Reuters News - Fed opens door wider for rate hike but downgrades economic outlook

1 OF 3. U.S. Federal Reserve Chair Janet Yellen speaks at a news conference following the two-day Federal Open Market Committee meeting in Washington March 18, 2015.

CREDIT: REUTERS/JOSHUA ROBERTS

(Reuters) - The Federal Reserve on Wednesday moved a step closer to hiking rates for the first time since 2006, but downgraded its economic growth and inflation projections, signaling it is in no rush to push borrowing costs to more normal levels.

The U.S. central bank removed a reference to being "patient" on rates from its policy statement, opening the door wider for a hike in the next couple of months while sounding a cautious note on the health of the economic recovery.

Fed officials also slashed their median estimate for the federal funds rate - the key overnight lending rate - to 0.625 percent for the end of 2015 from the 1.125 percent estimate in December.

The cut to the so-called "dot plot," together with other economic concerns cited by the Fed, sent a more dovish message than investors were expecting, and pushed market bets on the central bank's rate "lift-off" from mid-year to the fall.

"Just because we removed the word 'patient' from the statement doesn't mean we're going to be impatient," Fed Chair Janet Yellen said in a press conference after Wednesday's statement.

Stocks on Wall Street surged and oil prices jumped as much as 5 percent after the Fed statement. The dollar tumbled against other major currencies and the U.S. 10-year Treasury yield dipped below 2 percent for the first time since March 2.

In its quarterly summary of economic projections, the Fed cut its inflation outlook for 2015 and reduced expected U.S. economic growth. The policy statement repeated its concern that inflation measures were running below expectations, weighed down in part by falling energy prices.

"I just don't see any price or wage pressure out there," said Craig Dismuke, chief economist for Vining Sparks. "June is not off the table but it's unlikely. September is the most likely time for the first rate hike. They might get one hike in this year, maybe two."

The Fed noted that a rate increase remained "unlikely" at its April meeting and said its change in rate guidance did not mean it has decided on the timing for a rate hike. Yellen told reporters that a June move could not be ruled out.

The Fed statement, however, allowed enough flexibility for the central bank to move later in the year, stressing that any decision would depend on incoming data.

"The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium-term," the Fed said.

It had previously said it would be patient in considering when to bring monetary policy back to normal.

Goldman Sachs economist Jan Hatzius said in a research note that the Fed's statement and projections suggested a hike in September rather than June, citing the "dot plot" shift and changes to the central bank's assessment of the economy.

MUDDY DATA

Yellen has kept rates at near zero since taking over as head of the central bank in February, 2014, though she has also overseen a steady whittling of loose money promises.

And while she lays the ground for "lift-off," the Fed continues to grapple with muddy economic data: strong job creation, continued growth, and healthy consumer demand in the United States, but a global collapse in oil prices and a rapid run-up in the dollar that could mean the Fed remains far from its 2 percent inflation target.

The Fed on Wednesday downgraded its view of economic activity, saying growth has "moderated somewhat," a departure from its view in December, when it cited economic activity expanding at a solid pace.

Economists and investors were watching closely for the Fed to drop "patient" from its rate guidance language, as a sign that the central bank will shift toward making rate decisions on a meeting-by-meeting basis.

"Let me emphasize again, that today's modification of the forward guidance should not be read as indicating that the committee has decided on the timing of the initial increase in the target range for the federal funds rate," Yellen said in the press conference.

"In particular, this change does not mean that an increase will necessarily occur in June. Although we can't rule that out."

The federal funds rate has been at its low point since December of 2008. The last time the Fed raised rates was in June 2006, when a roaring housing market and strong economic growth prompted it to push its target rate to 5.25 percent.

There were no dissents on the Fed statement.

(Reporting by Michael Flaherty and Howard Schneider; Additional reporting by Richard Leong in New York; Editing by David Chance and Paul Simao)

BBC News - France and Germany join UK in Asia bank membership

France and Germany are to join the UK in becoming members of a Chinese-led Asian development bank.

