By Emma Farge

GENEVA (Reuters) – Swiss National Bank governing board member Petra Tschudin said on Thursday that inflation was comfortably within the range it hoped to see.

Inflation in October dropped to 0.6%, its lowest level since June 2021, stoking analyst expectations the SNB will press ahead with further rate cuts.

Asked about the risk of possible deflation at a banking event in Geneva, she said: “Inflation is now comfortably in the range of 0-2% where we want to see inflation (and) our definition of price stability.”

She declined to comment further on the outlook for monetary policy which she said will be decided at the SNB’s upcoming meeting on Dec. 12.

The central bank has been at the forefront of interest rate cuts this year, lowering borrowing costs three times in 2024 to 1%.

By David Latona

MADRID (Reuters) -Spanish lawmakers approved the government’s new tax plans, which include extending a modified temporary levy on banks by three years, in a last-minute deal with smaller parties on Thursday in the highly fragmented parliament.

The governing coalition constantly faces a balancing act as it weighs concessions to parties from across the spectrum, such as hard-left Podemos and centre-right Catalan separatists Junts.

The lower house backed the Socialist-led government’s plan by 178-171 votes.

The fiscal package’s centrepiece ensures that large Spain-based companies with an annual turnover of at least 750 million euros ($785 million) pay a minimum tax of 15% of their consolidated profits, in compliance with a European directive.

Following the bill’s passage, Prime Minister Pedro Sanchez described it as “landmark” legislation that would guarantee the disbursement of European recovery funds worth 7.2 billion euros.

In October, the European Commission sued Spain – along with Cyprus, Poland and Portugal – for failing to implement the rules designed to curb fiscal dumping by the end of 2023.

Government officials have previously said next year’s budget bill, yet to be unveiled, hinged on the package’s approval.

Spain had rolled over its 2023 spending plan after failing to pass a new budget last year, but Sanchez reiterated on Tuesday the government would eventually present the bill for 2025.

BANKING TAX

A three-year extension to the annual bank windfall tax, added to the bill’s amendments after the government clinched Junts’ support by ceding collection of the tax’s revenues to regional administrations, also got through.

Ranging between 1% and 7%, it will tax lenders’ net interest income and commissions in accordance with their lending income volumes, instead of the current fixed rate of 4.8%.

For lenders whose annual volumes surpass 5 billion euros, it sets a rate of 7%, affecting Santander (BME:SAN), BBVA (BME:BBVA) and Caixabank.

Banking associations AEB and CECA said they would take the measure, which they warned created legal uncertainty and hurt competitiveness, to court.

The Socialists were only able to pass the package after reaching a last-minute agreement with Podemos.

In exchange, they pledged to work on a permanent windfall tax on energy companies that was earlier dropped, or at least extend a temporary one by another year.

“Podemos will work to make this tax as ambitious as possible,” Podemos leader Ione Belarra said.

Utilities have warned that extending the tax would jeopardise 30 billion euros ($31.6 billion) in renewable energy investments.

($1 = 0.9548 euros)

WASHINGTON – Former Representative Matt Gaetz of Florida has announced his decision to withdraw his name from consideration for the position of Attorney General in President-elect Donald Trump’s administration. Gaetz, a Republican, cited the desire to avoid further distraction from the Trump/Vance Transition team’s work as the reason for his withdrawal.

The announcement follows what Gaetz described as “excellent meetings with Senators,” where he received feedback and support. Despite the momentum he felt, Gaetz acknowledged that his confirmation process was becoming a contentious issue in Washington, potentially delaying the establishment of Trump’s Department of Justice.

Gaetz expressed his continued support for Donald Trump, stating his commitment to help make Trump “the most successful President in history.” He also mentioned his honor in being nominated to lead the Department of Justice and expressed confidence in Trump’s ability to “Save America.”

The decision comes amid ongoing allegations of sexual impropriety, which have made Gaetz a controversial figure. Although the Republicans are set to hold a 53-47 majority in the U.S. Senate next year, it was uncertain whether there would be sufficient support from within the party to confirm his nomination.

