandemic). When somewhat illiquid investment products through construction need urgent liquidity, they may have to liquidate what they can in short order, accelerating market moves. This should worry us because central banks are bent on raising interest rates quickly – will they have to pause tightening (like the Bank of England delaying its sale of bonds, and temporarily buying them instead) due to financial instability caused by a higher interest rate?

The IMF is willing to consider some quite intrusive solutions, “such as reducing the frequency of investor redemptions” and forcing more circulation on central clearing. This is a reasonable. It is also a far cry from when financial deregulation was common not many years ago.

Other readings

  • My colleagues take deep diving Into the causes and consequences of property collapse in China.

  • Speaking of China, Noah Barkin the news On China-Europe relations it is always worth reading – one of the solid elements in the latest issue is how “Chinese diplomats removed their talking points blaming NATO for the conflict in Ukraine and made clear that Russia’s use of nuclear weapons would be viewed completely unacceptable in Beijing.”

  • The sudden collapse of gold is only a symptom of a deeper illness in how financial markets operate today. Eric Lonergan argues: “volatility virus”.

  • Today is the inaugural summit of the “European Political Community” – Franz Mayer, Jean Pisani-Ferry, Daniela Schwarzer and Shaheen Valli. paper About how to give it substance.

  • Sign up for FT’s Unprotected newsletter I especially loved my colleagues exchange With our great former colleague Matthew Klein on the pros and cons of the Bank of Japan’s 10-year interest rate targeting policy. For the record, I’m with Matt and I don’t see any reason why he should stop doing that.

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without hedge Robert Armstrong explains the most important market trends and discusses how the best minds on Wall Street respond to them. Participation over here

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Economic

New York Federal Reserve Securities Link Reverse Repo to Bank Regulatory Change by Reuters

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© Reuters. FILE PHOTO: The Federal Reserve building is seen in front of the Federal Reserve Board and is expected to signal plans to raise interest rates in March as it focuses on fighting inflation in Washington, US, January 26, 2022. REUTERS/Joshua Roberts

Written by Michael S Derby

(Reuters) – Continued massive cash flows at a key Fed facility are largely driven by a change in bank liquidity regulations from last year, a New York Federal Reserve report said on Friday.

The Fed offers what’s called a reverse repo, which allows eligible businesses to store cash at the central bank for a risk-free return. The rule that plays into the inflows is a regulation called the supplementary leverage ratio, which determines how much liquidity banks need on hand.

The SLR standard was relaxed during the most severe phase of the coronavirus pandemic in 2020, when concerns about market performance prevailed, and it was restored at the end of March 2021, to return to a more stringent level.

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Banking economists Jara Afonso, Marco Cipriani, and Gabriel La Spada write: “After the end of the SLR exemption period, banks had less flexibility to expand their balance sheets by increasing their holdings of reserves and Treasuries.” This had a knock-on effect on money market funds, the main users of reverse repo, which drove liquidity into the reverse repo facility.

After the regulations changed, the newspaper said, banks were less inclined to take deposits, and instead the money flowed into financial funds, which had to invest that money somewhere. Meanwhile, banks have cut back on short-term debt offerings, restricting where money can be invested. Moreover, the federal interest rate increases pushed cash into money market funds as financial markets experienced a shift in the cost of short-term borrowing, according to the authors.

The Federal Reserve’s esteemed buyback facility is an essential part of the toolkit it uses to manage its federal funds rate target setting, which it uses to influence the economy’s trajectory to achieve its inflation and employment targets. A reverse repo tool provides money market funds and other companies a place to deposit cash into the Federal Reserve overnight and earn a return. It is currently at 3.8% and is an investment with a better return than many private securities that come with greater risks.

The Fed’s reverse repo facility was largely unused in the spring of 2021, and then flows increased steadily. Inflows peaked at $2.426 trillion at the end of September before easing slightly to Friday’s inflow of $2.05 trillion.

