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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden (now) and Nick Fletcher

US Federal Reserve begins unwinding stimulus and leaves interest rates on hold - as it happened

A police officer keeps watch in front of the U.S. Federal Reserve in Washington.
A police officer keeps watch in front of the U.S. Federal Reserve in Washington. Photograph: Kevin Lamarque/Reuters

Closing post

Right, time to wrap up. Here’s a quick summary.

Almost a decade after the financial world plunged into its biggest crisis in generations, the US Federal Reserve has taken the landmark decision to start unwinding some of the stimulus it created to ward off a second Great Depression.

The Fed will start cutting its $4.5 trillion balance sheet in October, initially by just $10bn per month. Fed chair Janet Yellen said the normalisation process would be gradual and predictable.

Policymakers also left US interest rates unchanged, at 1.25% to 1.5%. The Fed committee expects to raise borrowing costs once more time this year, followed by three raises in 2018.

During her press conference, Yellen admitted that the Fed doesn’t really understand why inflation hasn’t returned to target. She also predicted that the US economy would suffer short-term damage from Hurricanes Irma, Harvey and Maria.

But there was no new insight into Yellen’s future; the Fed chair hasn’t met with president Trump recently, and refused to say if she wanted to serve a second term once her first stint ends in February 2018.

Investors are taking the Fed’s decisions well, with shares finishing a little higher in New York.

The US dollar has jumped, while US government debt has weakened, as investors brace for the Fed’s policies to hit the markets.

From New York, my colleague Dominic Rushe sums up the day:

The Federal Reserve has announced it will begin the great unwinding of the gargantuan stimulus programme it began close to a decade ago in the teeth of the worst recession in living memory.

As widely expected, the Fed voted to start reducing its portfolio starting in October, and kept interest rates at a range of 1% to 1.25%.

The move, announced after a two-day meeting by Fed officials, will start the gradual reduction of the central bank’s $4.5tn portfolio of bonds and other securities, bought to keep interest rates close to zero in an attempt to kickstart the economy.

“The basic message here is that US economic performance has been good,” Fed chair Janet Yellen said at a press conference. The Fed’s decision had been made because “we feel the US economy is performing well” but she added the Fed could reverse course if conditions changed....

Here’s Dom’s full story:

That’s all for today. Thanks for reading and commenting. GW and NF

Markets close at fresh record highs

Wall Street has taken today’s news in its stride.

The Dow Jones industrial average and the S&P 500 share indices have both closed slightly higher, at new record highs.

The close of Wall Street tonight
The close of Wall Street tonight Photograph: Bloomberg TV

But... short-term US government debt continues to sell off. The yield (interest rate) on two-year Treasury bills is pushing higher, following the news that the Fed will trim its balance sheet.

What the experts say

Reaction to the Fed’s announcement keeps flooding in.

Geoffrey Yu of UBS Wealth Management predicts the Fed will unwind its balance sheet slowly, as it takes a step into the unknown.

It has taken a decade for policymakers to begin to understand the effects of quantitative easing and with that debate still raging, markets will need to absorb the impact of its reversal.

Because of the uncertainty this could entail, we expect the Fed to adopt a ‘do no harm’ approach.

The fact that the Fed is even willing to begin this process indicates their confidence in the direction of the US economy and markets should not be perturbed by any new policy approach.

Sophia Ferguson of State Street Global Advisors says the Fed will be watching economic data closely, especially following recent hurricane damage:

In spite of record low unemployment and increasingly loose financial conditions, benign wage growth kept hawkish members of the committee grounded, with a downward drift in the longer-run expected policy rate path as represented by the dot plots.

With 11 out of 16 participants calling for another rate hike before the end of the year, the decision to leave the cash rate unchanged at 1.25% provides a welcome respite for the FOMC to evaluate the economic data over the coming weeks and months; the pause reduces the risk of pre-emptively removing policy accommodation, yet leaves ample fuel in the tank should inflation start to accelerate more aggressively than forecast in the second half of the year.

James McCann of Aberdeen Asset Management says the Fed has “fired the starting gun” on unwinding its QE programme.

This is set to be a marathon, rather than a sprint, with a slow-but-steady runoff in Treasury and Mortgage Backed Security holdings to begin in October. This step reflects rising confidence that the recovery is sufficiently durable to withstand a slow withdrawal of emergency policy measures, a full ten years after the financial crisis struck.

Nicholas Wall of Old Mutual Global Investors, says the Fed wanted to get its balance sheet reduction underway before the committee is shaken up next year (possibly with a new Fed chair).

The strong economy and loose financial conditions also gives the central bank confidence that the market will be able to handle the extra bond issuance.

Rick Rieder of asset management giant BlackRock predicts the European Central Bank will slow the pace of its own stimulus programme soon (that’s not the same as actually unwinding it, though)

Updated

Back in the markets, investors now believe there’s a 60% chance of a US interest rate rise in December, to 1.5%.

That’s up from 50% before today’s announcement.

