Monetary policy

The combination of a rapidly growing economy, and a surge in oil prices, has raised questions about the strength of the doves’ hand at the Fed. Previously in firm control, the doves had until yesterday been silent about the recent mixture of strong GDP growth and rising headline inflation. Was the case for exceptionally easy monetary policy beginning to fray at the edges? Not in the mind of New York Fed President Bill Dudley, who is among the most eloquent spokespersons for the dovish standpoint. Read more

The era in which central bankers could apparently do no wrong ended emphatically in 2008. Since then, they have attracted plenty of criticism as they have adopted a succession of unconventional policies to stabilise the world economy and financial system. Read more

The UK consumer price figures for December have certainly thrown the cat among the pidgeons. Repeating a pattern which has now been seen for many months, the figures were not just bad, they were also worse than the markets or the Bank of England expected. In a reversal of the normal order of things, there are suggestions that the government might now see a political case for higher interest rates, while the monetary policy committee still prefers to keep rates at close to zero. Whichever way you look at it, this is a tricky moment for the Bank, but it is probably doing the right thing. Read more

The Fed statement just released indicates that the central bank intends to purchase a net total of $600bn of longer term Treasury securities between now and the end of 2011 Q2, at a pace of around $75bn per month. This was almost exactly in line with what the market had been led to expect, so there was no surprise in the extent and timing of QE2. However, there was no further softening in the Fed’s statement that interest rates are likely to remain exceptionally low for an “extended period”, which may have disappointed some observers who were looking for this language to shift in a dovish direction. Overall, the markets initial reaction was a shrug of acceptance that the Fed has done just about what it told us it would do, but certainly no more. Read more

From now on, GDP figures in the UK will be watched with more than usual interest, because Britain is embarking upon the most significant fiscal tightening among the G7 nations. Can the economy withstand it?

Today’s GDP statistics for the third quarter, which show that the economy is growing at an annualised rate of 3.2 per cent, were much stronger than expected, and suggest that the economy is in better shape than many economists had predicted as the government is launching its fiscal retrenchment. However, the composition of the data is somewhat less encouraging than the picture painted by the headline figures. Read more

William Dudley, the President of the New York Fed, is an intellectual heavyweight with whom I was fortunate enough to work for a couple of decades. Long experience has taught me not to ignore his views on the economy. He made an important speech last Friday,  spelling out the dovish view on monetary policy which is currently held by the most senior members of the FOMC, probably including Ben Bernanke.

Although the speech was careful to go no further than the statement which followed the last FOMC meeting in September, it explained in considerable detail why the Fed now believes that inflation is too low, and why he at least also believes that a further round of QE is the right response to the situation. Read more

There are two massive fixed exchange rate blocks operating in the world economy today, and both of them are facing severe strains and conflicts.  Read more

Although the US economy is no longer quite as dominant as it once was in the global economy, there is no sign that the Federal Reserve is losing its primacy among the major central banks – at least, not as far as the financial markets are concerned.  Read more

Mervyn King’s speech to the TUC this week reiterated his strong support for the fiscal retrenchment plan announced by the coalition government in the UK. Some people have said that it is not the role of the central bank Governor to comment on fiscal policy, which they argue should be confined to the political arena. However, the Fed Chairman and the President of the ECB frequently comment on government debt and budget deficits, so it is hard to see why Mr King should be criticised for expressing his opinion. A much more important question is what his speech tells us about the likely course of fiscal policy and its relationship with monetary policy. Read more

The shift in market prices since the Fed meeting on Tuesday has been very minor in the great scheme of things, but it has obviously got some people worried that it is the start of a much bigger move in the coming weeks.  Read more