The Fed

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

If he were still alive today, what would Milton Friedman think of his disciple, Ben Bernanke? This is a matter of some concern to the Fed Chairman. Read more

After a week which has been replete with important economic and political news from the US, the bulk of the incoming information has confirmed what we knew already. The Fed has embarked on QE2, more or less exactly as expected. The Republicans took the House but not the Senate, and the President’s initial reaction suggests that the Bush tax cuts will probably be extended, which was the central case before the election. And the economy continues to grow at a pace which is neither fast enough to bring unemployment down, nor slow enough to threaten a double dip. While all of this was broadly as expected, there have been some interesting (and mostly encouraging) developments which are worth noting.

So what do we know today that we did not know a week ago? Three things: Read more

The US GDP data for the third quarter are a mixed bag. In some areas, they look truly encouraging; in other areas, much less so. What do they tell the Fed, which is preparing for its crucial meeting on QE, next Tuesday and Wednesday Read more

In this blog in the Wall Street Journal, Sudeep Reddy reminds us of a Bernanke speech in 2004, in which the now-chairman of the Fed used a golf analogy to justify making a series of gradual changes in monetary policy when the authorities are unsure about the effectiveness of the policy weapon in use at the time. Read more

Ben Bernanke’s speech in Boston on Friday seems to have disappointed those who were expecting him to announce concrete measures to restart quantitative easing, but we already knew from the last set of FOMC minutes that the groundwork for such an announcement had not been undertaken. That announcement will come after the committee’s next meeting on November 2nd and 3rd. Nevertheless, Mr Bernanke has nailed his colours to the mast, even more clearly than he has done in recent speeches. This is a Fed Chairman who is very dissatisfied with the depressed state of the US economy, and who is not afraid to say so. Read more

The minutes of the September meeting of the FOMC, published yesterday, suggest that the Fed is considering how to communicate its policy message more clearly to the markets.  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

The Federal Reserve broke a taboo yesterday when it said quite baldly that inflation in the US is now below the level “consistent with its mandate”. In other words, it is too low. This is a very big statement for any central banker to make, since the greatest feather in their collective cap is that they successfully combated inflation after the 1970s debacle.  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

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