Daily Archives: October 15, 2010

Robin Harding

All the papers at today’s Boston Fed conference on monetary policy have been fascinating but the last one of the day is the first one I’ve been free to concentrate on.

It was an fascinating – and extremely disturbing – paper on inflation dynamics by Jeff Fuhrer, Giovanni Olivei and Geoffrey Tootell of the Boston Fed.

To crudely, crudely summarise one of the most interesting conclusions they find that inflation is well modeled using expectations of inflation a year ahead and lagged inflation a year behind. 

Robin Harding

Here at the Boston Fed’s conference on monetary policy in a low inflation environment there was some head-scratching over lunch at the market’s muted reaction to Fed chairman Ben Bernanke’s speech.

Let’s recap. Mr Bernanke said:

  1. That inflation is 1 per cent but the Fed thinks it should be 2 per cent;
  2. That despite a 9.6 per cent unemployment rate, growth next year is unlikely to be much above its longer-term trend;
  3. That the bulk of unemployment is due to lack of demand and hence potentially addressable through monetary policy;
  4. That “there would appear–all else being equal–to be a case for further action”

Fed-speak does not come much more dovish than that. It really doesn’t. 

James Politi

Ben Bernanke, Federal Reserve chairman, did not satisfy everyone’s desires for a decisive, comprehensive, statement on what the US central bank will be doing to address the sluggish recovery in his speech today in Boston.

For instance, he did not even touch some of the more radical moves to tackle inflation expectations that were mentioned in the minutes from the last FOMC meeting in September, such as a nominal gross domestic product target or a price level target.

In addition, Mr Bernanke addressed some of the risks associated with quantitative easing, saying for instance that “one disadvantage of asset purchases relative to conventional monetary policy is that we have much less experience in judging the economic effects of this policy instrument, which makes it challenging to determine the appropriate quantity and pace of purchases and to communicate this policy response to the public.”

But no-one came out of the speech with the impression that the Fed is rethinking a QE2 announcement in November. Quite the contrary, it seems that the debate on the need and timing of a move is pretty much settled, but there is still some wavering and discussion on the form. 

The Federal Reserve has taken a large step towards a formal inflation target after chairman Ben Bernanke said that most of its officials think the rate of price rises should be “2 per cent or a bit below”.

Noting that current measures of core inflation are around 1 per cent, Mr Bernanke said that “inflation is running at rates that are too low” relative to what the Fed judges is most compatible with its mandate. 

Taiwan just expanded its armoury against hot money: its financial regulator has apparently accepted a proposal from the central bank to accept only US dollars as cash collateral for bond borrowing. The move is intended to bar the use of bond borrowing as a means of speculating on Taiwan’s currency. There is no official confirmation (in English, at least) on the Financial Supervisory Commission or central bank websites but the news is widely reported from local sources. While addressing the Legislative Yuan’s Finance Committee, FSC chairman Chen Yuh-chang also voiced reservations about a more direct ‘hot money’ tax, saying it could dramatically affect domestic equities.

Chile’s central bank is still raising rates, but more slowly. On Thursday, the Bank increased its key policy rate 25bp to 2.75 per cent, as expected. This marks a slowdown for the Bank, which has increased rates by 50bp every month since June.

Banco de Chile cited an appreciating peso and a slowdown in developed economies as key risk factors: “Slower than expected recovery in developed countries is an important risk factor facing emerging economies.” Inflation has also tempered more quickly than expected with annual inflation currently standing at 1.9 per cent; short- to medium-term inflation expectations have also fallen and are now bang on target at 3 per cent.