Federal Reserve Chair Janet Yellen speaking at today’s press conference
Federal Reserve Chair Janet Yellen speaking at today’s press conference Photograph: Pablo Martinez Monsivais/AP

And finally, a question that gets to the heart of the matter....

Q: Are you bothered that financial conditions are actually looser than before you raised interest rates four times?

Yellen says the Federal Reserve has tightened policy since late 2015 because the US economy has been recovering, and the labor market has strengthened.

There are risks on both sides to our objectives, she warns. Tighten too early, and we risk hurting the economy and keeping inflation permanently low.

But wait too long, and we risk the economy overheating. That would ultimately force us to raise rates fast, leading to a recession.

So the Fed is treading a careful path as we aim to hit our mandate, she concludes.

And that’s the end of the press conference. Reaction to follow.....

Yellen expresses concern about the massive cyber attack at credit monitoring agency Equifax.

She calls it a “serious breach” and urges Americans to carefully monitor their credit reports.

Q: What would it take for the Fed to start QE again?

Yellen gives a long answer, repeating that the Fed could potentially expand its balance sheet in future if there was a “material shock” to the economy, meaning interest rate cuts weren’t a strong enough responce.

Perhaps significantly, she talks about how “future policymakers” will have to decide this issue. A hint that she doesn’t expect to be renominated for a second term?

Here’s a video clip of Janet Yellen’s (deservedly) stinging criticism of Wells Fargo:

Q: Will you take action against Wells Fargo over its huge misselling scandal?

Yellen roasts Wells Fargo, saying its actions are “Egregious and unacceptable”.

The Fed is working very hard to understand the root causes of Well Fargo’s problems, and decide the appropriate action.

[Background: a year ago, we learned that Wells Fargo staff had created 1.5m deposit accounts and 565,000 credit card accounts without customers’ consent, to meet their sales targets]

Q: Will there be operational problems when vice-chair Stanley Fischer steps down (early) next month? It will deprive the Federal Reserve of its quorum of four governors.

Yellen pays tribute to Fischer’s contribution to the Fed, saying she appreciated his “wise council and friendship”.

She says the Fed can carry out its duties with only three governors, but hopes that Congress will approve some new appointees to the Fed board.

Asked about financial regulation, Yellen says it’s important that reforms put in place since the crisis stay put.

She adds that regulations could be ‘tailored’ to avoid undue burden on the sector.

Yellen: I've not met with Trump recently

Ah, the elephant in the room.....

Q: Your current term expires in February 2018 - Have you discussed the situation with Donald Trump, or had any thoughts about your plans?

Janet Yellen says she intends to serve her current tern, and will not comment on whether she wants to stays on beyond that.

She has not had a further meeting with Trump, since one early meeting shortly after he became president.

Refreshingly, Janet Yellen says the Fed doesn’t know why inflation is below target this year.

We need to “figures out” if the factors are persistent of transitory, she adds.

Here’s Tom Stevenson, investment director for personal investing at Fidelity International, on the Fed’s balance sheet reduction plan:

As expected, the Fed has fleshed out its plans for reining in the size of its balance sheet. This has ballooned since the financial crisis on the back of America’s massive quantitative easing stimulus programme.

The balance sheet has expanded to $4.5trn since the financial crisis. The plan is to start reducing it from next month and to progressively accelerate the rate at which bonds are returned to the public market. The Fed hopes that by telegraphing its $1trn to $2trn taper, it can avoid unsettling bond and equity markets.

Janet YellenFederal Reserve Chair Janet Yellen speaking today.
Federal Reserve Chair Janet Yellen speaking today. Photograph: Pablo Martinez Monsivais/AP

Yellen reminds the press conference that the Fed has now raised interest rates four times in this cycle, and it still thinks the recovery is on a “strong track”.

Q: The Fed is locked into reducing its balance sheet, and raising interest rates in a gradual fashion. So what will you do if economic conditions don’t turn out as you expect?

Yellen denies that the Fed is ‘locked in’ to a particular path. We are assessing incoming data, and these plans are subject to change.

What won’t change, though, is our commitment to delivering price stability and full employment, she adds.

Yellen says that the Fed could “stop its balance sheet rolloff” in future, if adjusting interest rates is “insufficient” to respond to changes to the economic outlook.

Q: Is the Fed concerned that markets are at, or close to, record highs?

Yellen replies that it’s not easy to see how asset prices will affect the economic outlook, but the Fed is “taking account of asset prices when setting monetary policy”.

Onto questions, and the first one is a zinger.

Q: Why the Fed is unwinding its balance sheet when core inflation is consistently below target, and the unemployment rate for Black Americans is 8% (much higher than the 4.4% national average).

Yellen replies that it is a “concern” that inflation is below the 2% target. The Fed still believes it will rise, but will adjust policy if needed.

Yellen repeats that the Fed’s balance sheet will be shrunk gradually and predictably.

It will start by cutting its holdings by up to $10bn per month this autumn; a small change designed to help the markets adjust.

This cap will rise to $50bn per month by next autumn.

