Will the next Fed meeting’s decision really make a difference?

So now we're all on tenterhooks until 18th Sept.

So now we're all on tenterhooks until 18th Sept., when we hear if the Federal Reserve has decided to reduce, (‘taper’), its monthly bond purchases. Traders, Treasurers, pension pot holders, emerging market Finance Ministers-this is what we’ve been waiting for since Bernanke first warned us in May/June it may be coming.
However, this certainly will be no surprise-this is not 1994 with its surprise Fed hike and bond market rout. The Fed has done a fantastic job of delivering an unpopular message-the start of the end of cheap money-in a manner designed to cause the least possible market volatility, and maybe the still buoyant level of the S&P 500 is eloquent testimony to their success. The reasons for the S&P's resilience are important.
Developed market countries' stock markets have retained their poise because US bonds yields have been going up for a good reason-and that is the return of growth and optimism, not just in the US, but also in Europe and China. The rise in 10-yr US Treasury yields from 1.4% to 3.0% is best described as a healthy normalisation, as it has been driven by a reduction in the all-pervading fear which has gripped the market since the Lehman bankruptcy, first, and then the emergence of the Eurozone crisis, once the depth of Greece's fiscal mess became clear.
This basic human response to seek safe-haven has played an equally important part as that of QE in keeping yields subdued.
Only in the last six months have we started to return to the 'normal' modus operandum, in which long term yields are the sum of compounded short rates and the risk premium, the latter being investors' judgement of future liquidity, credit, and fiscal and monetary policy uncertainty over the life of the bond.
Paradoxically, desperate safe-haven flight far outweighed those factors for US Treasuries, and collapsed the risk premium. We have now returned to a normal state of affairs, with the Eurozone crisis also contained, as we all belatedly came to appreciate that political will would easily overcome any economic maladies.
This has lead me to the scary conclusion that while the FOMC's pronouncements on 18th may prompt a temporary rally in US Treasuries, (especially as there is a 50 per cent probability that they will lower the employment threshold for rate rises from 6.5 per cent to 6 per cent), but that will be a great opportunity to sell bonds.
This is a bond bear market-and companies like Verizon are very wise indeed to lock in cheap borrowing. Growth is on the rise worldwide, (even rather anaemically in Europe), and I'm afraid the Fed won't have any room for hesitation driven by concerns over the effect of tapering on emerging markets, as was made abundantly clear by a couple of senior Fed officials at the Jackson Hole conference. No wonder; the Fed-haters in the Senate would have a field day if the FOMC seemed to be managing other countries' economies for them. (Of course, those Senators give no thought for the potential negative feedback effects that an EM crisis could have on the US).
Let's say the Fed doesn’t actually taper QE at all, that will send stock markets soaring and give business confidence another boost-quickly pushing yields higher anyway.

Ben Bernanke Photograph: Getty Images

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

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Donald Trump wants to terminate the Environmental Protection Agency - can he?

"Epa, Epa, Eeeepaaaaa" – Grampa Simpson.

 

There have been countless jokes about US President Donald Trump’s aversion to academic work, with many comparing him to an infant. The Daily Show created a browser extension aptly named “Make Trump Tweets Eight Again” that converts the font of Potus’ tweets to crayon scrawlings. Indeed, it is absurd that – even without the childish font – one particular bill that was introduced within the first month of Trump taking office looked just as puerile. Proposed by Matt Gaetz, a Republican who had been in Congress for barely a month, “H.R. 861” was only one sentence long:

“The Environmental Protection Agency shall terminate on December 31, 2018”.

If this seems like a stunt, that is because Gaetz is unlikely to actually achieve his stated aim. Drafting such a short bill without any co-sponsors – and leaving it to a novice Congressman to present – is hardly the best strategy to ensure a bill will pass. 

Still, Republicans' distrust for environmental protections is well-known - long-running cartoon show The Simpsons even did a send up of the Epa where the agency had its own private army. So what else makes H.R. 861 implausible?

Well, the 10-word-long statement neglects to address the fact that many federal environmental laws assume the existence of or defer to the Epa. In the event that the Epa was abolished, all of these laws – from the 1946 Atomic Energy Act to the 2016 Frank R. Lautenberg Chemical Safety for the 21st Century Act – would need to be amended. Preferably, a way of doing this would be included in the bill itself.

Additionally, for the bill to be accepted in the Senate there would have to be eight Democratic senators who agreed with its premise. This is an awkward demand when not even all Republicans back Trump. The man Trum appointed to the helm of the Epa, Scott Pruitt, is particularly divisive because of his long opposition to the agency. Republican Senator Susan Collins of Maine said that she was hostile to the appointment of a man who was “so manifestly opposed to the mission of the agency” that he had sued the Epa 14 times. Polls from 2016 and 2017 suggests that most Americans would be also be opposed to the agency’s termination.

But if Trump is incapable of entirely eliminating the Epa, he has other ways of rendering it futile. In January, Potus banned the Epa and National Park Services from “providing updates on social media or to reporters”, and this Friday, Trump plans to “switch off” the government’s largest citizen-linked data site – the Epa’s Open Data Web Service. This is vital not just for storing and displaying information on climate change, but also as an accessible way of civilians viewing details of local environmental changes – such as chemical spills. Given the administration’s recent announcement of his intention to repeal existing safeguards, such as those to stabilise the climate and protect the environment, defunding this public data tool is possibly an attempt to decrease awareness of Trump’s forthcoming actions.

There was also a recent update to the webpage of the Epa's Office of Science and Technology, which saw all references to “science-based” work removed, in favour of an emphasis on “national economically and technologically achievable standards”. 

Trump’s reshuffle of the Epa's priorities puts the onus on economic activity at the expense of public health and environmental safety. Pruitt, who is also eager to #MakeAmericaGreatAgain, spoke in an interview of his desire to “exit” the 2015 Paris Climate Agreement. He was led to this conclusion because of his belief that the agreement means “contracting our economy to serve and really satisfy Europe, and China, and India”.

 

Rather than outright closure of the Epa, its influence and funding are being leached away. H.R. 861 might be a subtle version of one of Potus’ Twitter taunts – empty and outrageous – but it is by no means the only way to drastically alter the Epa’s landscape. With Pruitt as Epa Administrator, the organisation may become a caricature of itself – as in The Simpsons Movie. Let us hope that the #resistance movements started by “Rogue” Epa and National Parks social media accounts are able to stave off the vultures until there is “Hope” once more.

 

Anjuli R. K. Shere is a 2016/17 Wellcome Scholar and science intern at the New Statesman

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