The Asian Infrastructure Investment Bank agreement was signed in October by 21 countries, including China

The finance ministries of both countries confirmed on Tuesday that they would be applying for membership of the Asian Infrastructure Investment Bank (AIIB).

Last week, the US issued a rare rebuke to the UK over its decision to become a member of the AIIB.

The US considers the AIIB a rival to the Western-dominated World Bank.

The UK was the first Western economy to apply for membership of the bank.

But German finance minister Wolfgang Schaeuble confirmed on Tuesday that his country would also be applying for membership.

France's finance ministry confirmed it would be joining the bank. It is believed Italy also intends to join.

The US has questioned the governance standards at the new institution, which is seen as spreading Chinese "soft power".

The AIIB, which was created in October by 21 countries, led by China, will fund Asian energy, transport and infrastructure projects.

When asked about the US rebuke last week, a spokesman for Prime Minister David Cameron said: "There will be times when we take a different approach."

The UK insisted it would insist on the bank's adherence to strict banking and oversight procedures.

"We think that it's in the UK's national interest," Mr Cameron's spokesperson added.

'Not normal'

Last week, Pippa Malmgren, a former economic adviser to US President George W Bush, told the BBC that the public chastisement from the US indicates the move might have come as a surprise.

"It's not normal for the United States to be publicly scolding the British," she said, adding that the US's focus on domestic affairs at the moment could have led to the oversight.

However, Mr Cameron's spokesperson said UK Chancellor George Osborne did discuss the measure with his US counterpart before announcing the move.

Some 21 nations came together last year to sign a memorandum for the bank's establishment, including Singapore, India and Thailand.

But in November last year, Australia's Prime Minister Tony Abbott offered lukewarm support to the AIIB and said its actions must be transparent.

US President Barack Obama, who met Mr Abbott on the sidelines of a Beijing summit last year, agreed the bank had to be transparent, accountable and truly multilateral.

"Those are the same rules by which the World Bank or IMF [International Monetary Fund] or Asian Development Bank or any other international institution needs to abide by," Mr Obama said at the time.

Bloomberg News - Greece Grabs Cash as More Than $2 Billion in Payouts Loom

Customers select products to purchase beneath a giant one euro sign in a Euro store in Athens, Greece, on Nov. 13, 2014.

Kostas Tsironis/Bloomberg

(Bloomberg) -- Greece will begin debating measures to boost liquidity as the cash-starved country braces for more than 2 billion euros ($2.12 billion) in debt payments Friday.

Unable to access bailout funding and locked out of capital markets, the government will outline emergency plans to parliament Tuesday to increase funding. Payments due March 20 include interest on a swap originally arranged by Goldman Sachs Group Inc., said a person familiar with the matter who asked not to be identified publicly discussing the derivative.

Prime Minister Alexis Tsipras’s government is burning through cash while trying to get its creditors -- euro area member states, the European Central Bank and the International Monetary Fund -- to release more money from its 240 billion-euro bailout program. European governments have said they won’t disburse any more emergency loans unless the government in Athens implements a set of economic overhauls agreed last month, including pension and sales tax reform.

“As days go by, room for maneuver becomes ever smaller,” said Theodore Pelagidis, an Athens-based senior fellow at the Brookings Institution. “The impression given is that there’s no plan A or plan B. There’s nothing.”

The government’s plan includes eliminating fines on those who submit overdue taxes by March 27 to encourage payment, helping cover salaries and pensions due at the end of the month. The bill also requires pension funds and public entities to invest reserves held at the Bank of Greece in government securities and repurchase agreements, and transfers 556 million euros from the country’s bank recapitalization fund to the state. A vote on the measures is scheduled for Wednesday.

Ending Austerity

The government said March 14 it has a plan to “enhance its liquidity” and won’t have problems meeting payments for civil servants and retirees due just one week after the March 20th debt payments. Tsipras has pledged to meet the country’s obligations while at the same time ending austerity measures.

