Monthly Archives: November 2013

Mark Carney’s announcements today about the UK housing market represent the first blast from a major country of a new policy weapon that is increasingly available to the global central banks, a weapon known as macro prudential regulation. Because this weapon is seen as an alternative to raising short rates, not as a prelude to raising them, the Carney intervention should logically under-pin the lower-for-longer path for short rates discussed in his evidence to the Treasury Select Committee earlier this week. Mr Carney has turned more hawkish today, but not more hawkish about interest rates or sterling.

The Carney announcement will represent an important restraint on the UK housing market, which was showing distinct signs of getting too ebullient in the south east of the country. By acting early, and using methods that are distinct from the short term interest rate, this action may well make the economic recovery in the UK more durable than otherwise, though it may slow down some parts of the consumer sector in the immediate future. 

The past week has been another important one for Fed watchers, a group which nowadays seems to include almost every active investor in the financial markets. Following the decision of the Senate on Thursday to ban filibustering on Presidential nominations to many important federal posts, it has been suggested by Morgan Stanley that Ms Yellen might take up her position as Chair in time for the next meeting of the FOMC on 17-18 December, two meetings earlier than previously expected.

Furthermore, according to Neil Irwin, President Obama will now find it easier to appoint at least two new monetary doves to support Ms Yellen on the Board of Governors next year. This will offset what might otherwise have been a shift towards hawkishness on the FOMC, since regional Presidents Fisher and Plosser (both hawks) are rotating into voting status, and the unannounced new President of the Cleveland Fed may turn out to be “on the hawkish end”, according to J.P. Morgan.

These personnel changes will create their own uncertainty. But, in addition, the Fed’s monetary strategy is clearly in a state of flux, with its approach to tapering having developed markedly in recent weeks. A new “separation principle” seems to be emerging, and it explains why the FOMC seems eager to begin winding down its asset purchases in the near future, while relying even more heavily than before on “lower for longer” guidance on forward short rates. This could have important ramifications for markets. 

One week ago at the IMF Research Conference, Larry Summers delivered a remarkable speech about secular stagnation, which he suggested might be the defining issue of our age. The term secular stagnation, coined by American Keynesian Alvin Hansen in the late 1930s, has always had a polarising effect among economists, and the same will certainly be true again this time. But whatever one thinks about the argument, the Summers speech, at 16 minutes long, is a tour de force that demands to be watched. 

Investors will be paying rapt attention to Janet Yellen’s verbal evidence in her confirmation hearing at the Senate Banking Committee on Thursday. With December tapering of asset purchases possibly back on the agenda after the stronger US jobs data in October, her take on the strength of the economy will be critical, especially since she has not opined on this or any other contentious matter since the spring.

But tapering is going to happen fairly soon in any event, and in the longer term investors should pay more attention to what she says about the framework which she will be using to determine policy during her five year term. In particular, will she be using an “optimal control” framework, which she adopted last year and which was at the centre of two Fed research papers published last week? 

While the markets have become obsessively focused on the date at which the Fed will start to taper its asset purchases, the Fed itself, in the shape of its senior economics staff, has been thinking deeply about what the stance of monetary policy should be after tapering has ended. This is reflected in two papers to be presented to the annual IMF research conference this week by William English and David Wilcox, who have been described as two of the most important macro-economists working for the FOMC at present. At the very least, these papers warn us what the FOMC will be hearing from their staff economists in forthcoming meetings.

Jan Hatzius of Goldman Sachs goes further, arguing that the papers would only have been published if their content had been broadly approved by both Chairman Ben Bernanke and by Janet Yellen. The new works take the Fed’s mainstream thinking into controversial areas which have certainly not been formally approved by the majority of the FOMC. 

The sharp decline in inflation in the euro area to only 0.7 per cent in October has focused attention squarely on the monetary strategy of the ECB, ahead of its policy meeting next Thursday. In 2012, the Governing Council was willing to introduce very unconventional measures in order to keep the single currency together, dampen crises in sovereign debt and repair the fragmentation of interest rates between member states. Most people now concede that, without these measures, the eurozone would have fallen apart.

The startling success of this action has tended to shift attention away from more mundane matters, such as the overall stance of monetary conditions for the euro area as a whole. But the recent decline in inflation has raised serious questions about whether the monetary stance is anywhere near appropriate for an economy in such a depressed state.

This is problematic for the ECB, since it has already fired almost all of the conventional monetary ammunition available to it. And it has never followed the example of other major central banks in considering that quantitative easing is needed to ease policy at the zero lower bound for interest rates. It may soon have to face up to this issue.