Claire Jones

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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:  Read more

Robin Harding

The cut in the interest rate on the Fed’s currency swaps with Europe has led to speculation that the Fed will have to cut its discount rate as well. I’m pretty sure that speculation is wrong.

The point is fairly simple: European banks will now be able to get one week dollar loans from the ECB at an interest rate of about 0.6 per cent. If a US bank needed to borrow dollars from the Fed and went to the discount window it would have to pay 0.75 per cent. That seems perverse. Read more

Robin Harding

For me, the most interesting passage in the November Fed minutes was:

“The Chairman asked the subcommittee on communications to give consideration to a possible statement of the Committee’s longer-run goals and policy strategy, and he also encouraged the subcommittee to explore potential approaches for incorporating information about participants’ assessments of appropriate monetary policy into the Summary of Economic Projections.”

A host of communication options were discussed in the minutes but these are the only two that the Chairman referred back to the subcommittee on communications (vice chair Janet Yellen, governor Sarah Bloom Raskin, Charles Evans of Chicago and Charles Plosser of Philadelphia). That’s a strong signal of the direction that debate is going. Read more

Robin Harding

For my money the most interesting piece of Fedspeak today was some coded support for further easing from John Williams of the San Francisco Fed. Mr Williams wasn’t exactly gung ho, but his words were fairly clear.

“Right now, though, the real threat is an economy that is at risk of stalling and the prospect of many years of very high unemployment, with potentially long-run negative consequences for our economy. There are a number of potential steps the Fed could take to ease financial conditions further and move us closer to our mandated goals of maximum employment and price stability. Of course, these “treatments” won’t make our economic problems go away and their costs and benefits must be carefully balanced. But they could offer a measure of protection against further deterioration in the patient’s condition and perhaps help him get back on his feet.”

Mr Williams also set out an economic forecast that is notably grim on unemployment. He forecast 2 per cent annualised growth in the second half of 2011, but unemployment above 9 per cent at the end of this year, and most importantly, above 8.5 per cent at the end of 2012. Mr Williams also referred to ‘stall speed’ implying that he sees plenty of downside risk. You would certainly want to ease with that forecast. Read more

Claire Jones

Our new week ahead email will help you to track the most important events in the central banking world. To see all of our email and alerts visit

Public appearances

A busy week is in store for Jean-Claude Trichet.

On Saturday, the ECB president will speak at Jackson Hole at 17:00 GMT. On Monday, Mr Trichet travels to Brussels, where he will field questions from the European parliament on how to restore market confidence (some suggestions from Ralph Atkins and Chris Giles).

The president will be joined by Jean-Claude Juncker, Eurogroup president, Jacek Rostowski, Poland’s finance minister and Olli Rehn, the European commissioner for economic and monetary affairs.  The hearing takes place at 13.00 GMT.

On Thursday, ECB executive board member Jürgen Stark is a participant in a panel on Europe and global competitionRead more

Claire Jones

Two of the three FOMC dissenters on Wednesday said why they broke ranks at last week’s meeting.

Aside from their view that the conditional commitment to keep rates on hold until 2013 looked suspiciously like the Fed was trying to buoy financial markets, there was another common strand to their discord.

Both Mr Fisher and Mr Plosser claimed monetary policy was limited in what it could do to spur growth. This is becoming a popular argument among senior central bankers. Read more

Claire Jones

This from the

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: Read more

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.

 Read more

Robin Harding

There are some extremely interesting points in today’s FOMC minutes which provide more forward-looking policy signals than any others I can remember recently.

No taper of QE2

The signal here could not be more clear. The New York Fed “indicated that the greater depth and liquidity of the Treasury securities market suggested that it would not be necessary to taper purchases in this market”.

Fed officials are not persuaded that there is any monetary policy value in sending a signal through a taper so a request from the markets desk was the only remaining uncertainty on this point.

“In light of the Manager’s report, almost all meeting participants indicated that they saw no need to taper the pace of the Committee’s purchases of Treasury securities when its current program of asset purchases approaches its end.” In other words, it’s not going to happen. Read more

Robin Harding

After a five month recruitment process, the San Francisco Fed has appointed a president from within, its research director John Williams.

The appointment of another highly-respected economist (#329 on the RePEc list) as a regional Fed president is the latest in a trend after Narayana Kocherlakota (#262) in Minneapolis, James Bullard (#738) in St Louis, Charles Evans (#205) in Chicago and Eric Rosengren (#663) in Boston.*

It reflects the evolution of the regional Feds: as the banking industry consolidates and payments systems centralise they are becoming less banks and more economic research centres. The role of the regional Fed president, increasingly, is defined by the ability to hold your own and contribute to debate on the FOMC. Read more

Robin Harding

The St Louis Fed has just launched a brilliant new resource called FOMC Speak. It’s an archive of all public comments by members of the FOMC including interviews and video.

Kudos to the St Louis Fed, which is also responsible for FRED, the best place to find US economic data.

