Daily Archives: May 20, 2010

James Politi

Yesterday’s Federal Open Market Committee minutes revealed, for the first time in this economic cycle, that some officials are concerned about the “downside risk” of inflation.

With the core PCE and the core CPI running much lower than the Fed’s target range, and lower than expected earlier in the year, some within the Fed are clearly getting nervous that a deflationary spiral could be on the horizon if the economy hits another rough patch, which isn’t out of the question given events in the eurozone

Simone Baribeau

The Federal Reserve – which, in recent years, has not been the first to recognise the warning signs of a crisis – is, by central bank standards, expressing considerable concern about the potential effect of the European debt crisis in the US.

Daniel Tarullo, Federal Reserve governor, outlined the worst case scenario to a House subcommittee this afternoon. 

By Delphine Strauss

Turkey’s central bank took the first step in its planned exit from monetary stimulus this week – but it still seems in no hurry to raise interest rates from historic lows. In a technical change it had signalled in a strategy announced last month, the central bank said on Tuesday its policy rate would now be the 7 per cent weekly repo rate, not the 6.5 per cent rate for overnight borrowing.

Durmus Yilmaz, Turkish central bank governor, told reporters on Thursday that banks could soon find financing more expensive. Reuters cites him saying: “From now on, our or the banks’ job will not be easy. We will have to make finer calculations. The banks may have to bring the money left in their hands at the end of the day to the Central Bank at a lower price.”

Yarkin Cebeci, analyst at JPMorgan, said the measure was unlikely to affect markets: “Because the CBRT had become a net lender to the markets, the [overnight] borrowing rate had already lost its relevance as the policy rate. Furthermore, the 1-week repo rate had already stabilized around 7.0 per cent in recent weeks.”

The real question is how soon the monetary policy committee will feel obliged to raise interest rates, with market expectations of inflation running well above the central bank’s medium term targets.

The statement issued by policymakers on Tuesday, when they held rates, suggests that the eurozone’s latest troubles have ended any likelihood of their acting sooner than the last quarter of 2010, as they have
already signalled. 

Ralph Atkins

It is just a few days until Lucas Papademos steps down as the European Central Bank’s vice president, and the ECB is holding a conference in his honour in Frankfurt. Quiet and thoughtful by character, Mr Papademos has not had a high profile. But he has been active behind the scenes, especially in recent weeks as the eurozone has lurched from crisis to crisis. (The fact that many of the problems have been focused on his native Greece might explain his reticence.)

Mr Papademos has been responsible for financial stability issues. Only a few years ago, that meant working laboriously on “financial stability reports” which at the time attracted little attention, but in hindsight gave clues about the trouble brewing in financial markets. More recently, central bankers have been debating whether central banks should take greater responsibility for the stability of the financial system on top of fighting inflation. 

Rumours of a Europe-wide short-selling ban; an unexpected jump in American initial jobless claims; exceptional volatility in currency markets; and sharp plunges in equities. It’s quite a day.

Theories on what is happening, why, and what is likely next, are most welcome below.

Thoroughly recommended, from Howard Davies & David Green:

There are areas in the coalition agreement where mating a pure-bred Tory policy with a pedigree Liberal Democrat manifesto commitment has produced a mongrel, but in the area of financial regulation the opposite is the case… The formal statement says the government will “give the Bank of England control of macroprudential regulation and oversight of microprudential regulation”. We may presume from this that day-to-day institutional supervision will remain with the FSA. That makes sense. 

Chris Giles

The Con-Lib coalition agreement includes lots of new spending commitments and pledges. That is what has made agreement between the two parties so easy. But the best bit is this green box at the back, which I presume was added by George Osborne and David Laws, who have seen the Treasury’s books.

 

Robin Harding

The BOJ policy board meeting that concludes on the 21st may well produce at least an outline of the bank’s new scheme to encourage commercial bank lending to ‘growth industries’.

That is likely to involve the BOJ offering to refinance a bank’s new loans or its net increase in loans to whatever the BOJ judges to be growing (e.g. health, environment sectors). In trying to guess how it might work it’s interesting to look at the data on which the BOJ will have to judge whether banks are making the kind of loans it wants.