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Fed Minutes Suggest Yellen Made the Difference in ‘Close Call’

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  • Fed Minutes Suggest Yellen Made the Difference in ‘Close Call’

Divided in their views over the labor market, most Federal Reserve officials last month ultimately listened to Chair Janet Yellen’s argument for holding off on a rate hike, for now.

“A growing number of committee members are pulling in the direction of hiking, so it’s becoming increasingly harder for Yellen to hold them back,” said Roberto Perli, partner at Cornerstone Macro LLC in Washington and a former Fed economist.

At their Sept. 20-21 session, the Federal Open Market Committee voted 7-3 to leave interest rates unchanged. Minutes released Wednesday showed “several” of those who supported the decision to wait on tightening policy said the decision was a “close call.” Several also indicated it would be appropriate to raise rates “relatively soon.”

Following the minutes’ release, investors continued to see about a two-thirds chance of a rate increase in December, based on prices in federal funds futures contracts. They assigned a 17 percent chance to a move in November, when the Fed meets a week before the U.S. presidential election.

Investors will get a chance to hear directly from Yellen on Friday when she speaks at a Boston Fed conference. The official title of her remarks is “Macroeconomic Research After the Crisis,” which leaves open the question of whether she will comment on the outlook for the economy and monetary policy.

Sharpening Debate

The record of the September FOMC meeting revealed a sharp debate over the potential impact of keeping rates ultra-low on the labor market and inflation. One camp warned this risked driving unemployment too low, possibly triggering much higher inflation and forcing the Fed to raise rates more drastically, a tack that has historically led to a recession.

An opposing group argued that more slack remains for the labor market outside the official measure of unemployment. Holding off on an increase, they claimed, could help draw people who had previously given up looking for jobs back into the work force. That would allow for continued job growth without a surge in wages and inflation.

Thomas Costerg, senior U.S. economist at Standard Chartered Bank in New York, said the latter camp can point to the fact that through most of 2016, measures of unemployment remained essentially flat and the participation rate modestly climbed, even as the economy added jobs at a healthy clip. The participation rate is the proportion of working-age people employed or actively looking for jobs.

“The biggest surprise recently is this increase in the labor force participation rate,” Costerg said. “The doves say: ‘Look, there’s more running room there.’ And I think the hawks are a bit disoriented and don’t know what to do, how to interpret this.”

It also helped the doves that they had Yellen in their corner. The argument against a hike laid out in the minutes echoed Yellen’s comments at her Sept. 21 press conference following the FOMC meeting. She stressed that recent steadiness in labor force participation suggested the job market recovery has room to run.

“That argument is prominent in these minutes,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “It does feel like it has her fingerprints on it.”

That doesn’t mean Yellen will necessarily be working to hold her colleagues back from a move in December.

“I don’t think it’s a, ‘Let’s stay on hold for six months to year’,” said Omair Sharif, senior U.S. economist at Societe Generale in New York. “It’s, ‘Let’s hold our fire for two more months so we can make a little more progress on discouraged workers.”’

Perli, at Cornerstone Macro, added the September decision may even have been a close call for Yellen herself.

He pointed to a portion of the minutes that read: “It was noted that a reasonable argument could be made either for an increase at this meeting or for waiting for some additional information on the labor market and inflation.”

Perli said the “it was noted” language frequently reflects a comment from the chair. That suggested Yellen could have gone either way, “but in a close call, like several others, she leaned toward staying on hold for now,” he said.

 

 

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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CBN Resumes Forex Sales as Naira Hits N1,570/$ at Parallel Market

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The Central Bank of Nigeria (CBN) has resumed the sale of foreign exchange to eligible Bureau De Change (BDC) operators.

The decision was after Naira dipped to N1,570 per dollar in the parallel market,

CBN announced that it would sell dollars to BDCs at a rate of N1,450 per dollar. This decision aims to address distortions in the retail end of the forex market and support the demand for invisible transactions.

Following the CBN’s intervention, the dollar, which recently traded as low as 1,640 per dollar, has shown signs of stabilization.

The apex bank’s action is expected to inject liquidity and restore confidence among market participants.

BDC operators have welcomed the move. Mohammed Magaji, an operator in Abuja, noted that the dollar was selling at 1,630 per dollar.

He emphasized the market’s volatile nature but expressed optimism about the CBN’s intervention.

Aminu Gwadebe, President of the Association of Bureau de Change Operators of Nigeria, attributed the naira’s decline to acute shortages, speculative activities, and increased demand due to recent duty waivers.

He praised the CBN’s action as a necessary step to alleviate market pressures.

The CBN’s efforts include selling $20,000 to each eligible BDC, with a directive to limit profit margins to 1.5% above the purchase rate.

This strategy aims to ensure that end-users receive fair rates and to curb inflationary pressures.

The CBN’s ongoing reforms seek to achieve a market-determined exchange rate for the naira. As the naira continues to navigate turbulent waters, stakeholders remain hopeful that these measures will lead to a more stable and liquid forex market.

Market analysts suggest that sustained interventions and increased access to foreign exchange could help reverse the naira’s downward trend.

