MacroScope

Central bank independence is a bit like marriage: Israel’s Fischer

For Bank of Israel governor Stanley Fischer, this week’s high-powered macroeconomics conference at the International Monetary Fund was a homecoming of sorts. After all, he was the IMF’s first deputy managing director from 1994 to 2001. The familiar nature of his surroundings may have helped inspire Fischer to use a household analogy to describe the vaunted but often ethereal principle of central bank independence.

Fischer, a vice chairman at Citigroup between 2002 and 2005, sought to answer a question posed by conference organizers: If central banks are in charge of monetary policy, financial supervision and macroprudential policy, should we rethink central bank independence?  His take: “The answer is yes.”

In particular, the veteran policymaker, who advised Fed Chairman Ben Bernanke on his PhD thesis at MIT, argued various degrees of independence should be afforded to different functions within a central bank.

While monetary policy should be more insulated – though it is not always – from politics, it might be appropriate for the financial stability function to entail greater coordination with fiscal authorities, as is the case in Israel. Which is where marriage comes in:

Some of my colleagues say, well, you can’t be independent in one role and not in another. Well, I don’t think any of them are married, if that’s what they say. You can be. There are things you do (separately) and there are things you do together.

Abe’s European spring break: Japan stimulus sends euro zone yields to record lows

It wasn’t just the Nikkei. Euro zone government bonds rallied following Japan’s announcement of a massive new monetary stimulus. That sent yields on the debt of several euro zone countries to record lows on bets that Japanese investors might be switching out of Japanese government bonds into euro zone paper, or might soon do so.

The Bank of Japan on Thursday announced extraordinary stimulus steps to revive the world’s third-largest economy, vowing to inject about $1.4 trillion into the financial system in less than two years in a dose of shock therapy to end two decades of deflation.

Austrian, Dutch, French and Belgian borrowing costs over ten years fell to record lows as investors piled into euro zone debt offering a pick-up over Germany. The bond rally was led by 10- and 30-year maturities after the BOJ said it would double its holdings of long-term government bonds.

Yellen-san supportive of BOJ’s aggressive easing

For all the talk about clear communications at the Federal Reserve, central bank Vice Chair Janet Yellen’s speech to the Society of American Business and Economics Writers ran a rather long-winded 16 pages.

However, while Fed board members generally do not take questions from reporters, there was a scheduled audience Q&A which, at this particular event, meant it was effectively a press briefing.

So I asked Yellen, seen as a potential successor to Fed Chair Ben Bernanke when his second term ends early next year, what she thought of Japan’s decision to launch a bold $1.4 trillion stimulus to fight a long-standing problem of deflation and economic stagnation.

Investors call for interest rate hike in Brazil

Two analyses published this week highlight how alarmed investors are about inflation in Brazil.

In the first, published on Wednesday following a poll on global stock markets, equity investors say an interest rate hike wouldn’t be a bad idea – a paradox, since stocks usually drop when borrowing costs rise. Are they keen to move to bonds? Not really; their argument is that an interest rate hike could assuage inflation fears after eight consecutive months of above-forecast price rises. A rate hike could also reduce concerns of economic mismanagement after several government attempts to intervene in key sectors such as banking and power generation.

The central bank signalled it could act later this year, but would rather wait because the recent inflation surge could be just temporary. Bond investors disagree, according to a separate analysis published today. In their view, inflation will remain above the 4.5 percent target mid-point through at least 2018, raising uncertainty about long-term investments needed to bridge the gap between Brazil’s booming demand and its clogged roads and ports.

For whom the bell will not toll: Fed ditches old-school tech in policy release

It’s had a good run, and will remain in use for the purposes of alerting reporters that “Treasury is in the (press) room.” But when it comes to the Federal Reserve’s monetary policy decisions, which are also released out of Treasury, the central bank is ditching the old ringer.

Until the last FOMC decision, reporters would be guided by a 10 second countdown followed by a loud clinging of the bell pictured above. Now, news agencies will report the news at the set time of 2 pm – so there’s no wiggle room in the hyper competitive world of microsecond timings that give robot-traders an edge.

Given that this is how most other official economic releases are disseminated, the shift makes a lot of sense. Still, there was just something about that bell.

Beware: UK services PMI is no crystal ball for QE

Take with a pinch of salt economists who say Tuesday’s strong UK services PMI  might persuade the Bank of England to hold off from restarting its printing presses this week.

