Daily Archives: January 4, 2010

Simone Baribeau

Federal Reserve Governor Elizabeth A. Duke today echoed others at the Federal Reserve, saying that she expected a “moderate” recovery in economic activity in 2010, and that businesses would “cautiously” begin to add jobs. And she, like others, said that the recovery depends largely on improving credit conditions.

“In my view, the outlook for economic activity depends importantly on our ability to build on the progress to date in improving the operation of financial markets and restoring the flow of credit to households and businesses,” she said in a speech in Raleigh, North Carolina.

Her stance is nothing new for the Fed, and she’s the third governor to repeat the sentiment in the past few weeks. Yesterday, Donald L. Kohn, Vice Chairman, said: “Lingering credit constraints 

Simone Baribeau

Monthly remittances to Mexico in November hit their lowest level since February 2005, Mexico’s Central bank reported today.

The payments were 14.4 per cent below their year ago levels, and more than 43 per cent below the high hit in October 2008. But the speed of the annual decline slowed to its lowest level since March as the US economy sheds fewer jobs.

Simone Baribeau

The Fed just released December’s average exchange rates. It’s nothing that couldn’t have been worked out earlier (the data’s a day late and a dollar short, as it were), but it’s a reminder of some striking forex recoveries post-Lehman.

The Brazilian real, up 27 per cent against the dollar compared to its level a year ago, is now stronger than it was immediately preceding September 2008. Ditto the South African rand, which also experienced a double digit drop as risk-averse investors fled to the dollar. The other major movers on the Fed’s list are well on their way to recovery. Of course, then there’s the Venezuelan Bolivar, which avoided currency drama altogether by pegging its currency to the dollar. 

Ralph Atkins

The economic news from Spain has turned more worrisome. Eurozone purchasing managers’ indices for manufacturing showed the region’s recovery humming along nicely (December’s final index reading at 51.6, up from 51.2 in November, was in line with the preliminary estimate released last month).

But Spain is heading in the opposite direction. Activity in its manufacturing sector continued to fall, and the pace of contraction in the fourth quarter 

Chris Giles

It’s the new year, but the big questions facing the British economy – how fast should it reduce its gaping 13 per cent of national income budget deficit, and how much can monetary policy offset fiscal tightening – remain unanswered.

In the annual FT survey of British economists, the most commonly cited economic threat for 2010 was a fiscal crisis, raising the cost of servicing Britain’s public debt and raising risk-free interest rates, thus undermining the recovery. But economists were split almost 50:50 about how quickly the deficit should be reduced.

On one side of the argument, those urging caution worried about the consequences for the recovery of rapid action in raising taxes or cutting public spending. The counter view was that a failure to act soon will lead to rising costs of servicing debt and that would, itself, undermine the recovery.

I don’t have a good answer to this genuinely difficult balancing act. But the answer must relate to 

Commodities inflation could rise rapidly if China follows the advice of one of its central bank officials, who recommends spending forex reserves on strategic resources such as oil. The move would further China’s diversification from the dollar.

Many emerging economies, such as Indonesia, list commodity inflation as a principal risk to continued economic recovery. 

A common single currency for the Gulf is a step closer after the central banks of Saudi Arabia, Qatar, Bahrain and Kuwait were asked to stop lending to the public sector in preparation for a unified regional central bank. It is not known whether bonds are considered part of the public sector loan portfolio.

The four states are part of the Gulf Co-operation Council, which also includes Oman and the United Arab Emirates. The latter two are not planning to join monetary union at this stage.

Apparently, the draft GCC common monetary union agreement prohibits the central banks 

A summary of Ben Bernanke’s conclusions, from yesterday’s speech.

We must remain open to using monetary policy as a supplementary tool for addressing build-ups of financial risk, but regulation would have been a more effective and surgical tool to combat the house price bubble.

The direct linkages between monetary policy and house prices are weak. Although the most rapid price increases occurred during periods of low short-term interest rates, the price rises seem too large to be explained by rates alone. The most important source of lower initial monthly payments, which allowed more people to enter the housing market, was the increasing use of more exotic types of mortgages and the associated decline in underwriting standards. That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary.