US ECONOMICS

US-CHINA TRADE ISSUES

THE WASHINGTON POST. April 4, 2018. Analysis. Interpretation of the news based on evidence, including data, as well as anticipating how events might unfold based on past events
By Emily Rauhalaat

BEIJING — The Chinese Foreign Ministry is not known for its sense of humor. But when the Trump administration announced plans to impose $50 billion worth of tariffs, it issued an unusually tart response.

On Tuesday, the White House warned that it plans to hit Chinese electronic, aerospace and machinery products with billions in fresh duties, the latest twist in what is shaping up to be a major conflict over trade. Many in the United States worry that protectionist measures threaten supply chains and could mean higher prices for American consumers.

China swiftly hit back with a warning of its own that U.S. tariffs will be met with comparable measures from Beijing. Tucked into the Chinese Embassy’s response, between references to win-win cooperation and referrals to the World Trade Organization, was this understated bit of shade: “As the Chinese saying goes, it is only polite to reciprocate.”

For a country whose official communications lean heavily on bland rhetoric, the quiet quip read like a late-night comedian’s zinger.

A few hours later, China did, in fact, reciprocate and showed it was not joking around, threatening $50 billion in tariffs on U.S. goods if the Trump administration does not back down, in what many see as a step toward an all-out trade war.

On April 3, President Trump alleged China forged a $500 billion trade deficit with the U.S., just days after the two countries hit each other with tariffs. (Photo: Jabin Botsford/The Washington Post)

The plan it outlined Wednesday would hit 106 U.S. products — including such big-ticket trade categories as soybeans, cars and some airplanes — with 25 percent levies.

Also included on the long, and in many cases oddly specific, list published on the Foreign Ministry website are beef, with and without bones; dried cranberries; fresh and frozen orange juice; various forms of tobacco (tobacco waste, hookah tobacco, tobacco cigars, partially or totally deterred tobacco stems), whiskies (no details provided); and chemicals (liquefied propane, primary shaped polycarbonate, etc.).

The move sent markets tumbling and intensified fears of an escalating series of moves on China-U.S. trade.

Chinese officials and analysts say China is demonstrating that it has no intention of bowing to pressure from President Trump.

Wei Jianguo, a former vice minister of commerce, said the key to understanding Beijing's response is “same proportion, same scale and same intensity.”

“That means we will retaliate with the same strength,” he said. “Whatever the total value of trade the United States targets, we will target the same amount. If it’s in the form of tariffs, we will do the same.”

The prospect of a tit-for-tat economic battle between the world’s two largest economies? Not funny at all.

Luna Lin in Beijing contributed to this report.

THE WASHINGTON POST. April 4, 2018. Analysis. Americans are more protectionist — and nativist — in places where trade has cost people their jobs
By James Bisbee

As promised, the Trump administration has launched a trade war with China. The markets are going down as tariffs are going up. These opening salvos could have drastic implications for both the U.S. and Chinese economies.

That makes understanding how trade affects U.S. workers all the more important. My research suggests that when regions lose jobs to free trade, it has a small but measurable effect on whether voters in those communities support free trade. But such losses have an additional effect on public opinion that relates directly to President Trump’s election: People living in regions hurt by free trade become not only more protectionist, but also more antiforeign or “nativist.”

How I did my research

Determining who may be hurt by free trade isn’t simple. It is not necessarily the stereotypical manufacturing worker who loses his job when the factory where he has worked for 30 years closes. Opinions about free trade are only weakly related to an individual’s occupation.

Rather, when free trade hurts a region’s economy, the results spill over and affect the workers’ friends, neighbors, favorite businesses and local community. When a major employer leaves town, it can leave behind pockets of economic and social malaise, with spillover effects that include declining marriage rates, increased mortality due to substance abuse and suicide, and rising crime.

In my research, I examine how individuals feel about free trade based on whether they live closer to or farther from firms that have recently laid off workers because of it. To do that, I combined 21 Pew Research Center surveys conducted from 2000 to 2016 with data on how many people in an area applied for a federal government program called Trade Adjustment Assistance (TAA). This program provides various benefits to eligible workers, including job training, extended unemployment insurance, and additional allowances for relocation and job-search expenses.

TAA applications are a noisy proxy for the economic fundamentals that separate free trade’s winners and losers. However, they give us a sense of who believes they lost their jobs because of free trade.

Across the United States’s approximately 3,140 counties between 2000 and 2016, the annual average number of trade-related layoffs captured by TAA applications is only 1.46 per 1,000 workers. But the concentration varies dramatically by region, of course. In the areas worst hit by the Great Recession, the Labor Department deemed as many as 10 percent of some counties’ workers to be eligible for TAA compensation. If you expand that figure to include applications that the department denied, as many as one-third of some counties’ workforces say they lost jobs because of free trade.

What happens when a community loses jobs to free trade

In communities with higher numbers of layoffs due to trade, survey respondents were more likely to say that free trade was a “bad thing” for the United States. This is based on a statistical model that accounts for several other factors, including the overall unemployment rate in the county. If just four more people out of 1000 in a particular county were laid off because of free trade, opposition to free trade increased by 1 percent.

Most Americans live in counties that had between zero and nine trade-induced layoffs per 1,000 residents. Such small numbers, of course, resulted in only a small change in the county’s attitude toward free trade — but small is larger than nothing. These layoffs do matter.

