Yearly Archives: 2013

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. Read more

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. Read more

The recent buoyancy in global equities has raised fears that the markets have entered a major bubble, driven by the unprecedented expansion in central bank balance sheets.

To the extent central bank asset purchases have reduced government bond yields, they have certainly brought forward returns from the future into the present, thus reducing expected returns on both equities and bonds. But this is normal in a period of monetary easing, and it does not automatically mean that markets are in a bubble. Read more

Exactly a year ago this week, the markets woke up to the fact that Shinzo Abe would become the next Prime Minister of Japan, and would introduce the most far reaching set of economic reforms seen in that country since the similarly audacious Takahashi reforms in the 1930s. A year later, some progress has been made, but crucial issues have been ducked and much greater challenges lie ahead.

The new administration under Mr Abe immediately fired the first and easiest of his three “arrows” (see David Pilling), a dramatic expansion in the BoJ balance sheet that will be maintained until inflation reaches 2 per cent. The second arrow, a temporary fiscal support programme, has also been implemented. Read more

The Federal Reserve told us in December last year that it would maintain its asset purchases until the outlook for the US labour market had improved substantially. Does Tuesday’s rather anaemic jobs data release meet this criterion any more than it did last month, when the Fed decided not to taper its asset purchases? Not really.

The underlying pace of job gains is certainly not rising, and may even have fallen slightly. But the unemployment rate dropped to 7.2 per cent, and the pace of decline suggests that the 6.5 per cent threshold for considering interest rate rises could be reached in mid-2014, ie before the balance sheet tapering has ended! This gives Janet Yellen, the incoming Fed chairman, an early problem: she will surely have to reduce that 6.5 per cent threshold soon.

In this blog, we use some statistical tools which have been developed by the regional districts of the Fed to frame a judgment about the underlying state of the labour market, updated to include this week’s new information [1]. Read more

The award of the Nobel Prize last week to three academics who have specialized in the empirical modelling of asset prices has focused attention on what academic research can tell us about a highly topical question: could the US equity or credit markets currently be in a bubble? It goes without saying that this is of great interest to investors, who have seen the US equity market rise by 131 per cent since February 2009, and are asking when the bull market might end.

It is also of relevance to the likely next Chair of the Fed, Janet Yellen, who will be closely examined about bubbles in her confirmation process. In the past, she has strongly argued that the Fed should not use standard monetary policy to deal with bubbles [1]. Read more

Global trade growth has stopped. Gavyn argues that this undermines global GDP growth, but The New York Times’s Paul Krugman disagrees. Mr Davies replies to Mr Krugman’s points in an interview with John Authers:

When Ben Bernanke became Fed Chairman in 2006, his collection of speeches and academic papers turned out to be extremely relevant to the decisions he would take in office, especially after 2008. The same is likely to be true of his nominated successor who, pending her confirmation by the Senate, has now become the de facto voice of the Fed.

Google Scholar lists dozens of entries under the name Janet L. Yellen. These citations outline an extremely well considered economic philosophy that has developed along a consistent path since the early 1980s. A 67-year old leopard is unlikely to change its spots. Read more

Janet Yellen has been nominated to take over as Fed chairman when Ben Bernanke steps down. Gavyn discusses with John Authers what a Fed led by Ms Yellen would mean for tapering and interest rate policy

In the endless saga over US fiscal policy, attention has shifted from the closure of some parts of the government (which happened on Tuesday) to the possibility that the Treasury Department will reach the limit of its extraordinary measures to work around the debt ceiling on or around 17 October.

The negotiating tactics of the White House are now clear. They are painting the scenario in which the debt ceiling remains frozen as completely catastrophic, perhaps hoping that market disruptions will increase pressure on the Republicans to waive through the necessary legislation. Markets, however, have so far been reluctant to co-operate. (See this earlier blog.)

In a letter to Congress on 25 September, Treasury Secretary Jack Lew described the ensuing situation as “default by another name”, and Goldman Sachs CEO Lloyd Blankfein has said that “there is no precedent for a default”.

Investors hate the word “default” but they need to be careful about its exact meaning here. Most observers, including the major investment banks, think it very unlikely that the US would ever choose to default on any payments due on its sovereign debt, even if the debt ceiling is left permanently unchanged after 17 October.

The government could, however, go into arrears on many of its normal payments after that date. This would have serious contractionary effects on the economy, and might lead credit agencies to downgrade their ratings on US sovereign debt. Read more