But....she also flags up that the Fed could adjust its balance sheet in future, if circumstances demanded it.

Updated

Policy is not on a preset cause, says Yellen - a reminder to the markets that events could yet force the Fed to chance course.

On interest rates, Yellen says the Federal Fund Rate won’t have to rise much further to get back to a ‘neutral stance’.

Yellen warns that US economic growth in the current quarter will be hurt by the recent hurricanes that battered Florida and Texas (as well as the Caribbean).

Inflation will also be pushed higher, temporarily, because gasoline has become pricier.

However, this won’t “materially” affect the long-term path of the economy, she adds.

Yellen also expresses sympathy, on behalf of the Fed, for those who have suffered from Irma and Harvey.

Janet Yellen's press conference begins

Over in Washington, Federal Reserve chair Janet Yellen has sat down to face the press and explain today’s decisions.

She starts by predicting that the US economy “will continue to expand over the next few years”, and that the Fed’s accommodative monetary policy stance will help create more jobs.

Yellen adds:

We expect the job market will strengthen somewhat further’

She says the Fed’s balance sheet reduction plan will be gradual and predictable.

Explainer: What the Fed will do to its balance sheet

What does ‘reducing the Fed’s balance sheet’ mean in practice?

Well... once the financial crisis stuck, the US central bank created more than a trillion of new dollars to buy American government debt, and bonds backed by mortgages.

This chart, from Bloomberg, reminds us how the Fed unleashed three quantitative easing programme in an attempt to prop up growth, fight unemployment and keep inflation higher.

.

So now, the Fed is planning to cut back, by cutting the amount of assets on its books.

Those QE programmes drove asset prices to record levels, such as bond prices and equities.

Kully Samra, UK managing director of Charles Schwab, warns that markets could wobble once the Fed’s plan gets underway.

Robust fundamental data and solid corporate earnings should allow the bull market to continue, but political, fiscal and monetary uncertainties still present risks.

The Fed’s announcement today to start unwinding the balance sheet has already been priced in by markets, but we continue to believe the Fed’s “quantitative tightening” could be the cause of some heightened volatility, especially as the impact on the real economy remains largely unknown.”

Updated

Wall Street has reacted calmly to the news that the Fed will start unwinding its balance sheet in October.

The main stock indices have dipped slightly, with the Dow down 0.25% and the S&P 500 losing 0.1%.

Cue the sarcasm:

Skimming through the Fed statement, it appears that policymakers are still confident that the US economy is recovering.

Here’s a flavour:

Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year.

Job gains have remained solid in recent months, and the unemployment rate has stayed low. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters.

On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined this year and are running below 2 percent.

Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

The dollar has jumped by 0.4%, reversing its weakness before the Fed’s announcement.

Traders are reacting to the news that the Fed still expects to raise interest rates once more this year, and three times in 2018.

In the markets, the yield on short-term US debt has jumped, meaning bond prices have fallen.

The Fed also flags up the damage suffered by hurricanes in recent weeks.

It predicts inflation could push higher in the short term, but hopes the US economy will bounce back:

Today’s statement says:

Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship.

Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.

Updated

Importantly, some Fed committee members have become more dovish about the path of interest rates in 2018.

The new Dot Plot (in yellow) shows that two hawkish policymakers have pulled their horns in (one was expecting rates to hit 3% next year!)

There’s also very little consensus about where rates will be in 2019....

Fed to start shrinking its balance sheet in October

Boom! The Fed says it will start shrinking its balance sheet in October.

That means it will beginning the task of unwinding the stimulus it injected into the US economy once the financial crisis began.

Updated

US Federal Reserve Decision

Breaking! The Federal Reserve has left interest rates unchanged at today’s meeting, at up to 1.25%.

Fed policymakers are also sticking with their prediction of one more rate hike this year.

More to follow...

The dollar is dipping slightly as traders brace for the Fed statement to hit the wires.

This has pushed the pound up to $1.359, up 0.8% of a cent today.

Oliver Jones of Capital Economics predicts that the Fed will sound more dovish about interest rates today.

He suspects they will drop the notion of another rate hike in 2017, and push it into 2018.

Jones writes:

While the federal funds rate is almost certain to stay on hold on this occasion, updates to FOMC members’ median forecasts – which are currently for one more rate hike this year and three further three hikes in 2018 – will be closely scrutinised as usual.

Although we no longer expect the Fed to raise rates again in 2017, we are still expecting four rate hikes in 2018 as inflation rebounds.

Wall Street is becalmed, with less than 30 minutes until the Fed announcement, which is followed by Janet Yellen’s press conference.

The Dow Jones industrial average is up 2 points, or a measly 0.01%, having hit a record high last night.

Do play along with Fed Bingo at home, or in the office.

Fingers crossed, and seatbelts buckled, please....

What to watch for from the Fed today

Today’s meeting of the Federal Open Market Committee is one of the most eagerly anticipated in a while. But what will Wall Street, the City, and investors around the world be looking for - and what will it mean for the rest of us?

