More Weakness for the USD to Come as the FED Cuts 25bps

Economic

Forex

Summary:

Recent economic data and signals from the Federal Reserve have increased the likelihood of a more significant interest rate cut at the Federal Open Market Committee (FOMC) meeting scheduled for September 18th.

The US dollar has experienced a slight decline, dropping by around 1.0% since its peak earlier last week. Recent economic data and signals from the Federal Reserve have increased the likelihood of a more significant interest rate cut at the Federal Open Market Committee (FOMC) meeting scheduled for September 18th. While the market remains divided on whether the rate cut will be 25 or 50 basis points, the odds of a larger 50bps cut have strengthened, driven by weaker-than-expected labour market data.

More Weakness for the USD to Come as the FED Cuts 25bps_1

Midweek reports, including the JOLTS job openings and the ADP employment figures, both indicated a slowdown in the labour market. Additionally, the ISM Employment Index came in below expectations, reinforcing concerns about economic weakness. These developments have raised questions about how aggressively the Fed will move to address the changing economic conditions.

Federal Reserve officials have weighed in on this issue, suggesting that they are open to the possibility of a larger rate cut if the labour market continues to deteriorate. For example, San Francisco Fed President Mary Daly emphasized in a recent interview that a worsening labour market would be concerning, although the pace of any rate cuts remains uncertain. Similarly, Chicago Fed President has noted that inflation is steadily decreasing, but the growing signs of weakness in the job market could justify multiple rate cuts to support the economy.

The Fed’s Summary of Economic Projections (SEP), which currently estimates the unemployment rate at 4.0% and core PCE inflation at 2.8% by the end of the year, may undergo significant revisions depending on the results of the upcoming payroll report. This report is crucial as it could spark substantial movements in bond yields and the US dollar, particularly the 2-year Treasury note, which has already seen its yield decline by 23 basis points this week.

From a foreign exchange perspective, the dollar’s future performance will likely hinge on the health of the labour market. A weaker-than-expected jobs report could drive further dollar weakness, especially if equity markets react negatively. In contrast, a strong report might trigger a rebound in short-term yields and provide some support for the dollar. Among G10 currencies, the yen, Swiss franc, and euro have all outperformed the dollar this week, reflecting market positioning for a potentially weak jobs report.

Looking ahead, the yen stands to gain the most if expectations for a 50bps rate cut solidify, with USD/JPY possibly retreating into the 130s. This could continue to unwind the dollar’s strong rally against the yen seen in recent years.

To stay updated on all economic events of today, please check out our Economic calendar

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Samantha Luan

Commodity

Energy

Tropical Storm Francine forced some oil drillers to halt production and evacuate crews as it barreled through the Gulf of Mexico and was expected to strengthen to a Category 2 hurricane as it heads toward the coast of Louisiana.

Strong winds and a dangerous storm surge are expected along the state’s shoreline, the National Hurricane Center said in an advisory issued at 1am in Houston on Tuesday. Francine is “anticipated to be just offshore of the coasts of northern Mexico and southern Texas through Tuesday and make landfall in Louisiana on Wednesday,” the centre said.

The system, located 690km south-southwest of Cameron, Louisiana, saw winds accelerate to 105kph from 80kph on Monday. A hurricane watch is in effect for communities along part of the Louisiana coast.

Chevron Corp, Exxon Mobil Corp and Shell plc are among the companies taking measures like evacuating workers from vulnerable installations, suspending drilling activities and shutting in some wells. The storm’s forecast path intersects with fields that account for roughly 125,000 barrels of crude and 300 million cubic feet of natural gas on a daily basis, according to Bloomberg calculations using government data.

Gas supply to Cameron LNG also fell about 41% from the previous day, according to data compiled by BloombergNEF.

On its expected track, Francine may rake nine major platforms, including Enchilada, Cerveza, Perdido and Hoover. That said, the storm probably won’t have a large impact on overall energy production, Chuck Watson, a disaster modeller with Enki Research, said in a social media post.

Meanwhile, the US Coast Guard declared Port Condition X-Ray at Houston, Galveston and other key Texas harbours, a warning that rough weather is expected within 48 hours. One upside to Francine as it moves ashore is that it will bring much-needed water to the parched Mississippi River, temporarily raising the fortune of shippers before dry conditions set in again.

