The death in December of Paul Volcker, former chairman of the U.S. Federal Reserve and famed inflation-fighter, is a reminder that galloping price increases used to be a problem. In recent years, though, inflation has largely gone missing. Its return in 2020 would be an unexpected bright spot.

Not, of course, the kind of inflation Volcker countered with tough monetary policy in the early 1980s, when annual price increases topped 10% in America. Or the debilitating 50% annual rate in Argentina as of October. But there’s a lot to be said for modest price gains.

The failure of U.S. price pressures to gain much momentum, starting with wages, is a head-scratcher given the tight labor market evinced by an unemployment rate of a mere 3.5% in November. The country’s consumer price index rose 2.1% in the year to November. That metric clears the central bank’s 2% symmetrical target but doesn’t make up for long periods of much weaker inflation since the financial crisis.

In turn, this contributes to low interest rates, which in the past decade or so have changed the financial world. Central bankers like New York Fed President John Williams like to talk about “r-star,” the real interest rate that’s natural for a healthy economy. Economists think the theoretical r-star has become lower than it used to be thanks to aging populations, lower productivity growth and other factors. Add weak inflation, and the nominal interest rate matching r-star is also low.

That’s why the Fed’s target rate is far lower than the historical average, in the 1.5%-1.75% range. In Europe and Japan, key policy rates are less than zero. That’s a huge challenge for pension funds, some targeting long-term 7%-plus annual returns on their often-underfunded portfolios, insurance companies seeking safe investments, and risk-averse savers. It’s also problematic for banks trying to lend profitably.

It’s hard to find hints of a resurgence in inflation. True, the impact of President Donald Trump’s tariffs could push prices up. But globally the International Monetary Fund, for example, is more worried about the reverse – even if BlackRock, the giant asset manager, thinks inflation risks are underappreciated. Maybe the best hope for a resurgence of manageable inflation is that the consensus is largely dismissing the possibility. Otherwise, there’ll be more painful adjustments to a new, low-interest rate future.

First published Jan. 2, 2020

IMAGE: REUTERS/Darren Ornitz

BY ROB COX

Federal Reserve Chairman Jay Powell is channeling Groucho Marx when it comes to climate change. The U.S. central banker seems to be following the comedian’s quip that he would “refuse to join any club that would have me as a member.” But there are good reasons for Powell to see sense and nudge the Fed into the Network for Greening the Financial System in 2020.

Founded two years ago, this 50-plus global group of central banks and other regulators wants to focus the financial sector’s mind on environmental and climate risks and encourage the industry to support the switch to a greener economy. Trying to keep the planet from frying is a noble cause and even hydrocarbon-dependent countries, like the United Arab Emirates and Canada, have sent emissaries to figure out how global warming will impact banking supervision and macro-financial policy.

Fed Governor Lael Brainard said in November the U.S. central bank was in discussions about how it might participate in the network. But there is no good official reason why it hasn’t already signed up. Some at the Fed worry that tackling climate change is a diversion from its mandate of maximizing employment and ensuring price stability. And Powell told Congress in April that climate risks don’t “fit neatly” into his financial stability duties. Neatness hasn’t, however, prevented the Fed from past diversions.

That leaves an impression the true motive for aloofness is a reluctance to tangle with President Donald Trump, who is pulling the United States out of the 2015 Paris climate accord. If this is the reason, Powell is doing a disservice to America’s financial institutions, which are among the world’s largest. It deprives them of some of the best practices agreed to by the body’s members, while cutting them out of their formulation altogether.

Joining the network would have the added benefit of broadcasting the Fed’s independence from political interference. Powell has cut rates even though the U.S. economy is relatively healthy and yet still gets bashed by Trump. Taking the central bank into a multilateral dialogue on an issue that Trump once called a “hoax” might defuse criticism that the central bank has been too malleable on interest rates. Brickbats will fly anyway. Better to do the right thing come what may.

First published Dec. 19, 2019

IMAGE: REUTERS/James Lawler Duggan

BY GEORGE HAY AND ANTONY CURRIE

Climate-change slowcoaches are heading for a smash. Fossil-fuel producers, steel companies, carmakers and other big greenhouse-gas emitters have so far faced only limited pressure from their owners for action on climate risk. That’ll change in 2020.

