I don’t understand why the ten-year yield is now at 3.47 per cent and the five-year yield is at 2.06 per cent in the wake of an FOMC statement that gave no comfort at all to people who think that the Fed will end its asset purchase programme short of $600bn.
There was the mildest of upgrades to the growth language:
Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward.
As Roberto Perli of ISI points out, meanwhile, the statement said that measures of underlying inflation continued to trend downward, which is an addition to last time.
An Ivy League handover may be in the cards for the post of National Economic Council director, president Barack Obama’s top economic adviser. Departing the White House is Larry Summers, former head of Harvard University, who will be returning to the famed Boston institution to teach, after delivering his farewell speech at the Economic Policy Institute on Monday. Potentially arriving is Rick Levin, an industrial economist – and president of Yale University since 1993 - who has already been active in Washington and is being considered for the job.
Mr Levin is facing competition from at least two other potential candidates – Roger Altman, the investment banker and former deputy treasury secretary who chairs Evercore Partners, and Gene Sperling, an adviser to the treasury department who recently played a big role in forging the deal with congressional leaders on the Bush tax cuts. There may be others in the mix too. ”The president is interviewing a number of qualified candidates and no decision has been made,” an administration official said on Tuesday.
Mr Levin would make a good choice for Mr Obama on several levels.
Current policy rate: 0 to 0.25%
Consensus expectation: no change
Simple Taylor rule policy: -0.55%
Core PCE price index: +0.9% (October yoy)
Inflation objective: 2% or a bit below
Notable special measures in operation
• Circa $2,100bn in completed asset purchases, holding $950bn of Treasuries and $1,023bn of MBS as of 8th Dec, 2010.
• $600bn increase in asset purchases in progress between November 2010 and June 2011.
Points to watch
• Not many. After launching its new $600bn programme of large scale asset purchases in November this meeting is a time to reflect.
• How much ‘elegant variation’ – which the Fed practices to avoid being pinned down on specific forms of words – will there be in the statement?
• Will the statement acknowledge either (a) the run-up in 10 year yields; (b) the tax deal; or (c) a somewhat improved growth outlook and, if so, how?
One wonders why they asked. Hungary has again requested a legal opinion from the ECB on a draft law; the opinion is again highly critical; and once again the opinion is likely to be roundly ignored.
On July 1, Hungary’s Ministry of the National Economy asked the ECB for advice on plans to limit central banker pay; the ECB issued an opinion saying this was a bad idea; the Hungarian cabinet disputed the opinion and one week later they passed a law cutting the governor’s pay by 75 per cent, which became effective in September.
Some interpreted the ECB’s defence of Mr Simor’s exceptionally high pay* as cronyism. The ECB’s argument, however, focused on central bank independence. A country can’t join the euro, ran the opinion, unless its laws are compatible with those of the ECB:
Gordon Brown has staked his claim to be the saviour of advanced economies in the crisis, by claiming in his new book that he pressed the case for recapitalising banks around the world. For this foresight, the former British prime minister has received adulatory reviews by nobel prize-winning economists.
“Hang on a second,” Mervyn King, governor of the Bank of England, has a right to say. One of the latest Wikileaks US embassy cables shows King was pressing in March 2008 for significant bank recapitalisations and a stigma-free method to allow banks to get rid of their unwanted toxic assets without resorting to central banks. That is well before Brown’s actions that Autumn.
Here is the summary from the 17 March cable:
“King said there are two imperatives. First to find ways for banks to avoid the stigma of selling unwanted paper at distressed prices or going to a central bank for assistance. Second to ensure there’s a coordinated effort to possibly recapitalize the global banking system. For the first imperative, King suggested developing a pooling and auction process to unblock the large volume of financial investments for which there is currently no market. For the second imperative, King suggested that the US, UK, Switzerland, and perhaps Japan might form a temporary new group to jointly develop an effort to bring together sources of capital to recapitalize all major banks.”
Frankfurt-based journalists spent a convivial evening with Jean-Claude Trichet on Monday. After a grilled salmon dinner at the European Central Bank’s headquarters, the ECB president took questions for about an hour. Much of what he had to say was familiar – the misplaced scepticism (especially in the US) before the euro’s launch, the ECB’s success in keeping inflation under control, and so on. Although looking relatively relaxed, Mr Trichet did not let his guard slip. So he refused to comment, for instance, on who might succeed him when his eight-year non-renewable term expires next October.
But he was prepared to be outspoken on the need for further deepening Europe’s economic integration.
We are beginning to see a flurry of concern at the Bank of England about high UK inflation. The annual rise in the consumer price index in November was 3.3 per cent, well above the 2 per cent target and higher than City expectations. The Monetary Policy Committee would have had sight of this figure last Thursday when it kept monetary policy on hold. Even so, there does appear to be a rising level of concern in Threadneedle Street about inflation.
We know from votes and speeches that Andrew Sentance is worried about the credibility of the Bank of England’s monetary policy when inflation is persistently far from target. He is not sounding such a lone voice these days, however. Charlie Bean’s speech yesterday was notable for the increased concern over inflation and Spencer Dale noted earlier this month that the Bank “might not appear to have done a very good job recently” in hitting the inflation target.
As the chart shows, the MPC collective forecast also shows a reasonable risk of inflation exceeding 4 per cent in the year ahead.
By Ralph Jennings in Taipei
It hasn’t been an easy year for Taiwan’s central bank. The authority – which uses exchange rates to manage the economy – grappled in early 2010 with rapid currency gains as investors expected the Chinese yuan to pull the rest of emerging Asia higher.
In October and November the central bank fought back as the Taiwan dollar surged about 3 per cent as hot money flowed into Asia after the United States launched a new round of monetary easing. On Tuesday the currency went at it again, but the central bank may stay on the sidelines this time.
The Taiwan dollar broke its key psychological barrier of T$30 per US dollar, rising as high as T$29.927 in the first hour of trade. An intra-day break past the T$30 mark was last seen in early 2008 on euphoria over the election of Taiwan President Ma Ying-jeou as markets expected him to forge new trade ties with economic powerhouse China. It has not closed a session above T$30 since 1997, before today’s central bank Gov. Perng Fai-nan took control.