This move by Gaetz to step back highlights the complexities of the confirmation process for key government positions, particularly when nominees face significant allegations. The withdrawal aims to expedite the readiness of the incoming administration’s Justice Department, emphasizing the need for a fully operational team from the outset of Trump’s term.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

By David Lawder

WASHINGTON (Reuters) – The International Monetary Fund will assess U.S. President-elect Donald Trump’s tariff and tax-cut policies as details emerge, but it’s “too early to speculate” on their potential impacts, IMF spokesperson Julie Kozack said on Thursday.

Kozack told the first regular press briefing since Trump’s Nov. 5 election victory that it was still “early days” for his economic plans to take shape. Trump takes office on Jan. 20.

The Republican president-elect has vowed to impose tariffs of 60% on Chinese imports into the U.S. and duties of 10%-20% on goods from elsewhere. Trump also wants to extend expiring 2017 tax cuts and enact new tax breaks, which budget forecasters say could add new debt of $7.5 trillion over 10 years.

“The exact impact of any of these policies is very much going to depend on the details and that’s why we will wait to see the details before we make our assessment,” Kozack said.

Worries among the IMF’s 191-member economies about a return of Trump to power dominated the IMF and World Bank annual meetings in October. But IMF officials, including IMF Managing Director Kristalina Georgieva, have been circumspect about the impact Trump’s plans could have on the global economy and international financial institutions.

Georgieva has long warned against rising trade barriers and growing geopolitical fragmentation of the global economy.

On Tuesday, the director of the IMF’s Asia and Pacific Department, Krishna Srinivasan, warned that tit-for-tat retaliatory tariffs threaten to disrupt growth prospects across the region. He did not mention Trump’s tariff plans directly, but economists widely view the president-elect’s tariff plans as likely to spark retaliation and raise costs.

WASHINGTON (Reuters) – The incoming chair of the Federal Communications Commission said it is “very unlikely” the commission could reconsider its 2022 decision to deny Elon Musk’s SpaceX satellite internet unit Starlink $885.5 million in rural broadband subsidies.

FCC (BME:FCC) Commissioner Brendan Carr, who is set to become chair on Jan. 20, told reporters further action was unlikely because following a 2023 decision to affirm the denial there had not been any further reconsideration or appeal by Starlink.

Procedurally “it’s very unlikely the FCC would revisit that” but Carr added he has not fully reviewed the issue. The FCC said in December 2023 that the decision was based on Starlink’s failure to meet basic program requirements.

AMSTERDAM/NICOSIA (Reuters) – Global economic output would suffer a “sizeable” loss if trade became more fragmented and an immediate boost to inflation would only fade over a few years, the European Central Bank’s chief economist Philip Lane said on Thursday.

His comments were the starkest warning so far from the ECB about the consequences of a global trade war, which has been on the top of investors’ minds since Donald Trump won the U.S. presidential election this month on a protectionist agenda.

“Trade fragmentation entails sizeable output losses,” Lane said in slides prepared for a speech in Amsterdam.

Lane envisaged a scenario in which global trade is increasingly divided between Western countries and a China-led East.

He put the hit to global output at between 2%, if all sectors are hit by partial trade restrictions, and nearly 10% under a full ban.

His estimates for the European Union were of similar magnitude, while the United States would fare a little better than that and China much worse.

“Under all scenarios China gets whacked,” Lane said during his presentation.

The global inflationary effects would only “subside gradually” over four or five years after an initial boost of between 60 basis points in a “mild decoupling scenario” and up to nearly 400 basis points under severe assumptions, Lane said.

Speaking earlier in Cyprus, Christodoulos Patsalides, governor of the Central Bank of Cyprus, said Europe could face a recession coupled with high inflation if Trump imposes the threatened tariffs.

“If trade restrictions materialise, the outcome may be inflationary, recessionary or worse, stagflationary,” he told a conference.

Still, the ECB could for now continue to lower interest rates with the next move possibly coming in December, Patsalides said.

“While growth in the euro area economy has been anaemic for some time now, the approach to rate cuts must be gradual and data driven,” Patsalides said. “If incoming data and new projections in December confirm our baseline scenario, there would be room to continue lowering rates at a steady pace and magnitude.”

The ECB has cut rates by a combined 75 basis points to 3.25% this year and investors have fully priced in another move on Dec. 12, with most also expecting cuts at each policy meeting through next June.

Inflation has fallen rapidly in recent months and the ECB said in October it now expects it to oscillate around the 2% target in the coming months. It could then settle at the target in the first half of the 2025, earlier than the ECB last predicted.

