Wednesday, December 12, 2012

BIS Warns About the Risky Bets of Central Banks
If Fed officials aren’t having second thoughts about QE and are about to proceed full-bore, maybe they should stop to reconsider. That seems to be the advice from the Bank for International Settlements (BIS). Today’s WSJ includes an article co-authored by Jon Hilsenrath, the newspaper’s plugged-in Fed watcher, titled, “Inside the Risky Bets of Central Banks.”

According to the article:

“Vocal critics include economists at the BIS, an international body based here that is increasingly an important staging ground for talks about the post crisis financial landscape. They say central banks, seeking faster growth, are stretched too thin. ‘Central banks cannot solve structural problems in the economy,’ said Stephen Cecchetti, who runs the BIS monetary department. ‘We've been saying this for years, and it's getting tiresome.’”
(Based on an excerpt from YRI Morning Briefing)
FOMC Statement: QE4ever Until Jobless Rate Falls to 6.5%
Today’s FOMC statement announced today that the Fed will buy $45 billion a month in long-term US Treasuries starting January with no limit on the total amount and no termination date. That adds up to $540 billion a year, though Fed Chairman Ben Bernanke said the latest version of QE would be “flexible.” The coupon income earned on those securities is sent back to the Treasury, less the 0.25% that the Fed will pay banks for the reserves they will accumulate as a result of this latest expansion of the Fed’s balance sheet.

Of course, that’s in addition to the $40 billion on mortgage-backed securities per month that the Fed committed to start buying back at the September 12-13 meeting of the FOMC under QE3. The latest program--let’s call it "QE4"--replaces Operation Twist, which expires at the end of this year. Under that program, the Fed swapped about $45 billion in short-term Treasuries for long-term Treasuries.

The FOMC statement, which was probably the longest on record, committed the Fed to keeping the federal funds rate near zero until the unemployment rate falls below 6.5%. Of course, tying the federal funds rate to the jobless rate wasn’t a surprise since the Fed now tends to leak its policy plans several weeks before they are implemented. FOMC meetings are now part of an ongoing (i.e., seemingly never-ending) and open forum discussing the next iteration of QE. Transparency is a wonderful idea, but it may be too much of a good thing, in my opinion. That’s because it perpetuates the myth that monetary policy is all-powerful and monetary policymakers are all-knowing.

Can monetary policy and its administrators really fix all of our problems by buying so much of our debts in such an open-ended fashion? I have my doubts. Apparently, Fed officials don’t have any doubts at all since they never even ask the question, with the exception of a couple of the usual dissenters on the FOMC. However, Mr. Bernanke did admit today that the “Fed's ability to ease further isn't unlimited.” He should have said that it is actually very limited.
(Based on an excerpt from YRI Morning Briefing)
WSJ Exposes Central Bank Clique’s Secret Meetings
Jon Hilsenrath and Brian Blackstone in an article in today’s WSJ titled, “Inside the Risky Bets of Central Banks,” describe how the major central bankers of the world meet every two months on Sunday evenings to exchange views over a fine dinner on the 18th floor of the BIS’s cylindrical tower in Basel, Switzerland, overlooking the Rhine. The talks are secret. No transcripts or minutes are kept:
Over Sunday dinners in Basel, which often stretch to three hours, they now talk of pressing, real-world problems with authority. The meals are part of two-day meetings held six times a year at the BIS. Dinner guests include leaders of the Fed, ECB, Bank of England and Bank of Japan, as well as central bankers from India, China, Mexico, Brazil and a few other countries.
The article notes that several members of the “clique” of central bankers are macroeconomists who received their PhDs from MIT. They emerged from their studies “with a belief that government could help to smooth out economic downturns. Central banks play a particularly important role in this view, not only by setting interest rates but also by influencing public expectations through carefully worded statements.” Here is a brief background on the BIS from the article:
The role of the Bank for International Settlements has broadened since it was formed in 1930 to handle reparation payments imposed on Germany after World War I. In the 1970s, it became the center of discussions on bank capital rules. In the 1990s, it became the meeting place for central bankers to talk about the global economy.

Tuesday, November 13, 2012

Yellen Endorses Targeting Unemployment Rate
In the past, stock prices tended to rally on days that Fed Vice Chair Janet Yellen spoke in public forums about monetary policy. That’s because she is a leading dove on the FOMC and has been an unabashed advocate of quantitative easing. Stock prices drifted lower today even though Yellen spoke again, and once again advocated super-easy monetary policy. In her speech, she endorsed proposals by some of her colleagues to tie monetary policy to specific targets for economic variables, particularly the unemployment rate:
Going further, the Committee might eliminate the calendar date entirely and replace it with guidance on the economic conditions that would need to prevail before liftoff of the federal funds rate might be judged appropriate. Several of my FOMC colleagues have advocated such an approach, and I am also strongly supportive. The idea is to define a zone of combinations of the unemployment rate and inflation within which the FOMC would continue to hold the federal funds rate in its current, near-zero range. For example, Charles Evans, president of the Chicago Fed, suggests that the FOMC should commit to hold the federal funds rate in its current low range at least until unemployment has declined below 7 percent, provided that inflation over the medium term remains below 3 percent. Narayana Kocherlakota, president of the Minneapolis Fed, suggests thresholds of 5.5 percent for unemployment and 2.25 percent for the medium-term inflation outlook. Under such an approach, liftoff would not be automatic once a threshold is reached; that decision would require further Committee deliberation and judgment.