Robin Harding

This exchange from the June 2005 FOMC transcript is quite fun:

MS. YELLEN. One of the things we’re seeing in California and elsewhere in our District—and maybe this is true nationwide—is a growing use of piggyback loans. Loan-to-value ratios of 90 to 95 percent are common in California, and we’ve even seen combination loan-to-value ratios and piggyback loans going up to 125 percent. I guess that means two things, one of which is that the traditional first mortgage looks utterly conventional. Those mortgages have an 80 percent loan-to-value ratio and I suppose they are being sold off to Fannie and Freddie. The other thing is that with such conventional mortgages being sold to Fannie and Freddie, there’s no need for private mortgage insurance. So Fannie’s and Freddie’s books may look better in some sense—less risky—than they really are because of all of the second mortgages going up to possibly 125 percent. Read more

Robin Harding

Read them here:

My tip is to head first for the June 2005 meeting where the FOMC held a full day discussion of house prices. It should make for interesting reading…

Robin Harding

I don’t understand why the ten-year yield is now at 3.47 per cent and the five-year yield is at 2.06 per cent in the wake of an FOMC statement that gave no comfort at all to people who think that the Fed will end its asset purchase programme short of $600bn.

There was the mildest of upgrades to the growth language:

Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward.

As Roberto Perli of ISI points out, meanwhile, the statement said that measures of underlying inflation continued to trend downward, which is an addition to last time. Read more

Robin Harding

Current policy rate: 0 to 0.25%
Consensus expectation: no change
Simple Taylor rule policy: -0.55%
Core PCE price index: +0.9% (October yoy)
Inflation objective: 2% or a bit below

Notable special measures in operation
• Circa $2,100bn in completed asset purchases, holding $950bn of Treasuries and $1,023bn of MBS as of 8th Dec, 2010.
• $600bn increase in asset purchases in progress between November 2010 and June 2011.

Points to watch
• Not many. After launching its new $600bn programme of large scale asset purchases in November this meeting is a time to reflect.
• How much ‘elegant variation’ – which the Fed practices to avoid being pinned down on specific forms of words – will there be in the statement?
• Will the statement acknowledge either (a) the run-up in 10 year yields; (b) the tax deal; or (c) a somewhat improved growth outlook and, if so, how? Read more

Robin Harding

Current policy rate: 0 to 0.25%
Consensus expectation: No change to policy rate; new $500bn programme of asset purchases
Headline consumer price index: +1.1% (September)
Inflation objective: about 2 percent or a bit below

Notable special measures in operation
• Circa $2,000bn in completed asset purchases, including $1,100bn in mortgage-backed securities and $792bn in Treasuries.
• Size of the programme is currently stable. Capital payments from MBS are reinvested in Treasuries.

Points to watch
• This meeting is likely to end in QE2. See past posts on size, speed and forward guidance, plus newspaper pieces on Fed objectives, QE as a policy, committee dynamics, and an overall preview.
• Market expectations are pretty well settled Read more

Robin Harding

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. Read more

No further quantitative easing announced by the Fed today, and no change in the Fed funds rate, either, but they say they are ready to act. Reinvestment of principal payments will continue, and Thomas Hoenig hawkishly dissented once again. Key additional parts of the statement:

Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months… The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

 Read more

Robin Harding

Current policy rate: 0 to 0.25%
Consensus expectation: no change
Taylor rule policy: -0.5%
Headline consumer price index: +1.1% (August)
Inflation objective: around 2%

Notable special measures in operation
• Circa $2,000bn in completed asset purchases, including $1,100bn in mortgage-backed securities and $792bn in Treasuries.
• Size of the programme is currently stable. Capital payments from MBS are reinvested in Treasuries. Read more

Although the US economy is no longer quite as dominant as it once was in the global economy, there is no sign that the Federal Reserve is losing its primacy among the major central banks – at least, not as far as the financial markets are concerned. In fact, the Fed is possibly even more important than it used to be, because it is now setting monetary policy not just for the US but for many other countries as well, via exchange rate links.

In a world where output is generally subdued and demand insufficient, no country wants to accept a rise in its real exchange rate. A global game of pass-the-parcel is underway, with many countries being forced to follow the Fed’s lead in monetary easing in order to prevent unwanted currency appreciation. Among other effects, this is clearly acting as a powerful support for equities and other risk assets at the moment.

At the last FOMC meeting on 10 August, the Fed worried the financial markets by sounding concerned about the economic outlook, while taking only a small step towards additional quantitative easing. Consequently, as the graph shows, all of the main risk assets fell quite sharply for a couple of weeks. This decline was only arrested when Ben Bernanke’s speech at Jackson Hole spelled out the Fed’s thinking on further monetary easing, after which “informed” financial opinion began to suggest that another big round of QE would begin before the end of the year. With US and Chinese economic data showing some improvement as well, risk assets rallied markedly.

The Fed faces a tricky decision tomorrow, Read more