MacroScope

Curse of the front-runner a bad omen for Fed contender Yellen?

The buzz on who will replace Ben Bernanke as Federal Reserve chairman has grown this year and amplified recently with talk of Lawrence Summers as a real possibility. There is also lingering speculation over Timothy Geithner, another previous U.S. Treasury Secretary, and former Fed Vice Chair Roger Ferguson among others as possible successors. Bernanke has provided no hint he wants to stay for a third term.

But above the din the central bank’s current vice chair, Janet Yellen, has remained the front-runner. Her deep experience and implicit policy continuity has crowned her the heir apparent until proven otherwise. A Reuters poll of economists showed Yellen was seen as far and away the most likely candidate.

Yet this is a familiar plot that has played out in other Western countries over the past year – with a shock climactic twist. New Zealand, Britain and Canada have all pulled the rug out from under the presumed front-runner and named a surprise new head of their respective central banks. And perhaps most worryingly for Yellen, in each case the overlooked candidate was the bank’s No. 2 official.

Graeme Wheeler was a U.S.-based consultant last June when he was named governor of the Reserve Bank of New Zealand, cancelling the nomination party planned for RBNZ’s deputy governor Grant Spencer. In November Britain raised eyebrows worldwide when it ignored Bank of England Deputy Governor Paul Tucker and instead named Mark Carney, who was then chief of the Bank of Canada, to be the first non-British head of the BoE. And then in May Canada itself tapped an outsider, Stephen Poloz, a former BoC official who at the time headed an import-loan organization, as its top monetary policymaker. In that case, senior BoC deputy Tiff Macklem was left in the lurch.

A meaningless pattern? Perhaps. But at the very least another wildcard in Washington as President Barack Obama decides who to nominate at the Fed. Time will tell whether the United States breaks from the plot.

Central bank guides

The Bank of England will publish the minutes of Mark Carney’s first policy meeting earlier this month which will pored over for signs of how the debate about forward guidance – it’s all the rage in the central banking world now – went, and whether that may herald more money printing or act as a proxy for looser policy.

Carney’s colleague, Paul Fisher, indulged in his own form of guidance yesterday, telling a parliamentary committee that discussions within the Bank were focused on how to give a steer about future policy moves and whether to inject more stimulus, not whether it should start to be withdrawn as the Federal Reserve has signalled it may do before the year-end.

Fisher is one of the three of nine members of the Monetary Policy Committee who has been voting to print more money in recent months, but it was an interesting comment nonetheless. Unemployment data today will give the latest guide to the state of recovery while the independent Office for Budget Responsibility will publish its fiscal sustainability report.

Loose lips sink ships? Fed’s latest transparency sows confusion, says Mizuho’s Ricchiuto

The complexity of non-traditional monetary policy is hard enough to explain to other economists and policymakers. Market participants prefer sound bites, opines Steven Ricchiuto, chief economist at Mizuho Securities USA in a note. As such, the more the Federal Reserve Chairman Ben Bernanke tries to explain the Federal Open Market Committee’s position on tapering and policy accommodation the more he confuses the message, Ricchiuto says.

The problem is fundamental to the nature of monetary policy. According to the Chairman, monetary policy accommodation is adjusted through the Fed Funds rate. Quantitative Easing (QE) is a separate policy. Yet he has also said that tapering is simply reducing accommodation, not tightening. These pronouncements work at cross purposes and ignore how the markets read policy. For the markets, QE is an extension of policy into non-traditional tools. Therefore, tapering is tightening. There is no such thing as reducing accommodation for market participants.

For the FOMC, it is the stock of bonds that have been purchased that defines policy, Ricchiuto says. Essentially, if the Fed stops buying Treasury and mortgage-backed securities but the Fed’s System Open Market Account (SOMA) doesn’t sell any, then policy is unchanged. This implies that long-term rates should remain unchanged.

Back to banking union

The G8 produced little heat or light on the state of the world economy but if there was one clarion call it was for the euro zone to get on with forming a banking union – the last major initiative needed to draw a line under the euro zone debt crisis.

With the European Central Bank effectively underwriting the bloc’s governments with its bond-buying pledge, a cross-border mechanism to recapitalise or wind up failing banks would do the same for the financial sector.

The trouble is, not unreasonably, Berlin does not want to fall liable for the failure of a bank in a weaker country. Instead, it is pressing for a “resolution board” involving national authorities to take decisions on winding up failed banks, which sounds like the onus would remain on governments to sort out their own banks rather than pooling risk which would convince investors that a proper backstop was in place.

Yellen likely to replace Bernanke at Fed, but beware “overwhelming” top picks

Reuters has just published a poll of economists that shows Federal Reserve Vice-Chair Janet Yellen is the overwhelming favorite pick for President Obama to replace Ben Bernanke as Fed Chairman next year.

The poll conclusions are based on the collective thoughts of dozens of professionals who are not only paid to make these kinds of predictions, but who are also likely to have been in a conversation with people who ought to know.

But it is worth noting one spectacularly wrong call from recent history.

