MNI INTERVIEW: Warsh May Defer To Bessent On FIMA Usage

Federal Reserve Chairman Kevin Warsh may not oppose expanding and allowing the FIMA repo facility to be used for currency intervention, on grounds that decisions over international facilities ultimately rest with the White House rather than the FOMC, former New York Fed trader Joseph Wang told MNI. 

"You can make a very strong case that the international stuff is a political decision -- that the Fed's swap lines, FIMA facility, that's foreign policy, that's not part of monetary policy independence," Wang said in an interview. "It's definitely gray enough that the president would be given deference."

Treasury Secretary Scott Bessent has encouraged Japan to use the Fed's foreign and international monetary authorities repo facility to fund its yen exchange rate intervention rather than selling U.S. Treasuries, calling on the Fed to upsize its per counterparty limit from the current USD60 billion. As of last Wednesday, the facility had zero usage.  

Allowing the administration to promote the tool for its own purposes is likely not seen by Warsh as ceding core central bank independence, Wang said, adding he's also skeptical that Japan has any real need for the facility. 

Warsh wrote to Congress following his confirmation hearing to say Fed independence does not extend to areas affecting international finance, he noted.

THEATRE

FIMA "could play a role where it's slightly less emergency-driven than the swap lines. So now swap lines would be the ultimate emergency, but you could use this at a level lower," Wang said. 

Outside of the Covid-era dash for cash when a number of foreign authorities tapped the facility, Switzerland also used it in March 2023 to source dollar liquidity amid an acute banking sector crisis. 

It's unclear however whether Japan has any reason to use the backstop, as it has many better sources of dollar liquidity, Wang said. It can access a standing swap line that it has drawn on heavily in past crises, borrow more cheaply through private repo markets, and holds outsized dollar reserves in the New York Fed's foreign repo pool. 

"I view this as more of just theater to convince the market that you have a lot of dollars to intervene. And maybe if you rope the Fed in and hint that maybe you could really extend the FIMA repo facility pool, then that would create more of a perception that investors should not be fighting this." 

But it isn't likely to work until Japanese interest rates are adjusted, he added. The yen has weakened since the joint intervention last month, last standing at JPY159.06.

DURATION SHIFT

As Warsh's wider balance-sheet reforms take shape, the FOMC will likely move first to adjust the duration of the Fed's asset portfolio rather than its overall size, Wang said.

Of the three parameters shaping the balance sheet debate under Warsh, duration is an "easier conversation" to have, compared to shedding MBS and shrinking the total size of the portfolio. The FOMC will likely endorse slowly moving to a bill-heavier balance sheet by reinvesting in bills, he said.

The MBS issue has broad consensus but no agreed mechanism. Fed officials have ruled out selling MBS at a loss, as doing so would widen the spread between mortgage rates and Treasuries at a moment when the housing sector is already under pressure from high borrowing costs, he said.

The size of the balance sheet is likely to remain largely untouched for an extended period, even though it draws the most market attention, he said. Task force leader Raghuram Rajan is a prominent skeptic of a large balance sheet but co-lead Jeremy Stein has been more sympathetic to a larger footprint. (See MNI POLICY: Warsh Task Forces Will Need To Woo FOMC Skeptics)

FIMA usage would expand the balance sheet but only temporarily, and "I don't think it would bother him," Wang said.    

"The size is the one that's going to take a very long time to change, and it's going to be the least interesting one for quite some time." 

MNI INTERVIEW: Ex-BOJ's Sekine Sees Likely Sept Hike

The Bank of Japan Board will find raising its policy interest rate to 1.25% in September an easy decision as underlying inflation has reached 2% and may have risen above that level, former BOJ chief economist Toshitaka Sekine told MNI, noting that pressure from Washington over the weak yen will also support a hike.

Pointing to some board members’ view that inflation had already reached the target, Sekine said he shared their concerns about upside risks to prices, but found it difficult to pinpoint underlying inflation using a single indicator, noting various measures should be monitored. Core CPI excluding fresh food and institutional factors, as well as core CPI excluding fresh food, energy and institutional factors, had largely remained above 2% since fiscal 2022, said Sekine, now, a professor at the School of International and Public Policy at Hitotsubashi University. 

