Dhiraj Nayyar writes: India’s central banker Raghuram Rajan certainly cheered investors with his second surprise rate cut in less than two months: The country’s benchmark stock index temporarily zoomed to a record after Rajan lowered the repruchase rate,  the rate at which commercial banks borrow from the Reserve Bank of India — by 25 basis points to 7.5 percent.

The move should boost investment and consumer sentiment in a country that remains burdened by high interest rates relative to the rest of the world. It should add to any growth momentum generated by Prime Minister Narendra Modi’s first full-year budget.

India does confront several major structural problems that hamper the economy — in land, labor and capital markets — most of which emerge from the excessive and misplaced intervention of its leviathan state. None of those problems, however, preclude a sound macroeconomic environment characterized by low and stable inflation, which is critical to investor and consumer confidence. Between 2010 and 2014, when GDP growth rates cratered, rampant inflation damaged India’s prospects as much if not more than a lack of policy reform. That’s why Rajan has made reining in inflation his top priority.

Three factors could explain Rajan’s decision — all of which involve less-than-flashy measures announced by the government this week. First, Rajan appears convinced that Modi’s administration is serious about improving India’s fiscal position. The central bank governor would always have been reluctant to ease monetary policy as long as fiscal policy was too loose and fueling inflation on its own. Ironically, in the budget, the government actually delayed its fiscal consolidation targets for a year.

Second, for the first time, the government and the RBI have signed a formal agreement on a new montary policy framework.  The Finance Ministry has given the central bank an explicit inflation target of 4 percent, plus or minus 2 percent. Any deviation from this target would require an explanation from the RBI governor.

Third, the government has laid out plans for radical reform of the RBI.  The bank has been stripped of its responsibility for managing the government’s debt — which posed a conflict of interest given its task of setting rates. More importantly, interest rates will henceforth no longer be decided by the governor alone but by a monetary policy committee.

Modi’s budget may not have been radical enough for some critics, focusing more on incremental reforms rather than the kind of sweeping changes many free-market proponents wished to see. But bringing the Finance Ministry and the RBI onto the same page is a major accomplishment in itself. “This makes explicit what was implicit before — that the government and the Reserve Bank have common objectives and that fiscal and monetary policy will work in a complementary way,” Rajan said in today’s RBI statement. That in itself should be a boost to growth, no less than the mood of India’s giddy punters.

Justin Fox writes:  The Federal Reserve System is a strange, ungainly beast. Its strangest and ungainliest appendages are the regional Federal Reserve Banks, 12 technically private institutions scattered unevenly across the nation. The Federal Reserve Bank presidents are chosen by boards of local citizens — although not, since the Dodd-Frank Act, by local bankers, and are paid on a scale that only state-university football and basketball coaches as government officials).

Yet these well-remunerated private citizens get to help set the nation’s monetary policy. The New York Fed president has a permanent say in the deliberations of the rate-setting Federal Open Market Committee; the other 11 presidents rotate through four voting spots — and they can come to the meetings even when they don’t vote.

Is this weird?  Probably.  But it is not a bad system that has reduced the effectiveness of the Fed and public trust in it.

In a Brookings Institute report which is great on the Fed history even if you disagree with the conclusions, Conti-Brown argues that the Fed would be more effective and more trusted if some or all of the Federal Reserve Bank presidents were appointed by the president and approved by Congress — or, better yet, if the Federal Reserve Board appointed them.

Former Philadelphia Fed President Charles Plosser argued that this was a solution in search of a problem. None of the Fed’s big historical failures — the Great Depression, the Great Inflation of the 1970s, and the 2007-2008 financial crisis — could really be attributed to the appointment process at regional reserve banks.

The Federal Reserve Bank presidents were a big cause of the Fed’s dawdling in the early 1930s; in 1935 Congress shifted the balance of power away from them to the Federal Reserve Board in Washington. But his bigger point that it isn’t clear what Conti-Brown’s proposal would fix seems right. In fact, I could think of a couple of things it would mess up.

The first is the Fed’s status as one of the last islands of technocratic, largely nonpartisan policy making in Washington. Technocracy and nonpartisanship aren’t always positives; they can be used to disguise interests and power relationships. Also, the technocrats can be terribly wrong, as they were in the lead-up to the financial crisis (not that the politicians were any righter). But at a time when Congress is riven by the deepest partisan divide in more than a century and even the deliberations of such supposedly technocratic agencies as the Securities and Exchange Commission and the Federal Communications Commission have become increasingly hijacked by party-line disputes, the tone of discourse within the Federal Reserve System stands out as a refreshingly civil and thoughtful exception.

The second thing is that having the Federal Reserve Bank presidents on the FOMC increases the diversity of opinion and economic methodology on the committee.

