Commentaries
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Euro at $1.50 — a disaster or an alibi?
The French can never resist blaming a strong currency for their misfortunes. So it should come as no surprise that Henri Guaino, President Nicolas Sarkozy’s influential political adviser, has said that having the euro at $1.50 is “a disaster for European industry and the economy”. Since the euro stood at just above $1.49 as he spoke on Tuesday, Guaino presumably sees the single currency area as on the edge of the abyss.Â
This is manifest nonsense. European exports to the rest of the world, including the dollar zone, were booming in mid-2008 when the euro stood at just short of $1.60. The euro area had a trade surplus with the United States at the time. The steep slide in exports over the last 15 months has been due to a collapse in demand, even though the euro fell as low as $1.25.
A strong currency is not necessarily an economic handicap. West Germany’s export-fuelled post-war economic miracle was built on the foundation of a strong deutschemark.
A strong euro has kept the prices of imported commodities and energy under control and thus helped moderate inflation. That in turn enables the European Central Bank to keep interest rates low, benefiting industry.
Higher NAIRU doesn’t equal higher interest rates
Goldman Sachs analyst Peter Berezin is jumping into the debate about the impact of a rising NAIRU – a measure of unemployment equilibrium. Felix Salmon posted on it here back on Sept. 29 and quoted PIMCO’s Mohamed El-Erian saying that 7% seems “reasonable.”
Berezin notes that the CBO estimates NAIRU at 4.8%. If it increases to the 5.8% used in the early 1990s, it still wouldn’t have a meaningful impact on the Fed’s monetary policy, which is why people care about NAIRU in the first place. Berein says a 1 percentage point jump in NAIRU should lead to a corresponding 2 percentage point increase in the Fed funds rate. That would take the so-called optimal fed funds rate (which takes into consideration the extraordinary measures like quantitative easing) to -3.5% from -5.5%. Even using El-Erian’s “reasonable” 7% level would still keep the optimal fed funds in the negative.
Trichet points to possible double-dip recession in Europe
In his cautious Franglais central-bank speak, Jean-Claude Trichet has pointed to the strong possibility that the euro zone may face a double-dip or W-shaped recession.
Of course, that’s not exactly what the European Central Bank president said. But how else are we to interpret his repeated references to a “bumpy road” ahead, and his comment that we are likely to see quarters with positive growth and other quarters with “less flattering” figures? All this was illustrated with a hand gesture that drew a W (or a corrugated iron washboard) rather than a V or a U.
Tidbits from the FOMC minutes…
Just going through the FOMC minutes now and there were a couple of interesting bits worth flagging:
Meeting participants again discussed the merits of including agency MBS backed by adjustable-rate mortgages (ARMs) in the Committee’s MBS purchase program:
Some thought it would be useful to include agency ARM MBS, noting that doing so could reduce
the unusually large spreads between ARM rates and yields on similar-duration Treasury securities—spreads that were far larger than the comparable spreads on fixed-rate mortgages; others saw little potential benefit, given the small stock and limited issuance of ARM MBS, and were hesitant to involve the Federal Reserve in another market segment. The Committee made no decision on purchasing ARM MBS at this meeting.
Fed policy statement lag
The Fed and Treasury are extending the Term Asset-Backed Securities Loan Facility into next year, which is no surprise since the asset-backed securities market and its cousin, the commercial mortgage-backed securities market, are still struggling. The question for me, though, is why doesn’t the Fed make these announcements when it’s issuing its FOMC statement.
The same thing happened in June. The FOMC releases this statement, and the next day it announces it will tweak a number of its extraordinary measures, deciding to extend some while letting others die a natural death.
Live Fed blog
The Federal Reserve is entering a period of transition as a two-day meeting concludes today. Many questions remain on whether a recovery can take hold and on whether the central bank should start withdrawing from the extraordinary measures it took during the financial crisis. This may also be the beginning of the end of the Bernanke era at the Fed: President Obama must decide by next year whether to renominate the Fed chairman, whose term expires at the end of January.
Today’s statement from the Fed’s policy group, the Federal Open Market Commitee, may show changes in the Fed’s view of the economy and may also give hints of an exit strategy. Starting at 2 p.m. on this blog, Reuters columnists will discuss the Fed, the economy and the Fed statement, due out at 2:15 p.m. Please join us.
All eyes on Fed, though few expect big policy changes
Markets are fixated on the outcome of the Fed’s two-day meeting, with the statement due out around 2:15pm. Few expect big changes on its policy, however, so tweaks on language about the economic outlook and a possible extension of its purchase of $300 billion of Treasuries, which expires in September, would get tongues-wagging if not markets moving.
Andrew Brenner of MF Global Inc. notes that the Dow Jones Industrial Average typically moves 2.5% within 24 hours of a Fed announcement.
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The Wall
