Reuters blog archive
from Anatole Kaletsky:
Following Wednesday’s publication of the Federal Open Market Committee minutes, we now know that a reduction in U.S. monetary stimulus could be on the agenda for the next FOMC meeting on December 19. How much does this matter?
When the Fed unexpectedly decided not to “taper” in September, the markets were stunned and gyrated wildly, although investors had only themselves to blame for being wrong-footed in this way. Ben Bernanke had made crystal clear his reluctance to reduce monetary stimulus as long as the U.S. economy appeared to be weakening, which appeared to be the case throughout the summer. By December 19, the situation may well be very different, since the economy will probably be improving and the U.S. fiscal stalemate may well have been resolved. If such improvements happen, the Fed will have no compunctions about wrong-footing investors again, in the opposite direction, as this column suggested last month.
So what will be the impact on the world economy and financial markets if the Fed decided to taper as early as December? The answer is, not much. As long as the Fed stands by its commitment to keep interest rates near zero for the foreseeable future, tapering will have no major economic impact. Therefore its financial significance should also be marginal, except insofar as investor psychology overwhelms rational economic analysis.
Ever since the global “taper tantrum” started six months ago, this column has suggested that investors and business leaders should spend less time on Talmudic parsing of Fed rhetoric and more on analyzing the economic and financial data that will ultimately determine the outlook for the global economy and financial markets, and therefore drive monetary decisions too. For much of this period, investors have chosen to do the opposite, swinging from panic to euphoria and back at the slightest hint of a nuance in the Fed’s verbal contortions. Luckily this neurotic behavior has calmed down in the past few weeks, as investors have reverted to the focus on economic and financial fundamentals that served them well in first few months of this year, before the taper tantrum.
from Anatole Kaletsky:
If anyone still doubted that central bankers all over the world will keep interest rates at rock-bottom levels, those doubts should have been dispelled this week. Janet Yellen’s statement on Thursday to the U.S. Senate that the Fed has “more work to do” to stimulate employment, and that “supporting the recovery today is the surest path to returning to a more normal approach to monetary policy,” capped a series of surprisingly clear commitments to easy money from central bankers this week. On Wednesday Joerg Asmussen, a member of the executive board of the European Central Bank, and Ewald Nowotny, the Austrian central bank governor -- both of whom had previously been reported as voting against last week’s surprise ECB rate cut -- said that they might in fact support further rate cuts and even negative interest rates, as well as the possibility of breaking the taboo against U.S.-style purchases of government bonds. And Mark Carney, the Governor of the Bank of England, reiterated more strongly than ever that any early increase in British interest rates was out of the question, despite the fact that the outlook for the British economy has turned out to be much better than the BoE had expected.
But what if these zero interest rate policies produce disappointing results in the year ahead, as they have in each of the past four years? What if the world economy fails to spring back to life or just plods along with sub-par growth, despite all this stimulus, as has happened in each of the past four years?
from Nicholas Wapshott:
For those with memories of hyper-inflation and “stagflation” in the 1970s, these cogent pleas for higher prices is heresy, an irresponsible clamor for the return of an ever-changing fiscal landscape that led to widespread misery and economic turmoil.
from The Great Debate:
The confirmation hearing of Federal Reserve Chairwoman nominee Janet Yellen on Thursday will be an opportune moment for Fed critics to air their grievances. There is plenty of fodder for disagreement and debate -- ranging from the Fed’s supervisory track record, to the rules for tapering large-scale asset purchases, to the criteria for ending its zero-interest rate stance.
Yet, one sure criticism is sharply at odds with the facts: That the Fed’s crisis response was an insider affair, run by and for a handful of too-big-to-fail banks.
By Alister Bull
Christina Romer, former chair of the White House Council of Economic Advisers and a strong advocate for Janet Yellen to take over from Ben Bernanke as the next chair of the Federal Reserve, slammed the Fed in a lecture last week that accused the U.S. central bank of being too meek and of fighting the wrong battle by being fixated on asset bubbles.
Romer, sometimes touted as a potential candidate to fill one of the 3 vacancies on the Fed's Board in Washington, or maybe run a regional branch (Cleveland has an opening), also discussed deliberately aiming for 3 or 4 percent inflation, as well as targeting nominal GDP.
By Daniel Indiviglio
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
America’s dysfunctional politics might just preserve the central bank’s independence - if inadvertently. President Barack Obama’s pick as the next chairman of the Federal Reserve, Larry Summers, was torpedoed by congressional opposition. That suggests an unwelcome increase of political meddling in the Fed’s affairs. But if the Fed’s internal choice, Janet Yellen, gets the job, isn’t the central bank’s sovereignty maintained? It’s a messy way to the right outcome.
from The Great Debate:
The money markets rejoiced when Larry Summers pulled out of the race to be Federal Reserve chairman. The reason was simple, self-serving and not necessarily wholesome: A different chairwoman -- most likely Janet Yellen -- would be more inclined to continue the Fed’s program of large-scale bond purchases and low interest rates.
Stock and bond markets, of course, love low interest rates. Cheap rates on bonds push stock values up as investors seek higher returns. Interest rates and bond prices move inversely -- so cheap money keeps bond prices high. And low interest rates are good for mortgage demand and housing prices.
from The Edgy Optimist:
As this week’s release of government numbers on unemployment and jobs highlight, the American economy is puttering along in the slow lane. And while few things in life are more frustrating than being stuck in the passenger seat of that car, it certainly beats crashing.
The second gear syndrome of our current economic life doesn’t sit well in a culture that demands more. Our macroeconomic numbers may be stable, but they obscure vast differences in affluence and opportunity, depending on where you live, what you do, what ethnicity you identify with, and how educated you are. The official unemployment rate, now at 7.4 percent, has been ticking down, but it is simply a statistic. It says nothing about the quality of those jobs, hours worked, wages paid, and needs met. Those are the questions we need to attend to.
from The Great Debate:
The chattering classes are fascinated by the Republicans’ internecine battle to redefine the party in the wake of the George W. Bush calamity and the Mitt Romney defeat -- from Senator Rand Paul’s revolt against the neoconservative foreign policy, to intellectuals flirting with “libertarian populism.” Less attention has been paid, however, to the stirrings of what Senator Paul Wellstone dubbed “the Democratic wing of the Democratic Party” -- now beginning to challenge the Wall Street wing of the party.
Perhaps the strongest demonstration of this was the barrage of “friendly fire” that greeted the White House’s trial balloon on nominating Lawrence Summers to head the Federal Reserve Bank. More than one-third of Democrats in the Senate signed a letter supporting Janet Yellen, now vice chairwoman of the Fed. More than half of the elected Democratic women in the House of Representatives signed a similar letter. Many were appalled at the notion of passing over the superbly qualified Yellen for Summers, with his notorious record of denigrating and dismissing women.
from Nicholas Wapshott:
The two-horse race to replace Ben Bernanke as the Fed chairman appears to have come down to gender. In a letter to the president, about a third of Senate Democrats have made clear they would like Bernanke’s deputy Janet Yellen to replace him, primarily -- though they do not openly say it -- because she is a woman.
The White House, it seems, would prefer Larry Summers, Bill Clinton’s Treasury Secretary who was also director of Barack Obama’s National Economic Council. Summers is a distinguished economist, a former chief economist of the World Bank and briefly, until he was subsumed by controversy, president of Harvard University. (Summers writes a monthly column for Reuters.)