The Fed is buying more bonds; the ECB might even be considering it. But Hungary is throwing in the towel on its bond-buying programme, saying the plan has not made “significant progress” in easing long-term forint funding conditions for banks.
Hungary’s central bank introduced the bond-buying programme on February 8, 2010, intending to buy up to HUF 100bn to the end of this year. Purchases in the secondary market went broadly as planned, with HUF 30bn of nominal value bought and mortgage-government bond spreads declining from 150–200 basis points in 2009 to 80–150bp now. Purchases in the primary market, however, were “much smaller than expected”, at about HUF 7bn.
ECB support for struggling sovereigns is at its highest since July. Data just released show that €1,965m bonds bought by the European Central Bank settled last week.
This number is expected to continue to rise. The FT reported on Thursday that the ECB was buying Portuguese and Irish bonds in €100m tranches, four times the previous clip size.
It is good news that the New York Fed is engaged in a campaign to get key staffers to finally think about asset prices.The Alan Greenspan mantra that the market is always right has – mercifully – been cast aside… Still, there is one sphere where the central banks are unlikely to sound the alarm.
In both Japan and the US, sovereign debt trades at ever lower yields as a result of purchases of government bonds by the central banks themselves… [T]he largest part of the buying comes from the central banks themselves. With massive purchases of Treasuries, the distinction between fiscal policy and monetary policy is becoming blurred. Central banks become ever more complicit in politics…
The Federal Reserve has just released minutes from its September 21 meeting, and it does seem that the path towards a new round of quantitative easing, starting as early as November, is set.
Although there are still a few hold-outs who believe the threshold for action should be higher and involve further deterioration in the economy, Ben Bernanke, Fed chairman, seems to have forged a consensus along the belief that conditions are already bad enough to warrant more monetary stimulus.
Arguably the most interesting segment of the minutes came when officials began reviewing the benefits and costs of additional easing, and the “best means to calibrate and implement such [asset] purchases”.
Richard Fisher, the president of the Dallas Fed, tells off the markets and the media in a speech today for being presumptuous about what the Fed has decided.
“I am afraid that despite recent speculation in the press and among market pundits, we did little to settle the debate as to whether the Committee might actually engage in further monetary accommodation, or what has become known in the parlance of Wall Street as “QE2,” a second round of quantitative easing. It would be marked by an expansion of our balance sheet beyond its current footings of $2.3 trillion through the purchase of additional Treasuries or other securities. To be sure, some in the marketplace―including those with the most to gain financially―read the tea leaves of the statement as indicating a bias toward further asset purchases, executed either in small increments or in a “shock-and-awe” format entailing large buy-ins, leaving open only the question of when.”
I’m one of the naughty boys in the media. But Mr Fisher has been a bit naughty, too, because he shouldn’t be telling us about the last FOMC meeting before publication of the minutes.
ECB bond purchases have moderated again, down to €134m last week from €323m the week before. This is well within tolerance, as the chart shows. So while there may be renewed concerns over the eurozone periphery, the central bank’s covered bond purchases do not yet hint at structural support.
Related post: ECB bond purchases are noise (Sep 14)
The ECB has stepped up its purchases of securities, but viewed in context it’s small fry. Last week, €237m was spent on “securities held for monetary purposes”; the week before it was €173m; the week prior, €142m. (They are the three barely discernible rightmost blue boxes on the chart.)
Confining ourselves to this three-week ‘trend’ is misleading, however. Low level purchases fluctuate. Four weeks ago, €337m were bought.
In late July, James Bullard, president of the Federal Reserve Bank of Saint Louis, gave a speech which for all intents and purposes signalled that the central bank was contemplating a tilt towards easier monetary policy. Usually known for being an inflation hawk, Mr Bullard raised that Japan-style deflation could unfold in the US, and said quantitative easing might be an appropriate response.
Well, Mr Bullard was back in action today, and at a presentation in his district – Rogers, Arkansas was the location – he argued that if the economy worsens, additional asset purchases (beyond the reinvestments of proceeds from expiring mortgage-backed securities that were agreed on August 10 by the Fed) might be necessary.
Goldman Sachs economists have been among the more bearish forecasters on Wall Street, seeing an incredibly sluggish recovery with inflation falling close to zero and unemployment hovering around 10 per cent through the end of next year.
So last night, they released a 32-page paper taking their view to its most logical conclusion. If they ran the Federal Reserve, they might well be contemplating further policy accommodation. “In the short term our model combined with GS economic projections implies that further macroeconomic easing would be optimal to counter stubbornly high unemployment and falling inflation. With the funds rate already at zero bound, additional stimulus would need to come through fiscal easing and/or renewed asset purchases.”
The GS paper goes on to say, to no great surprise, that if the additional easing is carried out on the fiscal side, “it should be paired with legislation that brings the federal budget back onto a sustainable path via a combination of spending cuts and tax increases.”
Instead, if the focus is on asset purchases, GS warns that the Fed would have to be “realistic” about the outcome, since there is a potential problem of diminishing returns.
The Fed’s forecast will have to shift a lot to get it into an early tightening mode, says Krishna Guha of the Financial Times