MacroScope

Who’d be a central banker?

The focus is already on the euro zone finance ministers meeting in Copenhagen, starting on Friday, which is likely to agree to some form of extra funds for the currency bloc’s future bailout fund. What they come up with will go a long way to determining whether markets scent any faltering commitment on the part of Europe’s leaders.

In the meantime, top billing goes to Bundesbank chief Jens Weidmann speaking in London later. He is heading an increasingly vocal group within the European Central bank who are fretting about the future inflationary and other consequences of the creation of  more than a trillion euros of three-year money. There is no chance of the ECB hitting the policy reverse button yet but the debate looks set to intensify.
A combination of German inflation and euro zone money supply numbers today (which include a breakdown on bank lending) will give some guide to the pressures on the ECB.

Central bankers face a very mixed picture with U.S. recovery and high oil vying with the unresolved euro zone debt crisis and signs of slowdown in China.

Bank of England Governor Mervyn King was sitting firmly on the fence yesterday, saying he did not know whether more QE would be required in Britain or not. Tellingly, he also did not know whether euro zone policymakers will take advantage of the window of opportunity offered them by the ECB or not. King illuminated a common theme coming from central bankers, saying the onus was firmly on the politicians now, while his colleague Adam Posen noted that the reason Britain’s recovery has lagged America’s is because of the former’s tough austerity measures. That’s another debate that is echoing around the euro zone.
In the States, Bernanke said it is too soon to declare victory in the U.S. economic recovery.

Back to the euro zone and Spanish media was alive with reports that the EU was pressing Madrid to take a bailout to recapitalize its wobbly banks. The denials from both centres were so emphatic that it seems not to be true. It seems  EU Competition Commissioner Joaquin Almunia spelled out three options to clean up Spain’s banking sector: using Spanish public funds, finding private investment or applying for European aid.  Journalists present leapt on the latter. That may well become true in the end … but not yet.

There be feudin’ at the BoE

The once-good relationship between Bank of England Governor Mervyn King and his most likely successor, Deputy Governor Paul Tucker, is coming  under increasing strain, according to a new book by former Daily Telegraph journalist Dan Conaghan.  It  alleges   King’s management style and and alleged disdain for the financial markets is to blame.

While the Bank of England’s Monetary Policy Committee remains reasonably collegiate, on other matters King more than lives up to the description from former chancellor Alistair Darling that he is ‘incredibly stubborn’, says Conaghan, who now worksas an asset manager.

“The governor can be particularly dogmatic,” he told Reuters. “One of the key things … is the attitude to the capital markets. One of my sources described Sir

Fed hasn’t silenced markets, Williams says

Federal Reserve policymakers have long watched markets to gauge what investors think is in store for interest rates and the economy. Some – like former Fed Governor Kevin Warsh – have worried that the Fed’s unprecedented purchases of trillions of dollars of U.S. Treasuries and its long-term guidance on the future path of interest rates shuts off a key source of policy-guiding information. The Fed’s recent decision to publish policymakers’ interest-rate forecasts will make the problem worse, he predicted in a speech at Stanford University last month.

In some sense I have partially been made blind by these asset purchases. I, for one, consider financial markets an incredibly useful source of information. If the markets take the Fed’s projections and build that into their own, then the Fed won’t have a full set of gauges in front of them. The markets will simply be a mirror to what they say.

Now comes San Francisco Fed President John Williams with a research paper that argues, to put it bluntly, that Warsh is wrong – that markets are providing just as much information about expectations for Fed policy as they did in the days before the Fed had bought $2.3 trillion in long-term securities and began signaling short-term rates would stay low for years.

Channeling Milton Friedman

Ask not what your monetary policy can do for you, but what you can do for your monetary policy. That’s the jist of a 1968 paper by Milton Friedman, the poster-child for monetarist economics, entitled “The Role of Monetary Policy,” whose key questions remain hotly debated more than four decades on. Friedman’s answer is simple (some might argue too simple), and all too familiar to those who read the speeches of present-day Federal Reserve hawks – focus on the only thing monetary policy can truly control, which in Frideman’s view is price stability.

By setting itself a steady course and keeping to it, the monetary authority could make a major contribution to promoting economic stability. By making that course one of steady but moderate growth in the quantity of money, it would make a major contribution to avoidance of either inflation or deflation of prices. […] That is the most that we can ask from monetary policy at our present stage of knowledge.

Friedman’s writing suggests he was not a big fan of the Fed’s own dual-mandate, introduced in 1978. Any effort to goose employment through a persistent period of low very low interest rates, Friedman argues, would likely lead to overshooting and inflation.

Monetary policy as improv

Should central bankers be more like Miles Davis — experimental, improvisational, and out in front — or a Dixieland band — traditional, predictable, and in the background?