“None of my colleagues, or anyone in the international institutions, can tell me how this is supposed to work,” German Finance Minister Wolfgang Schaeuble said in Berlin Monday. Greek leaders are “lying to the population,” he said.

The government plans to auction 1 billion euros of treasury bills on March 18. As much as 60 percent of the auctioned amount can be tapped on top of that in non-competitive and second-day bids. The money will be used to roll over 1.6 billion euros of short-term notes due March 20.

The same day, Europe’s most indebted state is scheduled to repay about 350 million euros to the IMF, while interest due on four bonds held by the ECB total about 110 million euros.

Goldman Swap

The Goldman Sachs derivative, now held by the National Bank of Greece, masked the country’s growing debt when it was agreed in 2001, helping it meet European Union rules for entering the euro area. The interest payment adds to the country’s funding woes as the government misses budget targets and the ECB refuses to allow Greek banks to keep the country afloat with additional short-term debt.

Spokesmen for the National Bank of Greece and Goldman Sachs declined to comment on the amount due for the swap, and the government didn’t respond to calls and text messages seeking comment.

Greece’s 2014 primary budget surplus was just 0.3 percent of gross domestic product, missing a target of 1.5 percent, according to preliminary data released Monday by the finance ministry.

Euclid Tsakalotos, Greece’s deputy foreign minister, said Monday that the ECB is partly to blame for Greece’s cash crunch. Tsipras and Finance Minister Yanis Varoufakis have asked on several occasions for creditors to allow more short-term notes to be issued and bought by Greek lenders to help the country meet obligations in the next weeks.

ECB Review

ECB President Mario Draghi has poured cold water on Greek demands, saying emergency funding facilities, which are keeping the country’s lenders afloat after a massive deposit outflow, can’t be used to tide over the government.

The ECB will review the liquidity position of Greek banks on March 19, the same day European Union leaders convene in Brussels. Tsipras may raise the issue of the country’s cash-flow problem in his first bilateral meeting with German Chancellor Angela Merkel on March 23.

“Vagueness from the Greek side continues and so does pressure from the euro area counterparts,” said Aristides Hatzis, associate professor of law and economics at the University of Athens. “The cat-and-mouse game is expected to continue until June.”

To contact the reporters on this story: Nikos Chrysoloras in Athens atnchrysoloras@bloomberg.net; Vassilis Karamanis in Athens atvkaramanis1@bloomberg.net; Christos Ziotis in Athens at cziotis@bloomberg.net

Reuters News - Has the Fed's 'patience' been exhausted?

The United States Federal Reserve Board building is shown in Washington October 28, 2014.

CREDIT: REUTERS/GARY CAMERON

(Reuters) - For a world economy coming to terms with a soaring dollar and a plunge in oil prices, this week will be all about the U.S. Federal Reserve's policy meeting and its intentions on interest rates.

A combination of the European Central Bank printing lots of euros and expectations of a first U.S. rate rise has caused turmoil on the foreign exchanges and in emerging markets.

The euro, which peaked at nearly $1.40 in the middle of last year, is now languishing around $1.05 and apparently headed for parity.

After successive months of strong jobs data, expectations have been growing that the Fed will point towards a June rate rise by dropping a pledge to be "patient" in considering such a move.

But the dollar's surge, crimping U.S. exports and cutting imported inflation, could cause its policymakers to pause for thought.

St. Louis Fed President James Bullard, generally viewed as a hawk, said last week the central bank risked delaying too long given the fall in unemployment.

Others expect the absence of inflation to hold sway. A Reuters poll of around 70 economists found an almost even split between the first move coming in June or later in the year.

"Under our base case, continued inflation weakness will get the Fed to change its tune and refrain from hiking rates in June," said Michael Hanson, senior economist at Bank of America Merrill Lynch in New York.

"But the Fed does not appear ready to capitulate yet, and will probably keep a June rate hike front and center in the minds of market participants."

