Daily Archives: February 10, 2011

Robin Harding

Kevin Warsh, governor of the Federal Reserve, is to step down at the end of March. It is not an enormous surprise: he has been at the Fed for five years and after the passing of the financial crisis, where he was a leading player in the Fed’s response, it is probably time for new challenges.

A few thoughts:

(1) Mr Warsh had hawkish views on QE2 and his departure will be seen as making the committee more dovish. I’m not sure that’s quite right: Mr Warsh was always a stalwart supporter of chairman Ben Bernanke and I think he helped to keep the committee together.

(2) His departure will leave the Board in Washington light on financial markets expertise and contacts. The Board will also be short of governors with strong Republican credentials which may not help it on Capitol Hill. Read more

Never have forecasters disagreed so much over eurozone inflation. Average inflation expectations for the current year have jumped, as the breadth of views has widened substantially.

Prices are now forecast to rise by 1.9 per cent in the course of this year – up from about 1.5 per cent for the past 5 quarters. But for the first time since Q4 2008 some believe that inflation will be above 4 per cent this year – even as a growing number believe it will end the year around zero. The spread of responses – as measured by the standard deviation – rose to 0.3: this is the first time since the creation of the eurozone that there has been so much disagreement over current-year inflation.

Given the upward trend of actual inflation – and the latest, December, number being above target at 2.2 per cent – the ECB may be well pleased that the 60-odd independent forecasters still project below target inflation for the eurozone.

On the chart, right, Read more

The Bank of England has again held rates at 0.5 per cent and kept its stock of asset purchases at £200bn. Minutes, showing voting patterns, will be released in two weeks’ time, at which point we will be able to see whether members of the MPC are more worried by the (probably temporary but very surprising) downward dip in growth, or by current rate of consumer prices.

Rumours of rate-raising were based on persistently high inflation in the UK. CPI is currently running at 3.7 per cent y-o-y, against a target of 2 per cent. The Bank’s view is that the forces pushing up inflation are temporary, and that it will fall back to target within the next two years. As increasing numbers of commentators are observing, however, the Bank has relatively little control over imported inflation.

After a two-week hiatus, the European Central Bank is back; reportedly intervening to buy up Portugese bonds on Thursday after yields on the Club Med debt surged.

Surprisingly low inflation figures from Norway will weaken the already-dubious case for a rate hike. Annual core inflation in January fell to 0.7 per cent from 1 per cent the month before. Headline inflation fell from 2.8 to 2 per cent. The target is 2.5 per cent and many analysts had expected a rise in core inflation.

Indeed, the persistent downward trend of the two core measures of inflation (red and blue on the chart) might add to the case for some monetary loosening. Care must be taken relying on annual figures, though, as a new source of weightings applies to the consumer price indices as of 2011. Month-on-month figures over the next few months will give a better indication.