That question was the theme of a discussion at the Council on Foreign Relations in New York yesterday morning that featured Arminio Fraga, a former governor of the Central Bank of Brazil; Kevin Warsh, a former governor of the Federal Reserve Board; and Adam Posen, an American economist who currently sits on Bank of England’s Monetary Policy Committee (and who coined the Davis/Dixieland dichotomy). Within the panel, which was entitled “Central Banking in an Age of Improvisation,” there was discord about how activist monetary policy should be when interest rates are already at the zero bound and when the economy was not undergoing a financial crisis.

For Posen, the big fear is that in fifty years the current period will be remembered as a “major deflationary mistake.” In a series of op-eds and speeches this year, Posen has consistently called for more stimulative monetary policy, urging central banks to undertake unconventional maneuvers like purchasing long-term government bonds or even backing new public institutions that would lend directly to small- and medium-sized enterprises or securitize illiquid SME loans. He is not wide-eyed enough to believe that further easing will be a panacea, but does maintain that “irresponsible monetary tightening will make your problems insoluble.”

No, the Fed isn’t powerless: Let’s do the twist

By Amer Bisat
All opinions expressed are his own.

In recent weeks, financial markets have behaved as if the global economy is a plane crashing with no parachute in sight.  The price action is not entirely irrational.  Global growth has indeed fallen sharply and suddenly.  At the same time, the ability of policy makers to engage in bold counter-cyclical measures is being severely constrained by budgetary and political realities.

That said, the assumption that economic policy in the developed world is utterly impotent is an exaggeration.  Monetary policy in the U.S. is a good case in point. The Fed’s tool box is far from empty.  Given the persistent economic weakness and the severe headwinds facing the U.S. over the next few years, it is time for the Fed to become (even) more aggressive.

The notion that the Fed “can do nothing” is fast becoming conventional wisdom.  To an extent, it is naïve to completely dismiss the view.  Monetary policy effectiveness and the Fed’s political room-for-maneuver are arguably both at a historic low. For one thing, even though the Fed has already lowered interest rates to zero (and tripled its balance sheet), U.S. growth is frustratingly tepid.  Politically, the attacks on the Fed no longer emanate from the fringe but now represent the view of important segments of the political and academic mainstream.  The pressure, in fact, has contaminated intra-FOMC dynamics with a rarely seen concentration of dissenting voices within the Committee complicating the Fed’s traditionally consensus-based decision making process.

Primary dealers driving the printing presses

The U.S. Federal Reserve’s hotly-contested $600 billion renewal of its quantitative easing programme is roughly the size of the Gross Domestic Product of Switzerland.

Expectations by forecasters in Reuters Polls on how much more bond purchases the Fed will conduct beyond the $1.7 trillion already conducted varied widely running up to the Fed’s announcement that it would go ahead with QE2.

But the high end of forecasts has been consistently driven by the 18 primary bond dealers which deal directly with the Fed. Perhaps that’s no surprise, given that they are selling bonds to the central bank at a very good price.

from Global Investing:

Bad economic data, please

Interesting twist at the moment - how are financial markets going to view not-so-bad or good data out of the United States in the run-up to the next Federal Reserve meeting.

Investors have been pricing in a chunky operation by the Fed to feed the markets with cheap cash – look at the gold, silver, the Australian dollar and the Canadian dollar. Bad data from the United States will keep investors confident of such Fed action and support the flows into high yielding assets.

But any data showing the pace of recovery in the world’s largest economy is not in such a bad shape. Investors will adjust their expectations and positions, causing a sell-off in equities, speculative-grade credit and high-yielding currencies.

On the wings of doves

Fed officials eager to give the ailing job market some relief are showing their stripes – or perhaps their feathers – and adding to their ranks, making it seem more likely the U.S. central bank will provide further monetary easing.

USA-FED/TWISTThe Fed has a dual mandate to provide price stability and ensure full employment. Policy makers who place priority on supporting economic growth and keeping unemployment low are called doves while those who would endure uncomfortable unemployment in order to keep inflation at bay are called hawks.

The doves were not only louder but became more numerous this week. First, the Senate voted to confirm Janet Yellen as Fed vice chairman and Sarah Raskin as a member of the board of governors.

Fed’s Plosser: If Fed eases, it needs to be clear about why

Even the Federal Reserve official who is one of those most opposed to further financial easing by the U.S. central bank has thoughts about how the Fed ought to do it.

CZECH/Philadelphia Federal Reserve Bank President Charles Plosser on Wednesday told reporters in Vineland N.J.  that while he doesn’t think the economy is now in need of further Fed asset purchases, he would support such a move if a clear risk of deflation emerges.

The conditions Plosser set out for any eventual asset buying give a flavor of the debate at the Fed as it considers how to proceed with a renewal of quantitative easing, as the process of pushing additional reserves into the financial system by purchasing securities is called.