Daily Archives: September 20, 2011

Claire Jones

Sir Mervyn King is not known for his fondness for international travel, preferring to send one of his two deputies – Charlie Bean and Paul Tucker – whenever possible.

The governor, however, has traditionally made an exception for the IMF/ World Bank autumn meetings. Read more

Gavyn Davies plans to comment after the FOMC meeting finishes.

Ben Bernanke 

Ben Bernanke. Image by Getty.

As the Fed starts its special two-day FOMC meeting today, economists are uniformly expecting a further easing in monetary policy, and markets have priced this in. It would be surprising if the Fed did not deliver. The FOMC will be mindful of the fact that US core inflation has risen in the past few months, but the majority still seems confident that this will prove temporary. Recession risks, on the other hand, would quickly return if the Fed allowed financial conditions to tighten. That will be uppermost in their minds at this meeting.

It is useful to analyse the Fed’s options by asking what it is basically trying to achieve at present. The minutes of the August FOMC meeting made it clear that the majority of members are trying to ease monetary conditions by reducing long bond yields, and thereby flattening the yield curve. The thinking is fairly straightforward. Since they cannot reduce short rates below zero, the next most obvious way of easing policy is to reduce long rates towards zero as well. That was also the purpose which lay behind QE2; the rise in the monetary base which occurred as they increased the size of their balance sheet was an incidental side effect of the policy, not its primary purpose. And it has got them into a lot of political trouble.

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Claire Jones

Lars Nyberg, one of the deputy governors at Sweden’s Riksbank, is a frequent critic of the eurozone authorities’ handling of the crisis. He has also been remarkably prescient.

So, what do the Riksbank’s minutes of its 6 September meeting, out today, reveal about what Mr Nyberg thinks will happen next? Read more

Claire Jones

Courtesy of the Irish Times:

How many euro area finance ministers does it take to change a light bulb? None – there is nothing wrong with the light bulb.

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The Bank of England’s quarterly bulletin is usually a very dull and conservative document. This quarter, it has been more widely read for its article on the impact of quantitative easing.

It is easy to quibble with the estimates, but I am not going there. More useful is the understanding it gives of what the Bank thinks the effect of QE is on growth and inflation. That way we can gain some insight of its own assessment of the transmission mechanism. The article concludes:

If we compute the range across the different estimation methods, using the middle of the ranges of the bottom-up estimates , this would suggest that QE may have raised the level of real GDP by 1.5% to 2% and increased inflation by between 0.75 to 1.5 percentage points.

These rules of thumb are, as the QB says, very uncertain. They are also very useful. Read more