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from Breakingviews:

Central bankers live in silent fear

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By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It’s scary to think what higher policy interest rates might do to a financial system habituated to virtually free money. Central bankers, though, profess not to be too worried about this risk. They are either overconfident - or living in silent fear.

Meltdown risk doesn’t seem to be on the radar of the U.S. Federal Reserve, the European Central Bank or the Bank of England. When the Fed’s Janet Yellen and her global peers explain why they are not planning on increasing rates, they talk about inflation, unemployment and output gaps. Just as they almost never discussed the toxic buildup of credit before the 2008 crisis, they are silent about the current risks in the financial system.

They never say anything like, “After five years of zero rates, with systemic leverage almost as high as just before Lehman Brothers failed and our economies still deeply scarred from the subsequent deep recession, we’d be taking an unnecessarily big chance if we raised rates any time before inflation was a clear and present danger.”

from MacroScope:

Is it time for the ECB to do more?

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From financial forecasters to the International Monetary Fund, calls for the European Central Bank to do more to support the euro zone recovery are growing louder.

With inflation well below the ECB’s 2 percent target ceiling and continuing to fall, 20 of 53 economists in a Reuters Poll conducted last week said the bank was wrong to leave policy unchanged at recent meetings and should do more when it meets on Thursday.

from Counterparties:

MORNING BID – Hi Janet, Here’s a Selloff.

Welcome Madame Chair, here's a market selloff for you.

Fed Chair Janet Yellen made some news that she didn't expect yesterday. She perhaps thought she was offering some clarity when she answered the question from Reuters' Ann Saphir as to when the Fed might start raising interest rates. That's not how it worked, although at least in this case she didn't mouth off to Maria Bartiromo the way Ben Bernanke did eight years ago.

What we didn't see in her answer on the distance between the end of QE3 and the first rate hikes of "six months" (or something like that), is whether we will start to see any kind of reaction from the primary dealers surveyed by Reuters yesterday.

from Breakingviews:

ECB needs cunning plan to join currency wars

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By Swaha Pattanaik

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The euro is at two-and-a-half-year highs. Its strength risks driving ultra-low inflation even lower. The European Central Bank may be squeamish about blatantly targeting a weaker euro. But it need have no qualms about picking monetary policy tools that maximise damage to the single currency.

from Counterparties:

Slacktivist monetary policy

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

How much slack is there in the labor market? That is, how close is the American labor market to full employment? The answer to that question is important, says Evan Soltas, because estimating whether the economy is near its potential affects what, if anything, policymakers actually do to help the economy. No one is quite sure, but Paul Krugman argues against the emerging consensus that says “even though we still have huge unemployment, we’re actually running out of employable workers”.

from Breakingviews:

Just ditch forward guidance

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By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Central banks’ forward guidance provides modest gains with significant risks. That judgment, already common among economists, has just received an authoritative endorsement from the Bank for International Settlements. The implication is that this policy experiment should be abandoned.

from Global Investing:

Will Lithuania fly like a hawk or a dove at the ECB?

No one will really know how Lithuania will impact European Central Bank monetary policy until the country gets a seat at the table. That is expected to happen in 2015, provided the last of the three Baltic nations meets the criteria to become the euro zone's 19th member. We'll all find out in early June.

The ECB's monetary policy remains at its loosest (main refinancing rate is just 0.25 pct) since the bank assumed central banking responsibilities for the euro area 15 years ago. My Frankfurt-based colleague, Eva Taylor, explained earlier this month that the addition of Lithuania will change the voting patterns of the ECB, curbing smaller members' perceived influence and giving more weight to the center.

from Breakingviews:

G20 can get past angry stares and platitudes

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By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The G20 risks becoming a particularly pompous talking shop. As finance ministers and central bankers from the world’s largest economies gather for their weekend summit in Sydney, Australia, they might plan to get out of a potentially dangerous rut.

from Anatole Kaletsky:

Yellen looks toward a Keynesian approach

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This has been a banner week for the world economy, inspired largely by events in the United States.

In Washington, the first congressional testimony from Janet Yellen in her position as new Federal Reserve Board chairwoman reassured and impressed two notoriously petulant audiences: Tea Party congressmen, who had assembled a posse of hostile witnesses to attack the Fed’s “easy money” policies; and panicky Wall Street investors, who had spent the previous month swooning on fears that monetary policies might not be easy enough.

from MacroScope:

Japan-style deflation in Europe getting harder to dismiss

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To most people, the idea of falling prices sounds like a good thing. But it poses serious economic and financial risks - just ask the Japanese, who only now finally have the upper hand in a 20-year battle to drag their economy out of deflation.

That front is shifting westward, to the euro zone.

Deflation tempts consumers to postpone spending and businesses to delay investment because they expect prices to be lower in the future. This slows growth and puts upward pressure on unemployment. It also increases the real debt burden of debtors, from consumers to companies to governments.

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