Daily Archives: June 14, 2013

Markets rallied sharply late on Thursday on unconfirmed indications that the Fed may push back more forcefully on investors’ fear of a pre-mature tightening in monetary policy. To sustain the change in market sentiment for more than a few days, the Fed would need to follow up with greater details or, even better, have its beneficial market impact gradually superseded by an accelerated improvement in economic fundamentals.

I suspect that, having witnessed the recent market turmoil and fearing that the related liquidity disruptions could feed on themselves, Fed officials worry that investors are abandoning too quickly the notion of a “central bank put.” After all, financial markets in general, and equities and corporate bonds in particular, had surged quite nicely on the (repeatedly demonstrated) notion that central banks were investors’ best friends. 

The hearings of the German constitutional court this week in Karlsruhe raise a series of interesting questions, in particular about the independence and accountability of the European Central Bank.

Concerning independence, it seems peculiar that the Court called a national institution, the Deutsche Bundesbank, to testify. Since 1 January 1999, the Bundesbank has been an integral part of the Eurosystem – the chain of institutions headed by the ECB – for its monetary policy functions.

Like all the other national central banks of the euro area, it is not responsible for deciding the single monetary policy of the euro area, but only for implementing it. How can part of an institution express a different opinion from the rest, without undermining its integrity, and thus its independence?