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.”
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.
Officials I have spoken to since venting my anger at the raid on the government’s quantitative easing surplus have struck a decidedly disappointed tone. It was a shame I didn’t understand that there was no trickery involved; it was a pity I could not see that the move was standard practice in public sector liability management; and it was sad I had questioned whether the the Treasury’s move, which itself eased monetary conditions, undermined the Bank of England’s operational independence to set monetary policy.
While I have convinced a sizable majority of readers, I note that some people are swallowing these lines without much challenge. Here I will deal with trickery and liability management. In the next post, I will turn to monetary policy. Simon Ward of Henderson Global Investors is the latest to say that anything other than treating temporary profits from QE as government revenue “would be out-of-line with the treatment of other future government liabilities”. Read more
After the surprise news today that annual inflation fell to a two-and-a-half year low of 2.8 per cent in May, analysts now increasingly expect the Monetary Policy Committee to announce more quantitative easing on 5 July.
Following Sir Mervyn’s Mansion House address last Thursday, it has largely been a case of when — not if — the MPC would plump for more money printing. But before today’s inflation number, analysts were split on whether more QE would come in July, or in August.
Now, the majority expect further asset purchases to come sooner rather than later. Here’s what economists are saying: Read more
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Hopes for joint central bank action mounted on Friday ahead of Sunday’s Greek election. Will the central banks deliver? Read more
Adam Posen’s brief flirtation with the Monetary Policy Committee majority is well and truly over.
At the MPC’s April and May votes, Mr Posen left David Miles as the only member voting for more quantitative easing.
That is unlikely to be the case at next month’s vote, however. In a speech delivered this afternoon, Mr Posen not only calls for more money printing, but also for the Bank to spend the cash on assets other than gilts – an idea that the governor and other Bank staffers have fiercely objected to on the grounds that it would hinder Threadneedle Street’s independence.
Elements of the argument are not new — Mr Posen in September called for the Bank to branch out from buying gilts and do more to spur lending to smaller businesses. Again, he is dismissive of the view that doing more impacts a central bank’s credibility.
But there are also significant differences in today’s speech from what Mr Posen had to say in the autumn. Read more
Vincent Reinhart of Morgan Stanley has a fascinating note out today which reverse engineers US forecasts from the IMF’s World Economic Outlook to answer questions about headwinds to demand, the effectiveness of unconventional Fed policy and the potential growth rate.
His chart on the effectiveness of Fed policy is particularly neat. Essentially, he plots annual long-term real interest rates against short-term real interest rates for the years from 1980 to 2007, draws a regression line, and then adds on dots for 2008 to 2011. Read more
Commuters pass the Bank of England. Image by Getty
As expected, the Bank of England today kept interest rates on hold at 0.5% and opted not to print more money.
Analysts’ attention has long focussed on the Monetary Policy Committee’s May meeting; it was always more likely to hold off on plumping for more quantitative easing until then. However, its far from certain whether the MPC will opt for further asset purchases on 10 May.
Here are a few of the factors that are likely to sway the MPC’s decision on whether it adds its the £325bn-worth of asset purchases. Read more
As most suspected, the Bank of Japan did little today to step up its fight against deflation.
Bar some tinkering with its special lending facilities, the BoJ kept policy on hold with the size of its asset purchase programme remaining at Y65tn.
However, there are signs that the central bank could do some proper easing in the coming months.
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: Read more
For almost the entire time the Bank of England has enjoyed operational control of monetary policy, the redistributive effects of monetary policy have rarely hit the headlines.
The public appeared to accept that interest rate rises hit borrowers and benefited savers and vice versa. The vast majority of the commentary related to the analysis of whether any monetary policy change was warranted by the prospects for inflation. This, in Britain at least, was the way the Bank of England liked it.
Unelected officials feel very uncomfortable about being seen to favour one group of society over another. Redistribution, after all, is properly something for elected politicians, since it involves using the power of the state to take money from some to give it to others.
It is noteworthy, therefore, both that the distributional effects of quantitative easing are now being raised vocally by strong lobby groups and that the Bank is feeling peeved, rightly so. Read more
The Bank of England’s Monetary Policy Committee has announced £50bn more in quantitative easing, taking the total size of the asset purchase programme to £325bn.
The amount is in line with the consensus view, though some analysts were unsure whether the MPC would back further asset purchases after some positive news on the economy in recent weeks. Read more
The pound, along with Britain’s fiscal retrenchment, are often cited as explanations for why yields on UK government debt now hover around record lows.
Some suggest another factor is at play: financial repression.
This sinister-sounding phrase describes the situation where government policy attempts to artificially lower interest rates with the specific aim of reducing their debt burden. Given that QE has done much to lower yields on UK government debt, some have tagged the policy with the financial repression label.
Regardless of whether or not this is the case (more on which later), Fathom, a consulting group made up of former Bank economists, today expressed doubts about whether such a policy – and for that matter gilt purchases – will do much to aid the UK recovery. Read more
The Bank of England meets on Thursday with expectations running high that the MPC will announce a further large dose of quantitative easing. Even if they pass this month, which seems possible, this is likely to be only a temporary postponement. Whenever it comes, the next move will be another bout of “plain vanilla” QE, involving the purchase of £50-75bn of government bonds, and taking the overall Bank of England holdings to over one third of the total stock of gilts in issue.
Meanwhile, the Fed is still debating whether to increase its holdings of long dated securities, and if so whether to focus once again on government debt, or to re-open its purchases of mortgages. Any further QE would be contentious on the FOMC, but there is probably still a majority in favour. Read more
The Bank of England looks set to announce more money printing on Thursday, with £50bn the amount most analysts expect.
If the Monetary Policy Committee does go ahead and announce more QE, there is little doubt that it will buy nothing but gilts. However, it is less certain what sort of gilts the Bank would buy.
Over the past four months the Bank has bought around £5.1bn a week in gilts. The purchases have been spread out across the curve, with the Bank buying £1.7bn of gilts with maturities of between three and 10 years, £1.7bn with maturities of between 10 and 25 years, and the same amount with maturities of more than 25 years.
However, Sam Hill, UK fixed income strategist at RBC Capital Markets, believes that could change with the next round of asset purchases. Read more
So the Bank of England’s decision is out at noon on Thursday. More money printing is pretty much of a dead cert isn’t it?
More or less. Since the Bank’s November inflation report showed policymakers expect inflation to undershoot its 2 per cent target over the next few years, most analysts have viewed it as a case of when, not if, the monetary policy committee announces more quantitative easing. Read more
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The Federal Open Market Committee meets on Tuesday and Wednesday to set monetary policy for the coming month and a half.
The meeting – to be followed by one of chairman Ben Bernanke’s press conferences – could see the FOMC announce an inflation target. This from the FT’s US economics editor Robin Harding: Read more
Spencer Dale, the Bank of England’s chief economist, was at Bloomberg’s London headquarters on Tuesday to deliver a talk that attempted to de-bunk a few myths circulating about quantitative easing.
The highlights of Mr Dale’s speech are covered here by the FT’s economics correspondent Norma Cohen.
However, there was also much that was of interest in the Q&A that followed. Read more