The unique appointment process for Federal Reserve Bank presidents brings people into policy making who might not be willing to take conventional government jobs. It then gives them the freedom to entertain new ideas and diverge from the consensus in a way that would be much harder for Federal Reserve Board employees to do. And it does this within a structure that still leaves the political appointees in Washington with a clear power advantage that makes early-1930s-style deadlock unlikely. That seems more like a desirable feature than a bug.

YELLEN ON FED TRANSPARENCY: “Central bank independence in conducting monetary policy is considered a best practice for central banks around the world. Academic studies, I think, establish beyond the shadow of a doubt that independent central banks perform better.” What is the difference between independence and accountability?

— WARREN VERSUS YELLEN: Sen. Elizabeth Warren (D-Mass.) grilled Yellen for not disclosing public data after a recent leak of proprietary information. Warren said during the hearing: “Apparently, there have been no consequences for the most recent leak. No action has been taken” [after a subsequent internal Fed investigation]. Hints from the US Fed effect  the markets. Do insiders get information earlier?

YELLEN SAYS NO TO CURRENCY MANIPULATION, via Vicki Needham: Federal Reserve Chairwoman Janet Yellen told lawmakers on Tuesday that she would have a significant problem with adding currency manipulation provisions into global trade agreements.  “Yellen said monetary policy decisions — such as the massive stimulus programs at the Fed since the 2008 financial crisis — can affect currency exchange rates but don’t amount to currency manipulation.”  t

OBAMA, WARREN TAKE ON WALL STREET.  “For the first time in his second term, President Obama is picking a fight with Wall Street. With Sen. Elizabeth Warren (D-Mass.) by his side, Obama announced Monday at AARP’s Washington headquarters that he is moving ahead with new regulations on financial advisers that are vehemently opposed by the business community.”

“Obama is seizing the populist mantle as the likely 2016 Democratic nominee, Hillary Clinton, is coming under intense pressure to take a stand against the captains of finance. Much of that pressure is being channeled into efforts to draft Warren, a critic of Wall Street, into the presidential race.”

“Business groups lined up against the plan on Monday, warning it would radically change the industry’s payment system and make it harder for low-income Americans to obtain financial advice. The push for the new regulations on investment advisers also stirred angst among centrist Democrats.

“‘Americans are going to be shocked when the only advice they have available to them is Jim Cramer on CNBC,’ griped one Democratic financial services industry insider who works with big businesses.”I

WARREN, CUMMINGS TEAM UP, via me: “Sen. Elizabeth Warren (D-Mass.) blasted the new Republican Congress on Tuesday, arguing they are risking a partial shutdown of the Department of Homeland Security (DHS) at a time when the middle class is getting ‘hammered.’

“Warren made the remarks during an appearance on MSNBC’s ‘Morning Joe’ with Rep. Elijah Cummings (D-Md.), where they announced a new political partnership to examine economic policies to address income inequality, among other issues.

— WARREN ON ‘MORNING JOE:’ “Republicans are now in charge and what have they spent their time on? First, they wanted to spend weeks on a pipeline that would principally benefit some foreign oil company, and now they want to spend a month on shutting down Homeland Security at a time when we face terrorist threats.”

Large deposits, ones unimaginable for most of us, are going to be charged fees or have to find others who welcome their business.

JPMorgan Chase & Co announced it is aiming to save around $1.4 billion in annual expenses by cutting costs and simplifying businesses mainly in its consumer- and investment-banking units.

JPMorgan is urging some of its biggest customers to take their cash elsewhere or be hit with fees, saying that holding very large deposits has become too costly under new liquidity rules.

It says it is taking the step because it no longer makes financial sense to hold such sums.

As the biggest US bank by assets, and among the most complex and interconnected, JPMorgan feels particularly squeezed by new rules which effectively penalize banks for holding big, uninsured deposits that could flee in the event of a big market shock.

Under the rules, overseen by the Federal Reserve and finalized last September, banks have to maintain higher reserves against such deposits, meaning that they cannot put those funds to more profitable use.

US banks including Bank of New York Mellon and Goldman Sachs are already charging some customers for large deposits, and the Swiss and Danish central banks have both cut their deposit rates to negative territory.

Under the new regime, a big hedge fund or private equity firm would be encouraged to shift excess cash into other JPMorgan products such as money market funds, or find a new bank to hold their money.

The new rules treat various types of deposits differently, according to how likely they are to be withdrawn in a crisis. Retail deposits, which are covered by federal insurance, are seen as less likely to be pulled out, so require banks to hold reserves of as little as 3 per cent against them. The reserve requirement rises to 40 per cent for some corporate deposits, however, and as much as 100 per cent for deposits from other financial institutions.
“Clients know that we are doing this because we have no choice”

The bank is determined to resist calls for a break-up. JPMorgan has been hit by about $22bn in post-tax legal costs since 2010, prompting politicians, regulators and analysts to argue that it has grown too big to manage.

Ms Lake said splitting into two would lead to about $3bn in lost cost synergies, damaging the ability of the bank to invest throughout business cycles, while shrinking the excess capital available to shareholders.