Despite increasingly frantic calls from scientists to limit global warming to 1.5 degrees Celsius, companies and investors have had grounds to hang back. An International Energy Agency business-as-usual scenario has oil demand still growing during the 2030s. Even engaged governments have only set very long-term carbon emissions goals.

That narrative is shifting. Shareholders have until now mostly needled companies like BP, Glencore and Royal Dutch Shell for extra detail on global-warming risks. They’re getting pushier. Climate Action 100+, a group of 370 investors with $35 trillion in assets, will soon place more stringent demands on individual companies, including going after directors and supply chains. Activist hedge fund TCI, run by Christopher Hohn, is already doing it.

Meanwhile, the pension and insurance funds that hand out mandates to asset managers are slowly mobilising the trillions of dollars they have in passive investments with BlackRock and Vanguard, which have been chastised by think tank InfluenceMap for underwhelming shareholder engagement. The United Nations’ new Net-Zero Asset Owner Alliance includes big hitters like Allianz and CalPERS. Hiro Mizuno, chief investment officer of Japan’s $1.5 trillion Government Pension Investment Fund, is already awarding work based on environmental, social and governance concerns. Last year BlackRock’s passive foreign equities mandate for GPIF nearly halved.

Crucially, climate risk will increasingly feature in shorter-term analyses of company valuations. A U.N.-supported research project backed by Principles for Responsible Investment estimated that the world’s 10 biggest oil companies, including Exxon Mobil and Total, would lose a third of their value if markets repriced their shares now to anticipate tough policy pushbacks, such as carbon pricing by 2025.

That’s starting to create the kind of noise that wakes up more traditional shareholder activists and short sellers. The prospect of some governments using the fifth anniversary of the 2015 Paris climate accord to add some teeth to their green commitments will push more than a few laggards towards the ditch.

First published Dec. 18, 2019

IMAGE: REUTERS/Daniel Munoz

BY ANNA SZYMANSKI

It’s tough to pity the likes of JPMorgan, Bank of America and Goldman Sachs. But Wall Street giants with more than $700 billion in assets have barely benefited from the regulatory rollbacks bestowed on smaller peers and other industries by President Donald Trump’s administration and the Federal Reserve. But the central bank will finally give them some satisfaction in the next few months.

Sadly for the them, they won’t suddenly be allowed to cut their overall capital levels. Instead, they’ll get some relief from tweaks to the short-term lending market known as repo.

This usually arcane part of the business hit the headlines in September when repo rates jumped more than fourfold to around 10%. It wasn’t even sparked by an actual crisis. Large banks exacerbated the spike, though, by not exchanging reserves – basically a form of cash – for treasuries. Postcrisis rules were a big part of the reason why.

Technically, treasuries are treated the same as cash for many capital requirements for lenders, like the liquidity coverage ratio. But Fed Vice Chair Randy Quarles has said that many banks feel regulatory pressure to favor reserves. Ultimately, the two aren’t interchangeable: A client wanting to borrow $1 billion when the repo market is closed isn’t going to accept U.S. government bonds.

The Fed is likely to alleviate this by creating a permanent standing facility, presumably run by Lorie Logan, head of the New York Fed’s market operations. Banks could get cash from the Fed in exchange for high-quality assets like treasuries almost any time on a business day. That ought to persuade their repo desks to hold more treasuries, rather than hoarding reserves, and thus make a bit more money. It could also allow banks to reduce the amount of reserves they hold to satisfy their so-called living-will liquidation plans; the eight largest players currently have nearly $800 billion set aside as a precaution and could cut that drastically, the New York Fed reckons.

The facility would need some deft handling, from determining both the firms and assets allowed, to setting the right borrowing rate: too high, and it creates a stigma; too low and the Fed ends up running the entire market.

Those ought to be manageable. Granted, it wouldn’t be quite the regulatory relief the banks have been hoping for. But it would be welcome nonetheless.

First published Dec. 9, 2019

IMAGE: REUTERS/Carlo Allegri

BY UNA GALANI

The good days are coming: India’s Prime Minister Narendra Modi needs to jump-start the economy to keep that 2014 campaign promise. Months into a second term, GDP growth of 4.5% is about half the pace ideal for its 1.3 billion people. Modi surprised markets in good ways, and bad, before. Here’s how he might do so again.