1) Will the Fed raise interest rates today? Spoiler alert: this is seen as very unlikely. We’ve already seen two US interest rate rises this year, and American inflation probably isn’t bubbling away enough to justify a third today.

2) So when will rates go up? Previously, the Fed has predicted it will raise borrowing costs three times in 2017, and it has already hiked in March and June.

Today, it will release a new Dot Plot, showing how policymakers expect borrowing costs to move. If they don’t change 2017’s dots, and they don’t hike today, then a December hike would remain possible (but not certain).

3) Is it time to unwind the stimulus, and how? The big news from today’s meeting will probably centre on the Fed’s plans to normalise monetary policy and trim its $4.5 trillion balance sheet, including $2.5 trillion of US government debt.

That balance sheet swelled during the Fed’s various QE stimulus programmes, mopping up hundreds of billions of dollars of government and mortgage-backed bonds.

Economists predict that the Fed will announce that it will start unwinding this programme. But it may be reluctant to move fast. One option is to stop buying new bonds when existing debt matures.

The Fed is the first of the Big Four central banks to reach this point, so it is treading a path which the ECB, the Bank of Japan and the Bank of England will hope to follow.

4) What’s the hurricane damage? New economic forecasts will be released today, which may attempt to quantify the impact of hurricanes Harvey and Irma.

5) Yellen’s future in focus. Janet Yellen’s first term as Fed chair ends in early 2018. Is she considering running again, or ruling herself out following criticism from Donald Trump? She recently breakfasted with the president’s elder daughter, Ivanka, so reporters will want to hear Yellen’s thinking.

6) How do the markets take it? Investors seem remarkably relaxed about the prospect of QE being unwound, with markets at record highs. But might they have a change of heart when the deed is done? Loose monetary policy has driven asset prices higher for years, so withdrawing it could dent spirits....

Updated

European markets flat ahead of Fed

World markets are hovering around new highs, with the MSCI All Country World Index up another 0.09% to 487.82. But overall investors are - mostly - sitting on their hands ahead of the latest US Federal Reserve interest rate decision, due in just under two hours.

The exception, as previously mentioned, is the Spanish market, which has been rattled by the tensions in Spain surrounding a proposed independence referendum for Catalonia. The final scores showed:

  • The FTSE 100 finished down 3.3 points or 0.05% at 7271.95
  • Germany’s Dax edged up 0.06% to 12,569.17
  • France’s Cac climbed 0.08% to 5241.66
  • Italy’s FTSE MIB fell 0.31% to 22,355.58
  • Spain’s Ibex ended 0.83% lower at 10,292.1
  • In Greece, the Athens market dropped 0.64% to 757.98

On Wall Street, the Dow Jones Industrial Average is currently up 0.1% at 22,392.

Updated

Most European markets (and indeed the US as well) are treading water ahead of the US Federal Reserve meeting.

An exception is Spain, where the Ibex has dropped 1% after growing tensions over the proposed Catalonian independence referendum, with police arresting political officials in Barcelona. David Madden, market analyst at CMC Markets UK, said:

With the exception of the IBEX 35, it has been an uninteresting day for European indices. Catalonia has been calling for a referendum on independence for some time, and the fragile state of the Spanish economy has exacerbated it. Spanish police have raided the headquarters of the Catalonian government and scenes of unrest on the back of this has weighed heavily on the Spanish market. The move by the Spanish authorities is likely to stoke independence calls, and this spooked investors.

Ahead of the US Federal Reserve meeting, here is ING Bank’s crib sheet:

fed20sept

Oil prices have been moving higher recently on hopes that Opec and its partners would extend their production cuts designed to deal with a global supply glut. Indeed, crude is on track for its biggest third quarter gain in 13 years.

However they have now come off their best levels after the US Energy Information Administration reported a bigger than expected rise in crude stocks last week.

Markets continue to drift ahead of the Fed meeting. Connor Campbell, financial analyst at Spreadex, said:

Despite effectively not moving after the bell the Dow Jones still managed to flirt with a fresh all-time high – that’s just how consistent it has been in the last 3 weeks. Whether it can continue to build may be dependent on how the dollar reacts to September’s statement from the Federal Reserve – which in turn could come to depend on a) how cautious Yellen and co. are in regards to reducing the $4.5 billion balance sheet, and b) what kind of (December) rate hike signals are sent out.

For now, however, the greenback is sitting firmly on its hands. The dollar is down 0.3% against the pound, 0.1% against the yen and flat against the euro. Sterling is also up 0.2% against the euro, the currency receiving a bit of good news in the form of this morning’s surprisingly strong UK retail sales reading.

As for the European indices, sterling’s strength is once again weighing on the FTSE, which slipped 0.2% as the day went on having risen 0.3% during the morning. In the Eurozone there wasn’t a lot going on, with the CAC flat at 5225 and the DAX slipping below 12550 – if only just – following a 0.1% fall.

US house sales fall in August

More weak data from the US, with the effects of Hurricane Harvey starting to be felt.

