September 19 2013

Larry Elliott: It is hard to see how the Fed can start to scale back its quantitative easing program this year. Nobody is sure any longer what the Fed is really up to. What will it take for the Fed to start winding down the stimulus?…

 


Powered by Guardian.co.ukThis article titled “Federal Reserve tapering decision has baffled the markets” was written by Larry Elliott, economics editor, for The Guardian on Thursday 19th September 2013 17.19 UTC

The dust was still settling on Thursday after the Federal Reserve delivered one of the biggest surprises to financial markets in many a year. This was a return to the central banking practices of the past when policymakers liked to keep people guessing about their intentions. These days central bankers pride themselves on their transparency.

But nobody is sure any longer what the Fed is really up to. Clearly it got cold feet about announcing even the most modest reduction in the amount of stimulus provided to the US economy through its long-term asset purchase programme, but both the decision and the way it was announced raised more questions than they answered.

Why was there no warning to the markets that the Fed was worried about the slowdown in growth? Why, in the absence of such a warning, did it not go ahead with a tokenist reduction in the stimulus, of say $5bn (£3.17bn) a month, that would have made good the commitment to start tapering but had no material impact on growth? What will it now take for the Fed to start winding down the stimulus?

But although the Fed’s communications strategy now lies in tatters, some conclusions can be drawn from the postponement of the taper. Firstly, policy is going to remain loose for longer than the markets envisaged. It is hard to see how the Fed can start to scale back its quantitative easing programme this year, and the prospect of the process being completed in 2014 – as originally envisaged – is as good as dead.

Secondly, the Fed is even more doveish than the markets thought. When Ben Bernanke first floated the idea of the taper back in May, the notion was that the trigger for the taper would be falling unemployment. But despite a continued moderate improvement in the labour market, the Fed still feels the time is not ripe to act. It took fright when speculation about the taper led to rising bond yields, making mortgages more expensive. It looked askance when share prices fell. And it is worried about the possible consequences of the looming budget showdown between Democrats and Republicans in Washington. So when the time came to act, it blinked.

Thirdly, the Fed has provided a respite – albeit probably temporary – to emerging markets that had seen their currencies fall against the dollar in anticipation of a gradual withdrawal of the stimulus.

Finally, the muted second day reaction to the decision was the reaction to one final unanswered question: does the Fed have the remotest idea how to unwind the stimulus? As Stephen Lewis of Monument Securities put it: Bernanke has given the “impression of being astride a tiger he dare not dismount.”

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USA 

In the trading room today: What’s Next for the USD after the Fed’s Decision? In the aftermath of the Federal Open Markets Committee’s decision not to reduce the size of its monthly asset purchases, we examine the weakening of the USD across the board and explore the potential for further losses of the greenback as a result of “QE forever”, we analyze the bullish breakout in the EUR/USD currency pair, we take a close look at the over-extended rally of the GBP vs USD, we keep an eye on the USD/JPY pair, we highlight the market’s reaction to the FOMC and the Swiss National Bank monetary policy announcements, the U.K. Retail Sales and the U.S. Jobless Claims, we discuss new forecasts from Barclays, Royal Bank of Scotland and UBS, and prepare for the trading session ahead.

Polls point to grand coalition between Angela Merkel’s CDU, Bavarian sister party the CSU and the Social Democrats. One of Europe’s most important elections in years will be likely to go to the wire as the closeness of the contest becomes clear…

 


Powered by Guardian.co.ukThis article titled “German election goes to the wire with no clear winner in sight” was written by Kate Connolly in Berlin, for theguardian.com on Wednesday 18th September 2013 11.21 UTC

The final stretch of the German general election is turning into a nail-biting race between the main parties, with latest polls showing that neither Angela Merkel‘s conservatives together with her liberal coalition partner, the FDP, nor a leftwing-Green party alliance is set to obtain an overall majority.

The opinion polls indicate that one of Europe’s most important elections in years will go to the wire, with the most likely outcome to be a so-called grand coalition between the Christian Democratic Union (CDU) and its Bavarian sister party, the CSU, together with the Social Democrats (SPD).