By Ann Saphir

(Reuters) – Chicago Federal Reserve President Austan Goolsbee on Thursday reiterated his support for further interest rate cuts and his openness to doing them more slowly, remarks that underscore the U.S. central bank’s debate that it’s not about whether, but over how fast and how far, borrowing costs should be lowered.

Some Fed policymakers worry that progress lowering inflation may have stalled and call for a cautious approach, while others want to make sure the labor market doesn’t cool further, suggesting the need for continued rate cuts. And over all of those differences hangs the uncertainty of how potential tariffs and tax cuts and an immigration crackdown promised by President-elect Donald Trump will affect prices, jobs, and the economy more broadly.  

Fed policymakers will meet on Dec. 17-18 to resolve their differences, at least temporarily, with a decision to either cut the policy rate again or wait to do so until next year. Financial markets judge it to be a close call, with interest rate futures putting about a 55% probability on a quarter-percentage-point cut, and a 45% chance of no cut.

The Fed cut its policy rate by half a percentage point in September and by a quarter of a percentage point at its meeting earlier this month.

Goolsbee, in remarks to the Central Indiana Corporate Partnership, did not say whether he favored another rate cut next month, but he did stake out a longer-term view that appears to be shared by most Fed policymakers – that rates are not yet where they need to be.

The Chicago Fed president said inflation over the last year and a half has dropped and is on its way to the Fed’s 2% goal, labor markets have cooled and the economy is now close to stable, full employment.

It follows that interest rates should about a year from now be “a fair bit lower than where they are today,” he said. The Fed’s policy rate is currently set in the 4.50%-4.75% range.

Fed policymakers projected in September that at the end of next year the policy rate should be anywhere from 2.9% to 4.1%. Since then, stronger-than-expected inflation readings and big swings in monthly job market data may have shifted those views somewhat, with the central bank due to publish new forecasts at its meeting next month. 

Given the uncertainty and disagreement over how much lower rates ought to go, Goolsbee said “it may make sense to slow the pace of rate cuts as we get close.”

By Jamie McGeever

ORLANDO, Florida (Reuters) – A record-high $7 trillion of cash is currently sitting “on the sidelines” in money market funds (MMFs). Anyone hoping to see a significant chunk of this flooding the wider investment field in the coming months may be disappointed.

    Many strategists assume this massive pile of cash will start to shrink now that the Federal Reserve is cutting interest rates as investors seek a more profitable home for their capital in the face of diminishing cash yields.

    And if the Fed and incoming Trump administration engineer a “soft landing” – or “no landing” – for the U.S. economy, then equities, credit and even long-dated bonds should be a lot more appealing than cash. Right?

    Not so fast.

    The U.S. financial and economic landscape has changed radically – perhaps irrevocably – since the pandemic. Many rules of thumb that have guided investors, businesses, consumers and policymakers for decades no longer seem to apply.

    The Fed pursued the most aggressive rate hiking cycle in 40 years, yet Wall Street has rocketed to record highs and unemployment has barely eclipsed 4%. The yield curve has been inverted for two years, yet there has been no recession. Geopolitical tensions have spiked in the Middle East, yet oil prices have gone down.

    In this topsy-turvy world, MMFs have emerged as a premium destination for investors’ cash.

    They offer significantly higher rates of interest than rival checking accounts and commercial deposits or fixed income assets like Treasuries that would traditionally be the havens of choice for those seeking liquidity and safety.

    In ‘normal’ times, longer-dated bonds carry higher yields than MMFs, because the yield curve usually has a positive slope.

    But times have not returned to ‘normal’, and Treasury yields have been below the fed funds rate for two years. Why buy a two-, five- or ten-year bond and assume duration risk when you can earn more in a plain old money market fund?

Redeployment may not be so rapid. Strategists at Societe Generale (OTC:SCGLY) recommend clients maintain their 10% cash allocation next year.

    Yet expectations for an imminent exit from cash persist.

“The road is lined with people trying to call the impact and timing of cash moving off the sidelines,” says Adam Farstrup, head of multi-asset, Americas, at Schroders (LON:SDR).

NO ZIRP, NO PROBLEM

MMF balances have actually increased by nearly $40 billion since the Fed started cutting rates in September, according to the Investment Company Institute, a global funds industry body.  

    And this shouldn’t have come as a surprise.

