Week of 6/30: Fed’s Continuing Need for “More Data”, Growing Ties between Iran and Russia, and China Borrowing Billions in Bonds

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

In this twenty-sixth episode, we will discuss how the Fed noted that the Fed remains on a disinflationary path though needs more data before cutting rates, then to Iranian calls for closer ties with Russia, and finally to the PBoC borrowing hundreds of billions in government bonds.

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Email: rabossong2@gmail.com

Transcript

Hello and welcome to the 26th 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 how the Fed remains on a disinflationary path though needs more data before cutting rates, then to Iranian calls for closer ties with Russia, and finally to the PBoC borrowing hundreds of billions in government bonds.

Yeah, so first, Federal Reserve Chair Jerome Powell stated that the U.S. is back on a "disinflationary path" but emphasized the need for more data before cutting interest rates to confirm the recent weaker inflation readings. Powell noted that May's data showed no increase in the Fed's preferred inflation measure, with the 12-month rate of price increases dropping to 2.6%, still above the target but decreasing. Powell did not specify when rate cuts might begin but acknowledged the Fed's delicate position, balancing inflation and employment goals. He pointed out that further progress on inflation might require trade-offs with rising unemployment, a situation the Fed has so far avoided. With the U.S. unemployment rate remaining at or below 4% for over two years, Powell suggested a cautious approach in deciding when to cut the benchmark policy rate to avoid stifling economic expansion. Market expectations suggest the Fed might cut rates in September and December, although the Fed has maintained its benchmark rate in the 5.25%-5.5% range since last July, describing inflation as "elevated" in June. The timing of rate cuts will depend on upcoming employment and inflation reports, including the monthly jobs report and the consumer price index release. The Fed's next policy meeting is scheduled for July 30-31. 

Next, let’s move over to Iran, where their central bank governor Farzin called for increased financial cooperation with Russia. Speaking at the Bank of Russia’s Financial Congress, Farzin emphasized the need for the Iranian and Russian financial systems to collaborate more closely. Since the Kremlin’s invasion of Ukraine in February 2022, cooperation between the two countries’ central banks has been growing. This is evidenced by Russia’s governor Nabiullina's visit to Tehran in May, where she met officials while wearing a headscarf, and Farzin’s visit to Moscow in December 2023, where he received a warm welcome from Nabiullina. Farzin discussed Iran’s struggle with high inflation, which mirrors similar challenges faced by Russia due to increased state spending on defense and social programs. Farzin also proposed that the BRICS group of economies, which Iran joined this year, develop an alternative to the SWIFT financial-messaging service, as both Tehran and Moscow have been excluded from SWIFT due to sanctions from the US and its allies. 

Finally, the People’s Bank of China (PBOC) has commenced borrowing medium and long-term notes from lenders, now holding “hundreds of billions” of yuan in government bonds, according to state media. This move, which involves agreements with major brokers, aims to stabilize the plummeting long-term bond yields. The PBOC plans to borrow these bonds with no fixed term on an open-ended basis, selling them as market conditions dictate. The borrowing initiative follows the PBOC’s announcement that it will soon borrow Treasury bonds from some primary dealers, although no specific timeline was provided. Chinese government bonds have seen a prolonged rally, with demand for low-risk assets driving yields to multi-year lows, influenced by structural concerns about China’s economy. China’s leadership, known for intervening to maintain currency stability, may now seek similar stability for long-term yields. The effectiveness of this intervention in turning around long-term yields will depend on the PBOC’s willingness to deploy significant resources. With the central bank holding less than 5% of the total stock of Chinese government bonds, it needs to borrow from the market to substantially influence long-term yields. In addition to stabilizing government bond yields, analysts believe the PBOC will employ other policy tools to ensure economic stability, potentially including lowering interest rates to support the economy and increase domestic inflation.

So yeah, in conclusion, we began by discussing how the Fed remains on a disinflationary path though needs more data before cutting rates, then to Iranian calls for closer ties with Russia, and finally to the PBoC borrowing hundreds of billions in government bonds. 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!