BoE policymakers been perfectly willing over the last few years to vote in favour of more asset purchases after a rise in the services PMI number.

Only the last decision for more quantitative easing — July 2012 — came after a decrease in the services PMI’s main index. While members of the Monetary Policy Committee rely on the PMIs as a monthly gauge of economic activity, it’s clear the surveys can’t be read as any proxy for policy decisions.

Bernanke’s Senate tone not that of Fed Chairman seeking third term

Federal Reserve Chairman Ben Bernanke may be keeping quiet about his future plans, but he sure doesn’t sound like someone planning to seek Senate support for a third term at the helm of the U.S. central bank.

In unapologetic and sometimes testy exchanges before the Senate Banking Committee on Tuesday, the Fed chief defended his record and dismissed one Senate critic in unusually blunt terms.

“None of the things you said are accurate,” Bernanke told Bob Corker, a Republican senator from Tennessee, who accused the Fed of deliberately starting a global currency war and of printing money to bail out big Wall Street banks.

Bullard weighs in on his colleague’s challenge to the ‘Bernanke doctrine’

Earlier this month, Fed Governor Jeremy Stein made waves that are still rippling with a speech on the risks of credit bubbles. The policymaker said that the U.S. central bank could use interest rates, as opposed to the more conventional tool of regulation, to cool overheating in junk bonds and other markets.

With worries growing that the Fed’s easy-money policies are inflating dangerous bubbles in financial markets, the speech could portend an earlier-than-expected reversal of quantitative easing or raising of ultra low rates. But don’t take my word for it. Here’s what St. Louis Fed President James Bullard had to say about Stein’s speech, when he visited New York University last week:

“My main takeaway from the speech … was that he pushed back against the Bernanke doctrine. The Bernanke doctrine has been that we’re going to use monetary policy to deal with normal macroeconomic concerns, and then we’ll use regulatory policies to try to contain financial excess. And Jeremy Stein’s speech said, in effect, I’m not sure we’re always going to be able to take care of financial excess with the regulatory policy. And in a key line he said, raising interest rates is a way to get into all the corners of the financial markets that you might not be able to see, or you might not be able to attack with the regulatory approach. So I thought this was interesting. And I would certainly think that everybody should take heed of this. This is an argument that, maybe you should think about using interest rates to fight financial excess a little more than we have in the last few years.”

A Stein in Bernanke’s shoe: Is there a bubble in corporate bonds?

Financial markets are again on edge about the direction of Fed policy following the surprisingly hawkish minutes of the January meeting released last week, even if most still expect the central bank to keep buying bonds at the current $85 billion monthly pace at least until the end of the year.

Federal Reserve Board Governor Jeremy Stein, an academic economist who joined the central bank last May, surprised Fed-watchers in his latest speech by focusing entirely on the risks of recent monetary stimulus and saying very little about its benefits. In particular, Stein, a corporate finance expert, raised the possibility that a bubble might be forming in the corporate bond markets, which has seen yields fall to record lows and issuance to record highs.

While the speech was riddled with caveats, Wall Street took it as an unusually stern warning about the potential side effects of quantitative easing from Fed’s inner-sanctum, the influential, presidentially-appointed Board of Governors in Washington. Stein argued:

Fed stimulus benefits still outweigh risks, Lockhart tells Reuters

The Federal Reserve is cognizant of the potential costs of its unconventional policies, but the economic benefits from asset purchases are still far greater than the potential costs, Atlanta Fed President Dennis Lockhart told Reuters in an interview from his offices.

What follows is an edited transcript of the interview.

The December meeting minutes seemed to signal a shift in sentiment at the central bank toward a greater focus on the policy’s costs. How concerned are you about the risks from QE? Has the cost/benefit tradeoff changed for you? What’s your sense of how long you’ll need to keep going?

I would not say at this point that, in any respect, the costs, which are largely longer-term and speculative, outweigh the benefits of maintaining a highly accommodative climate that is being contributed to by both large-scale asset purchases and our interest rate policy. Having said that, I think policymakers have to be aware that in a policy such as quantitative easing or large-scale asset purchases, continuing to build up the challenge of reversal of that policy, or the challenge of normalization, has to be on your mind. I don’t think we’ve gotten to the point where the costs outweigh the benefits. I’m a believer, although of course it’s very hard to isolate cause and effect in the real world, that our policy has benefited the economy and that the improving situation that we are now seeing is at least in part a result of monetary policy.