The poll by the Forsa Institute put the CDU on 39%, the SPD on 25%, and the liberal Free Democrats on 5%, the threshold needed for it to get into parliament.

The Left (Linke) is on 10%, and the Green party on 9%.

Arithmetically the possibilities would be a grand coalition or a conservative-Green union, though the latter is unlikely, having more or less been ruled out by those involved.

As the closeness of the contest became clear, all parties were scrambling on Wednesday to try to garner the support of the large number of undecideds, estimated to be up to a third of voters.

The CDU was keen to warn its voters that splitting their two votes – a “local” vote for a constituency MP, and a second for the party list – would risk huge losses for the CDU.

The party had its fingers burned at a regional poll in Lower Saxony in January when so many second votes were given to the FDP that the CDU was narrowly defeated.

The FDP, meanwhile, whose survival in parliament is in grave doubt after it failed by a considerable margin to enter the Bavarian assembly in last Sunday’s election, was canvassing CDU voters to “lend” their second vote to the FDP to ensure a continuation of the conservative-FDP alliance. It was also trying to rally its core supporters by wheeling out its former star and foreign minister Hans-Dietrich Genscher.

The SPD, buoyed by a solid if not spectacular result in Bavaria, was also trying desperately to motivate its core voters, particularly as experience shows the higher the voter turnout is, the better its prospects have been. The SPD’s leadership has been gathering in recent days to discuss its position in a grand coalition, as its chances of re-entering government loomed ever larger.

An unknown quantity remains the Alternative für Deutschland, a new Eurosceptic party. Although polls show it is expected to get just 3%, analysts say the party should not be underestimated, not least because of the 1 million clicks its YouTube campaign video has received, and the €430,000 of donations it collected just last weekend. The party could yet benefit from the high number of undecided voters, and the growing number of “closet” anti-Europeans.

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Tony Abbott and Joe Hockey settle in to trappings of power and a former US Treasury secretary causes some ripples in the markets. What’s behind the recent roller coaster ride of the Australian dollar and will its rally be sustainable?…

 


Powered by Guardian.co.ukThis article titled “Dollar gyrations: a week is a long time in exchange rates” was written by Greg Jericho, for theguardian.com on Thursday 19th September 2013 01.15 UTC

If Tony Abbott and Joe Hockey were in any doubt that being “in charge” of the Australian economy is often more like riding a bucking horse of which you have little control, this week served to give them a quick reminder.

The general consensus is that the biggest problem for the non-mining sector in Australia is the value of our dollar. Since the float in December 1983, the dollar has averaged US$0.75 cents; in the past three years it has averaged US$1.01.

The simple equation is that the higher the dollar the harder it is for industries which rely on exports. So for the past three years manufacturing and other industries – such as tourism – have been crying out for help and hoping for the dollar to fall.

And then in May, on the back of the budget and reductions in the cash rate by the Reserve Bank, the dollar fell in the space of three months from US$1.05 to US$0.90. And yet, despite a few blips since the start of July, it has remained stubbornly around the US$0.90 mark.

And then this week, while Tony Abbott was getting used to his new digs at the AFP college and while Joe Hockey was reading a few incoming government briefs from his department, the dollar rose more than 1% in a day.

The reason for the jump was news from the US that former Treasury secretary under Bill Clinton, Larry Summers, was withdrawing his name from consideration to be the next chair of the US Federal Reserve once the current chair, Ben Bernanke, steps down in January 2014.

Summers was considered President Obama’s likely pick, so his withdrawal was big news in financial circles.

But why did our dollar rise?

Currently the Federal Reserve is engaged in some pretty extraordinary monetary policy – not just low interest rates (effectively zero) but also ongoing “quantitative easing” (which is a weasel word way of saying they are trying to stimulate the US economy by putting $85bn a month into the economy through buying Treasury bonds). This policy not only keeps interest rates in the US low, it also lowers the value of the American dollar, and as a result increases the value of other currencies – such as our little Aussie battler.

The Federal Reserve is now debating when to start winding back (or “taper”) this stimulus. The quicker it winds it back, the stronger the US dollar will be compared with other currencies.