And the relationship between opinions about free trade and trade-induced layoffs is larger when those layoffs occur closer to respondents. To calculate this, I measured the distances in miles between each survey respondent and all firms filing for TAA support. The effects are strongest for those who live 25 to 100 miles from firms with trade-related layoffs.

Not surprisingly, in other words, the immediately surrounding community felt the layoffs most keenly.

But other opinions changed, as well. Individuals living in communities with more layoffs were more likely to think poorly of immigrants — and were less likely to support having the United States act as a global leader. They were, in other words, more nativist and isolationist.

Although the increased nativism isn’t as strongly linked to the job losses as the increased protectionism is, the correlation nonetheless is consistent with the idea that economic hardship and antiforeign resentment are connected. When people face economic hardships, they may blame that situation on other groups.

THE NEW YORK TIMES. APRIL 4, 2018. The United States is Starting a Trade War with China. Now What?
By ANA SWANSON

The Trump administration is on the cusp of a trade war with China, one that threatens broad swaths of the United States economy, from soybean farmers to pork producers to automobile and drug makers.

On Wednesday, China threatened to retaliate against many of the American products and industries that President Trump has vowed to protect, hitting back against the administration, which detailed a list of $50 billion in Chinese imports that it plans to tax. China, in response, outlined tariffs on $50 billion worth of American soybeans, cars, chemicals and other goods, in a move likely to spark fears that the countries’ escalating confrontation could become an all-out trade war.

That has many wondering what, exactly, comes next and whether the administration has a plan to prevent a damaging trade dispute between two economic giants whose markets are inextricably linked.

On Wednesday, President Trump suggested in a tweet that he saw no reason to back down, saying that the United States was already on the losing end of a trading partnership with China.

“We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!” he wrote.

Looming China Trade Action Divides Industry and Roils Markets APRIL 2, 2018
He added in another tweet, “When you’re already $500 Billion DOWN, you can’t lose!”

Markets appeared unconvinced on Wednesday, with stocks plunging as investors began fearing a trade war that could derail the current economic expansion.

Administration officials, however, said they saw no reason to panic. Wilbur Ross, the commerce secretary, said on CNBC that he was “a little surprised” that Wall Street was surprised by China’s reaction and said that the United States could ultimately negotiate with the Chinese.

China’s tariffs “amount to about three-tenths of a percent of our GDP. So, it’s hardly a life-threatening activity,” Mr. Ross said. “It’s relatively proportionate to the tariffs we put on based on the intellectual property,” he said, referring to the White House’s calculation that the Chinese have cheated the United States out of $50 billion worth of intellectual property through coercion and cyber attacks.

Our columnist Andrew Ross Sorkin and his Times colleagues help you make sense of major business and policy headlines — and the power-brokers who shape them.

Those potentially affected by the tariffs, however, took a far less sanguine view.

“If there was ever a question of whether or not tariffs lead to retaliation, that question was answered today when China announced even more tariffs on U.S. goods,” the Americans For Farmers & Families said in a statement. “Just as members of President Trump’s own cabinet have warned, America’s food and agriculture industries are now taking a direct hit — and our farmers and families will pay the price.”

Mr. Trump’s new top economic adviser, Larry Kudlow, said on Wednesday that it is possible the tariffs will not be implemented and that it was primarily aimed at sending a “message” to the Chinese.

“The message is clear. China has got to stop the unfair and illegal trading violations. They’ve done it for years,” he said in an interview on Fox News.

Mr. Kudlow, an avid free-trader, said the tariffs were just proposals at this point and that it would be months before they were implemented, if at all. “Don’t overreact. We will see how this works out. I’m a growth guy.”

REUTERS. APRIL 4, 2018. China strikes back with duties on U.S. soybeans, planes; markets drop
Michael Martina, David Lawder

BEIJING/WASHINGTON (Reuters) - China hit back quickly on Wednesday against U.S. plans to impose tariffs on $50 billion in Chinese goods, retaliating with a list of similar duties on key American imports including soybeans, planes, cars, beef and chemicals in a move that sent global markets lower.

Beijing responded after U.S. President Donald Trump’s administration targeted 25 percent tariffs on some 1,300 Chinese industrial technology, transport and medical products, acting less than 11 hours later in a sharp escalation of the trade dispute between the world’s two economic superpowers.

U.S. President Donald Trump, who contends his predecessors served the United States badly in trade matters, rejected the notion that the tit-for-tat moves amounted to a trade war.

“We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S.,” he wrote on Twitter early on Wednesday.

(For a graphic on U.S. imports from China, click tmsnrt.rs/2FMsz1Q)

The trade actions will not be carried out immediately, so there may be room for maneuver. Publication of Washington’s list starts a period of public comment and consultation expected to last around two months. The effective date of China’s moves depends on when the U.S. action takes effect.

Trump’s top economic adviser, Larry Kudlow, and U.S. Commerce Secretary Wilbur Ross both held out the possibility of talks to resolve the matter. Asked by reporters outside the White House whether the United States could lose a trade war, Kudlow said, “No. I don’t see it that way. This is a negotiation, using all the tools.”

REUTERS. APRIL 4, 2018. Tariffs could force U.S. automakers to rethink China production
Paul Lienert, Norihiko Shirouzu

(Reuters) - U.S. automakers could be forced to rethink future production plans for several vehicles if the tit-for-tat tariff dispute brewing between the United States and China erupts into a full-blown trade war.

