The Fed

The past week has seen new highs for the year in many major equity markets, including the US. However, oil prices have continued to climb in ominous fashion, and there have been some weaker signals from the initial economic activity indicators which have appeared for the month of April. In the US, for example, the important Philadelphia Fed index fell sharply, housing data continued to bump along the bottom, and initial unemployment claims were disappointing. Next Thursday will see the publication of the US GDP figures for 2011 Q1, which are likely to report quarterly annualised growth at only around 1.5 per cent, sharply down from the previous quarter. So why has the US economy slowed, and should we be worried about it? Read more

Many investors fear that the Fed’s impending exit from QE2 will have a very damaging effect on the financial markets. Whether they are right will depend on the nature of the exit, and its impact on bond yields. Read more

The financial markets remain torn between their concerns over “black swans” (exogenous shocks from oil prices, food prices, and the Japanese earthquake) and the improving state of the global economy.  Read more

The behaviour of the world’s two main central banks, and the relationship between them, have profound effects on global financial markets. As a broad rule of thumb, the ECB (and the Bundesbank before it) have tended to act in a very similar manner to the Fed, except about 6-12 months later. In fact, that is one of the most well established rules in the analysis of monetary policy making.

It does not imply that the ECB deliberately “copies” the Fed, which it clearly does not do. But it does imply that circumstances have usually produced this symbiotic relationship between the two key central banks. When this relationship has been broken in the past, it has usually spelled trouble. Read more

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

This week, the dramatic events in Egypt failed to unsettle the global financial markets. Not only do investors believe that Egypt itself is not critical for global oil prices, they also seem to believe that there will be relatively little contagion to the more important oil producing states elsewhere in the Middle East. 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 batch of new year forecasts for the world economy have been almost uniformly positive this year, at least from economists in the financial markets. Only a few months ago, forecasters were talking of increasing risks of a double dip recession, but the surge in risk assets since the Federal Reserve announced QE2 in the autumn has swept away most of this pessimism. JP Morgan this week said simply that “strong global growth is baked in the cake”. Although nothing in economic forecasting is that certain, there is plenty of evidence in favour of the recent outbreak of optimism.

First, the most reliable and timely indicators of global economic activity have recovered strongly in recent months. Although QE2 may have helped somewhat in this regard, it is much more likely that the pause in the global economy was anyway about to end when the Fed took its expansionary decisions in the early autumn. Read more

Both the Federal Reserve and the ECB are now purchasing government debt in large scale. Yet neither of them seems at all eager to admit that they are doing anything unconventional with their monetary policy. In fact, some of the recent statements by both Ben Bernanke and Jean-Claude Trichet are not as straightforward and transparent as they might have been. Read more

Today’s publication of the latest FOMC minutes will probably unveil significant downward revisions to the Committee’s inflation and gross domestic product forecasts for 2011, as well as a large upward revision to its unemployment forecast. More interestingly, the minutes will show whether the FOMC is broadly united on the strategy of quantitative easing which it has now adopted.  Read more