Monthly Archives: July 2011

Claire Jones

Another day, another dollar. Or, in the case of the People’s Bank of China, about 1.7 billion of them.

In the three months to June, China added $153bn to its reserves, which now amount to $3,197bn.

As with growth, China’s premier has acknowledged that the pace of reserves accumulation must slow.

It has fallen from $197bn in the first quarter of the year. But it is hardly grinding to a halt. And if the renminbi continues to appreciate at the rate it has this year – it has climbed just 1.9 per cent against the dollar so far– then it is unlikely to anytime soon.

There are many benefits to having a $3,197bn reserves stockpile. However, for the PBoC, there are drawbacks too. Read more

Claire Jones

In response to a question from Ron Paul, the Republican congressman of End the Fed fame, on whether gold was money Ben Bernanke gave a resounding “no”.

However, Mr Bernanke might have not been quite so decisive had he taken a look at one of the more arcane parts of the Fed’s own balance sheet.

For an asset to pass the currency test it must fulfil three criteria. It must be a store of value, a unit of account and a medium of exchange . Of course, in everyday economic life gold cannot be used as a medium of exchange – one would struggle to pay most firms in bullion. But the Fed is not most firms. And when it comes to settling their balances with one another, each of the twelve regional Federal Reserves and the Washington-based board does so in gold certificates (which are backed by gold held by the US Treasury).

This from the August 1940 edition of the Federal Reserve bulletinRead more

Robin Harding

Well done to Tim Johnson, chairman of the Senate Banking Committee, for asking Ben Bernanke the direct question that finally let him spell out his position on QE3. That position was clearly implied by his comments yesterday and the minutes of the June FOMC meeting but Mr Bernanke’s reply today made it explicit. Bold is mine.

JOHNSON: The Fed, to its great credit, has pursued policies to stimulate the economy. However, although the Fed continues to hold short-term interest rates near zero, it has ended efforts to reduce longer-term rates through quantitative easing. Given the high rate of unemployment and relatively slow growth in output, why not start a new round of easing, a QE3? Read more

Claire Jones

The Bank of England’s Asset Purchase Facility – the vehicle through which it conducts QE – is up £9.8bn.

According to accounts released today, an increase in the mark-to-market value of bonds held by the facility (the vast majority of which are gilts) coupled with £11.8bn in cash, largely from coupons, means the assets held on its balance sheet were worth £209.7bn. The Bank has loaned £199.9bn. Read more

Robin Harding

The idea of a small rise in the federal debt limit to buy more time after August 2nd for a larger deal is starting to come up quite a lot. For example, the reporting on the Mitch McConnell fallback plan suggests that a $100bn rise in the debt limit would be made available immediately in order to buy time.

The trouble is that as soon as there is any space under the debt limit, the Treasury will be obliged to replenish the government trust funds that it has been borrowing from in order to stay under the limit for the last few months. The law is unambiguous: Read more

Claire Jones

The Bank of Japan did its bit for Sino-Japanese relations on Wednesday by publishing a paper which calls on Chinese policymakers to do what Tokyo did in the 1970s and rebalance their economy.

Accordingly to the paper, written by two BoJ economists, Chinese growth has relied too heavily on investment. This has meant that workers have failed to get their fair share of the spoils from rising profits. It has also limited job creation in urban areas and contributed to a decline in productivity growth. Plus it’s bad for the environment.

So what is to be done? There are two lessons to be learnt from Japan. Read more

Claire Jones

Federal Reserve chairman Ben Bernanke delivered an assured performance before the House Committee on Financial Services today.

The takeaway for financial markets will undoubtedly be that Fed officials are considering QE3. A rise in the prices of gold and stocks, coupled with a dip in the dollar, indicate that investors now judge a third round of asset purchases likely.

But Gavyn Davies and Robin Harding warn such an interpretation may be incorrect. Read more

Robin Harding

It is instructive to compare Ben Bernanke’s testimony today with his Jackson Hole speech last August. We know that Jackson Hole was deliberately intended to signal the likelihood of further monetary stimulus. The crucial lines there were:

“We will continue to monitor economic developments closely and to evaluate whether additional monetary easing would be beneficial. In particular, the Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly. The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do.”

That speech was marked by a heavy focus on the downside risks to growth and inflation rather than upside and it explicitly stated what the Committee was prepared to do. Compare that with today: Read more

Claire Jones

Ben Bernanke

Welcome to the live blog where we will cover Federal Reserve chairman Ben Bernanke’s appearance before the House Financial Services Committee.

All times are London time; Washington, DC is five hours behind. By Claire Jones in London.

This post should update automatically every few minutes, although it may take longer on mobile devices.

17.43 The questioning ends. That’s the end of the live blog. Analysis of Bernanke’s comments to follow. Read more

Claire Jones

Regulators’ fondness for sovereign debt is looking odder by the day.

The eurozone crisis and the Congressional impasse over the US debt ceiling have put paid to any notion of government bonds as risk free. What’s more, a Committee on the Global Financial System paper suggests that encouraging banks to up their holdings might in fact do more to endanger stability than promote it.

The paper, published Monday, identifies a “vicious circle between the conditions of public finances and those of banks”. As banks’ funding costs worsen, so does the creditworthiness of the sovereign, which in turn heightens funding costs. If such a vicious circle does indeed exist, then incentivising banks to hold more sovereign debt in order to fulfil regulatory requirements would only compound the problem. Read more

The first six  months of 2011 have been most uncomfortable for the Bank of England. The combination of overshooting of inflation and weakness of growth really brings out the inner-hawks and inner-doves on the Monetary Policy Committee.

