Mario Draghi, the European Central Bank president, pulled off the feat of sounding incredibly doveish today while keeping rates on hold and actually making sure his room for manoeuvre remains as wide as possible. Here are five quick takeaways from the press conference following this month’s meeting: Read more
Ben Bernanke may have a few sleepless nights over the weekend as he prepares for Tuesday’s crunch meeting of the Federal Open Market Committee. Clearly, today’s jobs figures will have given him cause for concern. Private sector job creation is anaemic – well below what it takes to keep up with population growth – and well below its pace in March and April. Could the labour market recovery have peaked just after it started ?
Looking to Tuesday, there is no doubt that the pressure is on for the FOMC to begin mapping out a strategy to deal with the “unusual uncertainty” in the US economy that was cited in Mr Bernanke’s congressional testimony last month. But no one is expecting the Fed to begin easing aggressively next week to jolt the sluggish recovery. After all, at its latest meeting, the FOMC set a high bar for easing : economic conditions would have to “worsen appreciably” – which they haven’t even considering today’s figures. Read more
Now it’s official. The Federal Reserve is definitely on guard about the possibility that it might have to ease monetary policy further in response to the sputtering US economic recovery, according to minutes of the Federal Open Market Committee meeting held in late June.
Here’s the key language: “Members noted that in addition to contuining to develop and test instruments to exit from the period of unusually accomodative monetary policy, the committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably”. Read more
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. Read more