A crisis of confidence is crippling the private sector, which is hobbled by $200 billion of bad debt, and isn’t investing as demand weakens and businesses adjust to new rules on everything from sales tax to insolvency. If India Inc is now acutely aware of the costs of corruption, the pendulum of fear has swung too far. Industrialists once willing to back large infrastructure projects are now risk-averse.

One big problem is unpredictable policymaking that has seen companies abruptly stripped of key licences or whacked with costly new contractual terms. Prashant Ruia, whose Essar Group lost its steel asset through a new bankruptcy regime to ArcelorMittal, told the audience at Breakingviews’ Predictions event in Mumbai on Dec. 6 that fixing regulatory risk is key to revival.

Another sentiment lift can come from privatising businesses like Air India, an indebted globetrotting reminder of India’s inefficiencies. Modi’s earlier attempt failed. Getting it right this time would send a message that New Delhi is serious about reform. Outlining a roadmap to other selloffs would help too, Sunil Mehta, non-executive chairman of Punjab National Bank said at Mumbai Predictions.

To kick start consumption, meanwhile, direct transfers of cash into people’s bank accounts or a big spending plan on roads can’t be ruled out. The government could risk the ire of the bond market to raise the funds by relaxing the fiscal deficit beyond a target of 3.3% by March 2020 to over 4%.

A more radical option is to devalue the rupee, says Shankar Sharma, co-founder of securities firm First Global. By making Indian goods more competitive, it would boost net exports. Most of the 200-strong audience predicted in a Breakingviews poll that India may choose a combination of these measures to kick start the recovery.

Modi’s past economic surprises haven’t all worked out: Demonetisation, the shock 2016 withdrawal of bank notes, dealt a massive shock and probably contributed to the current slowdown. Investors should brace themselves for the year ahead.

First published Dec. 9, 2019

IMAGE: REUTERS/Brendan Mcdermid

BY GINA CHON

Jack Dorsey will add another line to his resume in 2020. The Twitter boss banned political ads and did more than Mark Zuckerberg to prevent the silencing of Hong Kong protesters. Dorsey, who also runs payments firm Square, fared surprisingly well in Washington hearings, too. His style will turn him into the anti-Facebook hero.

Dorsey is an unlikely political darling. He comes across as awkward and soft-spoken. But he has also been more up-front with U.S. lawmakers than his social-media rivals about toxic content and his platform’s confusing terms of use. It’s a contrast with both Zuckerberg’s tin-eared talking points and the technical wonkiness of Sundar Pichai, who now runs Alphabet as well as its biggest business, Google.

Twitter has also been more decisive than rivals about resolving controversies, including political ads. While Facebook and Google’s YouTube are tying themselves in knots over restrictions, Dorsey in October announced Twitter was simply banning political ads altogether. While President Donald Trump’s campaign manager criticized the decision, it hasn’t sparked much blowback from other Republicans and it drew applause from Democrats.

That move followed another politically popular decision on Hong Kong. In August, Twitter decided to stop running ads from state-controlled media entities, including Beijing-backed outlets. Facebook, which generated about $5 billion in revenue from Chinese advertisers in 2018 according to Pivotal Research, has run Xinhua ads about this year’s protests in Hong Kong, while YouTube hosted similar China Global Television Network shows.

Square, meanwhile, has been building its cryptocurrency capabilities without drawing political backlash, whereas Facebook has put its Libra digital-currency project on hold after a global regulatory outcry.

Political pressure on social networks will increase as the November 2020 presidential election approaches. Dorsey may find he has earned a third important job as a thorn in the side of his larger, more compromised rivals.

That’s if he’s even around: After a trip to Africa in November he tweeted that he would spend three to six months living there in 2020. There are opportunities for Square in African markets, but Dorsey’s absence could hurt Twitter if it gets caught in an election firestorm. That said, a move to another continent is one way to get a breather from an interminable, and probably nasty, campaign.

First published Dec. 20, 2019

IMAGE: REUTERS/Chris Wattie