In the USA, as elsewhere, the paralysis of activity caused by the Covid-19 pandemic has affected the production of statistics, which have become harder to interpret. The rebound in hourly wages in April indicated by the “pulse” is a false signal and should be treated with caution: it can be explained by the collapse in hours worked, against which wages always show a certain inertia. Not only is the information gathered from companies incomplete, but there may well have been a lag between the shutdown of businesses and the stopping of wages [...]
Pressure on dollar liquidity created an urgent need for action from the US Federal Reserve (the Fed). Assuming its role as the global lender of last resort - the consequence of its position as the issuer of the international trade and reserve currency - the Fed reactivated the permanent or temporary swap agreements that it established with 14 other central banks in 2008. In order to extend the reach of its dollar supply, the Fed has also created a repo facility for the central banks of countries that do not have dollar swap agreements. The high fees charged, however, will limit take-up, depriving the markets of what could be a significant calming influence.
Over the past four years, the US Federal Reserve has reduced the surplus central bank reserves that it had built up under its quantitative easing programme. Over the same period, the Basel 3 banking regulations have, however, significantly increased banks’ demand for central bank liquidity. Before Basel 3, all reserves in excess of “required reserves”, in the monetary policy sense of the term, were, justifiably, treated as excess reserves. Since the new liquidity rules have come into force, only those reserves in excess of the regulatory constraint may be so treated
None of the legislative proposals to reform the US mortgage market has yet come into force. Most of them start from the same position: although government guarantees are essential in ensuring a liquid and stable mortgage market, the Federal government should not be the sole party exposed to payment default risk, especially as this is transmitted through two agencies, Fannie Mae and Freddie Mac, that are in financial difficulties. In the absence of legislation, the regulator of the two agencies has sketched out the foundations of a reform, by developing a program to transfer “non-extreme” credit risk to the market.
In May 2017, Donald Trump triggered a renegotiation of the North American Free Trade Agreement (NAFTA). Some proposals, 23 years after NAFTA came into force, aiming to introduce a chapter on the digital economy and strengthen the agreement’s current arrangements, have been generally welcomed. Others, such as a tightening of rules of origin and changes to trade remedies, have prompted concern.
The new US administration’s financial deregulation project has raised considerable concern about financial stability. For the time being, the details of the changes have not been spelled out, and it is unclear what level of support they will receive from Congress. Many are arguing that the leverage ratio should be (re)established as the foundation of the US prudential framework. The scope of the application of Basel 3 could be narrowed and the body of Basel rules to be applied could be limited.