One question is whether the world's big powers, which have hitherto accepted dramatic currency moves as part and parcel of efforts to galvanize growth, will start to grumble about competitive devaluations and a race to the bottom.

The euro has dropped a hefty 25 percent versus the dollar since around the middle of 2014.

International Monetary Fund chief Christine Lagarde flagged the risks of divergent monetary policies, given expectations of the Fed normalizing policy while the ECB and Bank of Japan continue to print money.

"This will clearly involve more volatility and it will also have currency impact in that those countries or corporates that have borrowed extensively in dollar-denominated loans are going to suffer," she said.

Goldman Sachs now expects the euro to slide to $0.80 by the end of 2017.

CENTRAL BANK FRENZY

It's a big week for central banks, and they have been busy.

Twenty-four of them have eased policy this year in an attempt to revive sluggish economies.

The Bank of Japan delivers its latest policy decision on Tuesday, a day before the Fed, and is expected to maintain its aggressive asset-buying campaign.

Policymakers continue to talk up the prospects of pushing inflation back towards its 2 percent target, but many economists expect the BOJ to ease again sometime this year, as weak oil pushes prices down.

Perhaps more intriguing is a Turkish central bank meeting, also on Tuesday. It has been in rate-cutting mode but found its efforts attacked by President Tayyip Erdogan, who has demanded more dramatic action even though inflation is high.

The lira, already under pressure from the strong dollar, has tumbled sharply as investors question the independence of the central bank and the position of its head, Erdem Basci.

Basci and Erdogan met last week to iron out their differences and may have secured a truce if not a meeting of minds. Erdogan has previously denounced defenders of high interest rates as "traitors", suggesting the chances of forging any common understanding are slim.

The Swiss National Bank holds its first policy meeting since it shocked financial markets in January by scrapping a three-year-old cap on the Swiss franc against the euro.

It is expected to keep its benchmark interest rate below zero until at least 2016 and is likely to lower growth forecasts for this year, according to a Reuters poll.

Norway is forecast to cut interest rates by a quarter point to 1 percent as its oil sector looks at an uncertain future.

House prices are rising fast, however, so a further loosening of monetary policy could risk inflating an asset bubble. The government has already asked the financial regulator for measures to put a lid on property prices.

Away from the central banking world, Britain's last annual budget before a national election in May will be a big political and economic moment.

With growth solid and public finances starting to surprise on the upside, finance minister George Osborne has scope for vote-winning giveaways. But that would run counter to his mantra of more austerity to come to put the UK back on track.

Osborne has talked about a cost-neutral budget, which may leave him some room for largesse.

BY MIKE PEACOCK (Editing by Catherine Evans)

BBC News - UK trade deficit narrows in January on oil price falls

The UK trade deficit has narrowed to £616m in January from a five-year high of £2.1bn in December, latest figures from the Office for National Statistics have revealed.

The narrowing of the deficit was mostly due to declining oil exports and imports

Imports decreased by £2.5bn from December 2014, the largest monthly decrease since July 2006.

The large decrease in imports was mainly due to a £1.3bn fall in the imports of fuels, specifically oil.

Imports of oil were £2.2bn in January, their lowest level since May 2009.

Excluding the impact of falling oil prices on the trade deficit, which also led to a decline of UK fuel exports, the balance of trade in goods excluding oil also narrowed to a deficit of £7.8bn.

That was the lowest monthly deficit in goods since June 2013.

The UK's goods trade deficit with the 28 EU nations narrowed slightly to £6.67bn.

The pound was ahead against the dollar after the ONS data announcement, with sterling strengthening by 0.44% against the greenback.

BBC News - Euro hits 12-year low against dollar

The euro has fallen to its lowest level against the US dollar in 12 years after the European Central Bank (ECB) began its government bond buying programme.

The euro may have reach the same value as the dollar

It fell as low as $1.0560, before recovering a little. But many traders expect it may soon be worth the same as a dollar.

