tightening

Jean-Claude Trichet spoke at the LSE on Monday afternoon.

Much of what he said was a combination of a couple of speeches he gave last week, the central message being that the eurozone needs to monitor member countries’ fiscal and macroeconomic policies and competitiveness more closely, and that there needs to be a sharper stick with which to beat countries that fail to behave themselves. Read more

The Bank of England would “have to” raise rates if oil price inflation remained high, Charlie Bean has said. Sterling has strengthened as traders have bet on an earlier rate rise.

The deputy governor of the UK’s central bank told businesses in Wales that inflation was driven by three factors: the weaker pound, VAT and commodity prices -

“We have seen substantial rises in food prices, which, in part, are connected to issues over bad harvests, but only partly,” he said. “We have seen oil prices rising, recently they have reached $100 a barrel, and global prices have been rising. The background of all these developments is the strong growth of emerging markets putting upward pressure on the price of commodities.” Read more

The cash crunch in India’s banking sector should not be allowed to disrupt economic activity. That’s the message from the Reserve Bank of India, which has raised its repo and reverse repo rates by 25bp. The repurchase rate is now 6.25 per cent; the reverse repurchase rate at 5.25 per cent.

Robust domestic growth and continued high inflation were given as the main reasons for continued rate normalisation. But governor Duvvuri Subbarao said rate rises were likely to slow, barring any inflation shocks: “Based purely on current growth and inflation trends, the Reserve Bank believes that the likelihood of further rate actions in the immediate future is relatively low.”

James Politi

I was watching a segment on the Federal Reserve on CNBC television earlier today, and a couple of times the guests on the show referred to the resumption of quantitative easing as Ben Bernanke’s “bazooka”.

And that brought me way back to the summer of 2008 – when then treasury secretary Hank Paulson sought authority from Congress to bailout Fannie Mae and Freddie Mac, the huge mortgage giants, if necessary. Mr Paulson argued that if markets knew the government would rescue the companies, that would be sufficient to restore confidence, and a bail-out would not be necessary. But the opposite occurred, and little more than a month later, Fannie and Freddie were in conservatorship.

Back to Mr Bernanke. Read more

Chris Giles

A crunch meeting of the monetary policy committee on Wednesday will reveal the Bank of England’s verdict on the new coalition government and the emergency Budget.

Will the MPC judge the proposed spending cuts so damaging to recovery that it has to crank up the printing presses again and inject more money into the economy? Is the global and UK recovery so strong that the Bank can head for the exit and relinquish its extraordinarily loose monetary policy? Or will the MPC be so paralysed by uncertainty over the future that it will again do nothing? Read more

Perhaps to offset rumours of further easing, the Fed has announced further trial runs of a key tightening tool.

The New York Fed will test one of its main liquidity-draining tools by conducting a “series of small-scale, real-value reverse repurchase transactions” with primary dealers et al. This repeats and expands upon a similar set of tests announced in October and run in DecemberRead more

James Politi

Ben Bernanke is not quite a native of South Carolina – he was actually born in nearby Georgia. But he did grow up in the state, and returned there this morning to give his latest assessment of the US economy.

The headline, in my view, was that there is a “considerable way” to go before the US recovery is complete – a no-less dreary variation on his comments last week that the economic outlook is “unusually uncertain”.

Unemployment is high, the housing market is weak, financial conditions are less supportive of growth than they were earlier in the year, Mr Bernanke said, in his first remarks following Friday’s disappointing growth data, which showed real gross domestic product increasing at a slower pace in the second quarter than it did in the first.

But if anyone was hoping for Mr Bernanke to discuss what steps the Fed might consider at their monetary policy meeting next week to reboot the recovery, they were disappointed. Mr Bernanke did not address the issue, presumably to avoid speaking ahead of his colleagues on such a crucial, market-sensitive matter. Read more

East Asian central bankers are to meet in Sydney from Wednesday to Friday this week, focusing on international regulatory issues and inflation.

There’s plenty of common ground: East Asia has the highest concentration of rate-raising central banks in the world. Australia, New Zealand, South Korea, Malaysia and Thailand have already begun raising, and the Philippines is expected to start soon. Indonesia, Singapore, China and Hong Kong all show signs of recovery. Japan – the final member of the 11-country forum – will probably be the only participant more worried by deflation than inflation at this Executives’ Meeting of East Asia-Pacific central banks (Emeap). Read more

James Politi

To say that Janet Yellen, Sarah Bloom Raskin and Peter Diamond got off lightly at their confirmation hearing before the Senate banking committee would be an understatement.

With most members distracted – or absent- by the imminent final vote in the Senate on financial regulatory reform, the event itself only lasted about 90 minutes. And if ever it was in doubt, it now seems abundantly clear that the three nominees will be comfortably, and swiftly, confirmed to the Federal Reserve board of governors.

 Nevertheless, I was able to extract a few interesting nuggets from question-and-answer period. The most timely question came from Jeff Merkley of Oregon for Janet Yellen, who is slated to take over from Don Kohn as vice-chair. He asked where she stood on the dominant debate over US fiscal policy – should there be more stimulus or should authorities immediately start reining in the deficit ? Read more

James Politi

Janet Yellen has just released her statement to the Senate banking committee, where she – along with Sarah Raskin and Peter Diamond, other nominees to the Federal Reserve board - faces a grilling from lawmakers today on her bid to become vice-chair of the Federal Reserve replacing Don Kohn.