General Motors Co (GM.N), which imports the Buick Envision crossover from China, said on Wednesday it is “too early” to say how the Trump administration’s proposed tariffs on Chinese-built vehicles will impact its future production plans for that vehicle.

China on Wednesday countered U.S. plans to impose tariffs on $50 billion in Chinese goods, retaliating with a list of similar duties on key American imports including autos.

Because the actions will not be carried out immediately, there may be room for maneuver. Publication of Washington’s list starts a period of public comment and consultation expected to last around two months. The effective date of China’s moves depends on when the U.S. action takes effect.

GM last year shipped nearly 30,000 Envisions to the United States from China, where the vehicle is built in partnership with state-owned SAIC Motor Corp Ltd (600104.SS). GM is by far the largest exporter of China-built vehicles to the United States.

The Envision shares its basic structure and mechanical underpinnings with the Chevrolet Equinox, which is built at GM plants in Canada and Mexico.

U.S. President Donald Trump’s new tariffs on Chinese-made cars brought into the United States will not cause much pain for GM, according to James Chao, Asia-Pacific head of consultancy IHS Markit. “Thirty thousand units is quite small in the overall scheme of things,” he said.

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Because the Envision is built on the same platform as the Equinox and GMC Terrain crossovers, GM “could potentially shift production to North America, where those models are made.”

In Detroit, GM spokesman Patrick Morrissey said “it is too early to speculate on what will happen since the list (of tariffs) is just a proposal at this time.”

The proposed tariffs could also affect Ford Motor Co’s (F.N) plans to shift production of the compact Focus next year from Mexico to China.

Ford declined to comment specifically on plans for the Focus. It said in a statement on Wednesday: “We encourage both governments to work together to resolve issues between these two important economies.”

The United States is a net exporter of complete vehicles to China, with a surplus of about $8 billion. According to the U.S. Trade Representative’s office, the United States in 2016 shipped vehicles worth $11 billion to China.

GM shares were up 1.3 percent at $37.42 on Wednesday afternoon. Ford shares were up 0.8 percent at $11.24.

Reporting by Paul Lienert in Detroit and Norihiko Shirouzu in Beijing; additional reporting by David Lawder in Washington and Allison Lampert in Montreal; Editing by Matthew Lewis

REUTERS. APRIL 4, 2018. Hit to Boeing from Chinese tariffs depends on definitions
Jamie Freed, Brenda Goh

SINGAPORE/SHANGHAI (Reuters) - China on Wednesday announced plans to place a 25 percent tariff on certain U.S. aircraft, in a move expected to affect some older Boeing Co (BA.N) narrowbody models, according to documents from China’s Ministry of Commerce and the U.S. manufacturer.

But it was not immediately clear how far they would affect Boeing’s upgraded 737 MAX family, a key source of future Boeing profits, because of a lack of detail in the announcement and the fact that not all airplane characteristics are published.

Boeing shares fell as much as 6 percent in early trading after China hit back at U.S. tariffs with the announcement of duties on key U.S. imports including soybeans, cars, beef and chemicals, as well as planes.

These include aircraft with an “empty weight” of between 15,000 kilograms and 45,000 kilograms, or 15 to 45 tonnes.

Depending on how “empty weight” is defined, this places a question mark over the fate of Boeing’s new big-selling 737 MAX 8 jet - though the larger MAX 9 and MAX 10 could be spared.

The stakes are high. The United States exported $15 billion of aircraft to China in 2016, ranking it equally with agricultural products like soybeans also targeted for tariffs as the biggest category of goods, according U.S. trade data.

Several definitions of “empty weight” are used in the aircraft industry and the ministry document did not contain any footnotes or further explanation.

Industry experts said the rules most likely refer to the “manufacturers’ empty weight,” or the core aircraft structure.

But manufacturers are usually shy about publishing this number because of its commercial sensitivity, while they do give estimates for the slightly higher “operating empty weight,” which includes crew and some fluids and equipment, but not fuel.

Yet even this number can vary according to an airline’s specific requirements, so it is seen as a guideline only.

Whatever category is used, the range appears comfortably to include the current-generation 737 narrowbody aircraft, which is in the midst of being replaced by the newer 737 MAX.

737 MAX 8 FATE UNCLEAR

Boeing documents available online list the “operating empty weight” of the 737-700, 737-800 and 737-900 well within the tariff zone at 37.6 to 42.9 tonnes.

The “manufacturer’s empty weight” would typically be about 1 to 1.5 tonnes lower than this, a plane appraisal expert said.

In contrast, the newer 737 MAX 8 is heavier than its predecessor, with an operating empty weight of 45,070 kilograms, according to a Boeing airport document published in August 2017.

Depending on how the rules are applied, this leaves it on the edge between the tariff zone and escaping the trade spat. But the larger 737 MAX 9 and MAX 10 could both be spared.

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A Beijing spokesman for Boeing declined to comment when asked about the impact of the tariffs.

Chinese airlines have been on a buying spree from Boeing and rival Airbus SE (AIR.PA) as air travel grows.

Boeing and China’s Commercial Aircraft Corp of China (COMAC) are expected to open a 737 completion center in the coastal city of Zhoushan to install interiors and paint liveries this year.

The bulk of published 737 orders from Chinese that have not yet been delivered are for the newer MAX version.

However, China Southern Airlines (600029.SS), Ruili Airlines and Okay Airways each have two 737-800s on order and Xiamen Airlines has four more, according to the Boeing order book.

