On the Impact of a Fed Rate Hike; Healthy Lifestyle and Cancer!

From: aditya rana
Date: Sat, Jun 4, 2016 at 1:20 PM
Subject: On the Impact of a Fed Rate Hike; Healthy Lifestyle and Cancer!

Hi!,

The prospects of a Fed rate hike in the summer months have significantly increased following stronger economic data and subsequent comments by various influential Fed officials. The question therefore arises – what is the likely impact of the rate hike on economic U.S. economic growth and stock market as well as global risk assets? A recent note by the veteran economist and advisor Paul Kasriel sends some light on the subject. To summarise:

-The recently improving economic data – retail sales, housing starts and industrial production – point towards a bounce back in the US economy from its winter slumber. In addition, various measures of consumer inflation have accelerated in recent months (see chart below).

-However, the Fed runs the risk of causing a stall in economic activity in later in the year due to the negative impact of a rate hike on the growth of total “thin-air” credit (i.e. monetary base plus bank credit).

-To explain – the Fed funds rate is the price of overnight funds in the inter-bank market and is determined by supply and demand. The demand for reserves is normally based on the amount of reserves required to be held by banks, but with the Fed now paying interest on reserves, there is considerable excess demand for reserves than would normally be the case. The supply of reserves is determined by the Fed through its buying (increase reserves) and selling (decrease reserves) of securities in the open market.

-If the Fed has an objective to raise rates, it will reduce the supply of reserves relative to the demand for reserves. The Fed funds hike in December 2015 coincided with a sharp fall in the monetary base (reserves plus currency in circulation), and while reserves subsequently increased they have not risen to the level prevailing before the rate hike (see chart below).

-Looking at the negative impact of the Fed rate hike on thin-air credit growth (see chart below) – the annual growth of 6.7% (close to its long-term median growth of 7%) over the 3-months ending in October 2015 , dropped precipitously to a level of only 1.1% over the 3-months ending January 2016, and has since recovered to a low level of 3.8%.

-Looking at the two components of thin-air credit, bank credit and the monetary base (see chart below) – the growth in bank credit has moderated to 6.0% in March and April 2016, while the monetary base is still contracting at an annualized rate of minus 2.5%. If the Fed raises rates this summer, the pace of the decline in the monetary base is likely to accelerate and unless bank credit recovers miraculously, slowing down thin-air credit slow down which is likely to negatively impact economic activity and the price of most risk assets (besides US Treasuries).

An insightful piece by Kasriel which sheds light on the plumbing of the monetary system which has a big impact on economic activity as well as risk assets globally. The link between the two can be somewhat underappreciated by market participants (at their peril!). In addition, what happens to US monetary policy has an outsized impact on global leverage as recent research by the ex-BIS chief economist Ceccheti has demonstrated. Some key excerpts:

– “The plots below show the median leverage ratios from a sample of 994 publicly traded financial institutions in 22 countries over the period from 1998 to 2014.The left-hand panel shows the impact on the leverage ratio for each of six different types of financial firms from a single quarter of easing in the institution’s home-country monetary policy. The short-term impact of policy easing is minimal. However, the leverage of some intermediaries rises markedly when the accommodation is sustained. In the right-hand panel, the green bars depict the impact of accommodation that lasts for one year, while the purple bars show the effect after two years of policy easing. In the latter case, for example, the leverage of the median bank rises from 10.2 to 12.5.”

So, how do these findings relate to spillovers from the Fed’s actions? It turns out that the impact on leverage abroad from an easing of U.S. monetary policy is a multiple of the impact of easing by the home-country central bank! For example, non-U.S. bank leverage jumps from a baseline of 15.8 to 23.6 following two years of U.S. accommodation (see chart below).”

-“Why is the U.S. spillover so enormous? As we emphasized in an earlier post, the dollar’s position in the global economy is special. Not only are substantial quantities of dollar securities and loans held abroad, but many EME borrowers raise funds in U.S. dollars. Indeed, the parallel Global Dollar system that operates outside the United States is probably larger than the liabilities of banks operating within the United States. The dollar also continues to dominate currency, trade and broader financial transactions. We suspect that it is this Global Dollar system that magnifies the impact of changes in Federal Reserve policy on the behavior of intermediaries around the world.”