In a similar Reuters poll, this time just days before UK finance minister George Osborne reported that he had chosen Mark Carney, Governor of the Bank of Canada, as new Bank of England Governor, the overwhelming conclusion among forecasters was that outgoing governor Mervyn King’s deputy, Paul Tucker, would get the job.

CME Group, home to bets on Fed policy, scrambles to keep watch

These days, it seems, everyone is trying to keep up with shifting market expectations for the Federal Reserve’s monetary policies. CME Group’s Fed Watch, which delivers a snapshot of those expectations based on futures tied to the Fed’s target for short-term rates, is no exception.

Rate futures traded at CME have dived since Fed Chairman Ben Bernanke said last week that the U.S. central bank may decide to cut back on its purchases of Treasuries and mortgage-backed securities in the next few Fed policy meetings if data shows the economy is gaining traction. CME’s website dutifully translated the drop in rate futures into rising market expectations that the Fed’s first rate hike since 2008 could come in early 2015.

But the site was silent on the likelihood of the Fed raising rates any earlier – it simply didn’t include that data, because as recently as a week ago, the probabilities of a rate hike in 2014 were close to zero. Bernanke’s comments, and some strong data, changed all that. By Wednesday, CME had caught up, adding data on meetings in the second half of 2014. Just in the nick of time: by the day’s end, traders were pricing in a rate hike at the Fed’s December 2014 meeting.

Central bankers everywhere after Bernanke warning

It’s raining central bankers today which is well-timed after Federal Reserve Chairman Ben Bernanke dropped the bombshell that the Fed could take the decision to begin throttling back its money-printing programme at one of its next few policy meetings. If that’s the case, and it’s not yet a done deal, then it will be the Fed that will move first in that direction, presumably putting further upward pressure on the dollar and send financial markets into something of a spin.

European stock futures look set to open sharply lower – 1.5 percent or more down – buffeted by suggestions that the Fed could soon change tack. Safe haven German Bund futures have opened higher for the same reason, though in a much more measured fashion. One of Bernanke’s colleagues, James Bullard, speaks in London today. Another, Charles Evans, is in Paris.

The European Central Bank has never got into the realms of QE but it did produce the single most important intervention over the past three years. Ten months after his pledge to save the euro fundamentally changed the dynamics of the currency bloc’s debt crisis, ECB chief Mario Draghi returns to the scene of his game-changing promise – London – to deliver a keynote speech. Draghi does not speak until the evening but his colleagues – Weidmann, Noyer, Coeure, Liikanen and Nowotny – all break cover earlier in the day. Draghi has said the ECB is prepared to act further if the economy worsens, having already cut interest rates to a fresh record low this month and ECB chief economist Peter Praet said last night that its toolkit could be expanded if necessary. But what?

What no crisis?

 

It seems eons since the euro zone finance ministers’ meetings which made such a hash of the Cyprus bailout but they were only two months ago. Monday’s Eurogroup will be altogether less eventful with some of the gathering probably a little jaded having spent part of their weekend at the G7 outside London where the usual differences about growth versus austerity and banking reform were aired.

No one will be sorry for a more routine meeting and there are no icebergs on the horizon but the agenda is still a full one. Featuring will be the economic situation on the basis of the Commission’s latest forecasts, the state of play in Cyprus, the decision already taken to release more bailout money to Greece, the new steps taken by Portugal to fill the gaps in its budget after the country’s top court struck some measures out, a review of European Commission reports on what is ailing Spain and Slovenia and a broad discussion about the merits of the ESM bailout being allowed to recapitalise bank retroactively from next year.

Italy offers a range of bonds at auction worth up to 8 billion euros which should be snapped up given the European Central Bank’s underwriting of the euro zone and Japanese money coursing through the financial system.

More Fed QE: done deal or Pavlovian response?

“Will he or won’t he?” That’s what investors, traders and policy-watchers in the financial markets are pondering, frozen at their terminals waiting to find out if Federal Reserve Chairman Ben Bernanke will persuade his colleagues to print more money this week.

Among economists who work for primary bond dealers, the firms who sell government bonds directly to the Fed, there’s a striking conviction rate that he will, 68 percent, according to the latest Reuters Poll of probabilities.

The wider forecasting community isn’t far behind, at 65 percent.

While that kind of probability is more than enough to make people paid handsomely to take huge bets with other people’s money to confidently say something is a done deal, the real policy decision is probably a lot closer.

Get ready for QE3 if things don’t get better soon

Ben Bernanke appears to be reluctantly gearing up for a third round of large-scale Federal Reserve bond buying, so-called QE3. Millan Mulraine of TD Securities captures just how likely further monetary easing is becoming following the Fed’s decision on Wednesday to expand Operation Twist.

The burden of proof may now be on the incoming data to prove that a third round of large-scale asset purchases may not be necessary.

Just under two months before the central bank’s yearly gathering at Jackson Hole – where Bernanke announced QE2 – the Chairman emphasized the path of the job market will be a key driver of any decision to further expand the central bank’s $2.8 trillion balance sheet. He told reporters at a press conference: