While the Bank of Japan is engaging in expansionary monetary policy and the ECB probably will in early 2015, the Bank of England will likely raise rates by 4/15 with the Fed following soon thereafter. While this monetary policy divergence reduces global growth, it keeps commodity inflation down and reduces the chances of a massive global recession as it dramatically decreases the likelihood of every economy sinking simultaneously.
Tag Archives: Monetary Policy
Bonded Bernanke
By perfectly calibrating his message, this time, Bernanke was able to taper yet see equities climb by 1.75% and bond prices barely budge. Quite a difference from this past May. By combining tapering with a commitment to keep short-term rates low into 2015, Bernanke has reduced uncertainty and compensated markets for the knowledge that QE will shortly be history. He’s also emphatically saying that 2014 will be pretty good. Bravo!
Yield of Dreams
The recent budget deal which reduces fiscal drag, along with improving employment numbers, the likelihood of faster growth in 2014 and the fact that long-term rates have adjusted to the idea that tapering will soon start, makes me peg the probability of a December taper at 25%, up from zero last month. The Fed will couple any tapering announcement with a statement/policy reassuring markets that short-term rates will remain super-low.
Fed Funding
Reading the just released minutes from the most recent Fed meeting, it sounds like when the Fed starts reducing its monthly purchases of $85 billion in treasuries and MBS, the Fed will concurrently announce that it will keep short term interest rates abnormally low for a long time to reassure markets it will continue its very accommodative policies. My take: taper in March, Fed Funds near zero for years.
Hazardous Headwinds
While the economy is improving, it’s now facing huge headwinds. They include the need for a Continuing Resolution, hitting the debt ceiling, Syria and its impact on oil prices, who will be the next Chairman of the Federal Reserve, the start date of tapering, fear about whether Abenomics will work in Japan, and concerns about US interest rate hikes reverberating across European peripheral nations and emerging-markets. Expect increased short-term volatility.
Monetary Slow Down
While the Fed has increased the money supply by $2 trillion and will increase it by another $1 trillion by 1/1/14, inflation is MIA. This is because the velocity of money, or the number of times a dollar changes hands before it is saved, has collapsed. Before the Great Recession, M1 (cash) velocity was 10.5, now it’s 6.5 and M2 (cash and checking accounts) velocity was 2, it’s now 1.5.
Monetary Medicine
Things can’t possibly be good when yesterday, in less than an hour, the ECB, The Bank of China, and The Bank of England all offered monetary medicine to the weakening global economy. Problem is, easier monetary policy won’t help much. What’s needed is stimulative fiscal policy. Separately, while US labor market conditions are worse than in Q1, they’re not terrible. Tomorrow’s employment report will show less than 125,000 new jobs.
Money, Money, Money
Given weak job numbers, a slowing world economy, and escalating financial stresses from Europe, the Fed will probably act. Since it can’t buy more long-term Treasuries (it nearly owns them all) or increase the size of its balance sheet (Republicans get angry) it’ll renew Operation Twist, which ends in June. The Fed will sell short term-Treasuries and with the money buy mortgage backed securities to help homeowners and the economy.
Quantitative Easing 3?
QE worked miracles by injecting massive liquidity into the economy in ’08 and ’09, and staved off a depression. While smaller, QE2 boosted equity prices and weakened the $US which boosted exports, raised commodity prices and headline inflation. If we get QE3, which is likely to be less successful than QE2, it’s because inflation’s receding, the stock market’s falling and Congress is MIA