Federal Reserve succession
The Federal Reserve launched a last-ditch effort to shore up the US economic recovery with a new $600bn round of quantitative easing, but the announcement was likely to disappoint markets, with no bias towards increasing that number in the future, the FT reports. The Fed gave no signal about whether it will expand its asset purchases beyond that number after announcing it will buy the longer-term Treasury bonds by the end of the second quarter of 2011. The start of QE2 is one of the most significant decisions that the Federal Reserve has made in years. The Fed’s move is probably the last chance to hasten the decline of America’s 9.6 per cent unemployment rate as there is little chance that the new divided Congress will agree to further fiscal stimulus. It is the first time the Fed has used QE as a regular tool of monetary policy, putting its credibility and that of chairman Ben Bernanke on the line. Quantitative easing is a way for the central bank to boost the economy by driving down long-term interest rates when short-term rates are already at zero.
“A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years).” It’s über-quantitative easing — again.
‘He believes that without the Obama administration’s $787 billion stimulus program, the nation would have been worse off, and that Congress needs to continue to prop up the economy in the short run…’ – the publicly unspoken views, according to friends who have spoken to the NYT, of Federal Reserve chairman Ben Bernanke. Mr Bernanke is said to believe that fiscal stimulus should follow likely quantitative easing by the Fed next week, but is wary of voicing his concerns – contrary to the interventions of his predecessor, Alan Greenspan, in the Bush tax cuts of 2001 and 2003. It is unclear if Bernanke counts Nouriel Roubini as a close friend. Writing in the FT, Roubini says that the Obama presidency is heading for a ‘train wreck’ by failing to carry out short-term stimulus measures, but also needs to watch long-term solvency.
Regulators will report next month on foreclosure processes at large lenders, Federal Reserve chairman Ben Bernanke has warned, according to Reuters. Results from the review will likely pile more pressure on banks just as fears rise that allegations of ‘robo-signing’ and other corner-cutting will affect their earnings. It will also threaten the already-fragile housing market even as the FDIC chair Sheila Bair warns that foreclosures must continue in order to keep the market going, says the FT. Other bits of the market are already collapsing. Mortgage modifications are grinding to a halt just a year after the program was established, reports the NYT.
US inflation expectations have jumped sharply in the past two weeks as investors bet that the Federal Reserve’s efforts to boost the economy by pumping in more money will succeed, reports the FT. Fears over the prospect of a Japan-style “lost decade” of deflation and weak growth have prompted the Fed to show it is prepared to pursue an aggressive bond-buying policy and tolerate higher than normal inflation in the short term. Ben Bernanke, Fed chairman, reiterated on Friday that the current underlying inflation level of 1 per cent was too low. Policymakers judge a rate of 2 per cent as being consistent with generating price stability and a growing economy. The prospect of the Fed restarting its expansionary quantitative easing policy, also known as QE2, as early as next month has brought big falls in the dollar, rises in commodity prices and higher long-term Treasury yields – all of which are barometers of higher inflation expectations.
Comment, analysis and other offerings from Tuesday’s FT Gideon Rachman: Mad as hell but not Mad HattersThe Tea Party movement that is stirring up US politics means different things to different people. The intended reference is to the Boston Tea Party, the anti-tax, anti-colonial rebellion that sparked off the American revolution. To British ears, the movement brings to mind another famous tea party – the Mad Hatter’s tea party in Alice in Wonderland, whose convener spoke in illogical and exasperating riddles, says the FT’s Gideon Rachman.
Further to our recap of the economic warning signs facing the Fed, here’s a round-up of economists’ advice for what Ben Bernanke should say in his Jackson Hole speech on Friday. Below we list a few of the latest previews, with links and excerpts:
This is not a recovery, says Paul Krugman in the NYT, despite what Federal Reserve chair Ben Bernanke will probably say at this morning’s Jackson Hole speech, sticking to the Fed’s line that the economy is still recovering, if slowly. Mr Bernanke will have to contend with fresh data expected to show that Q2 GDP grew 1.4 per cent in the second quarter, far weaker than initial readings suggested, Reuters reports. European and Asian bourses traded cautiously and currencies kept within tight ranges as markets looked to Mr Bernanke to start his speech, the FT adds.
Look to the past to understand what Federal Reserve chair Ben Bernanke will say during his speech at Friday’s Jackson Hole central banking summit, says the NYT. Mr Bernanke’s 2003 concerns over deflation swayed the then-chair Alan Greenspan to act against the threat, suggesting that he will act firmly now. But counter-arguments against renewed quantitative easing are gaining strength, FT Alphaville notes, given doubts on how lower interest rates will transmit to the rest of the economy. In the meantime, a Canadian insurer is busy making a bold bet that deflation will arrive, using inflation-linked derivatives, the WSJ reports.
There’s no need to read the minutes of the last FOMC meeting when they are published next week. The WSJ’s Jon Hilsenrath has saved everyone the trouble with an extremely detailed piece on the August 11 gathering. It describes at some length the divisions and views of the 17 member committee and how they arrived at the decision to stop the Fed’s $2,000bn stock of mortgage debt and Treasury holdings from shrinking any further.
Seven out of the Federal Open Market Committee’s seventeen members spoke against or expressed reservations with the Federal Reserve’s move to reinvest MBS into Treasuries at its August meeting, the WSJ reports, casting doubt over its ability to tackle a slowing economy. But the August meeting clearly shows Fed chair Ben Bernanke is determined to avoid any chance of deflation, Calculated Risk argues — suggesting that quantitative easing will return, eventually. Treasury yields are meanwhile falling again as investors wait for Bernanke to speak at a central banking symposium on Friday, Bloomberg says.
