MacroScope

Why is the Reserve Bank of India so quiet on the rupee?

 

When nobody’s listening, sometimes it pays to shout from the rooftops.

Based on the rupee’s daily pasting, the Reserve Bank of India might do well to look to the European Central Bank’s strong verbal defense of the euro just over a year ago.

In July last year ECB President Mario Draghi declared he would do “whatever it takes” to safeguard the euro’s existence.

That unexpectedly candid comment, uttered at a moment of rising market tension, wasn’t followed by concrete policy action. But markets took heed.

Sovereign bond yields in peripheral countries plunged from danger levels and the euro has rallied 10 percent since then – 8.5 percent by the end of last year.

Turn to the free-falling rupee.

It has plunged by 14 percent since the U.S. Federal Reserve signalled in May that it would soon have to slow the pace of its extraordinary monetary stimulus, which has triggered a rush of foreign investors to sell emerging market assets.

The other big question at Jackson Hole

It will be a tough one to avoid. Federal Reserve Chairman Ben Bernanke’s absence from Jackson Hole is just one in a series of strong hints he will step down at the end of his second term in January. So, it is only natural that a lot of the talk on the sidelines of this year’s conference will inevitably revolve around the issue of his replacement.  

But there is another, potentially more important question that needs to be answered in the shadow of Wyoming’s majestic Grand Teton peaks: Why have top U.S. Fed officials, even dovish ones, become increasingly queasy about asset purchases despite falling inflation?

Thus far, policymakers have discussed the prospect of a reduction in the pace of their bond-buying stimulus in terms of an improvement in the economy and the prospect of an even brighter outlook toward year-end and in 2014. Yet the U.S. economy, while outpacing its even more anemic rich-nation counterparts, is hardly besieged by runaway growth of the sort that would normally lead central banks to tighten monetary policy. And by even talking about reducing bond buys, the Fed has helped push interest rates up more than a full percentage point, to a two year high, in just a few months.

Back when Yellen and Summers had the same boss

With all the back-and-forth in the Yellen versus Summers Fed chair showdown, it’s easy to forget that the two once played for the same team – the Clinton administration.

This incredible photo from the Reuters archive features many of the key players in U.S. economic policy over the last two decades, tracing the arch of the 1990s tech boom, the early 2000s housing surge and the financial crisis of 2008-2009. They include Fed Vice Chair Janet Yellen, then advisor to Clinton, and Larry Summers, then Deputy Treasury Secretary. Both are now seen as leading candidates to replace Ben Bernanke as Fed chair next year.

Also pictured are Treasury Secretary and Citigroup magnate Robert Rubin; budget director and eventual Fannie Mae chief Franklin Raines; chief of staff Erskin Bowles, who became famous for the Simpson-Bowles deficit reduction plan; national economic council director Gene Sperling, currently an advisor to President Barack Obama; and Jack Lew, current Treasury Secretary, who was the deputy director of the office of management and budget.

Time to taper the taper talk?

It’s been three months since the Federal Reserve first hinted that it’s going to have to ease off on its extraordinary monetary stimulus, but financial markets are still not settled on the matter.

But while volatility is on the rise – surely partly a result of thinned trading volumes during the peak summer vacation season – the consensus around when the Fed will start cutting back hasn’t budged.

That makes endless daily reports from traders linking that to the latest falls in asset prices, particularly U.S. Treasuries and non-U.S. share prices, not terribly convincing.

Dozens of professors tell Obama to pick Yellen over Summers at Fed

More than 30 law and economics professors sent President Barack Obama a letter on Monday urging him to choose Federal Reserve vice chair Janet Yellen to serve as the next Fed chairman instead of former Treasury Secretary Lawrence Summers.

The professors from schools such as Cornell University Law School, Tulane University Law School and Duke Law School praised Yellen’s years of experience as a central banker and said she warned as early as 2005 about the housing bubble. They echoed many of the same concerns that some Democratic Senators have expressed over Summers’ role in preventing derivatives from being regulated and breaking down the walls between investment and commercial banking.

“It is imperative that the person nominated as chair of the Fed was not instrumental in enabling excess and is someone who is perceived as willing to take necessary steps to help prevent future crises,” the letter says.

For workers, the long run has arrived in Latin America

The outlook for emerging market economies over the next decade looks more challenging as long-term interest rates start to bottom out in the United States. Here is another complicating factor: ageing populations.

That problem is not as serious as in Japan or Europe, of course. Still, investors probably need to cut down their expectations for economic growth in Latin America over the next years, according to a report by BNP Paribas.

The graphic below shows the declining demographic contribution for economic growth in Latin American countries. The trend is particularly bad in Chile, Venezuela and Brazil:

Does less QE from the Fed necessarily mean a stronger dollar?

Based on the latest U.S. Treasury flows data, it may be time to ditch the textbook theory that says less monetary stimulus means a stronger currency – at least for now.

The problem may just be that the theory doesn’t fully account for the situation when your largest creditors – and they are very large – are trying to beat you to the market.

The Federal Reserve first hinted in May it would start reducing its bond purchase programme because the U.S. economy is recovering and so is the job market.

Europe may still be ‘on path for a meltdown’: former Obama adviser Goolsbee

Reporting by Chris Kaufmann and Walden Siew

For all the enthusiasm about the euro zone’s exit from recession, many experts believe the currency union’s crisis is more dormant than over. That was certainly the message from Austan Goolsbee, former economic adviser to President Barack Obama and professor at the University of Chicago. He spoke to the Reuters Global Markets Forum this week.  

Here is a lightly edited excerpt of the discussion:

What is your biggest worry about the U.S. economy right now?

A nagging worry is that if we grow 2 percent, it’s going to be a hell of a long time before the unemployment rate comes down to something reasonable. The nightmare worry is that Europe is still basically on path for a meltdown and that it ignites another financial crisis.

In my view the root of the problem is that most of southern Europe is locked in at the wrong exchange rate and will not be able to grow. Normal economics says that with a currency union you can 1) have massive labor mobility, 2) subsidies, 3) differential inflation, 4) grind down wages in the low productivity countries. But those are the only four things.

Five lesser-known facts about Yellen and Summers

U.S. President Barack Obama will announce in the fall who he wants to see succeed Ben Bernanke as chairman of the Federal Reserve. Here are five points of intersection between the two front runners, Fed Vice Chair Janet Yellen and former Treasury Secretary Lawrence Summers:

(1) Both got their first academic jobs at Harvard. Yellen never got tenure, moving to the London School of Economics and then landing a tenured post at the University of California, Berkeley, where she is currently a professor emeritus. Summers got tenure a year after he got his Harvard PhD, and later became the university’s president.

(2) Two of Summers’ uncles, one on his father’s side and the other on his mother’s, were Nobel prize-winning economists. Yellen has one Nobel prize-winning economist in her family: her husband, George Akerlof.

‘A new UK housing bubble? No, it’s just the old one being pumped up again’

There’s been no shortage of headlines warning the UK faces another runaway rise in house prices, brought on by government incentives to boost home-buying.

Economists polled by Reuters this week were clear there is a real risk of that happening.

But warnings of a “new” housing bubble may be off the mark, says Danny Gabay, director of Fathom Financial Consulting.