US existing home sales fell 1.7% to 5.35m units in August, down from 5.44m in July and the lowest level since this time last year, mainly due to a lack of supply.

The National Association of Realtors said Harvey, which hit Texas in the last week of August, had seen helped push sales in Houston down 25% year on year. Without that decline, existing home sales would have been unchanged in August.

Lawrence Yun, NAR chief economist, said:

Steady employment gains, slowly rising incomes and lower mortgage rates generated sustained buyer interest all summer long, but unfortunately, not more home sales. What’s ailing the housing market and continues to weigh on overall sales is the inadequate levels of available inventory and the upward pressure it’s putting on prices in several parts of the country. Sales have been unable to break out because there are simply not enough homes for sale.

Some of the South region’s decline in closings can be attributed to the devastation Hurricane Harvey caused to the greater Houston area. Sales will be impacted the rest of the year in Houston, as well as in the most severely affected areas in Florida from Hurricane Irma. However, nearly all of the lost activity will likely show up in 2018.

Updated

Some deal news from Japan. Reuters reports:

Toshiba Corp has agreed to sell its prized semiconductor business to a group led by U.S. private equity firm Bain Capital, a key step in keeping the struggling Japanese conglomerate listed on the Tokyo exchange.

Toshiba said it had signed a contract for the deal worth about 2 trillion yen ($18 billion), the latest and perhaps final twist in a deal that only hours earlier had seen the company leading toward an agreement with its U.S. joint venture partner Western Digital Corp.

The decision to sell the world’s No. 2 producer of NAND memory chips... was made at a board meeting earlier in the day.

Toshiba said the agreement assumed the deal would weather legal challenges raised by Western Digital. A Western Digital spokeswoman said the company did not have an immediate comment.

FILE PHOTO: A logo of Toshiba Corp is seen on a printed circuit board in this photo illustration taken in Tokyo July 31, 2012. REUTERS/Yuriko Nakao/File Photo

Wall Street opens flat ahead of Fed decision

US investors are in wait and see mode ahead of the Federal Reserve’s interest rate decision and the press conference from chair Janet Yellen. But markets still remain at record levels.

The Dow Jones Industrial Average and the S&P 500 both edged up 0.01% at the open, while the Nasdaq Composite slipped 0.04%.

If the US Federal Reserve is more hawkish than expected on interest rates and its balance sheet plans, then the US dollar could move sharply higher after its recent weakness, reckons Fawad Razaqzada, market analyst at Forex.com:

In making their decisions, policymakers at the Fed are likely to take into account last month’s sharper-than-expected rise in CPI inflation, and weigh this against somewhat softer macro pointers elsewhere in the economy. But with employment remaining healthy and inflation being so close to its target, the Fed may get the market ready for another rate rise in December and also provide a plan for balance sheet normalisation. In other words, the Fed may be more hawkish than dovish at this meeting.

If so, we would expect the dollar to rip, especially against currencies where the central bank is still very dovish – for example, the Japanese yen and the Swiss franc. This outcome may also be modestly negative for the US stock markets. If the dollar rises and stocks fall, then gold’s response may be relatively muted, although as a dollar-denominated commodity it too should fall. Obviously if the Fed comes across as more dovish than hawkish then one would expect the opposite reaction in these markets.

Market calm as Fed 'bungee jump' looms

After hitting record highs last night, Wall Street is expected to open calmly in 30 minutes time.

That means the MSCI World stocks index remains at record levels, after fairly unspectacular sessions in Asia and Europe today.

Investors are braced for today’s Federal Reserve meeting at 2pm East Coast time, followed by Janet Yellen’s press conference.

As explained earlier, the Fed isn’t expected to raise interest rates today, but it will give new guidance about future rate hikes.

Crucially, it is also expected to outline how, and when, it will start unwinding its huge stimulus programme.

Investors are hoping that Fed chair Janet Yellen and colleagues will tread cautiously to avoid causing market upheaval.

But are they too relaxed? Unravelling a $4.5 trillion balance sheet is no easy task; any gyrations in bond prices or the US dollar’s value will have global ramifications, potentially triggering surges of capital around the world.

Kit Juckes of Societe Generale, the French bank, says today’s meeting will all be about BSN - balance sheet normalisation.

Starting BSN if that’s the right term, is a return to ‘peace-time’ policy before Janet Yellen departs (if she does).

It’s also an leap into relative unknown (never been done before) which is happening into a market which seems as relaxed as a teenager getting ready for a bungee jump. This market knows no fear.

Updated

A thought for the day, as we await news from the Fed:

Russia's B&N bank seeks bailout

There’s drama in Russia today, as one of the country’s largest banks seeks help.

B&N has sought a bailout from the central bank; making it the second bank to hit trouble in three weeks.

The FT’s Max Seddon has more details:

B&N Bank, Russia’s 12th largest bank by assets, is one of three top privately held banks highly exposed to Otkritie – Russia’s largest private lender until the central bank rescued it last month – through an informal group known as the “Garden Ring.”