This will be the third storm to hit the US mainland this year. As Francine nears the coastline, it could encounter cross winds, or wind shear, that would threaten to weaken it. Still, the storm is currently forecast to make landfall with 100mph winds, which would make it a Category 2 storm on the five-step Saffir-Simpson scale.

The hurricane centre is tracking two other disturbances in the central Atlantic Ocean with the potential to become tropical storms. Both are hundreds of miles or more from populated areas.

Source: Theedgemarkets

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Pepperstone

Economic

A collection of thoughts on the Fed’s short-, and longer-run, outlook:

•The August jobs report was, in an ideal world, meant to resolve the ‘25bp vs. 50bp’ debate over the September decision. Instead, the Fed’s hawks can point to a drop in unemployment, to 4.2%, and a doubling in the pace of earnings growth, to 0.4% MoM, as reasons to begin normalisation with a ‘run of the mill’ 25bp cut. On the other hand, the doves can point to a slowing in headline job growth, with the 12-month average of job gains now under 200k for the first time in three years, as reason to instead plump for a ‘jumbo’ 50bp cut.

•Pending a potential surprise in the August CPI report, a 25bp cut seems like the most likely outcome at this stage – data suggests a gradually normalising, not a crumbling, labour market, and it would be sensible for policy to also normalise in a ‘slow and steady’ manner.

•This creates an interesting dynamic where, it appears, market participants desire a greater degree of short-term policy easing than the Fed are likely to deliver. Where participants wish policymakers would ‘get on with it’ in returning rates to neutral, those policymakers seem likely to plot a more careful path. That mixture, for now, is a rather dismal one for sentiment, and could create some short-term headwinds for equities.

•Over the medium-term, however, what the Fed do at their next meeting doesn’t matter especially much.

•As with the entirety of 2024, so far, the most important factor for global equities, and sentiment more broadly, has not been what the Fed will do next, but what they can do next. Here, policymakers still have >500bp of room to cut rates, were the economy, or financial conditions, to require it. This is the essence of the ‘Fed put’.

•This ‘put’, of course, has become stronger of late, since Chair Powell’s remarks at Jackson Hole, whereby Powell clearly stated that policymakers “seek or welcome” a further cooling in labour market conditions. Clearly, a forceful policy response would be delivered were the labour market to soften further, with such a response likely acting as a backstop for equities were it to be required. Knowledge of this ‘put’ should underpin investor confidence to remain further out the risk curve, and keep dips relatively shallow in nature.

•Looking even further ahead, into next year, the USD OIS curve currently discounts 227bp (i.e., 9 cuts) by July 2025. Although I think near-term pricing is too aggressive, I find it easier to envisage an environment where this rapid degree of rate cuts were to be delivered, particularly from the present starting point, where the fed funds rate resides 200bp above neutral.

•Though the election complicates matters, and a cut larger than 25bp to kick-off the normalisation process would smack of panic, cutting in larger clips could well be warranted later this year/early next, particularly if the current combination of solid growth + gradually falling inflation + slowly rising unemployment continues to hold true. The ‘why wait?’ question becomes an easier one to answer the more inflation fades, and the more confidence that policymakers obtain in a sustainable return to the 2% inflation target.

•The other factor to consider, here, is quantiatitve tightening. At the current pace of balance sheet run-off, the balance sheet looks set to return to its July 2020 level by the end of the year – we may as well now call this neutral, since the covid-era QE will likely never be entirely unwound (nor will the GFC-era purchases, by the way), effectively monetising $7tln of US government debt. A 25bp cut coupled with another QT taper, or even the end of QT entirely, would probably have the same macro impact as a 50bp move, albeit without the potential to cause a similar degree of market panic.

•To sum up – markets want a 50bp cut, asap, but are unlikely to get it; nevertheless, the ‘Fed put’ remains firmly intact, and has actually grown more forceful throughout the year; faster, deeper, cuts could well come to fruition however, in the longer-run, if data gives the Fed confidence to get to neutral sooner rather than later; hence, short-term headwinds for sentiment could well emerge, amid consternation over the September meeting, though the longer-run ‘path of least resistance’ continues to point to the upside.