It remains unclear whether the trade dispute between the U.S. and China could affect future jet purchases.

Asked if the airline’s plane buying plans could shift away from Boeing, China Eastern Airlines Corp (600115.SS) CEO Ma Xulun said on Wednesday “it’s too early to say, we will keep an eye on the situation of the China-U.S. trade war.”

Apart from some Boeing jets, the Gulfstream G650, a large corporate jet manufactured by General Dynamics Corp (GD.N), also appears within the weight range targeted by the tariffs.

Gulfstream did not respond immediately to a request for comment.

Reporting by Jamie Freed in SINGAPORE and Brenda Goh in SHANGHAI; additional reporting by Tim Hepher in PARIS; Editing by Mark Potter

REUTERS. APRIL 4, 2018. Dow falls 1 percent as China-U.S. trade spat intensifies
Sruthi Shankar

(Reuters) - The Dow Jones Industrial Average dropped just over 1 percent on Wednesday as big U.S. manufacturers and chipmakers bore the brunt of a deepening trade conflict between China and the United States.

Boeing (BA.N) and Caterpillar (CAT.N) led the slide as a raft of major U.S. firms saw millions knocked off share values by the announcement of tariffs on $50 billion worth of the goods exchanged daily between the world’s two largest economies.

President Donald Trump’s claim on Twitter that the two countries were not in a trade war did little to cool fears that have been building since the White House launched new charges on steel and aluminum a month ago.

The S&P 500 .SPX opened below its 200-day moving average, a key technical level, and the Dow lost as much as 510 points before recovering some ground to stand 250 points lower at .DJI.

“The level of uncertainty has definitely surged,” said Adam Sarhan, Chief Executive of 50 Park Investments in New York. “When you see China retaliate stronger than the U.S. that’s a very strong signal that they mean business.”

At 10:48 a.m. ET, the Dow was down 1.02 percent at 23,787.67. The S&P 500 .SPX fell 0.71 percent to 2,595.96 and the Nasdaq Composite .IXIC dropped 0.81 percent at 6,885.06.

The declines were broad based, with 23 of the Dow’s 30 components lower. The industrials index’s .SPLRCI 1.4 percent slide was the most among the 11 major S&P sectors, as has been the case since the trade war fears surfaced.

While Washington’s list covered many obscure industrial items, Beijing’s covers 106 key U.S. imports including soybeans, planes, cars, and chemicals.

Shares of Boeing (BA.N), the single largest U.S. exporter to China, tumbled 3.8 percent. Caterpillar (CAT.N) fell 3 percent.

Ford (F.N), General Motors (GM.N) and Fiat Chrysler (FCAU.N) fell between 0.2 percent and 0.8 percent as investors weighed the competing impacts on their global operations and production.

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While manufacturers were the bigger losers as a group, the technology sector’s .SPLRCT 1.3 percent drop weighed the most on the market.

Major tech names Apple (AAPL.O) and the FANG group – Facebook (FB.O), Amazon (AMZN.O), Netflix (NFLX.O) and Alphabet (GOOGL.O) were down between 0.3 percent and 2.9 percent.

Chipmakers, many of which have the highest revenue exposure to China among S&P 500 companies, also fell. 28 of the 30 constituents of the Philadelphia semiconductor index .SOX were lower.

“As a sector, technology has the most to lose from a world in which global trade is restricted and of course, some of the subjects of the tariffs, will also be hit,” said Rick Meckler, president of investment firm LibertyView Capital Management in Jersey City, New Jersey.

Among the few bright spots was housebuilder Lennar (LEN.N), whose shares jumped 6.8 percent after it reported quarterly revenue that beat estimates as it sold more homes at higher prices.

Reporting by Sruthi Shankar in Bengaluru; Editing by Savio D'Souza and Patrick Graham

US FINANCIAL STABILITY AGENDA

FED. April 03, 2018.Speech. An Update on the Federal Reserve's Financial Stability Agenda. Governor Lael Brainard. At the Center for Global Economy and Business, Stern School of Business, New York University, New York, New York

The Federal Reserve's work on financial stability is integral to our dual-mandate objectives of price stability and full employment. As the Global Financial Crisis demonstrated, when severe financial stress triggers a broad pullback from risk, the resulting disruption in financial intermediation can impose deep and lasting damage on American families, workers, and businesses.1

The primary focus of financial stability policy is tail risk (outcomes that are unlikely but severely damaging) as opposed to the modal outlook (the most likely path of the economy). The objective of financial stability policy is to lessen the likelihood and severity of a financial crisis. Guided by that objective, our financial stability work rests on four interdependent pillars: systematic analysis of financial vulnerabilities; standard prudential policies that safeguard the safety and soundness of individual banking organizations; additional policies, which I will refer to as "macroprudential," that build resilience in the large, interconnected institutions at the core of the system; and countercyclical policies that increase resilience as risks build up cyclically.2 This work also recognizes the important connections to our monetary policy objectives.

Assessment of Financial Vulnerabilities

The foundation for our financial stability work is our assessment of systemic financial vulnerabilities. Our assessment framework is informed by historical episodes of financial stress here at home and around the world, as well as by a growing body of research on key indicators of building imbalances.3 Instead of attempting to forecast particular adverse shocks that could buffet the economy, the focus is on vulnerabilities--that is, on features of the financial system that amplify bad shocks, spreading damage to households and businesses. Each quarter, Federal Reserve Board staff assess a set of vulnerabilities relevant for financial stability: asset valuations and risk appetite, borrowing by the nonfinancial sector (households and nonfinancial businesses), liquidity risks and maturity transformation by the financial system, and leverage in the financial system.