The central bank estimates Otkritie may have a balance sheet hole of up to 400bn rubles; senior Russian bankers say the final total may be twice that.

Russia’s central bank has confirmed it is in talks with B&N’s owners and will decide on a bailout in the near future.

Reuters has an interesting line too....

B&N Bank staff declined to comment outside its head office, three kilometers (1.9 miles) from the Kremlin, while a truck belonging to a firm called Shredder Express, which offers mobile document shredding, was parked on a private road in front

All this week, the Guardian has been turning a spotlight on the escalating problem of debt in the UK.

Today, the boss of Britain’s second-biggest doorstep lender, has told us about how illegal money lenders are targeting council estates, in search of vulnerable customers to sign up.

Paul Smith, the chief executive of Morses Club, claims that people who have been turned down by official lenders are most at risk.

“Loan sharks live in the same block of flats that our customers live in, they live in the same council estates, they drink in the same pubs, they go to the same betting shops. You don’t find a loan shark, a loan shark finds you.

“So the typical approach would be at a school gate to a mother: ‘I see your kid’s toes are hanging out of their shoes, it breaks my heart. Can’t you get a loan off Provident?’ – ‘I can’t, I failed to pay up on the last one, I can’t get another one.’ – ‘I’ll tell you what, I’ll lend you £500. Don’t worry about when you have to give me it back, I’ll pop around every week and you can just pay me’ – but the repayments never cease.”

More here:

Kroll picks Dublin over London to avoid Brexit risks

The City of Dublin
The City of Dublin Photograph: David Soanes Photography/Getty Images

A New York credit ratings agency set up after the financial crash by former private investigator Jules Kroll has shunned London for its European headquarters because of Brexit.

Kroll Bond Rating Agency is opening its first base outside the US with more than 100 jobs over the next three years.

Mauricio Noé, who is heading up the company’s European expansion, said the UK’s departure from the EU was a factor

Noé told Irelands’ RTE radio that:

“Brexit did influence us coming to Dublin … it wasn’t worth taking the risk on London, and actually Dublin is a good alternative and maybe better in some ways.”

KBRA is the latest in a series of financial services operations to set up in Dublin as a means of maintaining or gaining access to the European single market in the event of the UK’s departure from the EU.

Yesterday, the Irish prime minister announced that one of largest insurance syndicates at Lloyd’s of London, XL group, was moving its European headquarters to the Irish capital as part of the three way battle with Luxembourg and Paris for the insurance sector Brexit spoils.

Noé said Dublin didn’t have the cluster of talent that London has. So, he is “aggressively targeting Irish diaspora in London and New York, particularly people with Irish girlfriends or wives to see if they would come back home to Dublin.”

Asked if the soaring cost of housing - rental and sales - was a deterrent, he replied.

“The cost of housing is not so much the issue, it’s more people’s families ties, as it is always in moving people from one country to another.”

This chart highlights how Britons spent more on non-food items in August, and also relied more on internet shopping and catalogues (non-store spending).

Retail spending by sector
Retail spending by sector Photograph: ONS

Paul Mumford of Cavendish Asset Management argues that this is an encouraging sign that consumers aren’t “dead and buried” despite Brexit uncertainty.

This is a promising sign for an industry that investors have shunned in recent months due to headwinds such as a rising minimum wage, and higher input costs in line with the Sterling fall.

The pound is now moving in the right direction for importers, and moderate inflation could be coming into play - lessening competitive pressures and making it easier for these companies to absorb rising input costs.

Notably the performance of non-store retailers is impressive, and demonstrates a continued trend towards online shopping, which in itself makes retailers more international, and less vulnerable to a weak pound.

Here’s Capital Economics’ take:

Credit Suisse: BoE will hike in November, but it shouldn't

Credit Suisse has joined the ranks of City experts predicting that the Bank of England will raise interest rates in November, from 0.25% to 0.5%.

But they add a proviso - such a rate hike would be a mistake.

In a new report to clients today, Credit Suisse argues that the UK economy hasn’t reached the point where monetary policy needs to be tightened.

In their view, growth is too weak, especially as Brexit is creating “short-term political noise”.

They say:

We think the BoE has misdiagnosed the amount of slack and growth potential in the UK economy.

The hike is unlikely to have a profoundly negative impact on the economy, but there is a risk of a non-linear response to the first rate hike in ten years. A tighter response to an (entirely) externally driven inflation overshoot today runs the risk of a sustained inflation undershoot in the future.

Jamie McGeever of Reuters also questions whether UK wages are really rising fast enough to justify a hike.

OECD: UK to lag behind the eurozone next year

Britain’s economy will lag behind most international rivals next year, as the eurozone’s recovery strengthens

That’s according to the OECD, which has just updated its economic forecasts.

The good news is that the Paris-based thinktank sees Europe’s economy catching up with America. In particular, it has hiked its forecast for Italian growth to 1.2%, from 0.8%.

