Daily Archives: October 18, 2010

James Politi

Sheila Bair, chair of the Federal Deposit Insurance Corporation, gained much respect and notoriety in Washington for her warnings about - and handling of - the subprime mortgage crisis.

And so it is somewhat unnerving to see her offer remarks today warning about the potential for a bond bubble that could do significant damage to the US financial system if banks do not prepare for higher interest rates down the road. Especially in a context of possible additional quantitative easing by the Federal Reserve, which could easily push treasury yields even lower than they are now.

“The consensus is that this low-rate environment will persist for some time into the future,” said Ms Bair. “But what will happen when interest rates inevitably rise, and how disruptive will that process be? “ Read more

Robin Harding

Dividing the FOMC up into hawks and doves is only marginally productive but inescapable at the moment. Dennis Lockhart is a moderate member of the committee, and representative of a number of colleagues with backgrounds in banking rather than economics. A speech he has given today suggests he is in favour of further QE barring a change in the data.

To opt for more quantitative easing at this juncture is a big decision. Today I will walk you through the thicket of considerations that lead me, at this moment, to be sympathetic to more monetary stimulus in the near future.

 Read more

James Politi

One of the big debates in US economic and financial circles amid the sluggish recovery has centered around this question : are small businesses suffering, and not hiring, mainly because of a lack of demand for their products and services and uncertainty about the future, or is lack of available credit also constraining them in a significant way?

The Federal Reserve Bank of New York weighed in on this question today, releasing a new survey of small businesses conducted during the summer. “Prudent lending to creditworthy small firms who contribute to the recovery is in our collective interest: it’s good for our communities and it’s good for the American people,” said Kausar Hamdani, community affairs officer at the New York Fed. Read more

James Politi

The Federal Reserve has just released data on industrial production in September, and it wasn’t pretty. For the first time since the end of the recession in June 2009, factory output fell by 0.2 per cent – a disappointment compared to expectations of a small increase.

This is without doubt another round of ammunition in the belt of those officials on the Federal Open Market Committee who believe, without too many reservations, that an aggressive quantitative easing programme should get underway promptly. Read more

How did Allied Irish Banks pass the CEBS stress tests, but then require a bail-out from the Irish government? This is the question Labour MEP Alan Kelly is apparently to pose to EU competition commissioner, Joaquín Almunia.

There may be red faces at CEBS, the Committee of European Banking Supervisors, which organised the stress tests and published the results in July. Banks self-reported the numbers, based on a template with some EU-wide and some country-specific assumptions, and CEBS then cross-checked and peer-reviewed the data. Read more

The ECB didn’t buy any bonds last week, following an abstemious week the week before. Under the Securities Market Programme, the ECB has been supporting peripheral eurozone members by buying government securities since sovereign debt troubles in Greece in May.

Recent Irish and Portuguese sovereign debt woes prompted a resurgence in this (highly unusual) ECB activity, but the overall trend is clearly downwards (no doubt to Axel Weber’s delight). Markets have been calmer since the IMF-EU bail-out of Greece and the creation of the EFSF. Pity Mr Weber wants to phase that out, too.

South Korea, holder of the world’s fifth-biggest foreign exchange reserves, is considering expanding its small holdings of gold to diversify its dollar-heavy portfolio.

Such a move could prove significant to the international gold market as Seoul currently only holds about 14 tonnes of the lustrous metal, equal to just 0.2 per cent of its $290bn reserves at current prices. By contrast, Italy and France each hold just under 2,500 tonnes of gold, amounting to more than 65 per cent of their reserves. Read more

“Only one person can now stand in the way of Axel Weber, and that is Axel Weber.” This from an entertaining article by Wolfgang Munchau, who points to Professor Weber’s recent opposition to the ECB on matters such as bond buying and the mooted permanence of the European Financial Stability Fund. The Bundesbank president, widely considered a front-runner to succeed Jean-Claude Trichet next year, wants the ECB to phase out its asset purchase scheme, wants an early exit from low interest rates and favours the eventual phasing out of the EFSF. “It is,” says Mr Munchau, “hard to find someone who is more out of tune with the EU’s majority view on economic governance.” Mr Trichet seems to agree.

ECB governing council decisions are formed by consensus and not by vote. So the role of president is of peculiar importance, in building and communicating consensus – a decision reached by very human means, and not simply by a tally of hawks and doves. Mario Draghi – another front-runner – may possess more of these skills. But, Mr Munchau concludes, if the race for presidency turns into a two-man fight, the likely victor will be a third man, “nobody knows who, but most probably a northern European with a hawkish mindset. There is a long tradition in the EU that the top jobs do not go to those best qualified, but to those who happen to have the right nationality at the right time.” Well worth reading in full.

Robin Harding

One of the main things I took from chairman Bernanke’s speech last Friday was a wish to refocus attention on the Fed as an inflation-targeting central bank.

Although attaining the long-run sustainable rate of unemployment and achieving the mandate-consistent rate of inflation are both key objectives of monetary policy, the two objectives are somewhat different in nature.

Most importantly, whereas monetary policymakers clearly have the ability to determine the inflation rate in the long run, they have little or no control over the longer-run sustainable unemployment rate, which is primarily determined by demographic and structural factors, not by monetary policy. Thus, while central bankers can choose the value of inflation they wish to target, the sustainable unemployment rate can only be estimated, and is subject to substantial uncertainty.

Moreover, the sustainable rate of unemployment typically evolves over time as its fundamental determinants change, whereas keeping inflation expectations firmly anchored generally implies that the inflation objective should remain constant unless there are compelling technical reasons for changing it, such as changes in the methods used to measure inflation.

I think this highlights the enormous problems caused by targeting inflation without being willing to be admit that you have an inflation target. The Fed fondly imagines that the world understands it is targeting inflation. It is not a surprise it believes this: it talks to economists who run models in which it has a 2 per cent inflation target and to hacks like me who are misspending our lives studying Fed-speak. Read more