The Federal Reserve will be at the centre of market attention this week with a collection of FOMC speeches, culminating with Chairman Bernanke on “economic prospects for the long run” next Saturday. The Chairman made headlines on Friday when he said that the Fed is now watching “particularly closely” for instances of “reaching for yield” and other forms of excessive risk taking, but there was no smoking gun suggesting that this enhanced monitoring by the Fed would lead to any early amendment to the pace of asset purchases or the level of interest rates. Regulatory controls look much more likely.
On the wider issue of general monetary policy, the behaviour of inflation and unemployment remain the key drivers, and here the Fed has a headache. Its forward guidance on unemployment is in danger of giving misleading signals about the need for tightening, and it probably needs to be changed. Read more