The OECD says:

The upturn has become more synchronised across countries. Investment, employment and trade are expanding.

But the bad news is that Britain’s growth is expected to slow, from 1.6% in 2016 to just 1% in 2018.

That would put the UK at the bottom of the G7 growth league!

Here’s our news story about the OECB forecasts:

Andrew Sentance, senior economic adviser at PwC, reckons UK shops benefitted because more people stayed at home this summer (as foreign holidays are rather pricier since the Brexit vote).

He also believes that the first UK interest rate in a decade is imminent:

“It is encouraging that retail sales proved resilient and bounced back in August. Anecdotal reports from retailers suggest that spending may have been helped by more “staycations” in response to the weakness of the pound which pushes up the cost of overseas travel.

“The underlying picture has not changed greatly, though. In the past three months, retail sales volumes were just over 2 percent up on a year ago - and the annual growth rate has been hovering around 2 percent for most of this year. This is substantially below the growth rate of around 4.5 percent recorded in the three years 2014 to 2016 when inflation was much lower.

“These latest figures will give further encouragement to the Bank of England to follow up their recent statements on the need to raise interest rates. The first rise in UK interest rates for over a decade has now become even more likely - and we could see this happen at the next MPC meeting in November.”

But.... the Bank of England is less upbeat

Hold on a moment, though. The Bank of England’s latest healthcheck on the UK economy suggests that consumers are cutting back.

The BoE’s latest Agents Survey, just released, suggests that cautious shoppers are cutting back, or buying cheaper items. Higher inflation, though, means they’re having to pay more at the tills.

The survey is based on interviews with around 700 companies across the UK.

Here are the key points:

  • Consumer spending growth had eased slightly further in values terms. Manufacturing output growth had risen again, with exports supported by the past fall in sterling. Investment intentions were consistent with modest growth in spending over the year ahead.
  • Recruitment difficulties had edged higher and broadened slightly. Pay awards were clustered around 2%–3%.
  • Consumer goods price inflation had picked up further, largely reflecting the effects of the past fall in sterling feeding through into retail prices. Consumer services price inflation had also edged higher

Jake Trask, FX research director at OFX, reckons the jump in retail spending in August will encourage Britain’s central bank to raise interest rates soon:

“For the Bank of England, this data is yet more evidence that an interest rate hike is needed sooner rather than later, in an effort to get inflation back under control. Should CPI print 3% or higher in October, then we may see a rate hike as early as November, when the next quarterly Inflation Report is due.

“Former Monetary Policy Committee doves, Andrew Haldane and Gertjan Vlieghe, have already indicated that they’re close to switching sides, so the Bank will only need one other Committee member to join them before the rate can rise back to pre-Referendum levels.”

UK retail sales: instant reaction

The acceleration in UK retail sales last month is surprising, given household incomes are being squeezed by inflation.

It may show that people are borrowing more, warns Neil Wilson of ETX Capital:

Economics journalist Dharshini David also flags this up:

Economist Rupert Seggins points out that these monthly figures can be volatile...

...but the underlying picture is that people are still spending.

UK retail sales have now risen for three months in a row, as this chart shows:

UK retail sales

Pound jumps as retail sales smash forecasts

Breaking! UK retail sales were much stronger than expected in August.

The Office for National Statistics reports that retail sales jumped by 1.0% last month, beating City forecasts, and suggesting that consumers are still hitting the high street.

The ONS says:

  • In August 2017, the quantity bought (volume) in the retail sales industry increased by 1.0% compared with July 2017; with other non-food stores and non-store retailing as the main contributors to growth.

  • Compared with August 2016, the quantity bought increased by 2.4%; the 52nd consecutive month of year-on-year increase in retail sales.

  • Year-on-year contribution of food stores remains flat whilst there was a fall in the contribution of growth within petrol stations, showing that contributions to the overall growth came from non-essential items.

    • This has sent the pound jumping over half a cent against the US dollar, to $1.3587, as traders calculate that this makes a November interest rate rise more likely.

    Reaction to follow....

    Britain’s small businesses don’t share the sense of optimism in the markets.

    Confidence among UK firms has taken a tumble in the last three months, according to the Federation of Small Businesses. It’s Small Business Index has dropped to just +1 this quarter, down from +15 in April-June, and near to the -3 seen after last summer’s Brexit vote.

    Mike Cherry, FSB National Chairman, blamed economic factors:

    “Rising inflationary pressure and a weakening domestic economy are the twin drivers of plummeting confidence among small firms and consumers alike.

    Updated

    Tata Steel to merge European operations with ThyssenKrupp

    A steel worker works at blast furnace 8 of German corporation ThyssenKrupp in Duisburg, Germany.
    A steel worker works at blast furnace 8 of German corporation ThyssenKrupp in Duisburg, Germany. Photograph: Friedemann Vogel/EPA

    There’s big news in the steel industry this morning.

    Tata Steel has signed a “memorandum of understanding” with German steel manufacturer ThyssenKrupp to merge, creating Europe’s second largest steel group.

