MacroScope

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on how to give a steer about future policy moves and whether to inject more stimulus, not whether it should start to be withdrawn as the Federal Reserve has signalled it may do before the year-end.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.

Carney will deliver a plan to the government next month on how to give markets and Britons more certainty about future rate moves with the likelihood that, like the Fed, it will be tied to unemployment or growth targets rather than a definite timeline.

For the markets, Ben Bernanke will eclipse Carney when the Fed chairman testifies to Congress later. European markets are likely to be wading through treacle beforehand.

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.

Just a typical euro zone day

Spain will sell up to four billion euros of six- and 12-month treasury bills, prior to a full bond auction on Thursday. Italy attracted only anaemic demand at auction last week and Madrid has already had to pay more to borrow since the Federal Reserve shook up the markets with its blueprint for an exit from QE.

However, yields are nothing like back to the danger levels of last year and both countries have frontloaded their funding this year. Economy Minister Luis de Guindos, who declared over the weekend that the Spanish economy will grow in the second half of the year, speaks later in the day.

The political backdrop is also shaky, and getting shakier by the day, although that doesn’t always infect market sentiment. Prime Minister Mariano Rajoy rejected calls to resign on Monday over a party financing scandal and said his reform programme would continue unaffected.

Turkish trouble

How much time does massive central bank currency intervention buy? About a day at a time in Turkey’s case. It spent $1.3 billion of its reserves yesterday to stop the lira going into freefall having thrown a record $2.25 billion at the market on Monday.

So far this year, the central bank has burned over $6 billion of its reserves which have now dropped below $40 billion. So that can’t go on for long, meaning an interest rate rise which a slowing economy really doesn’t need must be on the cards. The lira hit a record low versus the dollar on Monday.

Much of this is to do with the global emerging market sell-off sparked by the Federal Reserve’s exit plan from money-printing but Ankara has sown the seeds of crisis too, first with the very public standoff with protesters in its main cities who railed against what they see as Prime Minister Tayyip Erdogan’s increasingly authoritarian rule.

Two Fed financial stress measures show conditions still easy

Composure restored. Despite gut-clenching stock market swoops and a violent 100 basis point upward spike in 10-year bond yields since the Fed’s June 19 meeting and press conference with Chairman Ben Bernanke, financial conditions are still very easy.

That ought reassure officials at the U.S. Federal Reserve that some normalcy has been restored in financial markets after the abrupt reaction to their decision to signal they would scale back bond purchases later this year.

A persistent upward scramble in yields and mortgage rates could chill spending and investment, potentially undermining economic recovery.

Raskin’s warning: ‘Shouldn’t pretend’ Fed capital rules are a panacea

Post corrected to show Brooksley Born is a former head of the Commodity Futures Trading Commission (CFTC) not a former Fed board governor.

Underlying the Federal Reserve recent announcement on new capital rules was a general sense of “mission accomplished.” The U.S. central bank, also a key financial regulator, has finally implemented requirements that it says could help prevent a repeat of the 2008 banking meltdown by forcing Wall Street firms to rely less heavily on debt, thereby making them less vulnerable during times of stress.

As Fed Chairman Ben Bernanke put it in his opening remarks:

Today’s meeting marks an important step in the board’s efforts to enhance the resilience of the U.S. banking system and to promote broader financial stability.

Fear the Septaper

Credit to Barclays economists for coining the term ‘Septaper’

A solid U.S. employment report for June appears to have cemented market expectations that the Fed will begin to reduce the pace of its bond-buying stimulus in September.  Average employment growth for the last six months is now officially above 200,000 per month.

Never mind that, even at this rate, it would take another 11 months for the job market to reach its pre-recession levels – and that’s not counting the population growth since then.

John Brady, managing director at R.J. O’Brian & Associates in Chicago, nails the market’s sentiment:

U.S. minimum wage hike would offer short-term economic stimulus: Chicago Fed

President Barack Obama proposed a hike in the U.S. minimum wage during his State of the Union Address in February. Since then, we haven’t really heard very much about the proposal. That’s too bad for a U.S. economy that could still use a bit of a boost, according to new research.

A paper from the Chicago Fed finds that, while there might be little impact on long-term growth prospects from a higher minimum wage, the measure could add as much as 0.3 percentage point to gross domestic product in the short-run. That’s not insignificant for an economy that expanded at a soft annualized rate of just 1.1 percent over the last two quarters.

This is how the authors summarize their findings:

A federal minimum wage hike would boost the real income and spending of minimum wage households. The impact could be sufficient to offset increasing  consumer prices and declining real spending by most non-minimum-wage households and, therefore, lead to an increase in aggregate household spending. The authors calculate that a $1.75 hike in the hourly federal minimum wage could increase the level of real gross domestic product (GDP) by up to 0.3 percentage points in the near term, but with virtually no effect in the long term.

Full blown damage control?

Call it the great wagon circling.

Central bankers are talking tough in the face of the wild gyrations in financial markets. But it’s becoming increasingly clear they are sweating – and drawing up contingency plans to assuage the panic that’s taken hold since Chairman Ben Bernanke last week sketched out the Fed’s plan for winding down its QE3 bond-buying program. U.S. policymakers in particular must have predicted investors would react strongly. But now that longer-term borrowing costs have spiked to near a two-year high, they look to be entering full-blown damage control.

Here’s Richard Fisher, head of the Dallas Fed, speaking to reporters in London on Monday:

I’m not surprised by market volatility – markets are manic depressive mechanisms… Collectively we will be tested. We need to expect a market reaction… Even if we reach a situation this year where we dial back (stimulus), we will still be running an accommodative policy.

Quis custodiet ipsos custodes?

Who guards the guards? In the case of Europe’s banks, the answer is still a work in progress given the faltering efforts to create a banking union.

Today, we interview Jaime Caruana, head of the Bank for International Settlements which said on Sunday that its central bank constituents should not be deterred by fears of market volatility when the time came to start turning off the money-printing machines. That moment was fast approaching, it said.

The big question is why it would not be safer to wait until the world economy is on a sounder footing before turning the money printing presses off, particularly since there is a notable absence of any inflationary threat.