It may be illuminating to briefly describe our current assessment in each of these areas. Valuations in a broad set of markets appear elevated relative to historical norms, even after taking into account recent movements. Estimates of risk premiums and spreads in a range of markets remain narrow by historical standards. Corporate bond yields remain low by historical comparison, and spreads of yields on junk bonds above those on comparable-maturity Treasury securities are near the lower-end of their historical range. Spreads on leveraged loans and securitized products backed by those loans remain narrow. Prices of multifamily residential and industrial commercial real estate (CRE) have risen, and capitalization rates--the ratios of operating income relative to the sale price of commercial properties--for these segments have reached historical lows. However, measures of credit conditions suggest that lenders are, to an extent, taking into account the potential for a reversion of valuations.

By contrast, prices of single-family homes appear to be closer to historical norms. House prices have risen at a robust pace, and the price-to-rent ratio is high in absolute terms, but it does not appear to be far out of line with its longer-run trend. This broad national trend belies significant variation among local markets, however.4

One area that the Federal Reserve is monitoring is the extreme volatility evidenced by some cryptocurrencies. For instance, Bitcoin rose over 1,000 percent in 2017 and has fallen sharply in recent months.5 These markets may raise important investor and consumer protection issues, and some appear especially vulnerable to money-laundering (BSA/AML, or Bank Secrecy Act/anti-money laundering) concerns. As in other highly speculative markets, individual investors should be careful to understand the possible pitfalls of these investments and the potential for losses. But it is less clear how the valuations of cryptocurrencies currently could pose a threat to financial stability. For instance, it is hard to see evidence of substantial leverage used in the purchase of the cryptocurrencies, or a material degree of use in payments, although our assessment of these markets is limited by their opacity. Nonetheless, we will continue to study them.

In the assessment of elevated asset valuations, the relatively low level of Treasury yields is a mitigating factor; many asset valuation metrics, such as price-to-earnings ratios, corporate bond yields, and property capitalization rates, appear notably less stretched when judged relative to low Treasury yields. That said, Treasury yields reflect historically low term premiums--the compensation investors demand to hold assets over a longer horizon. This poses the risk that term premiums could rise sharply--for instance, if investor perceptions of inflation risks increased. I will return to this risk later.

Although asset valuations are elevated, vulnerabilities due to debt owed outside the financial sector appear to be moderate--in the middle of their historical range. This reflects elevated leverage in the nonfinancial business sector and a moderate pace of borrowing in the household sector. In the nonfinancial business sector, the debt-to-earnings ratio has increased to near the upper end of its historical distribution, and net leverage at speculative-grade firms remains especially elevated. Overall, however, the ratio of nonfinancial-sector borrowing to gross domestic product has been below an estimate of its trend for several years as a result of the deleveraging of the household sector following the crisis. While the sustained period of post-crisis household deleveraging appears to have come to an end and savings rates have recently moved down, overall borrowing has been at a moderate pace and, on net, concentrated among borrowers with high credit scores. Even though the balance sheet of the household sector as a whole appears relatively strong, recent years have seen a rapid rise in student debt as well as rising default rates for borrowers with subprime credit scores on auto loans and, more recently, credit card balances.

Beyond the nonfinancial sector, the vulnerabilities associated with maturity and liquidity transformation in the financial system appear to have fallen significantly relative to the levels seen prior to the crisis. The amount of wholesale short-term funding, which proved to be a substantial source of run risk during the crisis, has dropped substantially since its peak in 2008. Money market funds, which had been an area of vulnerability in the crisis, have undergone important reforms, including a move to floating net asset values for prime institutional funds along with the imposition of fees and restrictions on redemption. The anticipation of the enactment of these reforms in October 2016 led to a large decline in the level of assets under management at the affected funds, which has since held steady. So far, the growth of alternative short-term investment vehicles that could pose similar risks appears to have been weak.

Finally, risks associated with leverage in the financial sector also appear to be subdued by historical standards. Leverage in the banking sector has declined notably since the crisis. Issuance of securitized products remains well below pre-crisis levels for most asset classes, with few signs of securitizations that involve maturity or liquidity transformation and limited issuance of complex securities whose opaque structures can contain significant leverage. And the data that are available suggest that leverage at nonbank financial firms has been stable. That said, there are indications that the use of leverage has been increasing at some institutions; for example, margin credit provided by dealers to equity investors such as hedge funds has expanded.

Prudential, Macroprudential, and Countercyclical Policies

There is an important connection between the robustness of our financial regulatory framework and the assessment of resilience in the financial sector. The subdued level of vulnerabilities from liquidity and maturity transformation and leverage is due centrally to reforms undertaken in response to the financial crisis. The Federal Reserve has implemented a framework of rules and supervision that requires large, interconnected banking organizations to hold substantial capital and liquidity buffers. This framework requires banks to be forward looking in their capital decisions and to be prepared for the possibility of severely stressed conditions occurring. The framework is macroprudential in design so that banks internalize the costs of undertaking activities that pose risks to the system.

The core of the framework is the requirement of a substantial stack of common equity to build resilience against shocks and to provide an incentive for prudent risk management. Regulatory capital ratios for the largest banking firms at the core of the system have about doubled since 2007 and are currently at their highest levels in the post-crisis era. U.S. firms have substantially increased their capital since the first round of stress tests led by the Federal Reserve in 2009. The common equity capital ratio--which compares high-quality capital to risk-weighted assets--of the bank holding companies participating in the 2017 Comprehensive Capital Analysis and Review has more than doubled from 5.5 percent in the first quarter of 2009 to 12.0 percent in the fourth quarter of 2017. Their leverage ratios--defined as Tier 1 capital to total assets--increased from 7.3 percent to 8.6 percent over the same period.6 There has also been an important shift in the distribution of high-quality capital so that the average ratio of high-quality common equity to risk-weighted assets at the largest banks now exceeds the average for smaller banks. The larger and more complex banking organizations are now holding more capital, commensurate with the greater risks their distress could pose.

Reduced vulnerability associated with liquidity and maturity transformation similarly is due importantly to key financial reforms instituted since the crisis. Large financial institutions are required to maintain substantial buffers of high-quality liquid assets (HQLA) calibrated to their funding needs and to their likely run risk in stressed conditions. Similar to the capital buffers, the liquidity buffers are greatest for those financial institutions that pose the greatest risks. Indeed, banks are holding buffers of HQLA in excess of their liquidity coverage ratio (LCR) requirements. Our largest banking firms have increased their holdings of HQLA from 13 percent of assets in 2011 to 20 percent in 2017 and have reduced their reliance on short-term wholesale funding from 36 percent of liabilities in 2011 to 29 percent in 2017.7

Just as our strengthened policy framework helps modulate vulnerabilities in the financial sector that could make the economy more vulnerable to shocks, so, too, our quarterly surveillance is intended to identify rising vulnerabilities early enough to be able to act to prevent disruptions that could damage the economy. In particular, the quarterly assessment of financial stability is a critical input into the Board's processes for adjusting the supervisory scenarios used in the stress test and the setting of the countercyclical capital buffer--the two tools that permit the Board to respond to vulnerabilities that build over time.

The supervisory stress test is intended to ensure that large banking institutions will be able to continue to function normally even under severely adverse macroeconomic conditions. It also assesses the resilience of the largest trading firms to risks of a large disturbance to global financial markets and the failure of the firms' largest counterparty. These components reflect some of the key linkages through which the distress or failure of one firm could affect others, including direct credit losses as well as the severe financial disruptions that would be expected to accompany fire sales and an increase in risk aversion.

By design, the Fed's stress test is intended to incorporate some elements to make the tests more stringent when the economy and financial markets are heating up. These countercyclical features are intended to give the stress tests some utility as a macroprudential tool--that is, to mitigate the financial system's inherent pro-cyclicality. The most prominent countercyclical feature of the stress-test scenario architecture is the setting of the unemployment rate in the severely adverse scenario. The general rule is to increase the unemployment rate by 4 percent unless the baseline unemployment rate starts at levels below 6 percent, in which case the ultimate level of the unemployment rate reached in the severely adverse scenario is fixed at 10 percent. In addition, last December, the Board put out a proposal for comment to introduce a systematically countercyclical mechanism in the component of the scenario that shocks house prices.8

Beyond these systematic elements, the assessment of vulnerabilities is a critical input in the development of scenarios for the stress tests each year to strengthen resilience against vulnerabilities that may be identified. As I noted earlier, recent assessments have noted high levels of valuations across a broad set of asset markets and elevated business leverage in an environment where Treasury yields and term premiums have been relatively low by historical standards. In such circumstances, asset prices might be particularly susceptible to an unexpected development that accentuates downside risks to the macroeconomic outlook. For instance, a sharp increase in concerns about the potential for high inflation or in uncertainty about policy could boost term premiums on Treasury securities, which could trigger declines in asset prices across a range of markets.

The scenarios for this year's stress tests, which were announced in February, feature material decreases in asset prices--notably including CRE prices--along with a substantial rise in Treasury term premiums. Although the severely adverse scenarios always include severe recessions and sharp declines in asset prices, in past years, they have been accompanied by large declines in Treasury yields, which have resulted in capital gains on these securities.9 In contrast, in this year's severely adverse scenario, yields on longer-maturity Treasury securities are flat. In this way, this year's severely adverse scenario addresses one of the salient vulnerabilities that have been identified. By encouraging institutions at the core of the system to build resilience against such an eventuality, we seek to lessen the severity of the distress to the overall financial system should asset prices fall and term premiums rise sharply in a challenging macroeconomic environment.

Even with these design features, the Fed's stress-testing framework has some limitations in counteracting the inherent pro-cyclicality in the availability of credit. Indeed, the stress tests have become less binding on banks as the recovery has gathered strength. Thus, losses on loans and positions in the severely adverse scenario among participating banks have declined over time as the economy has strengthened. For example, in the 2016 exercise, losses amounted to $526 billion, while in 2017 they had fallen to $493 billion, despite a larger increase in the unemployment rate in the scenario. As economic conditions strengthen, typical measures of underwriting quality look strong, delinquencies fall to low levels, and profits rise consistently, all of which could lead to lower projected stress losses. Of course, these effects tend to reverse during bad economic conditions: Underwriting deficiencies tend to be revealed, delinquencies to rise, and profits to fall. Thus, capital requirements based on stress tests alone are unlikely to completely compensate for the financial system's natural pro-cyclicality.

