Daily Archives: August 11, 2010

James Politi

I was watching a segment on the Federal Reserve on CNBC television earlier today, and a couple of times the guests on the show referred to the resumption of quantitative easing as Ben Bernanke’s “bazooka”.

And that brought me way back to the summer of 2008 – when then treasury secretary Hank Paulson sought authority from Congress to bailout Fannie Mae and Freddie Mac, the huge mortgage giants, if necessary. Mr Paulson argued that if markets knew the government would rescue the companies, that would be sufficient to restore confidence, and a bail-out would not be necessary. But the opposite occurred, and little more than a month later, Fannie and Freddie were in conservatorship.

Back to Mr Bernanke. Read more

Recovery in Europe is a regional affair. To generalise, the east is still cutting, the north is raising, and everywhere else is on hold. That realisation prompted the map, below. Bear in mind that the rate cuts are cumulative and absolute (i.e. percentage points, not percent).

Green means rates rose over the period; red means they fell; orange means they were constant. Shades between these indicates the depth of cut or rise, relative to those of all the other countries. Read more

American stocks opened sharply down today, following the Fed’s announcement and data showing the US trade deficit at a 21-month high in spite of this year’s dollar depreciation. The Dow index fell about 200 points on the open, before flattening at levels last seen about ten days ago (see chart). Equities have fallen globally today.

Either investors are nervous about the change in tone and outlook from the Fed, or they judge yesterday’s decision insufficient. Or both. All else being equal, the Fed’s decision should have increased the money sloshing round the system – and last time that happened, it was very inflationary for equities.

The Fed move:

Other news:

The Bank of England has reduced its growth forecast – but views the dip as a temporary blip and not a turning point.

Spot the difference in the fan charts: see the little dip 2010-11 in the upper (August) chart compared to the lower (May) chart. Growth will dip thanks to “persistent tight credit and faster fiscal consolidation” – but the latter has also reduced the downside risks. Risks to growth fall on the downside.

Further, inflation is likely to remain above target till the end of 2011 – a full year longer than projected in May. Mervyn King has just said at the press conference that after 2011 – once the base effects are removed – he expects a period of below-target inflation. Risks to the projection fall mostly on the upside.

Understandably, given this, the governor is concerned about the effects on inflation expectations: Read more

$2,054bn is the magic number. That’s the value of domestic securities in the System Open Market Account (SOMA) that the Fed now intends to maintain by reinvesting principal payments. We’ll find out that reinvestment value tomorrow.

The plan is to buy 2- to 10- year nominal Treasuries (and to a lesser extent, TIPS), but to steer away from those that are already in high demand or of which SOMA* already holds high concentrations. Read more