To stay updated on all economic events of today, please check out our Economic calendar

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Samantha Luan

Economic

Canadian gross domestic product in the third quarter is likely to fall well short of the Bank of Canada's forecast, possibly coming in at less than half the estimate, with growth flagging and joblessness still rising, economists said.

In July, the BoC had forecast Canada's annualized GDP in the third quarter would grow by 2.8%, led by falling borrowing costs, growth in exports and increase in household spending.

Economists' lower expectations for growth reflect constrained consumer spending in recent weeks and the difficulty of Canada's growing ranks of immigrants to find jobs.

A slide in growth projections, especially if substantial, could force the central bank to make larger interest rate cuts than previously envisioned to prevent the economy from slipping into recession in the coming quarters, according to a half dozen economists interviewed by Reuters.

"I think it's looking less likely that the Bank of Canada's Q3 projections are actually going to take hold," said Andrew DiCapua, a senior economist at Canadian Chamber of Commerce.

In the third quarter ending Sept. 30, Canada will probably record gross domestic product growth of around 1% to 1.5% on an annualized basis, DiCapua said, adding it looked more likely that the bank would be making deeper cuts.

A slew of disappointing economic indicators coming from Statistics Canada on GDP and the labor force have pushed economists to update their models.

Last month, Statscan said economic growth in June was flat and is likely to be unchanged for July. The labor force survey last week showed that unemployment hit 6.6% in August, a seven-year peak, excluding the pandemic period. The number of hours worked by employees in August also contracted, hitting income levels.

"We have seen months and months for now that essentially the labor market has flattened out, no growth," said Pedro Antunes, chief economist at Conference Board of Canada, an independent think tank.

"That's suggesting a very weak growth for Q3," he said, adding that bank's forecast could fall short by half or more.

Household spending in Canada, which contributes 57% to the GDP, slowed to 0.2% in the second quarter as higher interest rates put a damper on consumer purchases. High mortgage costs and rent increases have eaten into disposable incomes.

Population growth at a faster rate than economic expansion also bloated unemployment numbers, with a tepid economy failing to absorb a huge influx of immigrants. That dynamic has put pressure on growth, with per capita GDP contracting for five quarters in a row.

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Bank of Canada Governor Tiff Macklem conceded last week that while the bank said it saw growth strengthening, there were some downside risks to the expected pick-up.

The BoC, after keeping its key policy rate for over two-decade high of 5% for a year, trimmed it by a quarter point three times in a row since June, bringing it down by 75 basis points to 4.25%.

David Doyle, head of economics at Macquarie, said the jobs data reinforces the risks to BoC's growth outlook and the potential for a 50 basis point rate cut in October.

The central bank is also likely to be wrong with its outlook on the output of the Trans Mountain Expansion (TMX) pipeline and growth and vehicle exports, said Randall Bartlett, senior director of Canadian economics at Desjardins.

The bank had said in its monetary policy report from July that export growth is expected to rise over the second half of the year, led by TMX and motor vehicle exports which would boost GDP.

"We really think the Bank of Canada was overly optimistic in those two sectors in particular," he said.

Desjardins is tracking a third quarter GDP of 1% against the central bank's 2.8% forecast, Bartlett said.

Source: Theedgemarkets

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WELLS FARGO

Economic

G10 Central Banks Cautiously Transition Toward Monetary Easing

One important theme so far during 2024 has been a significant, albeit cautious, change in approach to monetary policy from major economy central banks as they have started to get the upper hand in their respective inflation battles. After a pronounced global tightening cycle and a sustained period of restrictive monetary policy, an ebbing of inflation pressures has allowed many G10 central banks to begin lowering policy interest rates.

The Swiss National Bank was the first major economy central bank to deliver a rate cut in March, and has been joined by many other peer major economy central banks since. However, even as G10 central banks transition to monetary easing, some have continued to express concern about elevated wage growth and lingering inflation pressures, especially in the services sector. Over time, the views of select central banks have evolved, with the focus of concern shifting from elevated inflation to unexpected weakness in employment and economic growth. In that context, market participants continue to question how quickly monetary easing of various G10 central banks will progress. In this article, we examine major economy productivity and labor costs with the aim of offering insights into the potential pace of G10 central bank monetary easing.

The evolving central bank landscape is best illustrated by the evolution of policymaker commentary over the past several months and quarters:

•Early this year the Federal Reserve was attentive to inflation risks and needed “greater confidence” that inflation was moving sustainably toward its target. Given some easing in wage growth and a pickup in productivity, the Fed no longer views the labor market as a source of elevated inflationary pressures. With an increased focus on the employment aspect of its dual mandate, the Fed appears to be on the cusp of easing monetary policy.

•The European Central Bank (ECB) and Bank of England (BoE) have both delivered initial rate cuts; however, even as both central banks have begun their monetary easing cycles they remain concerned about underlying inflation pressures—including those from services inflation and wage growth—which might lend itself to more gradual paces of monetary easing.

•The Bank of Canada (BoC) and Reserve Bank of Australia (RBA) are two other central banks that have expressed an attentiveness toward the ways that labor market developments—such as wage or productivity growth—can affect the inflation outlook. The BoC has cut rates by a cumulative 75 bps so far, though continues to express some caution toward wage growth and services inflation. While noting improving inflation trends, the BoC has said “wage growth remains elevated relative to productivity.” Finally, the RBA has remained vigilant on wage and productivity growth. The central bank has said inflation remains high and sticky, and that there are upside risks to inflation due to high unit labor costs, as wage growth is “above the level that can be sustained given trend productivity growth.”

Other central banks have also focused on wage, productivity and cost trends at times in their monetary policy announcements. Certainly from a theoretical perspective the interaction of wages, productivity and unit labor costs is a relevant influence behind cental banks' assessment of inflationary pressures. Wage gains that are not matched by productivity increases could make the production of goods and services more costly, input cost pressures that firms could potentially pass onto consumers in the form of higher prices. In contrast, a combination of slowing wage growth or rising productivity could reduce cost pressures, potentially leading to lessening inflation trends over time.

Measuring Wages, Productivity and Unit Labor Costs

Having established the significance and relevance of productivity and labor costs for G10 central bank policymakers, a comparison of these productivity and cost developments can potentially offer insight into how different central banks from different countries may approach their respective monetary easing cycles.

Of course, the main difficulty, in our view, in providing a snapshot of productivity and costs across countries is identifying data that is comparable and timely enough in order to provide sufficiently useful insight. By necessity, there will always be some-tradeoffs involved. For our purposes, we believe the productivity and cost figures produced by the Organization for Economic Cooperation and Development (OECD) offer the best compromise. The data are quarterly in frequency, and include:

•Labor compensation per employee (a proxy for wage growth)

•GDP per person employed (a proxy for productivity)

•Unit labor costs (employment based)

Depending on the exact measure or economy chosen, the latest available data are for either Q1-2024 or Q4-2023. In that sense and because some data will relate to slightly different time periods, the figures are not fully comparable. That said, we still think they are comparable enough, and recent enough, to provide some insight into the economic environment the respective central banks face, and the approach those central banks may take.

Looking first at labor compensation per employee, it's clear why many central banks continue to express concerns about elevated wage growth. Until very recently, several economies and regions fell into the high wage growth category, which for this analysis we define as gains of 5% year-over-year or higher. These include New Zealand (6.1%), Norway (8.3%), Sweden (5.6%), the United Kingdom (6.4%) and the Eurozone (5.0%). A few fall into a moderate wage growth category of 2.5% to 5.0%, including Australia (3.9%), Canada (3.9%) and the United States (4.4%). Only a couple fall into a low wage growth category, including Japan (0.6%) and Switzerland (2.3%).

Of some note, and with the exception of Japan, recent wage growth is also significantly above the levels that prevailed from 2010-2019. Depending on the country, recent wage growth is anywhere between 1 percentage point to 5 percentage points above the levels that prevailed during that decade. Finally, in terms of the most recent developments, while some economies saw a slight easing in wage growth in late 2023 and early 2024 period, wage growth was steady-to-stronger in recent quarters in Canada, Norway, Sweden, Switzerland, the United States and the Eurozone during that period. With the possible exception of Japan and Switzerland, recent wage developments in our view offer at least some caution against easing monetary policy at an excessively rapid pace.

