Finance

Minneapolis Fed President Kashkari sees slower pace of rate cuts ahead

Published

9 months ago

September 23, 2024

Minneapolis Fed President Neel Kashkari: Fed is likely to make smaller rate moves going forward

Minneapolis Federal Reserve President Neel Kashkari said Monday that he expects policymakers to dial down the pace of interest rate cuts after last week’s half percentage point reduction.

“I think after 50 basis points, we’re still in a net tight position,” Kashkari said in a CNBC “Squawk Box” interview. “So I was comfortable taking a larger first step, and then as we go forward, I expect, on balance, we will probably take smaller steps unless the data changes materially.”

In a decision that came as at least a mild surprise, the rate-setting Federal Open Market Committee on Wednesday voted to reduce its benchmark overnight borrowing rate by half a percentage point, or 50 basis points. It was the first time the committee had cut by that much since the early days of the Covid pandemic, and, before that, the financial crisis in 2008. One basis point equals 0.01%.

While the move was unusual from a historical perspective, Kashkari said he thought it was necessary to get rates to reflect a recalibration of policy from a focus on overheating inflation to more concern about a softening labor market.

His comments indicate the central bank could move back to more traditional moves in quarter-point increments.

“Right now, we still have a strong, healthy labor market. But I want to keep it a strong, healthy labor market, and a lot of the recent inflation data is coming in looking very positive that we’re on our way back to 2%,” he said.

“So I don’t think you’re going to find anybody at the Federal Reserve who declares mission accomplished, but we are paying attention to what risks are most likely to materialize in the near future,” he said.

As part of the committee’s rotating schedule, Kashkari will not get a vote on the FOMC until 2026, though he does get a say during policy meetings.

The rate cut Wednesday signaled that the Fed is on its way to normalizing rates and bringing them back to a “neutral” position that neither pushes nor restricts growth. In their latest economic projections, FOMC members indicated that rate is probably around 2.9%; the current fed funds rate is targeted between 4.75% and 5%.

Speaking separately Monday, Atlanta Fed President Raphael Bostic indicated he expects the Fed to move aggressively in getting back to a neutral rate.

“Progress on inflation and the cooling of the labor market have emerged much more quickly than I imagined at the beginning of the summer,” said Bostic, who votes this year on the FOMC. “In this moment, I envision normalizing monetary policy sooner than I thought would be appropriate even a few months ago.”

Bostic also noted that Wednesday’s cut puts the Fed in a better position on policy, in that it can slow the pace of easing if inflation starts to peak up again, or accelerate it if the labor market slows further.

Market pricing anticipates a relatively even chance of the FOMC cutting by either a quarter- or half-percentage point at its November meeting, with a stronger likelihood of the larger move in December, for a total of 0.75 percentage point in further reductions by the end of the year, according to the CME Group’s FedWatch measure.

Finance

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Published

1 day ago

June 6, 2025

Business Finance News

Finance

Swiss government proposes tough new capital rules in major blow to UBS

Published

1 day ago

June 6, 2025

Business Finance News

A sign in German that reads “part of the UBS group” in Basel on May 5, 2025.

Fabrice Coffrini | AFP | Getty Images

The Swiss government on Friday proposed strict new capital rules that would require banking giant UBS to hold an additional $26 billion in core capital, following its 2023 takeover of stricken rival Credit Suisse.

The measures would also mean that UBS will need to fully capitalize its foreign units and carry out fewer share buybacks.

“The rise in the going-concern requirement needs to be met with up to USD 26 billion of CET1 capital, to allow the AT1 bond holdings to be reduced by around USD 8 billion,” the government said in a Friday statement, referring to UBS’ holding of Additional Tier 1 (AT1) bonds.

The Swiss National Bank said it supported the measures from the government as they will “significantly strengthen” UBS’ resilience.

“As well as reducing the likelihood of a large systemically important bank such as UBS getting into financial distress, this measure also increases a bank’s room for manoeuvre to stabilise itself in a crisis through its own efforts. This makes it less likely that UBS has to be bailed out by the government in the event of a crisis,” SNB said in a Friday statement.

‘Too big to fail’

UBS has been battling the specter of tighter capital rules since acquiring the country’s second-largest bank at a cut-price following years of strategic errors, mismanagement and scandals at Credit Suisse.

The shock demise of the banking giant also brought Swiss financial regulator FINMA under fire for its perceived scarce supervision of the bank and the ultimate timing of its intervention.

Swiss regulators argue that UBS must have stronger capital requirements to safeguard the national economy and financial system, given the bank’s balance topped $1.7 trillion in 2023, roughly double the projected Swiss economic output of last year. UBS insists it is not “too big to fail” and that the additional capital requirements — set to drain its cash liquidity — will impact the bank’s competitiveness.

At the heart of the standoff are pressing concerns over UBS’ ability to buffer any prospective losses at its foreign units, where it has, until now, had the duty to back 60% of capital with capital at the parent bank.

Higher capital requirements can whittle down a bank’s balance sheet and credit supply by bolstering a lender’s funding costs and choking off their willingness to lend — as well as waning their appetite for risk. For shareholders, of note will be the potential impact on discretionary funds available for distribution, including dividends, share buybacks and bonus payments.

“While winding down Credit Suisse’s legacy businesses should free up capital and reduce costs for UBS, much of these gains could be absorbed by stricter regulatory demands,” Johann Scholtz, senior equity analyst at Morningstar, said in a note preceding the FINMA announcement.

“Such measures may place UBS’s capital requirements well above those faced by rivals in the United States, putting pressure on returns and reducing prospects for narrowing its long-term valuation gap. Even its long-standing premium rating relative to the European banking sector has recently evaporated.”