What happens when you raise rates by 2.5 percentage points, within a period of six months, for an economy that might only grow 0.2 per cent this year?
We’re not sure. Read more
The transition to a new normal monetary policy, by David Miles, Monetary Policy Committee member, click to read in full
Who thinks UK base rates will go higher this year? We ask because Economics Editor Chris Giles made precisely that bold prediction in the FT’s collection of holiday prophesy.
Will the Bank of England raise interest rates in 2014?
Yes. It is fashionable to think this is an absurd question to which the answer is obviously no. But not for the first time, fashion sucks. The British economy is growing at an annualised rate of more than 3 per cent, unemployment is rapidly falling towards the Bank of England’s 7 per cent threshold when it considers rate rises and inflation has been above the central bank’s 2 per cent target for all of the past four years. The reason the BoE would keep rates on hold at 0.5 per cent amid a fast expansion is a rapid improvement in productivity, allowing recovery to coexist with an absence of inflationary pressure.
Some prominent Fed Reserve Board staffers recently put out two weighty papers in advance of the 4th Jacques Polak Annual Research Conference which is hosted by the IMF starting on Thursday (today).
Paul flicked one paper up yesterday — The Federal Reserve’s Framework for Monetary Policy –Recent Changes and New Questions — and the second — Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy — is here. Read more
You’ve seen those who were (ahem) surprised by the US central bank’s decision not to start tapering this month… now read the words of one who got it right: BNP Paribas’ Julia Coronado, the bank’s chief North America economist and ex-forecaster at the Fed.
And interestingly, BNP think even December is in doubt: Read more
Barclays asks clients what they think every few months and the latest batch of answers from 799
dart throwing interns global investors show that they are ready, set and already yawning over the prospects for tapering by the Fed this week.
In the UK, however, who knows? Consensus came there none. Read more
The Bank for International Settlements says there’s a problem. Governments, by and large, haven’t done enough to address the issues that have emerged during/since the financial crisis. Some monetary policymakers have done rather a lot, but much of it is in unchartered territory and carries risks. So, says BIS, monetary policymakers should just stop it henceforth.
From the latest BIS annual report: Read more
Alternative title: the slow death of the money multiplier.
Bank of America Merrill Lynch’s Michael Hanson and team note on Tuesday that while the world and its dog obsess about an upcoming QE exit, things continue to look pretty bleak on the money multiplier side of things. Read more
And the annual report from the St Louis Fed found that 62 per cent of the wealth recovery through the end of last year has been the result of rising stock markets — and stock ownership is concentrated among richer households.
Coincidentally (or not), three speeches that exemplify a renewed focus on inequality have been given in recent weeks by the three women on the Federal Reserve Board – Governor Sarah Bloom Raskin, Governor Elizabeth Duke, and Vice Chair Janet Yellen.
That’s an observation from Neal Soss of Credit Suisse in a note released at the end of last month, writing that inequality has increasingly appeared on the radar screen of monetary policymakers. Read more
The following is a response from Peter Stella, former chief of monetary and foreign exchange operations at the IMF on the subject of reserve requirements and whether or not they pose an inflationary or credit expansion threat.
The note was penned as a response to an article by Jeremy Siegel, the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania, in the FT calling for the Fed to raise reserve requirements. Read more
“Whatever we can”, you say? Encouraging words from BoJ governor nominee Kuroda over the weekend (even if comparisons with Mr Draghi are overblown). If Cullen Roche is correct, what happens in Japan over the next year or many could change the future of economic policy. So it’s worth spending a bit more time on what Kuroda’s “can” might actually be.
Yes the IMF calls for common eurozone deposit insurance, in this new banking union paper. But also look at what they suggest on emergency liquidity assistance:
Lender of last resort. The lender of last resort makes liquidity support available to solvent yet illiquid banks. Centralizing all LOLR functions at the ECB would in the steady state eliminate bank-sovereign linkages present in the current ELA scheme (see Box 1). This would require changes to the ECB’s collateral policy, as by definition euro area banks that tap ELA cannot access Eurosystem liquidity owing to collateral constraints. Until such time as all banks are brought under the ECB’s supervisory oversight, ELA would be sourced through both the ECB (for banks brought under its purview) as well as national central banks (for banks that remain under national supervision, albeit with adjustments made to the national ELA limits).
Which would be nothing short of a revolution. Read more
Another excerpt from Janet Yellen’s speech today:
This possibility [of a skills mismatch between the skills of employees and the skills demanded by employers] and the unprecedented level and persistence of long-term unemployment in this recovery have prompted some to ask whether a significant share of unemployment since the recession is due to structural problems in labor markets and not simply a cyclical shortfall in aggregate demand. Read more
Are the BoJ’s newly-announced measures really that dramatic?
For all Shinzo Abe’s talk of urgency in meeting the new 2 per cent inflation target, the BoJ itself doesn’t actually expect it to happen that quickly. In the forecasts accompanying today’s statement, the BoJ has maintained the 2013 CPI forecast of 0.4 per cent made back in October — which is probably fair enough as the open-ended programme doesn’t actually start until next year — and only moved its 2014 up to 0.9 per cent from 0.8 per cent. Read more
A lot of ink has been spilled by various FX strategists over what the Reserve Bank of Australia is or isn’t doing with its FX transactions and whether this is or is not tantamount to printing money. The RBA isn’t ‘printing money’ but it is doing something… or rather, not doing something, as a way of signalling that it doesn’t like the Australian dollar being so strong. They’ve been given the opportunity to do this by a foreign central bank, but that’s neither here nor there. Read on for all the messy details… Read more
The Bank of Japan’s unprecedented joint statement with the Japanese government after the central bank’s October meeting raised eyebrows around the world. The BoJ was already widely seen as having come under increased political pressure in recent months as the country’s economy had slowed; so what did the joint statement mean?
The statement contained a couple of key declarations: “The Bank strongly expects the Government to vigorously promote measures for strengthening Japan’s growth potential”, and “The Government strongly expects the Bank to continue powerful easing as outlined in section 2 until deflation is overcome.” Read more
Credit Suisse’s answer last week to the (rather odd) idea of the British government “cancelling” (restructuring) the gilts held by its central bank under quantitative easing…
From the bank’s credit analyst William Porter, it’s worth a read:
Any financial problem can be solved at a stroke if double-entry book-keeping can be ignored as a constraint. The problem is, it cannot. So debate in the private-sector financial community about “solutions” to the UK’s financial challenges based on ignoring it worry us. In the UK, Mervyn King has been quick to debunk the fallacies. But if they can exist even for a while in the very simple UK, then the infinitely more complex euro area (which we do not address in detail here) is fertile ground for solutions based on fallacious reasoning…