Week of 6/10: Fed Keeps Rates Steady, Increase in CBDC Testing, and Falling Yields in China

Welcome to "Worldview: Central Bank Insights" – your shortcut to understanding recent trends in global finance.

In this twenty-fourth episode, we will discuss the Fed’s recent rate decision, a survey about central bank digital currency experiments, and falling bond yields which has put the PBoC into a dilemma.

Contact: 

Email: rabossong2@gmail.com

Transcript

Hello and welcome to the 24th episode of "Worldview: Central Bank Insights”. I am your host, Reagan Bossong, a sophomore at the Wharton School of Finance, and it is my pleasure to guide you through another exploration of the largest stories regarding global financial dynamics over the past week. In today's discourse, we will begin by discussing the Fed’s recent rate decision, then a survey about central bank digital currency experiments, and finally to falling bond yields which has put the PBoC into a dilemma.

The US Federal Reserve decided to keep interest rates unchanged on Wednesday but suggested that a rate cut might occur before the end of the year to combat persistent inflation. Since early 2022, when inflation reached a 40-year high, the Fed has raised interest rates multiple times, peaking at 5.3% in July 2023. Despite earlier predictions of rate cuts, stubbornly high inflation prevented any reductions. Inflation has significantly cooled since May, but the Fed now predicts it will be more persistent than initially thought, expecting the rate to bottom out at 2.6% by the end of the year, slightly higher than the previous estimate of 2.4%. The Fed's long-term goal is to bring inflation below 2%. "We've made pretty good progress on inflation," said Fed Chairman Jerome Powell in a news conference. However, he emphasized the need for more positive economic data before considering rate cuts. A report from the US Labour Department, released shortly before the Fed's announcement, indicated that the consumer price index (CPI) remained steady from June, with a 3.3% increase compared to the previous year. This was a slight decrease from April's CPI, which stood at 3.4%.

A recent survey by the Bank for International Settlements (BIS) reveals a significant increase in central bank digital currency (CBDC) experiments, especially among central banks in advanced economies. The survey indicates a 35% rise in proof of concept projects and a tripling of CBDC pilots from 2022 to 2023 among these central banks. Despite this progress, the approach and pace of these experiments vary, with central banks considering diverse design features for CBDCs. For central banks in advanced economies, 81% were involved in wholesale CBDC proof of concept experiments, and 33% were running pilots, compared to 60% and 10% the previous year, respectively. In contrast, fewer central banks in emerging markets and developing economies (EMDE) are focusing on wholesale CBDCs, with about a third working on proof of concept experiments and only 19% on pilots, showing little change from the previous year. While advanced economies are accelerating their CBDC exploration, stablecoin adoption remains limited. As of May 2024, the total market capitalization of cryptocurrencies was $2.7 trillion, with stablecoins comprising just 6% of this at $161 billion.

China's central bank, the People's Bank of China (PBOC), faces a challenging decision as it deals with falling bond yields, which contradict its view of the economy. Despite warnings, the PBOC has been unable to stop the decline in long-term government bond yields. There is growing pressure on the PBOC to take action, potentially ending a 17-year absence from the bond market by selling bonds, even considering short-selling treasuries due to its limited resources. This situation places the PBOC in a difficult position. Intervening in the bond market would reduce liquidity when the economy needs support to meet the 2024 growth target of around 5%. Conversely, inaction risks financial instability, similar to the collapse of Silicon Valley Bank in the U.S. Lower yields could also weaken the yuan and trigger capital flight. The PBOC's dilemma underscores the broader challenge of balancing ambitious growth targets with financial stability in an economy built on debt-fueled expansion. Recent statements from the PBOC about selling bonds have not been enough to significantly influence market expectations, and the central bank's limited bond holdings further complicate its position. Analysts and investors suggest that any PBOC action might cause only short-term volatility, and there are calls for the PBOC to act to maintain its credibility.

So yeah, in conclusion, we began by discussing the Fed’s recent rate decision, then a survey about central bank digital currency experiments, and finally to falling bond yields which has put the PBoC into a dilemma. As we continue to live throughout this financial landscape, the ripples of change will definitely continue being felt across economies worldwide. That’s a wrap for this week's central bank roundup. If you have topics you want me to dive into or thoughts on today's podcast, let me know anytime. You'll find all my contact details in the show notes. Until next time. Thank you!