“My view is that underlying CPI inflation has reached 2%... May be above 2%," he noted, pointing to core CPI excluding fresh food and institutional factors and core CPI excluding fresh food, energy and institutional factors, which rose 2.7% and 2.0% y/y respectively in July. Core CPI excluding food, energy and institutional factors rose 1.5%. "The BOJ is raising the policy rate to anchor it to around 2%. That’s clear logic. If the core CPI slows to 1.2% of 1.1%, that would be trouble. But the BOJ expects core CPI to accelerate in the second half of this fiscal year.”

While it was impossible to determine the natural rate of interest scientifically, if underlying CPI inflation is firmly anchored around 2%, the natural rate of interest is roughly zero, meaning it would not be unusual for the BOJ to raise its policy rate to 2%, or possibly 2.5%, he argued.

Sekine in May correctly predicted the Bank would hike the policy rate at its June meeting, noting greater pressure on prices building in the economy. (See MNI INTERVIEW: Ex-BOJ's Sekine Sees June Rate Hike)

YEN PRESSURE

Sekine said market players appeared skeptical of the BOJ's assessment that underlying CPI inflation had not yet reached 2%, contributing to growing market expectations that the bank was behind the curve and putting pressure on the yen. He said market participants also believed the BOJ was reluctant to raise rates because its executives were concerned about the political reaction.

“Judging from those elements, market players’ answer is to sell yen,” Sekine said.

If the BOJ clearly stated that underlying inflation was around 2% or possibly slightly above it, markets would better understand that rate increases were aimed at firmly anchoring inflation around 2%, helping to reduce yen-selling pressure, he added.

Aides advocating a dovish approach had strongly influenced Prime Minister Sanae Takaichi's opposition to higher interest rates, prompting markets to sell the currency, he argued, noting this was a natural challenge to a government and central bank pursuing contradictory fiscal and monetary policies.

As a result, U.S. Treasury Secretary Scott Bessent had waited a long time before becoming impatient and warning about contradictory fiscal and monetary policies through coordinated foreign exchange intervention, Sekine added, noting that the intervention was a way to buy time. Bessent almost certainly wanted the BOJ to raise its policy rate, he said, noting another bout of yen depreciation resulting from a decision not to raise rates in September could provoke Washington's anger.

Bessent has said he has known Governor Kazuo Ueda for 15 years and has great confidence in him, while describing Ueda as very market-savvy.

FISCAL POLICY

Sekine said it was contradictory for the government to implement demand-stimulus measures while Japan was experiencing inflation. Such measures would put further upward pressure on prices, leaving the authorities with either the option of raising interest rates or suspending fiscal measures, he said.

Market participants share that view and believe the government is comfortable with the BOJ's assessment that underlying CPI inflation has not yet reached 2%, which would imply that monetary easing remains necessary, Sekine said.

“Takaichi understands that she is walking a tightrope and that if financial markets collapse, her political power will end,” he said.

MNI NORGES WATCH: Aug Hold Seen On Back Of Softer Inflation

Norges Bank is widely expected to leave its key policy rate on hold at 4.25% this week, despite placing weight on a hike in its most recent rate projections, as softer-than-expected inflation data has boosted the case for waiting and reassessing in the September forecast round.

August is an interim meeting, coming between the quarterly forecasts, and while Norges Bank's policy committee has made clear further tightening is likely irrespective of the news flow from the Iran conflict the precise timing has been left open with the central bank moving away from meeting specific guidance (see MNI INTERVIEW: Norges Head Sees Rate Hike Despite Iran Deal ).

The June guidance was that "it will likely be necessary to raise the policy rate further at one of the forthcoming monetary policy meetings” with its rate projection pricing in a Q3 hike. 

The question of whether the move is more likely to come in August or September has swung in favour of the latter. Norges Bank had forecast that inflation on the target, core, measure (CPI-ATE) would be 3.3% in June and July but it fell to, and held at, 2.7% in those two months.  The two undershoots makes a case to wait-and-see if the softness is fleeting  but with inflation having overshoot target for some four years Governor Ida Wolden Bache is likely to continue to want to signal a readiness to hike. 

OPTIONS

One option for Wolden Bache and her colleagues is to leave the June guidance in place. Another is to alter the guidance statement to something less explicit, such as highlighting the reassessment to come in the September Monetary Policy Report, while using her statement and press conference to continue to stress that the door is wide open to a hike.