Fed officials were optimistic about the huge levels of inflows. Some have argued that as the Fed raises interest rates and reduces the size of its balance sheet to combat high inflation, inflows into the reverse repo facility should decrease over time. But so far it hasn’t really happened.

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Meanwhile, issues related to the correct setup of the SLR are under consideration by the financial authorities, who are treading cautiously on the issue. “History shows the massive costs incurred by society when bank capital is inadequate, and therefore the urgency that the Fed properly adjusts capital regulation,” Michael Barr, the Fed’s official on bank supervision, said in comments Thursday.

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US Federal Reserve proposes plan for banks to manage climate-related financial risks By Reuters

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© Reuters. FILE PHOTO: An eagle graces the facade of the US Federal Reserve Building in Washington, July 31, 2013. REUTERS/Jonathan Ernst

Written by Chris Prentice

WASHINGTON (Reuters) – The U.S. Federal Reserve on Friday joined other major bank regulators in proposing a plan for how big banks can manage climate-related financial risks, drawing immediate opposition from one member and reservations from another.

The proposed principles detail the expectations for banks with more than $100 billion in assets to incorporate climate-related financial risks into their strategic planning. The proposal was approved for public comment in a 6-1 vote of the Fed’s Board of Governors.

The proposal marks the latest effort by US policymakers to prepare for potential financial risks from climate change, bringing the Fed into line with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), which have separately proposed their own plans.

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The potential impacts of climate change — rising sea levels, worsening floods and fires, and government policies moving away from carbon-heavy industries — could destroy trillions of dollars in assets worldwide.

The Fed said these financial implications “constitute an emerging risk to the integrity and integrity of financial institutions and to the financial stability of the United States.”

The Fed’s plan requires banks to consider climate-related financial risks in their audits, manage other risks, and add climate-related scenario analysis to the traditional stress test. The report suggested that banks should also assess and consider whether they should include climate-related risks in their liquidity reserves.

The debate over the extent of financial system risks posed by climate change has been politically charged. Federal Reserve Governor Christopher Waller opposed Friday’s proposal, raising the question of whether it represented a serious risk to the safety of large banks or financial stability in the United States.

“Climate change is real, but I do not agree with the premise that it poses a serious risk to the safety and integrity of major banks and the financial stability of the United States,” Waller said in a statement released alongside the proposal. “The Fed conducts regular stress tests on large banks that deliver very severe macroeconomic shocks and show that banks are resilient.”

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Gov. Michele Bowman endorsed the plan for public input with reservations, noting that the board should consider the “costs and benefits of any new projections.”

The proposal will be open to public comment for 60 days.

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More than 1,000 New York Times union employees plan to quit over payroll, reports Reuters

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© Reuters. FILE PHOTO: The New York Times Building in Manhattan, New York, US, August 3, 2020. REUTERS/Shannon Stapleton/File Photo

(Reuters) – More than 1,000 unionized employees of The New York Times Company have pledged to quit if the news publisher does not agree to a “full and fair contract” by Dec. 8, according to a union tweet on Friday.

The New York Times NewsGuild sought “inflationary” wages as well as preserving and enhancing health insurance and retirement benefits promised during employment, according to a letter signed by 1,036 members.

“We will be out and about for 24 hours, Thursday, December 8th, if we do not have a full and fair contract agreement in place by then,” the letter said.

Union members are also asking for flexibility to work remotely, among other demands.

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A spokesperson for The New York Times said “While we are disappointed that NewsGuild is threatening to strike, we stand ready to ensure The Times continues to serve our readers without interruption,” adding that the company’s current pay offer offered “significant increases.”

Earlier in March, a group of nearly 600 tech employees at The New York Times voted to unionize as the company faced allegations that it illegally interfered with organizing work.

In August, approximately 300 Thomson Reuters (NYSE: Corp) journalists in the US, represented by the same NewsGuild, also staged a 24-hour strike while the union negotiated a new three-year contract with the company.

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