A Snapshot of Major Economy Productivity and Costs_1

The concerns emanating from elevated wage growth are compounded, we believe, by the recent underwhelming productivity performance of most major economies, as measured by GDP per employed person.

Among the major economies, only in the United States has there been any significant uptick in productivity, with the latest figures showing GDP per employed person rising 2.4% year-over-year. This in part might reflect an accelerated path toward the utilization of Artificial Intelligence (AI) technology, not necessarily in terms of the adoption of the technology in everyday use, but in terms of the build-out and infrastructure required to support the eventual widespread use of AI across the economy. A few countries have shown rather modest productivity gains, including Japan (0.7%), Norway (0.3%) and Sweden (0.3%). Many countries and regions, however, have shown a cyclical downturn in productivity during the most recent quarters. The most recent figures indicate productivity declines in Australia (-1.6%), Canada (-1.3%). New Zealand (-2.6%), Switzerland (-0.6%), United Kingdom (-0.6%) and the Eurozone (-0.6%).

A Snapshot of Major Economy Productivity and Costs_2

The lack of any perceptible productivity increase for many economies to offset elevated wage trends acts to exacerbate overall cost pressures. In fact, combining the labor compensation and productivity estimates above, the OECD calculates and estimates Unit Labor Costs—as the name suggests, the cost of labor required to produce a unit of output. Here, the contrast in cost pressures across the major economies becomes even more stark. For the most part, growth in unit labor costs are rising well in excess of 5% year-over-year or more, perhaps explaining why services and domestic inflation (areas that are more heavily influenced by wage and labor costs) are proving stubbornly persistent across many economies.

Among the economies where the most recent figures are showing accelerated growth in unit labor costs are Australia (5.7%), Canada (5.2%), New Zealand (9.0%), Norway (7.9%), Sweden (5.8%), United Kingdom (7.0%) and the Eurozone (5.6%). Unit labor cost growth is moderate in the United States (1.9%) and Switzerland (2.9%). Only in Japan are cost pressures absent, with unit labor costs dipping 0.1% year-over-year at the most recent reading. Overall, however, considering elevated wage growth and recent disappointing productivity trends, growth in unit labor costs is in many cases running around 4 to 6 percentage points above the averages from the 2010-2019 period, a potential source of costs pressures that could contribute to some persistence in inflation.

While not directly comparable to the OECD figures, data from national statistical agencies for more recent quarters are nonetheless illuminating. For the United States, labor compensation per hour and unit labor costs both slowed slightly further in Q2, reinforcing the trend of reducing costs pressures. In Canada, hourly compensation saw some slowing through Q2, also translating to some moderation in unit labor costs, an encouraging development. In the United Kingdom, a combination of some pickup in productivity in Q1 combined with some deceleration in hourly compensation has contributed to some slowing in unit labor cost growth, though likely still elevated at around a 5%-6% pace. And finally, Q2 data from Australia's national statistical agency indicated growth in unit labor costs that are still running in excess of 5% year-over-year.

Potential Implications For Inflation, Monetary Policy

Our assessment of productivity trends and labor cost pressures offers, in our view, some potential insights into the outlook for inflation and monetary policy across the major economies. To be sure, mapping labor cost pressures to inflationary trends is not a mechanical or one-for-one exercise. Several inflationary influences, including among others commodity prices, corporate profit margins and exchange rate fluctuations, can also act to influence inflationary trends. Moreover, the trade-off we highlighted above in identifying a data source that is sufficiently comparable as well as sufficiently timely means that key insights will be somewhat generic. With these caveats in mind, we still see some broad takeaways from this snapshot of productivity and cost trends across the major economies.

•The Federal Reserve could deliver a relatively forceful and somewhat truncated rate cut cycle.