    This ends uncertainty over the future of Tata’s operations in the UK, including the Port Talbot steelworkers which was recently threatened with closure.

    But it’s not all good news; Tata and ThyssenKrupp are already planning around 4,000 job cuts.

    The FT’s Jonathan Eley sees further consolidation ahead:

    Unions have said they “cautiously welcome” the deal. Here’s the full story:

    Peter Rosenstreich of Swissquote Bank fears that markets could react badly if the Federal Reserve announces that it will start unwinding its stimulus programme, and cut the size of its balance sheet.

    He argues that investors are simply too relaxed, given the risks of geopolitical instability around the globe:

    The big news event on 20 September will be the report of the US Federal Reserve’s Open Market Committee – we believe the central bank will finally announce plans to start selling its massive holding of bonds. This is likely to begin in October. Meanwhile, the Fed is unlikely to move interest rates.

    What does this mean for the US dollar? Possibly a shock. Markets are calm – too calm, really, like those western films where the sheriff rides into an empty town. Despite the tensions in North Korea and the Middle East, despite a see-sawing US president, despite implied volatility, willingness to take risks is historically unprecedented, which we know could end in tears. Markets continue to rationalize this, by seeing low inflation, solid growth and gradual central bank normalization. We’re not so sure. A balance-sheet unloading could end the ‘feel good’ environment, sending both bond and stock markets southward.

    Asian markets remained calm today, despite Donald Trump’s threat to ‘totally destroy’ North Korea.

    The South Korean won strengthened a little, shrugging off Trump’s remarkable attack on ‘rocket man’ Kim Jong Un.

    European markets have also opened softly too, with the FTSE 100 gaining 9 points to 7283, and Germany’s DAX pretty flat.

    Connor Campbell of SpreadEx says:

    Despite myriad different macro-events fighting for attention – including a deadly earthquake in Mexico, the latest hurricane devastation in the Caribbean, Donald Trump’s sabre-rattling speech at the UN and Boris Johnson’s Brexit boasting – the markets are only interested in one thing this Wednesday: September’s Federal Reserve meeting.

    World markets at new peaks

    World stock markets are at record highs as investors await tonight’s Federal Reserve decision.

    The MSCI All Country World Index has nudged up to 487.66, up from 487.37 yesterday.

    That extends its recent run of record highs, as markets begin the autumn in good spirits.

    The MSCI ACWI
    The MSCI ACWI Photograph: MSCI

    That follows another solid day’s trading on Wall Street, where the Dow Jones and the S&P both hit record highs.

    Mike van Dulken of Accendo Markets says:

    Investors are buckling up for another Fed policy update which may contain news and/or hints about the timing of further policy tightening by way of balance sheet unwinding and the next rate hike.

    The agenda: All eyes on the Federal Reserve

    The seal for the Board of Governors of the Federal Reserve System in Washington
    The seal for the Board of Governors of the Federal Reserve System in Washington Photograph: Joshua Roberts/Reuters

    Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

    Investors around the globe have one thing at the top of their agenda today - the Federal Reserve. America’s top central bankers are meeting today to set monetary policy, and it could be a red letter day in the recovery from the financial crisis.

    The Fed is expected to take the historic move to start unwinding its massive stimulus programme, concluding that the US economy is strong enough to cope without a helping hand.

    “Massive” isn’t an understatement. After the crisis began in 2008, the Fed bought tens of billions of dollars of government bonds each month, swelling its balance sheet to a mighty $4.5 trillion. It now has to decide how to unwind this money-printing programme without spooking the financial markets.

    The Fed is likely to tread carefully; it’s not expected to raise interest rates today, for example.

    Policymakers will also indicate whether they expect borrowing costs to rise this year, and where they expect rates to peak in a few years, by using the Fed’s famous Dot Plot.

    Here’s the old dot plot (each blob shows where one Fed committee member expects rates to be each year).

    Today’s arrangement of dots will be closely scrutinised, says Naeem Aslam of Think Markets:

    The element that investors are going to pay a lot of attention is the update on the dot plot. We expect the Fed to show more softer approach to the future interest rate hike.

    According to their last projection, the Fed expected seven rate hikes by the end of 2019. However, in the new forecast, the market is widely expecting them to drop one interest rate hike.

    The immediate question is whether the Fed still expects to make one more interest rise this year (assuming they don’t hike tonight).

    The Fed will also release new economic forecasts, and could also talk about the impact which the hurricane season will have on US growth.

    The markets aren’t really sure what to expect, so we’re looking at a cautious day’s trading until the Fed announcement comes at 7pm UK time, or 2pm in New York.

    The agenda:

    • 9.30am BST: UK retail sales for August. They’re expected to be flat month-on-month, having risen 0.5% in July.
    • 10am BST: OECD publishes its latest global economic outlook. Will it repeat its warning of a Brexit slowdown in 2018?
    • 7pm BST: Federal Reserve decision released.
    • 7.30 BST: Fed chair Janet Yellen’s press conference
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