Daily Archives: February 9, 2011

Robin Harding

This chart from Merrill Lynch via Alphaville (which shows how the market has made repeated false starts on when the Fed will raise rates) sent me off to CME Fedwatch to see when markets expect the first rise in Fed Funds.

The answer is that fed fund futures give a 22% chance of a rate hike by August, 41% by September, 54% by November, and 67% by December. I can only disagree: given what I understand of the FOMC’s reaction function, I think these probabilities only fit a scenario in which a large part of the FOMC has got its inflation forecast wrong and, by the autumn, been forced to change it. Read more

Domestic inflation seems a much likelier explanation for the recent appreciation of the yuan than American pressure. Many commentators have referred to the Chinese “bowing to pressure” or otherwise implied that the authorities have – without apparent trigger – capitulated to Western pressure. A quick look at the timing suggests otherwise. China is in the middle of a tightening extravaganza, raising interest rates and reserve requirements to tackle inflation. A strengthening yuan can have exactly the same effect, by making imports cheaper. Timing is only circumstantial evidence, of course, but it is something.

ECB executive board member Lorenzo Bini Smaghi roundly rebuffs the conclusion reached by a thinktank this week: namely, that Greece would have to restructure its debt. Read the accompanying article, or watch Ralph’s interview:

Axel Weber has indicated he will not serve a second term as Germany’s Bundesbank president, but left open whether he might succeed Jean-Claude Trichet as president of the European Central Bank later this year. The Bundesbank president told a private meeting on Tuesday that he might not want to serve a further eight-year term when his current mandate expires in April 2012, according to a Bundesbank source.

Leaked reports of comments led to a flood of speculation on Wednesday that the 53-year-old former academic economist was also withdrawing from the race to succeed Mr Trichet, who will leave the ECB at the end of October, and that he was planning a move to Deutsche Bank, Germany’s largest bank by assets. Read more

I have been informed by a former Monetary Policy Committee member that my post on the February voting maths is wrong. I have no reason to disbelieve this new information and when you get things wrong it is important to acknowledge the fact, learn from it and move on*.

Contrary to what I wrote and the minutes of MPC meetings**, the governor does not invite the Committee to vote on a specific proposition, but invites the members to vote as they see fit. Deputy governor for monetary policy first, then other members in a random order and governor last. This is confirmed by a 2005 Bank of England article by Richard Lambert, former MPC member and my former editor.

This procedure is certainly open to all  sorts of gaming, similar to what I described, particularly since members can opt to delay their vote until they have heard the views of other MPC members. Two former members, DeAnne Julius and Tim Besley, speaking at the Fathom Consulting Monetary Policy Forum this morning said that they would exercise that option if they were voting tomorrow. Read more

Another rate rise is likely on March 15, after a member of the MPC said it would have to raise rates to combat a “wave of inflation” coming from abroad. Last month, Poland raised its key refinancing rate 25bp, its first increase since the crisis.

“Through trade, an inflation wave is reaching even here. There is no other way. The MPC (Monetary Policy Council) will have to raise interest rates,” Jerzy Hausner said in an article coauthored with Miroslaw Gronicki, a former finance minister, reports Reuters. Read more

There are international rules to govern global trade, but none to oversee foreign exchange markets or capital movements, Israel’s central bank governor has observed.

Stanley Fischer said standards for capital movements were needed, even though it was not possible to govern how much central banks could intervene in markets. Reuters news wire reports: “It is important that the IMF is now trying to develop such rules, to figure out what works and what doesn’t work when the exchange rate starts to appreciate and … what measures they can take that are acceptable from the viewpoint of managing the international economy,” he told a conference. “Those are rules we have to develop just as we developed rules gradually in the years since the 1950s that produced a global trading system,” he added.

Many countries grappling with “hot money” blame the US openly and directly, but Professor Fischer did not join them. “I believe the US is doing what needs to be done for growth. Read more

Robin Harding

As I wrote in today’s paper it is the outlook for inflation, not growth, that is going to be most difficult for the Fed to judge as it ponders policy post-QE2. In that regard it’s fascinating to watch the dormant debate on core versus headline flare up again.

Jeffrey Lacker – Richmond

Mr Lacker cited both current and forecast headline inflation in his speech with no mention of core.

This generally positive assessment is complemented by the benign outlook for inflation. Over the 12 months ending in December, the price index for personal consumption expenditure has risen 1.2 percent. This low inflation rate seems more consistent with our price stability mandate than the figures over 2 percent that were common in the years leading up to this recession. Many forecasters are expecting inflation this year to come in between 1-½ and 2 percent. That is my expectation as well, and would represent a good outcome.

 Read more