Is the policy of continuing to pay interest on the bank reserves held at the Federal Reserve a good idea, a bad idea, or completely irrelevant? This question has been the source of ongoing debate among economists. Sadly, FT Alphaville does not have the answer, but we can at least trace the contours of the debate and look into some recent developments.
The summer of 2009 was characterised by one almighty debate between those expecting Japan-style deflation, those who forecast inflation — and those who thought monetary conditions would be ‘just right.’ Fast forward a year and we’re having the same argument, though the emphasis has shifted dramatically. The deflationistas appear to have suddenly grabbed the upper hand. What changed, asks FT Alphaville?
FT Alphaville has meticulously reviewed the ratings composition of Maiden Lane I: the special purpose vehicle created by the Fed to bail out Bear Stearns in 2008. Federal Reserve chairman Ben Bernanke was very clear in April 2008, in his testimony to the US Congress, that the assets taken from Bear Stearns to collateralise the Fed’s $29bn loan were “entirely investment grade, entirely current and performing.” Taxpayers were not getting junk. After a brief glance at a few bonds, we now know that’s not true.
Whispers around the White House say President Obama is poised to pick Janet Yellen to be the Federal Reserve vice chairman, Reuters has reported. After Donald Kohn’s departure, is it the Fed doves’ time to shine once again? After all, Yellen, currently chair of the San Francisco Fed, has been outspoken on her belief that the government needs to keep interest rates at exceptionally low rates — and she leans towards growth policies that favour employment over policies to keep inflation down.
It’s that time again on Capitol Hill. Fed chairman Ben Bernanke is up before the financial services committee, promising to “begin today with some comments on the outlook for the economy and for monetary policy, then touch briefly on several other important issues.” Cutting to the meat:
Most of the policy agenda in Washington has been postponed because of the weather. In fact the House of Representatives has been adjourned until February 22. So we don’t get to actually hear Fed chairman Ben Bernanke read this — testimony on the Fed’s QE/stimulus exit strategy, which was due to be delivered to the Financial Services committee on Wednesday.
Ben Bernanke, Federal Reserve chairman, has told the main government watchdog he would “welcome a full review” into the Fed’s 2008 bail-out of insurer AIG, including the decision to extend credit to AIG using the Fed’s emergency lending authority. In a letter published by the Fed, Bernanke, now awaiting confirmation for a second term by the US Senate, wrote to the Government Accountability Office on Tuesday to offer support for an inquiry.
Ben Bernanke moved closer to a second term as chairman of the Federal Reserve in the face of a revolt in Congress by Senate Republicans against his appointment. The Senate banking committee on Thursday voted 16 to 7 to advance Bernanke’s renomination to a full Senate vote in early 2010. But while the Fed chief won strong support from the committee’s Democratic senators, more than half the Republican members voted no. Bernanke is expected to win the full Senate vote but the contentious nature of his confirmation highlights the push for reforms that could trim the Fed’s powers and curb its independence.
Ben Bernanke is likely to face tough questioning when he appears before the Senate banking committee on Thursday seeking confirmation for a second term as Federal Reserve chairman. While there is little doubt he will be confirmed, congressional officials say the hearings will highlight concerns about the Fed, manifested in legislative proposals that would reduce its powers or its independence. Experts fear the US central bank could end up paying a heavy institutional price for its unorthodox actions to avert a depression.
Duh duh duh! The yield on some short-term Treasuries, T-bills, turned negative on Thursday. That means that investors are piling into Treasuries to such an extent that they’re now willing to effectively pay the government for the benefit of owning them. The last time we saw this happening was in 2008, in the depths of the financial crisis.
Comment, analysis and news from the FT, with a special focus on the decision by US President Barack Obama to reappoint Ben Bernanke for another term as chairman of the US Federal Reserve: At a time when political tempers are running high and world markets remain jittery, Barack Obama has made the right decision to keep Ben Bernanke on for a second term as Fed chairman, says an FT editorial comment. The Senate must now proceed with hearings to remove the remaining uncertainty.
The FT on Monday wades into the escalating debate over the future of Fed chairman Ben Bernanke with a strong argument in favour or reappointing the bearded one – a “Bernanke booster” that is bound to rile legions of his critics out there. A central banker “must combine the technocrat’s virtues with those of the politician”, pronounces the FT. “Ben Bernanke, chairman of the US Federal Reserve board, possesses both. He should be reappointed when his current term expires in January.” Continues the editorial comment:
Along with Gordon Brown, Simon Cowell, Victoria Beckham and all those wonderful, “love-to-hate” figures, the chairman of the US Federal Reserve is an easy and tempting target for all manner of slings and arrows. Alan Greenspan knew that, and his successor, Ben Bernanke, found it out all-too-quickly.
The statement from the FOMC’s most recent meeting contained one striking change to the previous statement, released in April: The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time. In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
Ben Bernanke urged Congress on Wednesday to act to bring down long-term budget deficits, or else face a future debt trap, reports the FT. The Fed chairman said that recent sharp increases in bond yields – from below 3% to 3.76% last week for 10-year Treasuries – reflect “concern about large federal deficits” as well as new optimism about the economy and other factors. Reuters meanwhile reports that the Obama administration plans to unveil on June 17 its sweeping plan to overhaul financial regulation.
An interesting observation from Bank of New York Mellon’s FX team on Wednesday (our emphasis): Indeed, at the risk of over-simplification, it appears to us that we have now entered a new era in financial history – an era in which certain governments are seriously deliberating the USD’s hegemony as a reserve currency and even its stability over the longer-term.