Ms Yellen, president of the San Francisco Fed, is predictably cautious as she introduces herself to the panel: “I am wholeheartedly committed to pursuing the Fed’s congressionally mandated goals of maximum employment and price stability and to strengthening our programme of supervision and regulation, building on the lessons learned during the financial crisis.”

Her statement gets a little meatier later on, and, reading through the lines, there are two main messages. On monetary policy, Ms Yellen still believes plan A is an eventual tightening. And to Congress, Ms Yellen is very clear: independence is crucial to central banking, so hands off the Fed ! Read more

As part of the ‘calibrated exit’ from expansionary monetary policy, the Reserve Bank of India unexpectedly increased the repo rate to 5.5 per cent and the reverse repo rate to 4.0 per cent. The central bank also extended liquidity support already in place for commercial banks:

i) The additional liquidity support to scheduled commercial banks under the LAF to the extent of up to 0.5 per cent of their net demand and time liabilities (NDTL) currently set to expire on July 2, 2010 is now extended up to July 16, 2010. For any shortfall in maintenance of statutory liquidity ratio (SLR) arising out of availment of this facility, banks may seek waiver of penal interest purely as an ad hoc measure. Read more

The Reserve Bank of India has increased the repo and reverse repo rates by 25bp, taking them to 5.5 and 4 per cent, respectively. The principal motivation was inflation:

The developments on the inflation front … raise several concerns. Overall, WPI inflation increased to 10.2 per cent in May 2010, up from 9.6 per cent in April 2010. Food price inflation and consumer price inflation remain at elevated levels…. Significantly, two-thirds of WPI inflation in May 2010 was contributed by non-food items, suggesting that inflation is now very much generalised and that demand-side pressures are evident. Read more

James Politi

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

James Politi

Kevin Warsh, a governor at the Federal Reserve, has just delivered a very interesting speech in Atlanta.

His main point is that the Fed could start selling mortgage assets it bought to sustain the housing market during the crisis independently of its moves to raise interest rates, putting him squarely in the camp of inflation hawks on the Federal open market committee. Ben Bernanke, Fed chairman, has suggested that any asset sales should come only after monetary policy tightening underway, but Mr Warsh seems to disagree. “Any sale of assets need not signal that policy rates are soon moving higher. Our policy tools can indeed be used independently. I would note that the Fed successfully communicated and demonstrated its ability to exit from most of its extraordinary liquidity facilities over late 2009 and early 2010, even as it continued its policy of extraordinary accommodation,” he said.

The Fed governor, a former Morgan Stanley investment banker and George W. Bush administration official, also attempted to quash the rising talk that the Fed might actually start buying assets again in response to continued weakness in the housing sector and the sluggish recovery, saying that such a move “should be subject to strict scrutiny”. Read more

This does not look good, says David Beckworth: the US market expects aggregate demand to fall, and if the Fed does not act to stabilise the fall in spending, it will act as an effective tightening of monetary policy.

His logic? Markets’ expectations of inflation fell in the first half of this year as shown by the falling yield spread between inflation-protected and regular bonds (see chart). Productivity growth – which could have explained it – also appears to be falling. “That leaves us with one troubling possibility: the market is expecting aggregate demand to decline going forward.” Read more

James Politi

Even though many economists have pushed back their expectations of the first interest rate hike by the Federal Reserve, the debate rages on about the tools the central bank should eventually use to tighten monetary policy.

In a research paper out today, Glenn Rudebusch, senior vice-president at the San Francisco Fed, makes a compelling case for not rushing to shrink the Fed’s $2,300bn-plus balance sheet, a move that some more hawkish officials have been pushing for early in the tightening cycle in order to contain inflation.

Overall, Mr Rudebusch concludes that since many predict the US economy will take “years” to return to full employment and inflation will stay low, it will take “a significant amount of time” for the Fed to exit from its current easy money monetary policy stance.

But some of his most interesting points Read more

James Politi

Today’s Fed minutes offered some crunchy details on the debate within the US central bank over asset sales. And it looks like Ben Bernanke is winning the argument.

Months ago the Fed chairman said the central bank should consider selling the $1,000bn-plus portfolio mortgage-backed securities and agency debt accumulated during the recession, but only after the recovery was entrenched and monetary policy tightening had begun. Read more

James Politi

In terms of monetary policy, the message from senior Federal Reserve officials today was not to read too much into their pledge of keeping interest rates low for an “extended period”.

In separate speeches, Donald Kohn, the vice-chairman, and Narayana Kocherlakota, president of the Minneapolis Fed, made clear that the phrase could mean pretty much anything under the sun, since the timing of any policy tightening would be determined by the health of the economy. Read more

James Politi

The 30-year fixed rate mortgage rate in the US fell this week to a five month low of 4.93 per cent, according to Freddie Mac.

Mortgage rates had spiked above 5.20 per cent early last month, just after the Federal Reserve ended its $1.250bn plan hatched during the financial crisis to purchase mortgage-backed securities and support the housing market. Read more

Chris Giles

If we get a Conservative/Liberal Democrat government in the next day or so, pity the UK Treasury. It had been preparing to tell the new chancellor that the public finances were in a terrible shape and new tax increases were extremely difficult to avoid. That pep talk seems to have become quite a bit more difficult.

There was no doubt at the gathering of central bankers here in Zurich today that Britain was the big unanswered question when it came to the next big global risk. Read more