In part for that reason, we also have a specifically countercyclical capital requirement that applies to the largest banks. Countercyclical capital requirements can lean against a dangerous increase in financial vulnerabilities at a time when the degree of monetary tightening that would be needed to achieve the same goal would be inconsistent with the Federal Reserve's dual mandate of full employment and price stability. The reverse is also true. The countercyclical capital buffer (CCyB) is designed to increase the resilience of large banking organizations when there is an elevated risk of above-normal losses, which often follow periods of rapid asset price appreciation or credit growth that are not well supported by underlying economic fundamentals. The CCyB is an additional margin of capital that the nation's largest banks can be asked to build to augment resilience at times of rising cyclical pressures and to release as the economy weakens in order to allow banks to lend more when it is most needed.

The CCyB framework, which was finalized in September 2016, requires the Federal Reserve Board to vote at least once per year on the level of the CCyB. Put simply, the criterion for raising the CCyB above its minimum value of zero is that financial risks are assessed to be in the upper one-third of their historical distribution. Our assessment of financial vulnerabilities is a key input into the Federal Reserve Board's decisions surrounding the setting of the CCyB, along with a variety of other model-based and judgmental criteria. On December 1, 2017, with overall risks assessed as moderate and with other measures that we routinely monitor sending a similar signal, the Board announced its decision to leave the CCyB at its minimum value of zero.

Of course, our assessments of financial vulnerabilities are also an important input into Federal Open Market Committee (FOMC) deliberations, recognizing that there is important interdependence between financial stability and our monetary policy objectives of full employment and price stability.10 The FOMC Statement on Longer-Run Goals and Monetary Policy Strategy notes that "the Committee's policy decisions reflect...its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals."11 Generally speaking, lessons from a broad range of countries suggest financial crises occur with substantially lower frequency than business cycles, and there is no settled doctrine to date on the use of the short-term policy rate--the key instrument of monetary policy--to lessen the probability and severity of financial crises. While financial imbalances are an important consideration in monetary policymaking and the expected path of monetary policy can have important implications for financial vulnerabilities, both research and experience suggest there is no simple rule for accomplishing our dual-mandate and financial stability objectives through reliance on a single policy instrument.

Cyclical Considerations

As I have noted elsewhere, the recently enacted fiscal stimulus should boost the economy at a time when it is close to full employment and growing above trend. It is hard to know with precision how the economy is likely to respond. If unemployment continues to decline at the rate of the past year, it could reach levels not seen in several decades. Historically, such episodes tended to see a risk of accelerating inflation in earlier decades or a risk of financial imbalances in more recent decades. It is important to be attentive to the emergence of any imbalances, because we do not have much experience with pro-cyclical fiscal stimulus at a time when resource constraints are tightening and growth is above trend.

Despite elevated asset valuations, overall risks to the financial system remain moderate in no small part because important financial reforms have encouraged large banking institutions to build strong capital and liquidity buffers. History suggests, however, that a booming economy can lead to a relaxation in lending standards and an attendant increase in risky debt levels. At a time when valuations seem stretched and cyclical pressures are building, I would be reluctant to see our large banking institutions releasing the capital and liquidity buffers that they have built so effectively over the past few years, especially since credit growth and profitability in the U.S. banking system are robust.

Of course, if cyclical pressures continue to build and financial vulnerabilities broaden, it may become appropriate to ask the largest banking organizations to build a countercyclical buffer of capital to fortify their resilience and protect against stress. Alternatively, if there were to be a material adjustment to the calibration of the structural buffers held by the large banking institutions, it would be important to make a compensating adjustment to the countercyclical buffer in order to achieve the same overall resilience to financial vulnerabilities.

As a rough rule of thumb--and as described in the Board's framework for implementing the CCyB, which was finalized in September 2016--the criteria for setting the CCyB are calibrated so that the CCyB will be above its minimum value about one-third of the time, assuming that vulnerabilities evolve as they did pre-crisis. It is worth noting that some other jurisdictions have designed their countercyclical buffer requirement to be above zero roughly half of the time--spanning a greater range of economic conditions than in the United States. This may reflect a difference in the relative emphasis on structural buffers relative to cyclically varying buffers. It is worth noting that, although U.S. structural buffers are on the stronger end of the range internationally, the U.S. banking system is also among the healthiest and most competitive in the world. Credit growth is robust, and banks are registering strong profitability relative to their international peers.

Conclusion

Our financial stability agenda seeks to reduce the likelihood and severity of financial crises. In the wake of the 2007-09 financial crisis and recession, we learned important lessons about the critical necessity of monitoring emerging financial vulnerabilities in a systematic fashion and taking corresponding prudential, macroprudential, and countercyclical policies to build resilience. We undertake systematic assessment of financial vulnerabilities as an important input into our policymaking processes--helping to calibrate the prudential, macroprudential, and countercyclical policies that are our first lines of defense, in addition to informing FOMC deliberations because of the important feedback loops between financial conditions and our dual-mandate goals. This work is complemented by the efforts of our domestic and international partners through the Financial Stability Oversight Council and the Federal Financial Institutions Examination Council here at home and through the Financial Stability Board and the International Monetary Fund internationally.