The CBN’s actions demonstrate a commitment to tackling the challenges facing the foreign exchange market and supporting Nigeria’s economic stability.

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Nigeria’s FX Inflows Leap 57% as CBN Steers Economic Confidence

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Nigeria’s foreign exchange (FX) inflows have surged by 57% over the past year, signaling newfound stability for the Naira.

Analysts attribute this growth to the Central Bank of Nigeria’s (CBN) consistent policies, which have bolstered investor confidence and enhanced market stability in Africa’s most populous nation.

Data from the CBN reveals that FX inflows rose to $8.86 billion in February 2024, compared to $5.66 billion in February 2023.

This increase is a testament to the effectiveness of the CBN’s strategic measures. Similarly, foreign exchange turnover skyrocketed 180% year-on-year to $240.64 million in February 2024.

“The upsurge in FX inflows reflects the positive impacts of increased interest rates and the relative stability of the exchange rate,” said Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting.

He noted that high interest rates in Nigeria are attracting investors seeking better returns compared to developed countries.

The CBN has actively engaged with foreign investors, addressing concerns and providing insights into monetary policy actions.

Olayemi Cardoso, the CBN governor, emphasized that investor confidence has been restored, partly due to the bank’s clearance of a $7 billion foreign exchange backlog.

New investments into Nigeria also increased significantly, reaching $1.24 billion in February 2024, compared to $0.33 billion in January 2024. This uptick is indicative of a more stable and attractive investment climate.

Analysts point out that improved oil production and higher global oil prices have significantly boosted FX earnings.

Also, government policies aimed at attracting foreign investment, along with strategic management of the exchange rate, have played pivotal roles in this economic revival.

The CBN’s efforts to diversify the economy and boost non-oil exports are starting to yield results.

Increased diaspora remittances, facilitated by better official channels and incentives, have further contributed to the rise in FX inflows.

While challenges remain, the positive trend in FX inflows suggests a more robust and stable economy, encouraging further investment.

Consistent and transparent economic policies are expected to enhance investor trust, stabilizing the Naira and fostering a more favorable exchange rate environment.

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Naira Hits Five-Month Low Amid Dollar Demand Surge

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Nigeria’s naira extended its losing streak to a fifth consecutive day as it slipped to its weakest level since March despite the Central Bank of Nigeria’s (CBN) interventions.

The naira closed at 1,577.29 per dollar on Monday, down from Friday’s N1,563.8 per dollar on FMDQ.

This decline comes despite the CBN’s efforts to stabilize the currency by injecting $122.7 million through dollar sales into the market.

However, analysts argue that these amounts were insufficient to balance the robust domestic demand for the greenback.

“The CBN has been in the market selling $50 million from time to time, which is not enough,” commented Carlo Morelli, senior portfolio manager at Azimut Investment SA.

Morelli attributes the persistent pressure on the naira to capital outflows and a lack of investor confidence in the currency, despite the central bank’s commendable efforts in tightening monetary policy and reducing naira liquidity.

Central Bank Governor Olayemi Cardoso has aggressively raised interest rates in an attempt to curb inflation and stabilize the naira.

The benchmark borrowing rate now stands at 26.25%, following an increase of 14.75 percentage points since May 2022.

However, the currency has weakened by approximately 70% against the dollar since exchange-rate controls were eased last year.

“Restoring foreign exchange broad confidence is the last step, and the huge volatility in May delayed the return to normalcy,” Morelli added.

“Many foreign investors are still waiting for more evidence of stability before considering Nigeria investable.”

The naira’s decline makes it the second-worst performing currency tracked by Bloomberg in 2024, trailing only the Lebanese pound.

The recent depreciation has been fueled by both seasonal dollar demand and ongoing investor skepticism.

The central bank’s next policy decision, set for July 23, is expected to address these issues. Monday’s data showing annual inflation quickened to 34.2% in June suggests that another rate hike might be on the horizon.

In a bid to bolster the naira, the central bank has increased Nigeria’s foreign exchange reserves to $35 billion as of July 8, the highest level since May 30, 2023.

This boost is attributed to recent loans from the World Bank and the African Export-Import Bank.

Omobola Adu, an analyst at BancTrust & Co. Investment Bank, noted that recent pressure on the naira has also stemmed from corporates and individuals preparing for foreign vacations.

“Boosting the supply of FX into the country remains crucial for the government to alleviate pressure on the naira,” Adu stated.

He suggested that a eurobond or local dollar bond sale later this year, along with increased support from multilateral institutions, could help shore up reserves.

Despite these challenges, Central Bank Governor Cardoso remains optimistic, asserting that the worst of the currency’s volatility is over.

He reiterated this sentiment on Thursday in Lagos, addressing business leaders and highlighting improvements in crude output and capital inflows as positive signs.

Nigeria, Africa’s largest crude producer, relies heavily on oil sales, which account for at least 80% of its export earnings.

The country’s combined crude oil and condensate output rose to 1.5 million barrels per day in June, the highest since February, according to the upstream petroleum regulatory commission.

“While the naira may be undervalued, for the naira to stabilize and perhaps regain ground, large portfolio and capital inflows are needed,” said Samir Gadio, head of Africa strategy at Standard Chartered Plc in London.

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