The Fed

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

On payroll day, the markets usually focus on the the nitty gritty of the monthly data, searching for lessons on the near term movement of the US economy. This is frequently a forlorn task, since the initial estimates of US employment (covering more than 130 million workers, some of whom are just assumptions in the models of the official statisticians) are so uncertain. Read more

The much awaited speech by Ben Bernanke at Jackson Hole was largely a holding operation. He did not deviate much, if at all, from the tone of the statement issued after the August meeting of the FOMC, which is understandable given that his policy committee contains several members who do not want the Fed chairman to offer any strong hints about further policy easing at this stage.  Read more

Ben Bernanke’s speech at Jackson Hole on Friday will reportedly discuss the pros and cons of further monetary easing in the US. This debate has suddenly taken on a new sense of urgency, because the weakening in US economic data seems to have accelerated quite markedly during August.  Read more

I am becoming increasingly concerned about the extent of the slowdown which is now underway in the US economy, a trend which has not yet been fully recognised by the Federal Reserve. 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

The Fed decision announced last night seems to have disappointed markets, yet it will surely come to be seen as a clear win for the doves. Prior to yesterday, the default option at the Fed was to allow the size of its balance sheet to decline whenever its holdings of mortgage debt matured. Although this would not have led to much shrinkage of the balance sheet in the near future, it signalled that the Fed was looking for opportunities to reverse its policy of unconventional easing. That bias has now been removed, though not yet reversed. Read more

The financial markets have now discounted some form of Fed easing at tomorrow’s FOMC meeting, and it seems to me unlikely that policy makers will allow these expectations to be completely dashed. If that were to happen, the setback to both bond and equity markets could be quite large, and the Fed will not want to risk this with economic data tending to weaken in recent weeks.  Read more

The Federal Open Market Committee meeting next Tuesday promises to be the most interesting for about 12 months, since the outcome is far from certain.

The recent slowdown in the US economy seems to have caused some members of the committee to soften their stance on monetary policy, and the markets have begun to speculate about a possible easing in policy. If this comes, it is likely to be very slight, since I doubt that the Fed has seen enough evidence yet to convince them that the economy is slowing in a dangerous way.

However, some members of the committee seem to be getting increasingly worried that the US may be about to fall into a deflationary trap, like the one which has affected Japan in the last decade. James Bullard, the president of the St Louis Fed, released a very interesting paper last week which analyses the Japanese precedent in some detail. Although he does not consider this the most likely development in the US, he does think that it is sufficiently probable to require contingency planning, in much the same way as the government might prepare for a terrorist attack which it hopes and expects will not happen. Read more