Sterilisation not the focus at the FOMC
I have a piece in today’s paper previewing what promises to be a quiet Federal Open Market Committee meeting this month.
In particular, talk that the FOMC is now studying a programme of “sterilised” quantitative easing is, in my view, incorrect. I think the current FOMC discussion looks more like this:
The week ahead in central banking
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The Federal Open Market Committee and the Bank of Japan’s policy board both vote on Tuesday. Will either panel back a change in course?
The week ahead in central banking
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Bernanke testimony
Fed chairman Ben Bernanke is due to speak on the economic outlook and federal budget situation on Thursday. He’s up in front of the House Committee on the Budget at 10.00 local time (15.00 GMT) on Thursday.
The week ahead in central banking
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FOMC meeting
The highlight of next week’s calendar is Tuesday’s Federal Open Market Committee meeting.
Here’s the FT’s US economics editor Robin Harding on what to expect:
The Fed twists…
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
It will also reinvest the proceeds of its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. It will maintain its existing policy of rolling over maturing Treasury securities at auction.
Again, there were three dissenters:
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time.
Gavyn Davies plans to comment after the FOMC meeting finishes.
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.
The week ahead in central banking
Our week ahead email will help you to track the most important events in the central banking world. To see all of our emails and alerts visit www.ft.com/nbe
Rate votes
The key event in next week’s calendar is the Federal Open Market Committee’s policy meeting, which Ben Bernanke announced at Jackson Hole would be a longer-than-usual two-day affair.
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Chris Giles has been the economics editor of the Financial Times since 2004. Based in London, he writes about international economic trends and the British economy. Before reporting economics for the Financial Times, he wrote editorials for the paper, reported for the BBC, worked as a regulator of the broadcasting industry and undertook research for the Institute for Fiscal Studies. RSS
Ralph Atkins, Frankfurt bureau chief, has been writing about European economics and politics for the Financial Times for more than 20 years following an economics degree from Cambridge. He has been watching the European Central Bank and eurozone economies since 2004. He has previously worked in London, Bonn, Berlin, Jerusalem and Brussels. RSS
Robin Harding is the FT's US economics editor, based in Washington. Prior to this, he was based in Tokyo, covering the Bank of Japan and Japan's technology sector, and in London as an economics leader writer. Robin studied economics at Cambridge and has a masters in economics from Hitotsubashi University, where he was a Monbusho scholar. Before joining the FT, Robin worked in asset management and banking. RSS
Claire Jones is Money Supply economics team writer, based in London. Before joining the Financial Times, she was the editor of the Central Banking journal and CentralBanking.com. Claire studied philosophy and economics at the London School of Economics. RSS
James Politi is US economics and trade correspondent for the Financial Times, based in Washington DC. He joined the Washington bureau in January 2008 following four and a half years as US deals correspondent covering M&A and private equity. James Politi joined the FT in London in 2000 with an MSc at the London School of Economics, and undergraduate degrees from Georgetown University and the University of Florence. RSS