Larry Summers was known to be a critic of the quantitative easing and so, were he to become chair of the Fed, markets were expecting it to be wound back more quickly than if someone else were in charge.

But with his withdrawal the current vice-chair, Janet Yellen, becomes the presumptive favourite. She is known to be a strong supporter of the current policy, and thus markets quickly changed their views of what would happen in 2014.

And so our dollar rose from US$0.924 to $US0.938 in a few hours, before falling back to US$0.93.

All because of something that didn’t happen in the US.

And then on Tuesday the Reserve Bank of Australia released the minutes of its monthly monetary policy meeting. Not surprisingly, it restated its desire for the value of the Australian dollar to stay low, noting, “Some further decline in the exchange rate would be helpful in achieving such an outcome.”

Now this might signal that the RBA would set monetary policy to achieve this aim, but there is a big “but” involved with our current interest rates – the housing market.

It is hard to avoid reading or hearing about the housing boom – which is at this stage more anticipation than reality. Prices have certainly risen but they were coming off a pretty low trough in 2011-12. At the moment, the boom seems concentrated in Sydney where analysts suggest prices could increase by as much as 20% next year, and to a lesser extent in Perth.

While the RBA is not too concerned yet, noting that “households continued to show prudence in managing their finances”, it did express some concern regarding “self-managed superannuation funds” investing in the housing market. The RBA noted that SMSFs were “one area identified where households could be starting to take some risk with their finances” and the RBA indicated it would “closely monitor” the situation.

And so, notwithstanding the RBA’s desire for a low value of the dollar, our currency rose as traders took the view that this meant interest rates were more likely to rise than fall.

Then last night the US Federal Reserve announced it would continue its quantitative easing a bit longer – and so our dollar went up again to US$0.95.

Thus, in the time between the Coalition winning the election and being sworn into government, the dollar has risen by more than 4%. I hope Mr Abbott and Mr Hockey enjoy the ride.

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No ‘taper’ to central bank’s support of US economy. Fed requires ‘more evidence that progress will be sustained’. Markets cheer the announcement while the US dollar falls. The Fed’s decision underlines the fragility of US recovery…

 


Powered by Guardian.co.ukThis article titled “Ben Bernanke: no change in Federal Reserve’s stimulus – live” was written by Tom McCarthy in New York, for theguardian.com on Wednesday 18th September 2013 21.15 UTC

Summary

We’re going to wrap up our live blog coverage. Here’s a summary of where things stand:

• The Federal Reserve announced no change to its program of monthly asset purchases designed to stimulate the economy. The central bank will continue to buy mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. ”The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” the central bank said in a statement.

The news sent markets through the ceiling. The Dow Jones Industrial Average, which had been concerned that the central bank would take the economy off life support, hit an all-time high on the announcement.

• However the decision to maintain the stimulus pointed to a diagnosis on the part of the Fed of sustained, underlying economic weakness. In June, Fed chairman Ben Bernanke said the central bank may begin tapering its asset purchases. There was no sign of such talk today, three months later.

• Bernanke said that unemployment was lower but not low enough (the Fed has set a 6.5% benchmark) and growth is up but not far enough. Bernanke said the current unemployment rate of 7.3% “understates the amount of true unemployment in the economy” because of the job markets cycle and demographic trends.

• The news floored analysts and reporters, who reminded Bernanke that as recently as June he was talking about “tapering” quantitative easing. “I don’t recall stating that we would do any particular thing in this meeting,” he replied.

• Bernanke said the economy continued to show signs of recovery, and sectors closest to the QE program – housing and autos – showed some of the best improvement. “There has been a lot of progress,” he said. “Labor market indicators are much better today than they were when we began… more than a year ago.”

• Bernanke warned of the potential “very serious consequences for financial markets and the economy” if the country defaults on debt or if the federal government has to shut down due to a congressional failure to reach a budget deal.

• Bernanke dismissed the idea that quantitative easing is turning, against the central bank’s will, into a very long-term policy. He said easing would last until there’s “substantial improvement” in the outlook of the labor market. At the moment there’s some improvement, he said, but “ultimately we will reach that level of substantial improvement.”

