The headlines from the Fed minutes are thoroughly covered on ft.com so a few more subtle points here.
What was day one of the two day meeting about?
Structural unemployment. It’s not a surprise that the FOMC wanted to discuss this given how important the degree of slack in the economy is for future policy. The summary in the minutes is feeble and gives no real sense of the committee’s conclusion – although maybe they didn’t reach one. The closest it comes is this:
Most of the research reviewed suggested that structural unemployment had likely risen in recent years, but by less than actual unemployment had increased.
Which is a statement of the blindingly obvious. It is a bit of a missed opportunity to put this issue to bed since I think there are few people in the Fed system who believe that structural unemployment will become a binding constraint any time soon.
It is no secret that China’s appetite for Treasuries has been waning. Official figures now bear out Beijing’s stated desire to diversify away from US government debt. The market impact is likely to be muted for now, given the Federal Reserve’s bond-buying under its “quantitative easing” programme. But what happens when QE2 ends in June? Beijing’s pull-back may then become noticeable.
The US Treasury market occupies the centre of the global financial system. It is the deepest and most liquid bond market in the world, and demand from central banks and institutional investors, including private sector banks and hedge funds, has allowed the American government to finance its multibillion-dollar budget deficits.
Georgia has raised its key rate 50bp after a three-month pause in tightening that began in May of last year. Back then, the refinancing rate was 5 per cent; now it is 8 per cent.
Strong inflation prompted the move. Consumer prices rose 12.3 per cent in the year to January, up from 11.2 per cent in the year to December. The government’s forecast for 2011 is 7 per cent and the target is 6 per cent. Tbilisi is facing a period of accelerating inflation, which was only slightly dampened by the last two 50bp rate rises in September and October 2010.
I’ve now had a few hours to digest the Inflation Report. As our news story says, the report confirmed market expectations of a series of rate rises starting in the second quarter. Of course, Mervyn King, the governor, did not say the Bank would raise rates. No one sensible ever expected him to – that would violate the Bank’s sensible rule of never deciding monetary policy until the meeting in question.
What you can say, as we did in this morning’s paper, is that the latest inflation forecasts are consistent with interest rate rises and inconsistent with interest rates staying on hold. The Bank has therefore verified the market expectations of rate rises, although not quite some of the more wild predictions yesterday that the MPC was just wanting a March rate rise to come as a surprise.
Lessons learnt from past forecasting errors
I asked the governor what lessons the Bank had learnt from its bad inflation forecasts since 2005. The answer could be paraphrased as, “stuff happens”. Mr King has learnt that inflation out-turns “can be explained by energy and commodity prices”. This is about as close to saying, “I’ve learnt nothing”, as is possible. I genuinely hope that is not true.
The way clothes price data used to be gathered probably made inflation seem lower than it really was, and updates to that method last year have added up to 0.3 percentage points to consumer price inflation – and more to retail price inflation. The Bank of England tells us that changes to price collection practices at the ONS “will potentially affect clothing and footwear inflation persistently; they do not represent a one-off adjustment to the price level.”
The Bank’s quarterly inflation report explains: “Increases in CPI clothing and footwear prices during 2010 in part reflect [cotton, sterling, VAT and energy]. But the increases probably also reflect a change in price collection practices by the ONS. Previous collection methods may have biased down estimates of CPI clothing prices.” Growing divergence between UK and euro area clothing price indices, right, supported this view, as some broad similarity would be expected.
Imported inflation from emerging markets is a short-run factor which the Bank will take into account, Mervyn King has said at today’s release of the quarterly inflation report. “In the very long-run, however, inflation is not determined beyond these shores but domestically.”
This is a surprising statement, and one at odds with some of his European peers, at the very least. Lorenzo Bini Smaghi, ECB executive board member, recently warned of a sea change in inflation dynamics. “Unlike the last decade,” he said, “the process of reducing the prices of manufactured goods imported from developing countries seems to have ended, particularly in respect of products imported from China.”
Germany’s ruling centre-right coalition parties are expected to agree this week to appoint Jens Weidmann, chief economic adviser to Angela Merkel, the German chancellor, as the youngest president of the Bundesbank. The move follows the surprise resignation of Axel Weber as head of the fiercely independent German central bank.
Mr Weber, who will leave at the end of April, had been expected to be Germany’s candidate to be the next president of the European Central Bank. His departure has left Ms Merkel without an obvious alternative for the ECB job.