How Norges Bank's analyses the recent softer inflation will be keenly watched -- if the emphasis is on ephemeral factors, most notably shifts in food prices and concerns over service sector inflation, are flagged up, the messaging will still be hawkish. 

The currency, which often correlates closely with shifts in short-term oil price along with swings in global risk-on/off sentiment, is a wildcard for the Norwegian central bank but is currently close to Norges Bank's projected level. On the output side, Norwegian oil investment and production tends to be robust to price shifts and the bank's projection of a gentle decline in investment appears to be holding good (See MNI INTERVIEW: Oil Investment Lower As Norges Bank Expects ).

MNI INTERVIEW: Oil Investment Lower As Norges Bank Expects

Norway’s oil investment is set to continue albeit on a gently declining path in coming years, in line with Norges Bank's June predictions, despite the higher crude prices seen after the onset of the Iran war, Marius Menth Andersen, Chief Economist at Offshore Norge, told MNI in an interview.

With the Norwegian industry production close to full capacity and a number of major projects coming to an end, the near-term outlook remains broadly in line with the central bank’s prediction in its latest quarterly forecasts of a gentle decline in petroleum investment between 2026 and 2028, with current high oil prices having only a marginal effect, according to Andersen.

"We are not a significant swing producer in the market. It's the long-term outlook that shapes the investment outlook ... if you look at the investment spend on production ..which is the factor that could be affected by the short-term movements of oil prices, it has stayed pretty much in line with predictions at the year's start," Andersen said.

He foresees investment stabilising after 2028 but warns of political risks, with budget negotiations underway and parts of the Labour-lead governing coalition in favour of cutting back on oil production.

Oil investment is set to be around NOK270 billion in 2026, which is predicted to drop off around 5% next year, Andersen said.

"It's a steady downtrend until around 2028, I believe, before it flattens out ...we have to remember that we are dropping off from quite high levels. So, the downward trend in the coming years is to be expected if we move over the peak of investment, and then the investment level is set to stabilise around historical levels," he said.

DECLINES CURBED

In the June Monetary Policy Report Norges Bank, noted that its intentions survey indicated that petroleum investment would fall somewhat more in 2026 and 2027 than it had previously predicted but that the price rise following the closure of the Strait of Hormuz  would "curb the decline."  Andersen, however, stressed that recent price movements are only relevant at the margins.

"Norway is not a swing producer in the same way as American shale or OPEC volumes. We produce near full capacity, pretty much regardless of the short-term movement in oil and gas prices. High prices can, on the margin, incentivize some in-field drilling," he said, adding that developments in the Strait of Hormuz do not change the longer-term picture, which is of continued strong European demand for Norwegian gas and oil.

POLITICAL RISK

The Labour Party, which has been broadly supportive of the oil industry, formed a minority government after last year's election and it relies on support from three parties sympathetic to lowering oil and gas activity.

"In October, when the state budget is presented, they have the opportunity to strong arm the minority government into giving them some wins on the climate side, and that's a significant risk for us because every year they propose either new taxes or holds to exploration and so forth... they haven't gotten significant wins so far, but this introduces political risk into the companies investment decisions," Andersen said.

MNI RBA WATCH: Board Ready To Hike Further - Bullock

The Reserve Bank of Australia Board stands ready to raise the 4.35% cash rate if incoming data push back its current timeframe for returning inflation to target, which it sees occurring by December 2027, Governor Michele Bullock told reporters Tuesday.

The Board is not ruling out further rate increases if inflation remains above target for longer than currently forecast, Bullock said, after its unanimous decision to hold the cash rate steady as expected. (See MNI RBA WATCH: Board To Hold On Lower Q2 CPI Print)

“The message today is that in waiting, the Board isn't ruling out that there might be a need for further interest rate rises if we look like we're off a path which takes us with inflation remaining above the target for much longer than in the forecasts," she noted. 

Tuesday's pause followed three 25-basis-point rate increases this year, which unwound all of 2025's monetary easing and demonstrated the RBA's commitment to bringing inflation down, Bullock said.

