Daily Archives: December 17, 2009

Recent demand for Fed short-dated credit has risen, bucking the downward trend. Data from Fed auctions shows both the demand and the number of bidders rose for 28-day credit at the most recent auction, on December 14. The bid/cover ratio of the most recent auction was 0.61.

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Simone Baribeau

Alan Greenspan, former Federal Reserve chief, warned today on the risks US social programmes – Medicare, Medicaid and Social Security – pose to the US’s ability to finance its deficits in testimony prepared for the Senate Committee on Homeland Security.

For more than two centuries, we have been able to hold the level of U.S. federal debt to well below our long-term capacity to borrow.

But for the next decade or two, on some reasonable sets of assumptions, our borrowing cushion shrinks significantly, threatening to test our capacity to raise funds to finance unprecedented deficits.

The challenge to contain this threat is more urgent than at any time in our history, in part because of today’s limited flexibility of adjustment, especially of entitlement spending whose constituencies are well entrenched.

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… but with a majority of republicans voting against.

For analysis of the swing votes, see this: Bernanke has a Republican problem

Krishna Guha

Another Republican swing vote that looked as if it was up for grabs has just gone against Bernanke – Kay Bailey Hutchison. Bernanke can rely on Republicans Bob Corker and Judd Gregg. But with David Vitter also saying he does not want to proceed before there is more information on AIG – and hardcore opponents Jim Bunning and Jim De Mint guaranteed No votes – that looks like at least half the Republican group on the commitee against by my calculations. Read more

South Korea has already recovered the remaining $450m USD loans extended to local banks, a day after the Fed announced closure of its temporary global liquidity-providing swap scheme by February 1, 2010.

Including the $450m, the BOK has recovered the full amount from the swap arrangement, which was worth $16.35bn. The Fed originally set a $30bn USD currency swap limit with the Bank of Korea on October 30, 2008, and has extended the deadline twice. BOK officials say the agreement helped to stabilise the local currency but that its closure will have “little impact” on Korean financial markets

Krishna Guha

OK so it’s not exactly Goldilocks. But maybe we are seeing a post-recession version of Goldilocks – call it Goldilite. The markets must be not too hot and not too cold, but just right.

The Fed marked up its assessment of growth yesterday but made no change to its assessment of inflation. In fact recent data suggest inflation risk has gone down not up: core inflation is flat, surveyed inflation expectations have edged lower and the dollar, commodities and gold have stabilised. Read more

Indian food prices surged an annual 20 per cent in early December as supply shortages hit, heightening expectations the central bank is set to tighten policy to curb inflation.

Food prices are jumping because of shortages after crops were hit by the weakest monsoon rains in 37 years and then flooding in parts of the country, but the price rises come as the economy is picking up strength after a dip in late 2008 and early 2009. Read more

Interest rates are unlikely to be the main topic of conversation at the Bank of Japan’s policy meeting, which started today: deflation and the strong yen are probably top of the agenda.

The bank is expected to keep rates at 0.1 per cent, and further measures are unlikely to be announced. Two weeks ago, the bank injected Y10,000 in 0.1 per cent three month loans, and the effects are still flowing through. Money market rates are falling and the economy is more liquid. Read more

The ECB wants to better understand the value of bank assets it is holding as collateral against loans made during the crisis. A consultation to achieve this may be approved today by the bank’s governing council. Read more

Krishna Guha

The separation principle is back – this time on the US side of the Atlantic. With today’s statement the Fed is basically embracing an ECB-style distinction between liquidity policy and monetary policy.

At the onset of the crisis some Fed officials thought there was something to the separation principle idea. Others thought it was complete nonsense.

As the crisis intensified Fed officials quickly reached a consensus that it made no sense to distinguish between monetary and liquidity policy in crisis conditions when both directly and substantially influence private borrowing rates and overall financial conditions. They thought the ECB was mistaken Read more