The ECB began its latest round of quantitative easing (QE) on Monday.

It will buy bonds worth €1.14tn over the next 18 months, flooding the market with euros.

Traders have reacted to the ECB's latest round of QE by selling euros and buying other currencies such as US dollars.

The US currency is appealing because the Federal Reserve looks to have completed its bond-buying programme.

The euro started its slide against the dollar in July last year as traders reacted to the divergence in policy between the ECB and the Fed.

The value of the euro has fallen 22.4% since 1 July, when a euro was worth $1.37.

Positive US data

An upbeat US jobs survey released on Friday provided an additional boost to the dollar.

"This opened up speculation again that the US will raise interest rates in June," says Jane Foley, senior currency strategist at Rabobank. This would attract foreign capital and boost the dollar.

In the eurozone Greece's economic woes continue to put downward pressure on the euro, bringing it closer to dollar parity.

The eurozone's growing current account surplus is encouraging Europeans to invest abroad causing the euro to weaken further, according to Deutsche Bank.

Analysis: Andrew Walker, BBC Economics Correspondent

It's what you expect when the economic performance of two currency blocs diverge in the way that the eurozone and the US have.

The stronger growth in the US means higher interest rates, because the Federal Reserve will raise its own rates, perhaps later this year, and also because there is more demand for cash to fund investment.

In Europe by contrast, the quantitative easing that is finally underway is driving down borrowing costs in the financial markets even further.

The weaker euro is also what you want, at least if you are at the eurozone end of this exchange rate.

Part of Europe's problem is weak demand for goods and services at home and the cheaper currency will make it a little easier to compensate for that by selling more abroad.

"The momentum is certainly building and there's a lot of talk of parity," says Ms Foley.

"We now see euro-dollar moving down to $1.00 by year-end, $0.90 by 2016 and down to a trough of $0.85 by 2017," said Deutsche Bank in a report published on Tuesday.

While further devaluation of the euro should give businesses in the eurozone a boost, the pace of change may pose challenges for companies that need to plan ahead.

Bloomberg News - Chinese Tourists Are Headed Your Way With $264 Billion

A Chinese tourist, center, tries on a wrist watch at a Laox Co. store in the Ginza district of Tokyo, Japan, on Monday, Feb. 16, 2015.

Yuriko Nakao/Bloomberg

Book your holiday now, before a wave of 174 million Chinese tourists snap up the best bargains.

Already the most prolific spenders globally, the number of Chinese outbound tourists is tipped to soar further as the millennial generation spreads its wings.

Here are the numbers: 174 million Chinese tourists are tipped to spend $264 billion by 2019 compared with the 109 million who spent $164 billion in 2014, according to a new analysis by Bank of America Merrill Lynch. To put that in perspective, there were just 10 million Chinese outbound tourists in 2000.

How much is $264 billion? It's about the size of Finland's economy and bigger than Greece's. 

"China-mania spread globally in the past few years, akin to when the Japanese started travelling some 30 years ago, when the world went into frenzy then, pandering to Japanese customers’ needs," the analysts wrote. "In our view, this is going to be bigger and will last longer given China’s population of 1.3 billion vs Japan’s population of 127 million.'' 

Millennials, or 25- to 34- year olds, are expected to make up the bulk of Chinese tourists at 35% of the total, followed by 15- to 24- year olds accounting for around 27%.

Only about 5% of China's 1.3 billion populace are thought to hold passports, meaning the potential for outbound tourism is vast.

The projected boom could be good news for the global economy. The Chinese are the world's biggest consumers of luxury goods, with half of that spending done overseas. Chinese visitors to the U.S. have risen more than 10% since 2009, the fastest pace for adestination outside of Asia. Australia, France and Italy are also popular.

Asian markets stand to benefit, with the biggest uptick tipped for Japan, South Korea and Southeast Asia, according to the research led by Billy Ng in Hong Kong.