Healthy Lifestyle and Cancer:

Recent research from the Harvard School of Public Health indicates that incorporating a healthy lifestyle can prevent up to half of cancer deaths:

Washington Post, May 19, 2016:

-Imagine a powerful new treatment that could cut all cancer deaths by more than half. In the age of $10,000-a-month cancer drugs that often extend life by the thinnest margins — a few precious months before the cancer rages back — the idea of such a potent effect sounds like a fantasy.

-But it isn’t, exactly. A new study published in the journal JAMA Oncology estimates that by applying insights we’ve had for decades — no smoking, drinking in moderation, maintaining a healthy body weight and exercising — more than half of cancer deaths could be prevented and new cases of cancer could drop by 40 percent to 60 percent.

-The excitement, funding and much of the prestige in the fight against cancer is fired up by the immense progress being made in understanding the molecular underpinnings driving the disease. Advances in science have created real hope for new generations of powerful drugs and combination cocktails — along with tremendous hype that almost certainly overstates the amount of progress that is just around the corner. This simple truth remains: Even as science gains powerful insights into many types of cancer, there’s still a lot that scientists don’t yet fully understand about its sinister biology. Meanwhile, the new study drives home an important point: Scientists already know how to prevent a large swath of cancer deaths.

-"Some of the declines we have already seen in cancer mortality — the large decline in lung cancer — that was because of efforts to stop people from smoking," said Siobhan Sutcliffe, an associate professor in the division of public health sciences at Washington University in St. Louis not involved in the research. "Even while we’re making new discoveries, that shouldn’t stop us from acting on the knowledge we already do have."

-To make their estimates of how lifestyle changes could affect cancer’s toll on the population, a pair of researchers from Massachusetts General Hospital and the Harvard School of Public Health used large ongoing studies that have closely followed the health and lifestyle habits of tens of thousands of female nurses and male health professionals. They divided people into two groups: a low-risk group that did not smoke, drank no more than one drink a day for women or two for men, maintained a certain healthy body mass index, and did two-and-a-half hours of moderate aerobic exercise a week or half as much vigorous exercise.

-The team compared cancer cases and cancer deaths between the low- and high-risk groups and found that for individual cancers, the healthy behaviours could have a large effect on some cancers: The vast majority of cases of lung cancer were attributable to lifestyle, as well as more than a fifth of cases of colon cancer, pancreatic cancer and kidney cancer. Then, they extrapolated those differences to the U.S. population at large, finding an even larger proportion of potentially preventable cancer cases and deaths. For women, they estimated 41 percent of cancer cases were preventable and 59 percent of cancer deaths. For men, 63 percent of cancer cases were potentially preventable and 67 percent of deaths.

-There are caveats to this — the high-risk group in the study is healthier than the general U.S. population, so there are reasons the numbers may be slightly overestimated. But Mingyang Song, the researcher who led the work, argues the numbers are a good approximation because they may be underestimating the effects of lifestyle, too, because they selected a narrow range of lifestyle factors. "We should not ignore the knowledge we already learned over the past decade, or the past 100 years," Song said. "We should use this knowledge to move the policy forward and also make the public aware that we already have this knowledge and we can utilize this knowledge, to improve the current cancer prevention effort."

-For years, the fight against cancer has been waged on two related, but largely siloed fronts. At the cutting-edge of science are physicians and researchers with ever more powerful tools to probe how cancer works and invent new ways to stop it. This fight is often waged near the end of the disease, once it has taken hold and doctors and patients would do anything to loosen its grip, even temporarily. On the front lines of public health are researchers who often focus on strategies to reduce deaths by preventing the disease altogether, trying to understand how to screen for it, or what environmental exposures should be avoided.

-"There sort of are two worlds, one world focused on therapy and another world focused on prevention, and I do think those two worlds are coming together now," said Tyler Jacks, director of Integrative Cancer Research at MIT.

This summer, MIT — a place teeming with biologists and engineers who have tended to favour the first approach — will hold a symposium focused on early detection and prevention of cancer. Jacks, said that prevention and early detection — and even untangling exactly why lifestyle risk factors such as obesity increase risk for cancer — are very much on people’s minds. "There’s room for both. Let’s not ignore the power of therapy and its applications for people who have cancer. We simply cannot ignore that," Jacks said. "But why can’t we also include, as we think about cancer control more broadly, the lifestyle issues, the human behaviour issues, that can lower overall risk."

Here’s to incorporating a healthier lifestyle – including diet and exercise – to reduce the risk of most serious illnesses.

Regards,

Aditya

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