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Fed Could Learn Policy Tactics From Apple Buyback, Dividend Plans

Fed Could Learn Policy Tactics From Apple Buyback, Dividend Plans
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Thursday, 03 May 2018 10:01 AM Current | Bio | Archive

There was nothing exceptional in the Federal Reserve policy decision.

The Fed did not change the course of central bank policy. It’s a little bit soon to be contemplating the idea of a rate rise, for example, every meeting, but the tone of the Fed statement suggested that it is entirely right and proper to expect the Fed to raise rates by a quarter point every quarter.

Financial markets seemed a little uncertain as to how best to react. The 2-year U.S. Treasury bond, which might be supposed to be the most closely concerned with the Fed funds rates was basically stable yielding 2.03 percent yesterday (05/02/18) against 2.05 percent on Tuesday (05/01/18).

In the broader context of the FOMC statement, I’d like to come back for a moment on the recent announcement that Apple intends to do a $100 billion share buyback with a higher dividend payment because this is also of economic relevance.

The buyback and the dividend payment represent a reduced demand for cash or liquidity and the willingness to purchase risk assets, shares in this case, instead.

This is very relevant to the Federal Reserve’s quantitative policy position at present. The Fed is reducing U.S. cash supply by reducing its bond-holdings, currently at the pace of $30 billion every month.

This is not draining cash from the financial markets because, as Apple has so admirably demonstrated, demand for cash is falling as supply of cash is falling.

Demand for financial market assets is increasing.

A lot of the cash, printed by the Fed during the period of quantitative policy accommodation, ended up sitting on company balance sheets gathering dust.

Apple’s actions demonstrate that the Fed should reduce cash supply and that does not automatically reduce the amount of cash that is available in financial markets.

Besides that, in the U.S. we get today data of varying degrees of importance.

Highlighting the data, productivity gains remained lukewarm in the first quarter. The measure of nonfarm business employee output per hour increased at 0.7% annualized rate (est. up 0.9%) after upwardly revised 0.3% gain in previous three months

In fact, what productivity measures is all the bits of the economy that economists cannot otherwise explain and as there’s more and more, it is harder and harder to explain, this is not perhaps a precise measure of effort anymore.

It does however give a sense of unit labor cost, and unit labor costs are more relevant for assessing inflation trends. As companies have clearly more pricing power and as labor costs are around 70 percent of overall prices in the U.S., the expected pickup in unit labor cost inflation is of some relevance.

Over in the Euro area we just got the “flash” year-over-year inflation data for April with the consumer price index (CPI) down to 1.2 percent from 1.3 percent in March, the core CPI down to 0.7 percent from 1.0 percent in March and the producer price index (PPI) up to 2.1 percent from 1.6 percent in March.

Tax effects have been lowering the CPI in recent months, it should be noted.

Euro area producer price inflation, (PPI) which measures companies’ pricing power is accelerating again. That does include oil effects though.

In the context of all this, over in Germany and as investors have recently been wondering whether weaker growth and inflation in the Euro area this year would test the ECB's resolve in dialing back its aggressive stimulus measures, German Bundesbank President Jens Weidmann and ECB Governing Council member told an audience in Germany that concerns about an imminent end to the euro zone’s economic expansion are exaggerated while expectations of a European Central Bank rate hike towards the middle of next year remain realistic.

He added the Fed’s experience in spelling out what steps it would take and in what order, was "very helpful" for the ECB. The Fed said it would first begin raising rates and then start selling down the assets it had bought in its stimulus program, which is an order that financial analysts expect the ECB to follow.

The ECB should end its bond-buying program by the end of this year.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Apple’s actions demonstrate that the Fed should reduce cash supply and that does not automatically reduce the amount of cash that is available in financial markets.
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Thursday, 03 May 2018 10:01 AM
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