A new debate is set to rage within the Fed in the wake of its decision to re-open currency swap lines with foreign central banks.
Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, today said at an event in North Carolina that the move was “not a problem” but “we’re going to think about whether we sterilise” the swaps.
Most of our interview on Saturday with James Bullard, president of the St Louis Federal Reserve Bank, was focused on his stance on the financial reform bill, which he seems quite exercised about.
But left on the cutting room floor were some of his observations on last week’s meeting of the Federal Open Market Committee, which he attended.
Ever heard of asymmetrical risk?
Well, it may be a key reason why Federal Reserve policymakers are keeping interest rates “exceptionally low” for an “extended period”.
There was little news in today’s prepared testimony by Ben Bernanke, Federal Reserve chairman, on the exit strategy. Mr Bernanke chose not to talk about the discount rate except to say that lasts month’s increase should not be viewed as a monetary policy shift.
And he mostly went over what he had already said last month in terms of the sequencing of the tightening, with reverse repurchase agreements and term deposits ramping up before – or alongside – an increase in the interest rate on reserves. Scant if any change there.
But one shift in tone did stand out.
Ben Bernanke, Federal Reserve chairman, heads to Capitol Hill on Thursday for a hearing on the US central bank’s exit strategy.
With the latest FOMC statement out only a week ago, few economists are expecting any significant changes to the monetary policy outlook of “exceptionally low” rates for an “extended period”. But that does not mean there won’t be news coming out of Mr Bernanke’s mouth. One guess of several economists, such as Michael Feroli of JPMorgan, is that the headlines could be made by a discussion of the discount rate – the rate at which commercial banks can borrow from the Fed in a pinch.
References to the discount rate were notably absent from the FOMC statement last week – but that doesn’t mean the committee did not discuss it.
The FOMC today kept the federal fund rates unchanged and didn’t change its closely-watched “extended period” language.
Analysts had been waiting to see if more FOMC members would vote against keeping the extended period language, but the only vote against it was Thomas M. Hoenig, who had previously used his new voting powers to dissent during the January meeting. This month, he gave a reason for his dissent saying that “continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.”
But, despite the Hoenig dissent, the meeting took the US no closer to policy normalisation.
Almost everyone agrees Britain needs to cut its budget deficit. The action is needed whether it is because British government debt is rising at an unsustainable pace; because there is a sizable risk that the cost of servicing each pound of debt will rise sharply; because we think it is unfair our children should fund our profligacy; or because spending much more on debt servicing limits government’s ability to spend money on things we really care about.
The question is how fast. In this big debate, there are two sorts of people: fundamentalists and equivocators.
The fundamentalists include almost all politicians. Gordon Brown insists fiscal tightening now is dangerous for the recovery. On the opposite side, the equally fundamentalist David Cameron asserts that the truth lies with the reverse argument. “To get the economy moving you’ve got to lift the black cloud of the deficit,” he says repeatedly. Business organisations, such as the CBI and IoD are fundamentalists. And many economists have also been overcome with fundamentalist tendencies, as evidenced by the spate of letter writing to newspapers.
The other group are equivocators. These people are reasonably sure there needs to be a credible plan to reduce the deficit, but are unsure about its timing, its effects, and whether history tells them very much. Many Treasury officials I know are equivocators, so was the recent Green Budget from the Institute for Fiscal Studies, so are significant elements of the Monetary Policy Committee and, to my surprise, so is the governor of the Bank of England. Mervyn King is often portrayed as a fundamentalist on fiscal policy, but his answers at the latest Inflation Report (pages 7 to 9) can be summarised as: ‘The effect of fiscal policy on the economy? Well, it depends’. I am also firmly in the equivocators’ camp.
Being unsure about the best policy is rather uncomfortable, feeble even. But I’ll try to explain why the decision is so difficult.
The Bank of England’s Monetary Policy Committee starts its February meeting tomorrow with the issue of whether to pause quantitative easing as the main issue on the agenda. A month ago, everyone thought the Bank would keep interest rates at 0.5 per cent and pause the programme of QE at a total £200bn of money created and assets purchased. After disappointing fourth quarter growth figures, there is a bit of doubt about the Bank’s actions. I still think the Committee will pause QE on Thursday. Here is why:
Vietnam’s central bank has asked the country’s largest bank by assets to slow loan growth in general, but to increase rural lending. The Chinese recently made the same requests of several Chinese banks (1, 2).
The State Bank of Vietnam has asked unlisted Agribank to limit loans this year to 20 per cent, after their loan book grew 24.4 per cent last year. Agribank should also increase its proportion of rural loans to at least 75 per cent in 2010, from 68.3 per cent last year, governor Nguyen Van Giau was quoted as telling the lender at its annual meeting last Friday.
China’s central bank has raised the yield on one-year government debt to 1.9264 per cent, significantly above forecasts, which were in the 1.84 – 1.89 per cent range. The People’s Bank of China auctioned 24 billion yuan ($3.5 bn) of one-year bills at 1.9264 per cent, up 8 basis points from last week’s level of 1.8434 per cent.
The rapid yield increase shows quicker-than-expected tightening from the Chinese central bank. Increasing the yield makes debt more attractive to investors, taking more money out of the system and into the central bank. “The central bank wants to lock up funds for a longer period because of concerns of the risk in inflation in the longer term,” a trader at a major Chinese bank in Shanghai told Reuters.