Opinion

Anatole Kaletsky

Have markets finally received Bernanke’s taper message?

Anatole Kaletsky
Dec 19, 2013 16:33 UTC

Thanks goodness it’s over. Financial market behavior ahead of last night’s announcement by Ben Bernanke on a gradual reduction in U.S. monetary stimulus has been tedious and irritating, rather like listening to whining children in the back of the car on a long journey: “Daddy, are we there yet?” In fact, impatient whining about when the Fed might start to “taper” has spoiled for many investors what should have been one of the most enjoyable financial journeys of all time, scaling previously unexplored market peaks and passing through unprecedented monetary vistas.

Imagine if everyone had simply taken Ben Bernanke at his word when he said in May that the Fed would continue buying bonds at the rate of $85 billion every month until it was absolutely confident that unemployment was on the way to 6.5 percent and that the scale of these purchases would only be increased or diminished if and when a change was clearly warranted by economic statistics. Investors would then have concluded, as I suggested at the time, that no significant changes in U.S. monetary policy were likely until the end of 2013.

Stock markets around the would have enjoyed their strongest year for a decade without the trauma of the spring and summer “taper tantrum.” Nobody would have been shocked or embarrassed by the “September surprise,” when the Fed very sensibly decided to keep up the pace of monetary stimulus in the face of lackluster economic figures, despite the howls of indignation from analysts who were wrong-footed by their own unsubstantiated predictions of early tapering. Finally, investors would have been fully prepared for the Fed’s decision to go ahead with tapering this week. After all, the recent strong run of U.S. employment, housing and production data provided exactly the sort of strong economic background that Bernanke had posited all along as the necessary condition for tapering, especially in conjunction with the Congressional budget deal that was ratified by the Senate at the same moment Bernanke as spoke across town.

Which brings us to the implications of this week’s momentous events in Washington for economic and financial prospects. For the U.S. economy, the combination of Fed tapering and overwhelming support in both houses of Congress for the budget deal is unambiguously good news. The uncertainties over monetary and fiscal policy that have dominated business, consumer and financial sentiment since the 2008 financial crisis are now essentially resolved. The budget deal virtually guarantees stability in both taxes and public spending until at least 2015 and probably until the next president is inaugurated in January 2017. Meanwhile, the addendum to the Fed’s tapering announcement, which promised to maintain interest rates at their present level until “well past the time that unemployment declines below 6.5 percent,” virtually excludes any possibility of monetary tightening until well into 2015 and represents a much stronger and clearer commitment to near-zero interest rates than anything previously heard from the Fed.

Most importantly, the Fed has now made absolutely clear and unambiguous the two key messages that Bernanke spent this year trying to explain to the markets. First, that a gradual slowdown in the Fed’s asset purchases does not imply any chance in the outlook for interest rates and the Fed will ensure that short-term rates remain firmly anchored near zero. Second, that U.S. interest rates will only start to rise after the U.S. economy has been restored to something approaching full employment — and given the millions of discouraged workers who have recently dropped out of the labor force, the restoration of full employment is likely to require several years  of rapid growth, at well above the U.S. economy’s long-term trend growth rate.

The budget deal and Washington’s new politics of compromise

Anatole Kaletsky
Dec 12, 2013 15:16 UTC

The muted market reaction to this week’s budget deal in Washington may initially seem like a disappointment. After all, uncertainty over government spending, debt and taxes has consistently emerged in business sentiment surveys as the biggest single factor holding back corporate investment and damaging financial confidence. Why then did Wall Street celebrate this breakthrough with its biggest daily fall in two months?

The standard explanation is that the budget deal will accelerate the tapering of monetary policy by the Federal Reserve Board, and that is probably a valid expectation. The main reason for the seemingly perverse response, however, is simply that this budget deal was predictable to the point of inevitability, even if most Washington pundits committed to the standard narrative of U.S. political dysfunction and gridlock did not see it coming until this week. Viewed from outside the Beltway, the inevitability of eventual bipartisan cooperation on the budget has been obvious since the 2012 election, which essentially settled all the important U.S. fiscal debates.

Having argued this position all year and having suggested back in October that a deal by this week was very likely, I could hardly be surprised that the markets greeted this event with a yawn. Short-term players on Wall Street have simply followed the time-honored formula of “buy on the rumor, sell on the news.” Business leaders and long-term investors, by contrast, are likely to be relieved and even enthused by this agreement, but their responses will have to be assessed over weeks, months and even years, not just a few days.

British economic governance encounters turbulence

Anatole Kaletsky
Dec 5, 2013 16:52 UTC

Students of British history will recall the story of Thomas a’Becket, the 12th century prelate who was handpicked by Henry II to become Archbishop of Canterbury because of his loyalty to the Crown. Within months of his appointment, a’Becket turned against the King in the numerous conflicts between church and state. As a result, a’Becket was murdered at the altar of Canterbury Cathedral in 1170, after four of Henry’s henchmen heard their royal master mutter in irritation: “Will no one rid me of this turbulent priest?” Archbishops do not have much political clout these days, but comparable spiritual importance now attaches to central bankers. And a central banker who suddenly seems reminiscent of Thomas a’Becket is Mark Carney, the recently appointed governor of the Bank of England.

When George Osborne, the British chancellor of the Exchequer (finance minister), delivered his Autumn Statement on Britain’s economic and fiscal prospects this week, he intended it as a “soft launch” for the Tory-Liberal government’s campaign for re-election in May 2015. The big set-piece speech offered Osborne an ideal opportunity to boast about the British economy’s sudden improvement this year and to announce some populist measures, such as a “voluntary” price-control regime for energy utilities, that were carefully designed to wrong-foot the Labour opposition. Osborne’s speech marked the start of a long political campaign designed to create a Pavlovian association in voters’ minds between government policies, rising house prices and the economic recovery. If this campaign is successful it will virtually guarantee election victory for the Tory-Liberal coalition — and it could even make an outright majority for the Tories conceivable in 2015.

Last week, however, the plan for a mutually-reinforcing cycle of rising house prices, strengthening consumer confidence, accelerating economic activity and improving Tory fortunes suddenly came under threat from the most unexpected quarter. Mark Carney was hand-picked this year by Osborne and was imported all the way from Canada because he seemed to offer less resistance than any plausible British candidate to the Tory plan for a pre-election economic recovery powered by rising property prices and re-leveraging by homeowners.

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