Updated

Bernanke is done. The news conference has ended. For the time being, he’s not going anywhere.

Pushing back against the impression that Fed policy helps the affluent most, Bernanke says the Fed is working to help the middle class by seeking to strengthen the jobs market and ensuring price stability.

He acknowledges that the rich are getting richer and the poor are getting poorer. Then he says the Fed can’t do much about that:

Our economy is becoming more unequal. The very rich people and the people in the lower half who are not doing well.

This has been going on for decades…. It’s important to address these trends, but the Federal Reserve doesn’t really have the tools to address these long-run… trends.

Bernanke says there are signs quantitative easing is working: 

It’s difficult to get a precise measure. There’s a large academic literature.. . my own assessment is that it has been effective… some of the leading sectors like housing and autos” are tied most directly to asset purchases.

There has been a lot of progress. Labor market indicators are much better today than they were when we began… more than a year ago.

Bernanke addresses the question raised by my colleague Dominic Rushe earlier. If the economy continuously fails to meet the benchmarks the Fed has laid out for ending asset purchases, how will it ever get out of QE?”

“The criterion for ending purchases is a substantial improvement in the outlook for the labor market,” Bernanke says. He says there has been some improvement and “ultimately we will reach that level of substantial improvement.”

Then easing can end.

A potential failure next month in Congress to raise the debt limit or pass a budget is “obviously part of a very complicated set of legislative decisions, strategies, battles” that Bernanke won’t comment on.

But he says “a government shutdown and failure to raise the debt limit could have very serious consequences for financial markets and the economy.”

Bernanke says the central bank tries to take into account such potential threats, but the Fed is relatively powerless in this field.

Is the Fed concerned about confusing investors by mentioning tapering and then not doing it?

I don’t recall stating that we would do any particular thing in this meeting. What we are going to do is the right thing for the economy, Bernanke says… We try our best to communicate.. We can’t let market expectations dictate our policy actions.

The markets really like it. 

0-2: At the start of the blog we speculated that Bernanke might simultaneously announce that he’s winding down QE and winding down his career as Fed chairman. In fact he has done neither.

Bernanke is asked whether he’s leaving:

“I prefer not to talk about my plans at this point.”

Could tapering begin by the end of 2013? Bernanke says there’s no fixed schedule:

There really is no fixed calendar… If the data confirm our basic outlook… then we could move later this year. But even if we do that, the subsequent steps will [rely] on continued progress in the economy.

The criteria include an improved labor market including lower unemployment.

Bernanke is asked whether he was speaking out of turn in June, when he said the fed could start tapering its stimulus program. Was it a mistake to talk about tapering back in June?

I think there’s no alternative … but to communicate as clearly as possible. As of June we had made meaningful progress in terms of labor [market],” Bernanke says. He says green shoots in the jobs market convinced the committee that it was the time to start talking tapering.

The question: what changed, to make the talk stop?

Updated

Bernanke says low job market participation is partly cyclical:

“There’s a cyclical proponent to participation. The unemployment rate understates the amount of true unemployment in the economy.”

“There’s also a downward trend in participation in our economy,” Bernanke says, but he pins the trend on external factors including an aging population.

The focus of course is on the Fed’s decision to leave its asset purchase program unchanged but a relevant question is “why.” “It seems as though there are two major reasons for the decision,“ Guardian business correspondent Dominic Rushe (@dominicru) writes:

1. The rise in mortgage rates is contributing to a tightening of financial conditions, which the Fed is obviously worried about.

2. The Fed inserted a new sentence that begins with “taking into account the extent of federal fiscal retrenchment.” The Fed has long been worried about their fiscal brethren and that worry crept further into today’s statement.

Even though the Fed acknowledges that things have picked up since they began QE3 late last year, they “decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”

This is not what we expected. However it is, from the Fed’s point of view, understandable.

But there’s a rather unsettling conclusion to Dominic’s analysis:

However, if the tightening of financial conditions, which was partially a result of the Fed’s decision to discuss slowing asset purchases, is enough to forestall an actual reduction, then in theory the Fed can never cease purchasing assets unless there is no adverse reaction in asset markets. It becomes a negative cycle in which the Fed would find itself trapped.

