What’s in a dissent? Quite a lot, potentially. Thomas Hoenig, the notoriously hawkish president of the Kansas City Federal Reserve Bank, had already disagreed at the last FOMC meeting on the reference to an “extended period” of low interest rates – saying the economy was strong enough that higher rates could be contemplated at some point sooner. Mr Hoenig disagreed again with his colleagues today, but elaborated on his reasons for doing so. It was not for fear that low rates could lead to a spike in inflation, as one might think, but rather because of concerns over a potential new asset price bubbles. “It could lead to the buildup of financial imbalances and increase the risks to longer run macroeconomic and financial stability,” the Fed said in the last line of its statement, explaining Mr Hoenig’s position.
This could open up a whole can of worms. Although certain asset price bubbles can be inflationary for the economy as a whole, there may be a debate about whether considering financial stability on its own when crafting monetary policy is consistent with the Fed’s dual mandate under law, which is to maximize employment while maintaining stable prices. Purists might argue it is not, others might argue that it is.
Bloomberg has obtained a copy of Fed chairman Ben Bernanke’s prepared testimony to the House Financial Services committee tomorrow. According to the wire, the Mr Bernanke plans to reiterate his position that the Fed’s bank oversight role is important to its monetary policy functions.
Mr Bernanke’s quote Bloomberg:
The Federal Reserve’s participation in the oversight of banks of all sizes significantly improves its ability to carry out its central-banking functions.
Nothing really new here.
From Mr Bernanke’s February testimony: Read more
Coincidentally, two regional Federal Reserve banks released papers today examining wage differences across groups. Nothing earth-shattering, but interesting, none-the-less.
The first paper, published by the Federal Reserve Bank of St Louis, looked at the reasons income per worker differ world wide and find that the regulatory costs of starting a business (as measured as a per cent of per capital GDP) have a significant negative impact on income. Read more
The FOMC today kept the federal fund rates unchanged and didn’t change its closely-watched “extended period” language.
Analysts had been waiting to see if more FOMC members would vote against keeping the extended period language, but the only vote against it was Thomas M. Hoenig, who had previously used his new voting powers to dissent during the January meeting. This month, he gave a reason for his dissent saying that “continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.”
But, despite the Hoenig dissent, the meeting took the US no closer to policy normalisation. Read more
Americans are again clamouring for a rise in the renminbi. First, the moral argument: keeping the currency pegged at about 6.83 to the dollar lends Chinese exporters an unfair advantage, critics argue, increasing the Chinese trade surplus. Second, the pragmatic argument: China will have to let the yuan appreciate to combat inflation.
Today, the counter-arguments. Read more
4,600 miles, 15 percentage point inflation gap. The range of inflation among European countries is widening again (although in general, inflation in Europe is converging).
Broadly speaking, annual inflation in member countries tracked each other down slightly. So, unlike last month, the small drop in aggregate inflation corresponds to the experience of most European countries. Read more
Wolfgang Schäuble, Germany’s finance minister, is winning support for his European Monetary Fund idea. Going further than in an article he wrote for the Financial Times, Lorenzo Bini Smaghi, an executive board member at the European Central Bank, has told the Netherlands’ NRC Handelsblad, that Mr Schäuble’s proposal “seems very reasonable” and “deserves to be explored further”. His comments contrast with the much more sceptical tone taken by Jürgen Stark, his executive board colleague, and Axel Weber, Germany’s Bundesbank president.
Except the ECB has clearly taken a disliking to the proposed title. The words “monetary fund” obviously suggest the institution’s primary objective would simply be to dish out billions of euros to countries in trouble (Greece) – something to which the Frankfurt-based institution would object strongly. Mr Bini Smaghi sees its role of differently. “Not only must the management of the euro be enhanced, and given more powerful means for preventive action and sanctions, but we also need a financial mechanism. So that we are ready when the euro is attacked,” he said in the interview. Read more
Eurozone inflationary pressures have weakened even further, with a closely-watched indicator of underlying price trends falling to the lowest since before the launch of the euro in 1999.
Annual inflation excluding volatile energy and unprocessed food prices fell to just 0.8 per cent in February in the 16-country region, according to Eurostat, the European Union’s statistical office. That was the lowest since comparable figures started in January 1997. Read more
Expect greater collaboration between the central bank and regulator in Switzerland. They have signed a memorandum of understanding saying they will work more closely together in future.
The two bodies worked more closely during the financial crisis, and fell in love found some common ground. Principal changes/ how it will work: Read more
Gordon Brown has intervened to block legislation to reform hedge funds and the private equity industry. Eighty per cent of the European hedge fund industry is based in London.
The issue has been dropped from the agenda of the next meeting of European Finance Ministers, though this is only a postponement. Officials say the vote should happen by June, handily after the British election. More on ft.com.
Is the Swiss National Bank allowing its currency to appreciate?
It may be coincidence, but the three previous times we reported rumours of bank intervention in the forex markets, the level at which they appeared to intervene was about 0.684 EUR per CHF (1, 2, 3). Read more
Watch out for greater agreement between the government and central bank of South Korea. The President has just named Kim Choong Soo governor of the central bank, to succeed Lee Seong Tae when his tenure expires at the end of the month. The nomination is subject to cabinet approval on March 23.
Mr Kim is currently envoy to the Paris-based Organization for Economic Cooperation and Development, according to Bloomberg. Mr Kim “sounds far less hawkish than the current governor, based on my impressions of his reported interviews and his career,” Lim Ji Won, a senior economist at JPMorgan Chase told Bloomberg. “This suggests the possibility that the new governor and government are likely to speak in one voice, at least for the time being.” Read more
Two of the least appealing features of central banks through the crisis have been their petty point scoring and over-complication of their operations. This creates the impression of big differences in approach, which I will explain is not true.
First, let me demonstrate what I am talking about with the use of a few examples. Spencer Dale, the Bank of England’s chief economist, crowed last week that “unlike some other central banks”, the Bank of England can “withdraw the stimulus, raising the bank rate and selling assets” without the “need to create new instruments to drain excess reserves or alter the terms of existing facilities”. But he was was not brave enough either to say that he was talking about the Fed, or to mention the complete failure of the Bank’s own sterling monetary framework during the crisis and its subsequent “alteration”.
But Spencer is far from alone. As Ralph has regularly pointed out, the ECB believes it spotted the crisis earlier than anyone else, thinks its liquidity operations were superior to those operated by the Fed and Bank of England before the crisis, and suggests it is ahead of the game on exit strategies.
The Fed, meanwhile, has got everyone excited about reverse repos and a whole raft of three and four-letter acronyms which serve, more often than not, to obscure its underlying policy rather than reveal it.
Rather than get irritated or confused by these traits, I would suggest that everyone remember the four following points about the banks’ plans to exit from their extremely loose policies:
1. They are all gradually eliminating their extraordinary liquidity policies
At its peak, the Fed was lending Read more
I’ve done a preview of this week’s Bank of Japan policy board meeting for the paper today.
The near universal expectation is that the BOJ will expand its operations at the three-month maturity or extend them to the six-month term. I’d note that there is still a real chance these expectations will be disappointed: it’s not a step the Bank will take with any great enthusiasm and it has the excuse of waiting for more Tankan data in April. Read more