Monetary policy was now somewhat restrictive, she added, pointing to signs of slowing in the labour market, a rise in unemployment, softer economic growth and weaker housing activity as evidence that policy was working. However, slowing growth and a rising unemployment rate did not mean policy was too restrictive or that the RBA needed to reverse course, she said.

Markets firmed their expectations for another rate increase following the release of the RBA's latest forecasts and Bullock's appearance, with a November hike attracting a 54% probability and markets pricing in a 4.64% cash rate by March 2027.

UPSIDE RISKS

In its updated Statement on Monetary Policy, the RBA lowered its peak trimmed mean inflation forecast by 50bp to 3.3% in the December quarter. It still expects trimmed mean inflation, its preferred measure, to return to the 2–3% target band by December 2027, unchanged from its May outlook, based on a slightly lower market-implied cash rate path that sees the rate peaking at 4.5% by June 2027.

Despite the lower CPI forecast, Bullock said inflation risks remained firmly skewed to the upside, citing the Middle East conflict, inflation expectations, the pace at which higher costs feed through to consumer prices and the extent of excess demand.

Bullock said Board members held diverse views on the severity of inflation risks, but all were concerned about the potential for inflation to remain higher than expected.

INFLATION TIMELINE

Bullock noted the RBA's current timeframe for returning inflation to target was reasonable and consistent with its dual mandate, despite it holding above the target band for some time. The RBA's mandate gives it flexibility to bring inflation down over time while avoiding unnecessary costs to employment and economic activity, she said. Forecasts were inherently uncertain and the RBA would reassess its outlook as new data emerged and adjust monetary policy if its forecasts proved incorrect.

However, future supply shocks could require a policy response, particularly if they occurred frequently or began to lift inflation expectations. "[The RBA] has reacted firstly to the excess demand. We have also been reacting to what's been going on with the supply shock, and the risks that I pointed to are about supply shocks," she noted. "Given the circumstances we're in, we have limited ability to completely ignore any future supply shocks. We have to be very careful."

MNI INTERVIEW: China Oil Import Slump Temporary - Economist

China's recent sharp decline in crude oil imports is likely to prove temporary as refiners gradually replenish inventories if oil prices ease, a senior energy economist told MNI, adding it is too early to conclude the conflict involving Iran has accelerated China's peak oil demand.

"The duration of the current pullback in imports will depend on how long the Strait of Hormuz remains closed and how oil prices move," said Lu Ruquan, president of the CNPC Economics & Technology Research Institute, a think tank under China National Petroleum Corporation.

Lu said the recent collapse in imports reflected temporary supply adjustments and weaker refining demand rather than a structural decline in oil consumption. Chinese firms are also unlikely to rush back into the market in a way that would sharply lift global prices, he added, pushing back against warnings that renewed Chinese buying could expose a supply shortage.

China's crude imports fell 20%, 29% and 41% y/y in April, May and June, respectively. June imports totalled about 29 million tonnes, or 7.1 million barrels per day, the lowest monthly level since October 2016 and well below the 2025 average of 11.6 million bpd, official data showed. (See MNI INTERVIEW: Less Demand Eases China's Oil Supply Pressure)

A temporary surplus of refined products also contributed to the decline, Lu said. Higher oil prices weakened demand, prompting refiners to cut operating rates and draw down inventories to limit losses.

Government policies also reduced China's reliance on imported crude. Without drawing on strategic reserves, authorities freed up the equivalent of about 200 million tonnes of additional supply by optimising refined-product exports, accelerating electric-vehicle adoption, increasing domestic oil production and expanding coal liquefaction and gasification, Lu said. Those measures largely offset the roughly 230 million tonnes of crude China imports annually through the Strait of Hormuz. 

Over the medium to long term, Lu said China's crude import demand will depend on the relative economics of imported oil and domestic renewable energy.

While rising demand for petrochemical feedstocks has yet to offset the sharp decline in gasoline and diesel consumption, Lu described the transition as gradual and still in its early stages rather than evidence that China's oil demand has already peaked. Stronger economic growth would also lift demand for petrochemical products and support overall oil consumption, he said.

"If the Strait of Hormuz reopens and oil prices fall sharply, the shift to electric vehicles could slow," Lu added. 

ENERGY SECURITY

Although China still imports more than 70% of its crude oil, its overall energy self-sufficiency rate is about 84%, supported by rapid renewable-energy deployment and abundant coal resources that amount to 5.9 trillion tonnes, Lu said, describing the country's energy system as "sensitive but not fragile".

Every 300 million tonnes of coal can be converted into roughly 100 million tonnes of oil equivalent, while coal liquefaction and gasification remain commercially viable when crude prices are around USD60-65 per barrel, he added.

Lu cautioned, however, that China's growing dependence on imported critical minerals represents a new strategic vulnerability. Copper, cobalt, nickel and lithium are essential to electrification, while China relies on imports for about 80% of its copper supply.

He argued competition for critical minerals is likely to become more intense than competition for oil, citing U.S. efforts to build critical-mineral supply chains and strategic reserves that exclude China.

MNI INTERVIEW: Warsh's 'Talk Less' Fed Reforms Much Needed

Kevin Warsh's decision to roll back forward guidance and go silent on his economic assessment is a defensible, even necessary, break from the Powell Fed, and markets reacting badly to the shift are behaving "like an addict," former New York Fed economist Dominique Dwor-Frecaut told MNI, adding she expects the Fed to keep rates on hold through year-end.

"In reality, the world is a very messy and uncertain place. The risk with providing policy guidance is that you project more certainty than you actually have," she said in an interview. 

The heavy Treasury sell-off that followed Warsh's July press conference, partly a kneejerk reaction to the new Fed chairman's refusal to spoon-feed markets, "is like trying to wean an addict," she said. "You take out the drugs, they don't take it well, even though in the long run it is in their own best interest." 

The cold-turkey approach that Warsh has taken is tenable, not that the rookie Fed chair hasn't made missteps, said Dwor-Frecaut, current chief U.S. economist at Macro Hive. 

At the press conference, he appeared comfortable letting markets do the Fed's tightening for it. And a Financial Times report last week citing people familiar with Warsh's thinking said he would consider raising interest rates in September if markets priced in higher borrowing costs -- implying Fed policy is dictated by markets. 

"If the idea was the lack of credibility would push up long term rates, so you have to hike to make up for the lack of credibility -- I don't think Warsh or anyone on the FOMC would agree," she said. "You build credibility by taking good decisions." 

Guidance that turns out wrong can add more volatility than the underlying economic surprises alone would generate, she said. And if the Warsh Fed makes the right decisions, the kind of volatile market reaction to pared-back guidance will likely calm, she said.

INFLATION COULD UNDERSHOOT

Hike expectations have already receded after a surprisingly soft July jobs report and a pullback in oil prices last week, and Dwor-Frecaut's base case is for the Fed to remain on hold through year-end on encouraging inflation data, she said.  

Workers currently have little bargaining power, so cost shocks from tariffs or energy prices are being absorbed through lower real wages and reduced household income rather than passed through to broader prices, she said. Additionally, the improving external balance suggests that the U.S. economy is not overheating. 

The Trump administration's immigration crackdown, wider economic uncertainty and potentially AI are dampening wage growth, she said. 

"Somehow unemployment must not be a very good measure of the pressure on the labor market, otherwise wage growth would not be slowing the way it is today," she said. "My research house estimates July CPI is likely to undershoot the consensus, and that could sway people like (Minneapolis Fed President Neel) Kashkari because he's a risk management guy, and give more conviction to the doves." (See MNI INTERVIEW: Fed Set To Hike Rates Once This Year-Haslag) 

Growth has stayed resilient because falling real household income has been offset by a falling savings rate, but that dynamic is unsustainable, she said. A flare-up in Middle East, an equity selloff or other shock could upset the fragile balance, though it is not her base case.

COMPETITION OF IDEAS

With Warsh refusing to engage in the economic discussion, markets need to widen their attention to other influential FOMC members and weigh their individual arguments. 

"Having a chair stepping back, it gives more scope for FOMC members to form their own opinions," she said. "Having this discussion of ideas on based on their own merit, rather than based on who supports them, I think it's a very, very healthy development."  

Reducing the number of meetings to six from eight and replacing the SEP and dot plot with something closer to the Bank of England's quarterly monetary policy report would improve Fed communication, she said. 

"We need a much richer submission, which will tell us how the FOMC views the economy and their reaction function. We don't need policy guidance, but we need those two things, and if we can have them in writing a few times a year, it would be fantastic."