Do they react to the rise in price pressures seeming to come from weakness in supply? Do they assume price rises are temporary and respond to what they see as a shortfall in demand? Or do they sit on the fence?

The fence sitters have won the day so far on the MPC. But today’s inflation figures give some ammunition to the doves. The fall in CPI inflation to 4.2 per cent in June (from 4.5 per cent) ensures there was no overshoot in inflation in the second quarter relative to the Bank’s may inflation report.

Much of inflation’s still high level reflects price rises quite a long time ago, so it makes sense to look (below) at a chart of annualised quarter-on-quarter inflation with rudimentary seasonal ajustment to see whether the inflation scare is past.

I drew this chart so blame me if it makes no sense, but it also gives some succour to doves. Read more

Robin Harding

Charts often circulate that show the size of the Fed’s balance sheet alongside movements in commodity or stock prices – they are used to make a prima facie case that QE2 inflated commodity prices.

Here is a not-very-good version but the best I could manage with FRED (note to St Louis – it’d be lovely to have the GSCI index plus all the numbers from H.4.1). Another one you often see is commodity price movements on the days when the Fed actually conducted QE2 buying. Read more

Claire Jones

A barometer of the Bank of England’s interest, or otherwise, in financial stability has been to calculate the proportion of expenditure devoted to it relative to monetary policy.

Take a recent grilling of chairman of the Bank’s court Sir David Lees, and some of his fellow members, by Treasury Committee chair Andrew Tyrie: Read more

Claire Jones

Central banks’ intellectual frameworks are a little dowdy and need a bit of a freshening up, says Jaime Caruana, the secretary general of the Bank for International Settlements.

In a speech published on the BIS’s website on Thursday, which was delivered in South Africa last week, Caruana claims the crisis opened up a gap between “the theory and practice of central banking” which has left the profession requiring an “intellectual makeover”.

Nowhere was this more apparent, he says, than with monetary policy. Read more

Claire Jones

Officials must do more to ensure no firm is too big to fail. So says the Basel Committee on Banking Supervision in its report on the progress made by its 27 members in introducing frameworks to resolve ailing banks.

Many of the 27 have made progress in granting powers to save local lenders. But for firms with operations around the globe, the problems are “largely unresolved”. Progress on burden-sharing between states remains “at a preliminary stage”.

No wonder. As Bill Dudley, the president of the Federal Reserve Bank of New York, has said, the bulk of regulation and financial information is contained within national boundaries. And these boundaries, Dudley believes, are formidable obstacles to overcome. Read more

Retired LSE professor Charles Goodhart makes a strong case in today’s FT about the systemic risks posed by bail-in bonds and contingent capital (cocos) — debt that converts to equity when a bank is in or near crisis.

But he may be overstating the case when he argues that the Basel Committee on Banking Supervision and the Financial Stability Board have become too enamoured of these cocos and should be forcing banks to raise more equity instead.

In fact, the BCBS did exactly what Mr Goodhart would have wanted when they met last month to determine how to make the world’s largest banks, known as Global systemically important financial institutions (G-sifis), more resilient and safer.  The regulators and central bankers agreed that 25-30 institutions would have to carry extra capital — ranging from 1 to 2.5 per cent of their assets, adjusted for risk — on top of the global minimum of 7 per cent set for all banks last year. Read more

Claire Jones

Brazilian finance minister Guido Mantega’s distaste for QE2 is well known. The Federal Reserve may have decided to give Brasilia a little of its own medicine, however.

Research published on the Fed’s website over the weekend takes aim at Brazil’s use of reserve requirements – the proportion of a bank’s reserves that they are required to park at the central bank – as a tool to manage liquidity.

The use of reserve requirements for this purpose (rather than to combat inflation, as is usually the case), is especially pertinent at the moment given that the Liquidity Coverage Ratio has become one of the more controversial aspects of Basel III. Read more

Claire Jones

ECB president Jean-Claude TrichetWelcome to the live blog where we will cover the European Central Bank’s rate decision and ECB president Jean-Claude Trichet’s press conference.

All times are London time; Frankfurt is one hour ahead. By Claire Jones and Chris Giles in London, and Ralph Atkins in Frankfurt.


16.39 Ralph Atkins’ key points, in no particular order, from today’s press conference. Read more

What was that infamous “Jo Moore” phrase again?

Yesterday certainly was “a good day to bury bad news”. As all eyes were focused on the News of the World phone hacking scandal, the government slipped-out an announcement that its preferred candidate for the new chair of the UK Statistical Authority withdrew her candidacy.

MPs were not convinced Dame Janet Finch, a paid up member of the non-executive great-and-the-good, she was sufficiently independent to be an effective watchdog over official statistics and ministerial spinning of data. The good news for all those interested in clear official data and wider access to information held by government is that the next candidate put forward by government must know they are there to serve the public not the government.

This creates the possibility of a new dawn for UK statistics. all areas including monetary policy will be more transparent and, even if pre-release of data to ministers is curtailed, the Bank of England is unlikely to find its job of controlling inflation compromised.

What was wrong with Ms Finch? She gave a shocker of an interview to MPs last weekRead more

Claire Jones

In the race to succeed Lorenzo Bini Smaghi (who has said he expects to step down before the end of the year) on the European Central Bank’s executive board, two frontrunners have emerged: IMF executive director Ambroise Fayolle, and second in command at the French Treasury Benoit Cœuré.

Both are highly regarded, as is outside bet Jean-Pierre Landau, a deputy governor at Banque de France, though his age may preclude a move to Frankfurt.

Cœuré is considered by some to have the edge because of the direct financial markets experience he has picked up during his time at the treasury. Read more