Daily Archives: August 9, 2011

Robin Harding

A few thoughts on today’s FOMC. What an August this is turning out to be.

How conditional is the two-year commitment?

Pretty conditional. I wondered initially because, in typical Fed fashion, it doesn’t say “conditional”. But what it does say is: 

Claire Jones

This from the FT.com:

The US Federal Reserve attempted to tackle a rapidly weakening economy on Tuesday by freezing short-term interest rates for two years and opening the door to more quantitative easing, in a move that sent the dollar and Treasury yields sharply lower.

Here is the FOMC’s conditional commitment to keep rates on hold for almost two more years: 

Claire Jones

The European Central Bank has insisted that its bond buying will have no impact on inflation.  But, given that the securities market programme now looks set to increase significantly in size, will it manage to keep its bond purchases ‘sterile’?

Since the programme began last May, the ECB maintained that an amount equal to the money it uses to buy the bonds would be withdrawn through the central bank paying lenders to hold more cash on deposit at the central bank.

Bar a few instances in which a spike in interbank rates impacted demand, sterilisation – as the technique is known – has worked well.

And why wouldn’t it? So long as the rate that the ECB pays is higher than interbank rates, then why would a lender not want to park their funds at the central bank?

In theory, there is no reason why this should change regardless of the size of the programme. 

Robin Harding

Ten days ago I would have said that the FOMC – which is holding its August monetary policy meeting right now – was a mile away from any move towards easing. Policymakers repeatedly and firmly said that inflation is higher and rising than it was last year, policy is already easier, and that’s the end of the story. Show us the deflation risks.

Today, I just don’t know. A lot has happened since the Fed went into blackout on 2nd August. Certain officials didn’t get much rest this weekend. 

Claire Jones

The Swiss authorities are considering several options to curb the franc’s appreciation. Among them negative nominal interest rates. This from the FT’s Haig Simonian in Zurich:

The Swiss government met for a third unscheduled session in short succession on Monday as ministers grappled with curbing the surging Swiss franc.

No details on any potential measures were expected until Tuesday, but Switzerland’s leaders have been bombarded by suggestions ranging from central bank intervention, negative interest rates, capital controls and even emergency tax cuts to help beleaguered exporters.

 

Three-month interbank futures contracts for December were trading at a high of 100.01 as of Thursday, meaning that some are now predicting Swiss rates will turn negative. 

This from the FT’s Robin Harding:

The US Federal Reserve’s meeting on Tuesday is likely to be one of its most difficult and divisive since, well, last August.

Sharply weaker economic data in recent weeks, a new peak in the eurozone debt crisis, and a downgrade to the triple A credit rating of the US have shaken confidence in a way that could spiral towards a new recession. The Fed will be forced to consider fresh stimulus in response.