Unit labor pressures are much lower in the United States compared to most other G10 economies, potentially offering the greatest potential for a reduction in underlying inflation trends and thus rapid rate cuts. Moreover, more highly productive economies are likely to be associated with higher neutral or long-run policy interest rates. This combination suggests a relatively aggressive and short-lived monetary easing cycle from the Fed, consistent with our view for Fed rate cuts to come to an end by mid-2025.

•Slower and steadier policy easing from Australia, Canada, Sweden and the Eurozone.

Unit labor costs for these economies were running between 5%-6% in late 2023 and early 2024, while these regions have also shown cyclical declines in productivity to varying degrees. That suggests that underlying inflation might decelerate only slowly for these economies, while somewhat lower productivity could also equate to a somewhat lower terminal policy interest rate. That backdrop suggests a steady and orderly pace of interest rate reductions. Indeed, some of these central banks that have begun lowering interest rates in a relatively regular manner (Bank of Canada, Riksbank) might still need to pause at times during their monetary easing cycle.

•Lingering inflation concerns in New Zealand, Norway and the United Kingdom.

Unit labor costs for these countries are still growing in excess of 6%, while the United Kingdom and New Zealand are experiencing cyclical productivity declines. Services and underlying inflation might take longer to abate, or be more subject to upside surprises, than for other major economies. Thus, although the Bank of England and Reserve Bank of New Zealand recently delivered initial rate cuts, we think these central banks are most at risk of needing to pause, and for longer than expected, during their respective monetary easing cycles.

•In Switzerland and Japan, limited cost pressures means only limited need for policy restriction.

We characterize Switzerland and Japan as relatively low growth economies with limited labor cost pressures. For the Swiss National Bank, that suggests few near-term impediments to further rate cuts. For the Bank of Japan, that suggests a sustainable increase in underlying inflation trends could remain something of a challenge, suggesting some risk of more gradual rather than more rapid monetary tightening.

To stay updated on all economic events of today, please check out our Economic calendar

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Cohen

Economic

Prime Minister Datuk Seri Anwar Ibrahim said on Tuesday that the Malaysian government is willing to learn and adapt from China to foster a conducive environment to strengthen investment in the country.

Anwar said while the policies have been implemented under the Madani framework, the government remains open to suggestions for further improvements.

“We are not here to suggest that this [Malaysia] has a perfect system and policies. We are here to govern and to learn and make the necessary adjustments [to our policies],” Anwar said in his keynote speech at the 17th World Chinese Entrepreneurs Convention (WCEC).

“You (China) advise us (Malaysia) what else needs to be done to foster an environment that is conducive to investment and innovation,” Anwar said.

The prime minister stressed that Malaysia and China have enjoyed a long-standing bilateral relationship, underpinned by robust trade and investment ties.

“We believe that a stronger bond and strategic relations with China would not only help Malaysia but the region immensely, and we will continue to embark on that policy,” he said.

He noted that China remains Malaysia’s largest trading partner for 15 consecutive years, and the fifth largest foreign investor in 2023, with total trade reaching US$98.80 billion (RM450.84 billion).

“The visit of Chinese Premier Li Qiang in June this year reaffirmed the enduring friendship and mutual respect between Malaysia and China,” Anwar added.

Li’s official visit to Malaysia in June saw a total of 14 memorandum of understandings and agreements (MOUs and MOAs), protocols and joint statements involving nine Malaysian ministries exchanged between China and Malaysia.

Source: Theedgemarkets

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Justin

Cryptocurrency

The digitalisation of large parts of everyday life and of the economy also extends to payment transactions. In the euro area, for example, the share of cash payments at the point-of-sale (i.e. in physical shops) declined from 79% to 59% between 2016 and 2022, mainly for the benefit of card payments. If this trend continues or even accelerates, the role of cash and thus central bank money would decrease significantly for the benefit of private payment service providers. This also raises concerns about insufficient competition, inclusiveness, privacy protection as well as strategic autonomy of sovereign states.

Against this backdrop, a heated debate about retail digital money issued by central banks – central bank digital currency – began in 2016. Due to the growing number of papers that present macroeconomic models examining CBDC and, on the other hand, quite detailed plans by central banks to issue CBDC, the question is to what extent the assumptions and scenarios contained in these macroeconomic models of CBDC correspond to the objectives and emerging design choices communicated by central banks.

