Tags: citigroup | buiter | economy | froth | fed rates

Citi's Buiter: US Encourages 'Financial Froth, Speculative Behavior'

Citi's Buiter: US Encourages 'Financial Froth, Speculative Behavior'
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By    |   Thursday, 10 August 2017 03:14 PM

Willem Buiter, the chief economist of Citigroup, reminds savvy investors that despite possibly one more looming interest-rate hike, it won’t be that drastic of an adjustment.

“I think financial conditions at the moment for the United States are probably too easy. They encourage financial froth and speculative behavior. So taking some of this excess liquidity out of the system is beneficial for financial stability,” he explained to the Epoch Times.

“Long-term rates are low, the stock market is booming, the currency is relatively weak, and policy rates are edging up in nominal terms very, very slowly. We’ll see one more rate hike, probably at the end of the year. So that is technically tightening relative to a situation we didn’t have, but there is very little absolute monetary tightness. Financial conditions and monetary policy continue to be very supportive of economic activity in the United States,” he said.

“Most of the commentators have never seen a rate increase before. The last time the Fed started hiking was nine years ago, so any rate hike looks dramatic, when in fact it is very little on top of almost nothing,” he explained.

Meanwhile, he urged investors to keep a sharp eye on China.

“China, against my expectations, actually upped its growth in the first half of this year, and most estimates, our own included, implied a slowdown in the second half. The growth rate for this year is probably 6.8 percent, which is way above what I think is the sustainable growth rate for China,” he said.

“And then there is excess capacity. It’s been addressed in steel, in coal, and to a certain extent maybe in aluminum. In most other sectors, massive excess capacity is being addressed by adding to it,” he said.

“So it’s unsustainable. It will end. When? They will keep the show on the road almost certainly until after the 19th Party Congress this fall. And then I assume that the authorities, if sufficient consolidation of political power has taken place by then, will move to restructure the bad assets and probably again create asset management companies—bad banks to deal with this overhang of bad assets accumulated since 2008.”

For its part, the Fed expects sluggish U.S. inflation to rise over the next several months while the hot labor market gets yet hotter, one of the Fed's most influential officials said on Thursday in comments that reinforce its gradual policy-tightening plan.

In a speech calling on the United States to better address factors driving racial inequality of employment and income, New York Fed President William Dudley suggested the central bank was on track to raise interest rates once more and begin shedding some bond holdings this year, Reuters reported.

"Our outlook anticipates a continued moderate growth trend, with some further strengthening in the labor market and an increase in inflation over the medium term toward our objective of 2 percent," Dudley said in prepared remarks that did not specifically mention monetary policy.

Dudley, a close ally of Fed Chair Janet Yellen and permanent voter on U.S. monetary policy, said "sluggish" productivity growth is behind persistently "modest" wage growth.

Unemployment has fallen to a 16-year low of 4.3 percent, yet wages have risen only at a disappointing 2-to-2.5-percent rate annually. That reflects overall U.S. price readings of about 1.5 percent in recent months, below the Fed's 2 percent goal.

(Newsmax wires services contributed to this report).

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Willem Buiter, the chief economist of Citigroup, reminds savvy investors that despite possibly one more looming interest-rate hike, it won't be that drastic of an adjustment.
citigroup, buiter, economy, froth, fed rates
Thursday, 10 August 2017 03:14 PM
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