Current policy rate: 0 to 0.25%
Consensus expectation: no change
Taylor rule policy: -0.5%
Headline consumer price index: +1.1% (August)
Inflation objective: around 2%
Notable special measures in operation
• Circa $2,000bn in completed asset purchases, including $1,100bn in mortgage-backed securities and $792bn in Treasuries.
• Size of the programme is currently stable. Capital payments from MBS are reinvested in Treasuries.
Eight former US trade representatives and commerce secretaries pop up in the renminbi debate, warning Congress against legislating. No doubt timed to coincide with the deliberations on the Hill, with Ways and Means chairman Sander Levin having to decide which of the various options he wants to go with.
Easy to urge others to take a politically difficult route once you are out of office and don’t have to be re-elected, of course, but still might be an interesting contribution. The letter was distributed, btw, by the US-China Business Council, an association of multinationals active in China, which has been lobbying hard on the issue.
All eyes on tomorrow’s €1.5bn Irish bond offering. As investors have become more nervous, the head of the central bank has called on the government to rethink some of its austerity plans:
“I think these kinds of budgetary programmes do need to be reprogrammed in the light of circumstances,” Patrick Honohan told an audience today at a regulatory conference in Dublin.
Although the US economy is no longer quite as dominant as it once was in the global economy, there is no sign that the Federal Reserve is losing its primacy among the major central banks – at least, not as far as the financial markets are concerned. In fact, the Fed is possibly even more important than it used to be, because it is now setting monetary policy not just for the US but for many other countries as well, via exchange rate links.
In a world where output is generally subdued and demand insufficient, no country wants to accept a rise in its real exchange rate. A global game of pass-the-parcel is underway, with many countries being forced to follow the Fed’s lead in monetary easing in order to prevent unwanted currency appreciation. Among other effects, this is clearly acting as a powerful support for equities and other risk assets at the moment.
At the last FOMC meeting on 10 August, the Fed worried the financial markets by sounding concerned about the economic outlook, while taking only a small step towards additional quantitative easing. Consequently, as the graph shows, all of the main risk assets fell quite sharply for a couple of weeks. This decline was only arrested when Ben Bernanke’s speech at Jackson Hole spelled out the Fed’s thinking on further monetary easing, after which “informed” financial opinion began to suggest that another big round of QE would begin before the end of the year. With US and Chinese economic data showing some improvement as well, risk assets rallied markedly.
The Fed faces a tricky decision tomorrow,
A welcome piece of good news for Jean-Claude Trichet, European Central Bank president: Estonia is about to join the eurozone as its 17th member. The entry of the tiny Baltic state has significance beyond its shores. It shows that despite all the woes of the past year, Europe’s monetary union is still on an expansion course. Mr Trichet has just been speaking in Tallinn, the country’s capital, at an event kicking off the final preparations before January 1, 2011 when the euro becomes legal tender.
His comments covered the usual themes about Europe’s common destiny and the euro’s importance in the continent’s economic integration. But Mr Trichet did not speak as if Greece had never happened. There was a stern warning that future members had to do more that just meet the technical requirements for joining (although with hindsight, it is not even clear that Greece managed that).
Mr Trichet said:
Overdraft rates are at a record premium to the Bank of England base rate: the spread is 18.6 percentage points, the highest since records began in 1995. Central-bank-quoted overdraft rates rose to a record 19.1 per cent in August. The base rate, of course, remained constant at 0.5 per cent.
The fact that consumer-facing interest rates are rising in spite of a static and extremely low base rate will be of concern to policymakers. Unsecured debt levels, which rose slightly in July, remain extremely high and write-downs are increasing. This will add to the growing debate on the need for further extraordinary measures, such as credit easing.
Latest figures cast doubt on the recent upward trend in UK capital issuance. Raising money had been increasing each month, but dropped £8.1bn in August to £40.9bn.
The fall was spread evenly among capital issuers (banks, public non-financial corporations and other financial corporations, in the jargon). Shares – red on the chart – are pretty much off the menu. Bond issuance fell considerably (£7.1bn), though commercial paper fell by less.