The final part of any Fed announcement of a new programme of asset purchases would be some indication of its future intentions: its willingness to increase or decrease the size of the programme and the conditions under which it might do that. Once again, the Fed will not decide anything until the FOMC meets and I don’t know any details, but I can set out some considerations.
How conditional is conditional?
If you look back to the Fed’s March 2009 statement there was an attempt to make asset purchases conditional.
“by purchasing up to an additional $750 billion of agency mortgage-backed securities”
In a previous post I suggested that a plausible estimate for the amount of asset purchases the Fed may initially consider for a new round of quantitative easing is about $500bn. I’d emphasise again that this is informed speculation because if I had any definite information it would have been in the newspaper this morning.
The next important question is how fast it would buy those assets. Again, I have no definite knowledge, but I can set out some of the considerations.
In the piece I wrote in Thursday’s paper I said that the Fed could either set out a rate of buying (Xbn a month until a total of X) or a timeframe (a total of Xbn over X months). Given that Distance = Speed x Time it is just a question of which of the latter two parameters you choose to define. Read more
I don’t have a reportable number for the size of the new programme of asset purchases that the Fed will consider at its November meeting – it is even possible that the meeting will tweak whatever the staff propose somewhat – but I can manage some informed speculation on the likely order of magnitude.
As I have reported, the Fed is not planning to go totally meeting-by-meeting, and there will be some medium-term guidance at least on the amount of purchases that are very likely to be completed. $500bn seems about right for that initial number.
There are several reasons to think this: Read more
Record high rates charged by banks on unsecured debt are not justified by default and write-down rates, as banks claim.
News broke yesterday that five-year debt in the UK is at its cheapest since the 1980s. Great news for banks; even politicians were probably pleased. But of little help to consumers – and by extension, the real economy. Until banks drop their rates, and pass through some of the savings, they remain a bottle-neck in the transmission of cheap debt. And that means that monetary policy tools – such as making debt cheaper – cannot effectively flow through to stimulate a debt-fuelled recovery.
The problem is simple: banks are borrowing ever more cheaply but lending at ever higher rates. Take overdrafts. In August the average overdraft rate offered by banks hit a record high of 19.08 per cent, and it stayed there through September. The banks’ cost of debt shouldn’t be causing this: we don’t know the composition of their funding, but we do know that government and corporate debt rates are falling. So, why the high rates?
When asked by the Bank of England, banks said increasing default rates were the problem:
…spreads between effective interest rates and Bank Rate and Libor for consumer credit — particularly for interest-bearing credit card balances — remained significantly wider than in late 2008, which lenders reported as partly reflecting heightened credit risk on this form of lending.
Why, then, did banks report falling defaults for ‘other unsecured’ loans in the latest credit conditions survey? Read more
French daily La Tribune reports that President Nicolas Sarkozy is opposed to Axel Weber taking the helm of the ECB next year. Citing sources close to the president, the paper says Mr Sarkozy has never agreed to Mr Weber’s appointment with German chancellor Angela Merkel. To underline the point, the paper points out that Mr Sarkozy has only recently received Bank of Italy governor Mario Draghi, widely considered Mr Weber’s chief rival.
The appointment of an ECB president needs approval by the EU’s political leaders, so Mr Sarkozy’s views will carry some weight. But this might just be political horse-trading. Automated Trader reports rumours that Mr Sarkozy has pledged to support Mr Weber’s candidacy in reward for Ms Merkel’s co-operation on EU fiscal rules. Plus it might be politically unpalatable to have ‘Southerners’ holding both key positions at the ECB (the ECB VP, Vitor Constancio, is Portuguese). Read more
Sweden is forecast to raise rates next week by 25bp, taking the repo rate to 1 per cent. If this happens, Sweden will have the honour of being the only European serial rate-raiser – an exclusive club spread across the globe, including Israel, Taiwan and Chile. Other rate-raisers have paused. From Citi:
We expect the Riksbank to continue its policy normalization, hiking by another 25bp to 1.0% at the upcoming October 25-26 meeting. Such a move would echo the September conditional interest rate path and also be in line with current market pricing (discounts about a 92% chance of such an outcome)…
We see compelling reasons building, though, for a downgrade of the longer-term part of the Riksbank’s rate path. There is little sign of inflationary pressures building and, combined with an uncertain global economic outlook and lower global interest rate expectations, the Riksbank should be in no hurry to hike, once the policy rate has reached more normal recessionary levels (of around 1.25-1.5%, in our view).