What central banks have announced on CBDC

All central banks working on CBDC have announced that CBDC would not be remunerated, that holdings would be limited, and that CBDC issuance would aim to preserve the roles of central bank money in retail payments in a digitalised world. Another set of key features announced for CBDCs are those that allow to somewhat decouple the store of value from the means of payments function of CBDC and that facilitate the preservation of a single pool of money for citizens. For example, the European Central Bank announced a so-called ‘reverse waterfall’ so that users would not have to prefund a digital euro account before making payments because the digital euro account can be linked to a commercial bank account. Last but not least, central banks have announced access restrictions for CBDC. For example, the ECB plans to only allow natural persons who are permanent residents of the euro area (or possibly of the European Union), and temporary residents (e.g. travelers) to be able to hold digital euro within the limits.

Gaps and fallacies in the macroeconomic literature on CBDC

Our paper identifies in particular the following issues which future research on the macroeconomics of CBDC should address.

First, the modelling in all the papers assumes that the decision to issue CBDC hits a static monetary and financial system. But the decision to issue CBDC is a ‘conservative’ response to profound changes of the monetary system relating to digitalisation. In other words, the macroeconomic effects of not issuing CBDC are likely to be more relevant than the ones of issuing it. Overlooking this means very likely ending with wrong conclusions.

Second, many papers do not consider the design features of possible CBDCs as outlined more recently by central banks. Most papers assume remunerated CBDC, or that CBDC is of considerable volume.

Third, as real-world CBDCs are expected to be unremunerated, it is difficult to specify a clear difference between CBDC and cash in macroeconomic models. None of the papers develops this difference in a way that could imply macroeconomic consequences.

Fourth, and relating to previous points, the papers generally tend to assume, in line with earlier narratives, that the issuance of CBDC will considerably increase the amount of central bank money in circulation. But it is more likely that the combined decline of banknotes in circulation (relating to their lesser use) and the announced CBDC design features will lead to a declining volume of central bank money in circulation, even if CBDC is issued.

The way forward on understanding the impact of CBDC

Under the assumption of ever-progressing digitalisation of society, the macroeconomic effects of issuing CBDC should be identified starting from the counterfactual. If retail payments are exclusively left to the private sector and central bank money would be marginalised, then the amount of central bank money in circulation will significantly shrink, the length of central bank balance sheets would decline and the banks would benefit from deposit inflows, payment costs will increase (due to increasing market power of the successful firms), monetary and financial stability will be weakened (as the unifying convertibility test of all private moneys, i.e. to be exchangeable at sight against central bank money, will have become remote or inexistent), and strategic autonomy. In this sense, the issuance of CBDC aims at preserving economic efficiency and stability by preserving the current role of central bank money – a genuine public good.

Of course, it cannot be excluded that some central banks and legislators will, in the future, design CBDCs which better match the assumptions taken in the macro models reviewed. For this reason, the models remain useful for future scenarios. Moreover, macroeconomic researchers could review the macroeconomic predictions of the models for CBDCs designed as in recent central bank communications.

Source:Ulrich Bindseil

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More Weakness for the USD to Come as the FED Cuts 25bps

Tropical Storm Francine Disrupts Gulf Coast Oil, Gas Output

Source: Theedgemarkets

Macro Trader: Short-, Medium-, And Long-Run Thoughts On The FOMC Outlook

Canada's Third-quarter Growth Seen Much Slower Than Bank of Canada Forecast

DOWNSIDE RISKS

Source: Theedgemarkets

A Snapshot of Major Economy Productivity and Costs

G10 Central Banks Cautiously Transition Toward Monetary Easing

Measuring Wages, Productivity and Unit Labor Costs

Potential Implications For Inflation, Monetary Policy

Anwar: Malaysia Open To Learn From China On Fostering Investments

Source: Theedgemarkets

The Macroeconomic Impact of CBDC: Why Model Predictions May be Wrong

What central banks have announced on CBDC

Gaps and fallacies in the macroeconomic literature on CBDC

The way forward on understanding the impact of CBDC

Source:Ulrich Bindseil

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