Daily Archives: January 23, 2012

Claire Jones

Money Supply will be running a series of Q&As on some of the more arcane but newsworthy aspects of central banking. Any suggestions for Q&As from our readers are of course welcome.

So the Federal Reserve on Wednesday will publish forecasts which will show us how long it plans to keep rates at more-or-less zero. Hasn’t it done that already?

Sort of. The voting members of the Federal Open Market Committee, which is responsible for setting interest rates, have already committed to keep rates at their current record lows until at least the middle of next year.

The move to produce interest rate forecasts however is a slightly different, slightly bolder step. Read more

Ralph Atkins

And now Finland. Jyrki Katainen, the country’s prime minister, has joined calls for a northern European to be appointed to an upcoming vacancy on the European Central Bank’s six-man executive board.

As reported by the Financial Times, a north-south divide has opened up over the successor to Spain’s José Manuel González-Páramo, whose eight-year term expires at the end of May. Madrid has nominated another Spaniard as his replacement. But Luxembourg and Slovenia have put forward their own candidates, and the Netherlands has also expressed worries about the disproportionate number of southern Europeans on the board. Read more

Ralph Atkins

As Greece’s largest bond holder, with a portfolio worth perhaps €40bn, the European Central Bank is watching closely the tense and protracted negotiations over losses private investors would accept voluntarily as part of a second refinancing deal for the country. Mario Draghi, ECB president, will discuss progress when eurozone finance ministers gather tonight (Monday) in Brussels.

The ECB has two objectives: first, to secure a deal that has a reasonable chance of working and, second, to avoid bearing any burden itself. Neither will be easy. Read more


Ben Bernanke has been very focused on the Fed’s “communications strategy” for several years now, and has patiently pushed the FOMC in his desired direction during a series of detailed discussions. Now it seems that he has reached his destination, and will reveal all (or almost all) in his press conference after the FOMC meeting which begins on Tuesday. Always a fan of explicit inflation targets, the chairman seems finally to have won agreement from colleagues on establishing a formal objective for core inflation of about 2 per cent, though the FOMC will also need to keep Congress happy by talking about its long term unemployment objectives as well. More unconventionally, each member of the FOMC will also publish for the first time their projections for the Fed funds rate extending to 2016.

What is the motivation behind these changes? Mr Bernanke has normally justified such steps in terms of stabilising expectations about the Fed’s genuine intentions, especially on inflation and the forward path for interest rates. At a time when the extension of the balance sheet is causing political difficulties for the Fed, and when inflation expectations could become unhinged by the rapid expansion of the monetary base, the chairman is looking for alternative ways of easing monetary conditions without printing more money. Modern macro-economics suggests that operating on expectations is one of the most powerful tools available to him, though he is using it much more cautiously than many economists would like to see.

 Read more