    Recent history shows that investors’ initial response to a Fed easing cycle is to increase their cash holdings, as was the case after the Global Financial Crisis and pandemic. When rates are coming down fast, fear rises and investors rush to cash.

Investors only begin to deploy their cash hoard after rates are slashed to zero and it becomes clear that ‘ZIRP’ – zero interest rate policy – is likely to remain in place for years.

It was a different story in 2020, however, as stimulus checks and other fiscal programs quickly resuscitated the economy and the Fed soon started raising rates, ensuring that the ZIRP-driven cash drain was brief and shallow.

    So what’s in store this time around?

    Few people seriously expect a return to ZIRP. Indeed, since the Fed started easing in September, markets have begun pricing in fewer cuts and the implied terminal rate has risen by around a full percentage point, and MMF inflows have accelerated.

    While there are myriad alternatives to MMFs, all come with downsides. Some are already expensive: many equity indices have never been higher, and U.S. corporate bond spreads have never been thinner. Others are cheap, like some emerging markets like China, but they’re cheap for good reason.

    Given the high levels of uncertainty surrounding the year ahead – from geopolitical tensions to questions about President-elect Donald Trump’s unorthodox policy agenda – the environment is likely to remain cash-friendly.

    And perhaps market analysts may have to start rethinking how they understand MMFs altogether. James Camp, managing director of fixed income and strategic income at Eagle Asset Management, argues that much of the $7 trillion in MMFs is now viewed not as dry powder for investment but rather as a “permanent” capital stock used for liquidity management.

“This large cash holding is more a feature of the economy now, not a bug,” he says

    In other words, those expecting a mass exodus from cash may be waiting a long time.  

(The opinions expressed here are those of the author, a columnist for Reuters.)   

(By Jamie McGeever; Editing by Andrea Ricci)

By Michael S. Derby

NEW YORK (Reuters) – New data from the New York Federal Reserve suggests the U.S. central bank isn’t facing any roadblocks to continuing forward with its ongoing effort to shrink the size of its balance sheet.

The regional Fed bank reported on Thursday that its Reserve Demand Elasticity Measure 50th percentile reading stood at -0.15 on Nov. 13, holding steady relative to where it was a month ago. The New York Fed said as part of its report that “reserves remain abundant.” 

The New York Fed index tracks market liquidity conditions. Launched publicly a month ago, it is designed to show how flush or tight bank reserves are. Numbers veering into negative territory can suggest mounting bank reserve tightness, which speaks directly to what the Fed is doing with its ongoing effort to reduce its bond holdings via a process known as quantitative tightening, or QT.

For just over two years the Fed has been shedding its holdings of bonds to normalize the size of its balance sheet. That’s taken its overall balance sheet from about $9 trillion in the summer of 2022 to the current level of about $7 trillion.

The Fed is aiming to take out as much liquidity as it can to allow the federal funds rate, its chief tool for achieving its monetary policy goals, to trade at the desired level and to allow for normal money market volatility. The challenge for the central bank and for private economists is that it is not clear how far it can go with liquidity removal before it runs into turbulence.

The New York Fed measure suggests the process faces no imminent need to stop, which jibes with recent comments from central bank officials and market expectations, which currently eye an end to QT at some point next year.

The New York Fed measure tends to front-run periods of tight reserves by a good margin, which suggests that increasingly negative readings could be a clear sign the Fed needs to shift gears on QT.

The index began to lose ground in October 2017 when the Fed last shrank its holdings and bottomed in October 2019, just after the central bank faced an unexpected liquidity shortfall that forced it to aggressively add liquidity to money markets to regain firm control of the federal funds rate.

WASHINGTON (Reuters) – U.S. mortgage rates increased to a four-month high this week, which together with higher home prices could sideline potential buyers from the housing market in the near term.

The average rate on the popular 30-year fixed-rate mortgage increased to 6.84%, the highest level since July, from 6.785% last week, mortgage finance agency Freddie Mac (OTC:FMCC) said on Thursday. It averaged 7.29% during the same period a year ago.

Though the Federal Reserve has cut interest rates twice since September, U.S. Treasury yields have risen on strong economic data and investor fears that President-elect Donald Trump’s policies, including higher tariffs on imported goods and mass deportations, could reignite inflation.

Mortgage rates track the 10-year Treasury note.