NOTES

1. I am grateful to John Schindler of the Federal Reserve Board for his assistance in preparing this text. The remarks represent my own views, which do not necessarily represent those of the Federal Reserve Board or the Federal Open Market Committee.
2. In this work agenda, the Federal Reserve cooperates closely with other regulators to facilitate joint responsibility for financial stability while respecting that each independent agency has its own specific statutory mandate and governing body.
3. In addition to cyclical vulnerabilities, structural vulnerabilities, such as those that arise from the complexity and interconnectedness of large financial institutions, also remain potential sources of risk to the financial system. The Federal Reserve assesses structural vulnerabilities in support of its financial stability and supervision and regulation responsibilities. For instance, cybersecurity is the subject of ongoing monitoring and policy efforts.
4. For example, the price-to-rent ratios in Los Angeles, Miami, and Denver are 10 to 20 percent above their long-run trends, compared with 4 percent at the national level.
5. Similar volatility was seen in some other cryptocurrencies, such as Ether, XRP, and Litecoin.
6. These statistics are for the 18 bank holding companies that participated in both the 2009 and 2017 stress tests. The risk-based capital statistics for 2009 report tier 1 common equity, and for 2017 report Basel III common equity tier 1.
7. These statistics reflect the 19 advanced approaches bank holding companies subject to the standard LCR.
8. See Board of Governors of the Federal Reserve System (2017), "Policy Statement on the Scenario Design Framework for Stress Testing," proposed rule (Docket No. OP-1588), Federal Register, vol. 82 (December 15), pp. 59533-59547.
9. Over the years, our adverse scenarios, which are not designed to be the binding scenario for capital planning purposes, have featured large increases in Treasury yields across the maturity curve.
10. See the box "Developments Related to Financial Stability" in Board of Governors of the Federal Reserve System (2018), Monetary Policy Report (Washington: Board of Governors, February), pp. 24-26.
11. For the most recent statement, see Board of Governors of the Federal Reserve System (2018), "Federal Open Market Committee Reaffirms Its 'Statement on Longer-Run Goals and Monetary Policy Strategy,' " press release, January 31.

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ECONOMIA BRASILEIRA / BRAZIL ECONOMICS

BACEN. 04/04/2018. BC divulga Indicadores Econômicos de março: fluxo cambial, a posição de câmbio dos bancos e IC-Br de março.

DOCUMENTO: http://www.bcb.gov.br/pt-br/#!/c/notas/16432

BACEN. PORTAL G1. 04/04/2018. Retirada de dólares do Brasil supera ingresso em US$ 3,94 bilhões em março. Foi o segundo mês seguido de saída de recursos. No acumulado do ano até 29 de março, porém, entrada de dólares supera a saída em US$ 2,66 bilhões, diz Banco Central.
Por Alexandro Martello, G1, Brasília

A saída de dólares do Brasil superou o ingresso em US$ 3,940 bilhões em março, informou o Banco Central nesta quarta-feira (4).

Foi o segundo mês seguido de saída de recursos do país. Em fevereiro, US$ 1,454 bilhão havia deixado a economia brasileira.

A entrada de dólares se dá quando investidores enviam dinheiro ao Brasil para pagar por compra de produtos brasileiros ou para realizar aplicações financeiras e investimentos em empresas, por exemplo.

O dólar sai quando esses investidores retiram recursos do Brasil para, normalmente, aplicar em outros países, ou para pagar pelas importações realizadas. Essas operações ocorrem por meio de remessas feitas por bancos contratados por esses investidores.

No acumulado deste ano, porém, ainda foi registrada mais entrada do que saída de recursos. Até a última sexta-feira (29), o ingresso de dólares no país superou a retirada em US$ 2,669 bilhões, de acordo com dados oficiais.

Impacto no dólar

A saída de dólares favorece, em tese, a alta da moeda norte-americana em relação ao real. Isso porque, com menos dólares no mercado, seu preço tende a subir.

No mês passado, de fato, o dólar registrou valorização. No fim de fevereiro, a moeda norte-americana estava em R$ 3,242 e, no fechamento de março, estava cotada a R$ 3,30 - aumento de 1,85%. Nesta quarta-feira (4), por volta das 13,h20, operava ao redor de R$ 3,350.

Segundo analistas de mercado, além do fluxo de dólares, outros fatores influenciam a cotação da moeda, como o cenário político interno e externo e o processo gradual de alta dos juros nos EUA, que tende a atrair capital para aquela economia.

O dólar é negociado em alta nesta quarta, com os investidores optando pela cautela antes do julgamento no Supremo Tribunal Federal (STF) do habeas corpus pedido pela defesa do ex-presidente Luiz Inácio Lula da Silva.

O movimento de alta nesta quarta-feira também é influenciado pela tensão entre Estados Unidos e China, depois que Pequim respondeu rapidamente aos planos norte-americanos de adotar tarifas sobre US$ 50 bilhões em bens chineses, retaliando com uma lista de taxas similares sobre importações dos Estados Unidos.

Interferência do BC

Outro fator que influencia a cotação do dólar são as operações de swap cambial, que funcionam como uma venda futura de dólares, ou de "swaps reversos", que funcionam como uma compra de dólares no mercado futuro.

Nestas operações, o BC faz oferta de dólares para tentar controlar a cotação da moeda e impedir grandes oscilações. Além disso, essas operações servem para oferecer garantia (hedge) a empresas contra a valorização do moeda.

O Banco Central não anunciou qualquer intervenção no mercado de câmbio, por ora. Em maio, vencem US$ 2,565 bilhões em swap cambial tradicional, equivalente à venda futura de dólares.

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LGCJ.: