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Monthly Archives: November 2010
Fed chairman Ben Bernanke is taking his QE2 outreach on the road to Columbus, Ohio, tomorrow for a ‘conversation on the economy’ with business leaders. It’s supposed to focus on the job market but I imagine it will turn to monetary policy. Businesspeople scheduled to attend include:
Alan Mulally, President and CEO, Ford Motor Company, Dearborn, MI
Samuel Palmisano, Chairman of the Board and CEO, IBM Corporation, Armonk, NY
Curtis Moody, President and CEO, Moody•Nolan, Inc., Columbus, OH
Jeni Britton Bauer, President, Jeni’s Splendid Ice Creams, Columbus, OH
Dwight Smith, CEO, Sophisticated Systems, Columbus, OH Read more
There is inevitably a focus on forecast revisions when any official body produces new predictions about the future. Today the Office for Budget Responsibility, Britain’s new fiscal watchdog, raised the 2010 growth forecast to 1.8 per cent and dropped the 2011 forecast from 2.3 per cent to 2.1 per cent, as the FT reported in recent days.
Robert Chote, the OBR’s new chair, also gave his endorsement to the deficit reduction plan, saying the government had a greater than 50:50 chance of wiping out the hole in the public finances within five years. All of this was incredibly easy to predict.
The interesting decisions taken by the OBR were on its estimate of the fiscal multiplier and its view of the degree of spare capacity in the economy. The first matters because it determines the official view of the effect of budget consolidation on growth. The latter matters because the degree of spare capacity determines the OBR’s view of the size of the hole in the public finances, but has the annoying problem of being impossible to measure. On these two issues, Mr Chote is gung-ho on the multipliers, but displays wise caution on sounding too certain about spare capacity. Read more
Berlin’s approach – and that of the European Central Bank – to handling the eurozone crisis, has come under strong attack from Peter Bofinger, economics professor at Würzburg university and an independent adviser to the German government. Without a profound change of strategy there was a “major risk of an unraveling of the euro area,” he has said.
A “dangerous” adjustment process is being forced on eurozone countries, he told a Financial Times/Credit Suisse conference in Frankfurt. The weakest spot is Greece, which faces rising unemployment and debt levels. As a result, political opposition to euro membership would grow, according to Prof Bofinger. “Sooner or later we will have a discussion in Greece: ‘why not leave the euro?’” A new currency could then be devalued and much of the government’s debt cancelled out. Once Greece had left, others would follow. Read more
When the FT reported that senior Bank of England staff including Monetary Policy Committee members thought Mervyn King, Bank governor, had overstepped the line separating monetary and fiscal policy, the governor was dismissive.
He rounded on my excellent colleague, Daniel Pimlott, who asked him whether he had the unanimous support of the MPC in endorsing the political decision on the speed and scale of the new government’s deficit reduction.
“And, just for the record, I’ve spoken far less on this than almost any other central bank governor around the world; less than Ben Bernanke, less than Jean-Claude Trichet, both of whom have given speeches in great length and regularly. I haven’t spoken on this except in response to direct questions at the Treasury Committee, and when asked by the Coalition. So perhaps we’ll move on to a serious question about the economy.”
There is still little sign of a change of direction in the inflation data. Core PCE in October came in at 0 per cent month-on-month at an annualised rate and 0.9 per cent year-on-year.
As the overall level of growth in the UK continues to be robust – at 0.8 per cent in the third quarter – the detail of the figures just published will keep everyone guessing about the sustainability of that growth. Good news and bad news are evenly balanced and the economy is far from set fair or obviously a basket case. That is why the mushy middle prevails on the Monetary Policy Committee
- Market sector output. Real market sector output grew by 1 per cent in the third quarter, indicating robust demand. It has expanded 3.4 per cent in the year to the third quarter, indicating that the willingness to pay for additional goods and services has been strong since late 2009 and the private sector has been in good shape. This bodes well for the consolidation ahead. (Market sector output represents goods and services produced and sold in markets at meaningful prices. Most private sector activity and public sector stuff such as planning fees are included. Direct provision of free-at-the-point-of-use health and education services are excluded.)
- Broad based output gains. In the third quarter, services accounted for half the 0.8 per cent GDP rise, construction a quarter, and production the rest. The expansion was not dominated by one sector, even if construction gains were disproportionate to their size in the economy.
- A welcome boost from net trade. When looking at the expenditure contributions to growth, net trade (exports and imports) contributed 0.4 percentage points of the growth, indicating that the trade account is finally helping drive prosperity rather than detracting from it. Both imports and exports grew faster than GDP, but exports grew much faster.
The European Central Bank governing council goes into “purdah” on Thursday ahead of next week’s interest rate setting meeting. So Yves Mersch, Luxembourg’s central bank governor, has seized a last chance to sway the debate.
Action to stabilise Ireland’s banks “will allow us to continue on our gradual and prudent exit strategy,” he told CNBC on Wednesday. “I would not take issue with the expectations that are presently in the market.”
That suggested at least Mr Mersch favoured another step to restrict the liquidity the ECB is pumping into the eurozone financial system. Read more
First, there was barely any change at all to the 2012 growth forecasts – the range edges down a little to 2.6-4.7 per cent – and elsewhere we learn that the Fed staff actually upgraded their growth forecasts because of the lower interest rates, currency etc brought on by expectations of QE2. That shows strong confidence in the effectiveness of the policy. Read more
People are missing the really important part of the Fed minutes: the videoconference meeting on October 15th. It tells us some vital things:
- The Fed gave serious consideration to targeting a term interest rate (presumably something such as the ten-year). It chose not to do so, but if it got this much attention, it must be a serious option if inflation continues to drift down or QE2 fails to anchor market interest rates.
- The Fed is considering big changes to its communication practices, including on-the-record press briefings by the chairman, after the fashion of the European Central Bank or the Bank of Japan. Vice-chair Janet Yellen has been put in charge of a subcommittee to investigate communications policy. Read more
Today’s publication of the latest FOMC minutes will probably unveil significant downward revisions to the Committee’s inflation and gross domestic product forecasts for 2011, as well as a large upward revision to its unemployment forecast. More interestingly, the minutes will show whether the FOMC is broadly united on the strategy of quantitative easing which it has now adopted. Is the FOMC clear about how QE is intended to work? I raise the question because Mr Bernanke’s most recent speech made the rather startling claim that the policy should not even be called “quantitative easing” in the first place. Not all of his colleagues on the FOMC, and few of his outside critics, appear to agree with him.
The term “quantitative easing” first came into prominence about a decade ago, when the Bank of Japan was being urged by economic commentators to take direct measures to increase the money supply, after its zero interest rate policy had failed to reverse deflationary forces in the economy. In an article co-authored by Mr Bernanke in 2004, the Bank of Japan was defined as conducting a policy of QE when it “added liquidity to the system beyond what is needed to achieve a (short term interest) rate of zero”. The Bernanke paper suggested that this was normally done “through open market purchases of bonds or other securities which have the effect of increasing the supply of bank reserves”. These are the standard definitions, which have been widely used by economists ever since.
Compare this with what Mr Bernanke said last week: Read more
This isn’t what was meant to happen. The euro is falling sharply today. Equities are also down and credit spreads have widened since the weekend. Peripheral debt is falling in value, so yields are rising (see four charts, below).
These are classic stress reactions in the markets… which the Irish bail-out was meant to stop, if not reverse. The worry is that politicians will continue to look for – and find – problems in domestic economies. (Portugal is lined up next, and then Spain.) The lack of reaction to Ireland’s bail-out tells us very clearly to look for a Europe-wide problem and a Europe-wide solution. Read more
Tensions in the eurozone banking system are not going away. At least one bank, maybe more, has been borrowing heavily from the European Central Bank’s “marginal lending facility” in recent days – a backstop mechanism for those banks who find themselves suddenly short of funds. Use of the facility, which incurs a penal 1.75 per cent interest rate, has been above €2bn for 11 consecutive days now and this morning rose above €3.6bn.
The level of borrowing is not yet at record levels but, interestingly, use of the facility has been heavier than in early May, when the crisis over eurozone’s public finances was at its most intense – and before the European Union’s bail-out system was put in place. Read more
If the Irish bail-out was intended to calm markets, it has failed. Yields on Irish debt are the most stable they have been for weeks, shifting a few basis points and staying above 8 per cent. The cost of credit insurance has risen and the ECB is apparently still buying Irish bonds.
Euro officials will be worried, and Irish officials furious. This suggests that Ireland’s lack of funds was not what was driving bond yields up. Did EU officials pressure Ireland to accept a bail-out for nothing?
Ireland is not Greece, and the markets know it. After the Greek bail-out, there was a dramatic, if temporary, fall in yields of about 4 percentage points. Of course, relief centred on more than just Greece’s small economy: the bail-out proved that eurozone members would stick together.
Ireland’s bank bail-out plans came as a relief to the European Central Bank, after providing another example of the increasingly political role being played by the euro’s monetary guardian. Alarmed at the massive amounts of liquidity it was pumping into Irish banks, the ECB lobbied hard behind the scenes for action to shore up the country’s financial system.
A successfully completed rescue, helped by the International Monetary Fund, would reduce the immediate pressure on the ECB, which welcomed Dublin’s decision in a statement late on Sunday – but not allow the Frankfurt-based institution to escape the political area. It is pushing hard for bolder reforms of the eurozone’s system of government – demanding tougher surveillance of fiscal and other economic polices, backed up with sanctions, to prevent crises from erupting.
Fresh ECB involvement would be required were the eurozone’s financial crisis to engulf Portugal or Spain. Even if it does not, the ECB is still likely to be active in buying government bonds under an emergency programme launched when the eurozone crisis was at its most intense in May. “The ECB has become part of the game to an extent it was not before,” said Jörg Kramer, chief economist at Commerzbank in Frankfurt. Read more