Daily Archives: September 21, 2010

James Politi

Larry Summers’ days as steward of the Obama administration’s economic policy are numbered. The White House has just released a statement, after two days of frenzied speculation, confirming Mr Summers’ departure as director of the National Economic Council at the end of the year to take up a teaching post at Harvard University.

Mr Summers‘ decision to leave the administration will no doubt rekindle concerns that the Obama administration’s economic team is burned out, after more than a year and a half of war with high unemployment and slow growth. It also reflects mounting pressure for the White House to refresh its approach to economic policy, as the recovery continues to sputter forward. 

James Politi

The Federal Reserve’s latest monetary policy statement has just been released, and the signal seems to be that the central bank is gearing up for another round of quantitative easing.

Whereas at the last meeting on August 10 officials simply said they would employ their tools “as necessary” to promote economic recovery and price stability, they went further this time, saying the Fed was “prepared to provide additional accomodation if needed”. 

No further quantitative easing announced by the Fed today, and no change in the Fed funds rate, either, but they say they are ready to act. Reinvestment of principal payments will continue, and Thomas Hoenig hawkishly dissented once again. Key additional parts of the statement:

Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months… The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate. 

Chris Giles

On this blog, I have repeatedly noted with dismay how badly Britain is afflicted by structural deficits disease – the mistaken belief that you can measure the underlying budget deficit.

Various economists have sympathised with my campaign, but argued that governments need to set fiscal policy and to do so ministers need an estimate of the ‘size of the hole in the public finances’ or ‘the deficit which would remain once the economy got back to normal’.

Some Treasury officials have said that without a target path for the structural deficit, it would be impossible to follow a consolidation plan and have room for automatic stabilisers to work in the event that the economy is derailed.

Apart from the many other problems I have noted with these arguments, a new drawback of the Treasury’s position occurred to me this week. It is that the Treasury’s June Emergency Budget does not give one estimate of the hole in the public finances, but three. And they are not consistent. Take your pick, the hole is either £116bn, £128bn or £160bn. 

Consumer prices rose 1.7 per cent in Canada in the 12 months to August, close to the Bank’s 2 per cent target but a 0.1pp fall from July. Core prices (excluding energy) rose to a healthy 1.6 per cent. Many had expected CPI to rise.

The fall in inflation, though slight, would support the idea of a rate pause. The Bank of Canada raised rates on September 8, despite issuing a pretty gloomy outlook on the economy. This rate rise – which came after the end of the inflation period – will likely dampen inflation further in the coming months.

Ireland has successfully raised €1.5bn on the markets – but at a price. €1bn 2018 bonds sold at an average yield of 6.023 per cent, nearly a 1 percentage point premium over their last offering in June.

€500m of 2014 bonds were also sold at 4.767 per cent, 1.1pp more than a similar offering in August

The UK is likely to suffer greater volatility in inflation, output gap and yield curve after the recent crisis because of the type of rate targeted by its central bank.

New research published by BIS suggests repo rate targeters – such as the Bank of England with its bank rate – experience greater macroeconomic volatility in times of turmoil. In normal times, the difference is less obvious. Still, if a central bank adopts a policy of discretion over commitment*, repo rate targeters will suffer greater volatility even in normal times.

Central banks targeting market rates – such as the Fed and the SNB, which target the rate at which banks lend to each other – are therefore somewhat insulated from recent shocks. Researchers