The most newsy point from NY Fed president William Dudley’s speech today was his call for a change in exit strategy, urging the central bank to reinvest in its mortgage portfolio. But there was a lot more going on in the speech: Mr Dudley put a dovish spin on the Fed’s inflation target. He said bank regulation may be driving down neutral interest rates, and he put markets on notice that how they price bonds will decide how the Fed changes interest rates.
(1) Inflation is coming
Mr Dudley’s tone on inflation was different to the isn’t-it-worringly-low type of remarks that Fed officials have tended to make recently. Instead, he expects inflation to head upwards, and seemed to be testing arguments for why Fed policy should not react.
“With respect to the outlook for prices, I think that inflation will drift upwards over the next year, getting closer to the FOMC’s 2 percent objective for the personal consumption expenditure deflator . . . That said, I see little prospect of inflation climbing sharply over the next year or two. There still are considerable margins of excess capacity available in the economy—especially in the labor market—that should moderate price pressures.”
Not the ECB (Getty)
The Bundesbank has weighed in on what forward guidance means for the European Central Bank and if you want the short version it boils down to: we have not forgotten about inflation.
The ECB pledged in July to keep interest rates at or below current levels “for an extended period of time,” which, as we’ve noted before has caused some confusion as to what precisely it means.
According to Germany’s central bank, that promise does not actually mean that interest rates cannot rise or that they will necessarily remain low for a long time. As it writes in its latest monthly report:
The decisive point in correctly interpreting this statement is that it is conditional on the unchanged obligation of the Eurosystem [the ECB and the eurozone’s 17 national central banks] towards its mandate of maintaining price stability (which means, operationally, medium term inflation that is below, but close to 2 per cent)… It follows that the ECB’s governing council has not bound itself. If higher price pressures become apparent in future compared to those expected now, forward guidance in no way rules out a rise in interest rates.
Graffiti outside the ECB's future headquarters. (Getty)
Could the European Central Bank be learning a thing or two about managing the message? Ahead of Thursday’s interest rate-setting meeting, when policymakers will want to do nothing more than say “we’re holding steady”, it looks like the bank may come up with an eye-catching announcement to give everyone something to write about.
That something is the long-running and vexed question of why the bank that loves to tell you how transparent it is (well, at certain times, once you’ve cleared security and as long as you understand no quotes should be used from this conversation) keeps the minutes of its governing council meetings secret for 30 years. The practice makes it an outlier – the Federal Reserve, Bank of England and Bank of Japan all publish minutes of their monetary policy meetings within a month of the meeting that they cover. Read more
The paper at this year’s US Monetary Policy Forum – where market economists get to present to central bankers – is called “Crunch Time: Fiscal Crisis and the Role of Monetary Policy“. It shows a new wrinkle on US fiscal problems: if there is any kind of debt sustainability crisis it could make the Fed’s exit from easy monetary policy a whole lot more painful.
This is the money chart. Black is the baseline for Fed profit and loss in the coming years. Red is what happens if a fiscal crunch pushes up long-term bond yields (and hence causes losses for the Fed on its portfolio). Read more
Mark Carney, the incoming governor of the Bank of England, was grilled by MPs and his ECB counterpart Mario Draghi faced awkward questions. By Tom Burgis, Ben Fenton and Lina Saigol in London with contributions from FT correspondents. All times are GMT.
Charlie Bean’s speech on Wednesday evening was grim, even by central bankers’ standards.
Mr Bean is the Bank’s deputy governor with responsibility for monetary policy. But he doesn’t seem to think that particular policy strand can do much good. Either now, or in preventing the next bubble.
Not only did Mr Bean echo the governor’s warnings over the effectiveness (or lack thereof) of more quantitative easing in the current climate, he is also sceptical that monetary policy can curb the build-up of credit bubbles. Read more
According to the Maradona theory of monetary policy, as outlined by Sir Mervyn King, governor of the Bank of England, a central bank can let expectations that it will act – rather than actual action – do the work for it.
The theory is being tested right now by Mario Draghi, president of the European Central Bank, as his controversial “outright monetary transactions” bond-buying programme is forced to sit on the benches until the prime candidate for help, Spain, applies to the EU’s bailout fund.
As a quick reminder, the Maradona theory refers to the 1986 World Cup quarter final between England and Argentina. Diego Maradona scored a celebrated goal with a run from near the halfway line in which he beat five England players by, er, running in a straight line. Read more
Because monetary policy acts with a lag, it has to rely on forecasts.
However, as the Bank of England’s attempts at prediction have illustrated, central banks’ forecasts, and indeed those of most economists, tend to be pretty dire.
This is what Svante Öberg, first deputy governor of Sweden’s Riksbank, refers to in a speech out today as the “Catch-22 of monetary policy.” So what’s a central banker to do? Read more
Sir Mervyn King. Image by Getty.
Welcome to our live blog on Sir Mervyn King’s appearance at the Treasury select committee.
The governor has been called before the committee to field questions on the Monetary Policy Committee’s latest inflation report, which came out earlier this month.
Reporting by Claire Jones. All times are GMT.
17.16 This live blog is now closed.
17.14 Given that the hearing was supposed to be about the MPC’s inflation report, it was ironic that the governor ended up revealing more about what the FPC is likely to recommend in the financial stability report later this week. Read more