Guardian finance and economics editor Heidi Moore (@moorehn) is performing Bernanke-to-English tranlsation:

Bernanke says there are signs the economy is improving.

He says that unemployment is falling [Editor: if only by 1.8% over the last two years]; 2.3m private sector jobs have been created; aggregate hours of work are up; and weekly unemployment claims are falling. ”

All this “despite substantial fiscal headwinds,” Bernanke says.

Bernanke is discussing the FOMC projections for interest rates, unemployment and inflation.

He says the collective projections of the committee members have rates moving from 2.0-2.3% in 2012 to 2.5-3.3% in 2016.

Unemployment is expected to move from 7.1-7.3% in 2013 to 5.4-5.9% by 2016, “about the long-run normal level.”

Inflation is projected to move from 1.1-1.2% in 2013 to 1.7-2.0% in 2016.

Updated

Bernanke is speaking. Watch live on CSPAN here.

Anything to instill confidence?

Updated

If the Fed keeps buying long-term government debt – and the board of governors just announced that that will continue to the tune of $45bn per month – return to investors on that debt will not be as strong. Also see this chart:

Bloomberg columnist Caroline Baum posed this question for Bernanke in the event that the Fed decided to maintain its stimulus program, which it now has: Why?

Various Fed studies suggest that the third round of asset purchases has had a negligible effect on long-term interest rates, that the real benefit comes from forward guidance. Why, then, have you decided to stick with the program? Ten-year yields are up 120 basis points since May. Any bang for the buck seems to have dissipated.

Read Baum’s Ten Burning Questions for Ben Bernanke here.

Fed chair Ben Bernanke is scheduled to meet the press in about 10 minutes. He’s likely to face sharp questions about why the Fed has decided to stick with a policy, quantitative easing, that seems to have born little fruit over three rounds and almost five year.

Guardian finance and economics editor Heidi Moore (@moorehn) sees the move as a symptom of how dire the economic situation is. Easing isn’t working – but there isn’t a plan B.

Try, try again. And again. And

What just happened? You can read the full Fed board of governors statement on the decision that has emerged from the two-day meeting of the open markets committee here.

In short the central bankers did not judge the economy to have hit benchmarks that would have dictated a change in stimulus policy – in this case slowing the purchase of mortgage-backed securities, Treasury bills and bank debt.

At a deeper level, the Fed self-evidently retains belief in these levers to move the economy. The tools still work, this decision says, and the Fed intends to keep applying them.

Here’s the key graph from the Fed statement, with this key sentence: ”the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”

Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

Read the full Fed statement here.

The markets like it.

Updated

Guardian business correspondent Dominic Rushe has some early details of the Fed announcement that it has no immediate plans to phase out or “taper” its $85bn-monthly asset purchase program.

The Fed says it is waiting for “more evidence that progress will be sustained before adjusting,” Dominic reports.

Reactions

No taper. More to come. 

And …

All the major US stock markets are trading slightly lower ahead of Fed announcement, GuardianUS business correspondent Dominic Rushe (@dominicru) reports:

 The S&P 500 is down 0.11% and the Dow 0.26%. Blame nerves. As until the announcement comes this afternoon, no one outside the Fed really knows whether Bernanke is going to start the “tapering” the $85bn a month quantitative easing stimulus programme or not.

That shoe took a long time to drop. President Obama is prepared to name Federal Reserve vice chairman Janet Yellen as the next chairwoman of the Federal Reserve, the Washington Post reports, citing a White House official and “people close to the White House”:

Federal Reserve Vice Chairman Janet Yellen is the leading candidate to be President Obama’s nominee to lead the Fed as chairman, a White House official said Wednesday. Barring any unexpected development, that likely means that Yellen will get the nomination, perhaps as soon as next week.

People close to the White House said this week that Yellen was the front-runner after the unexpected withdrawal by former White House economic adviser Lawrence Summers, who was facing sharp resistance on Capitol Hill.

Full piece here. Summers’ withdrawal did not leave Yellen the lone horse in the race, however. Wonkblog’s Neil Irwin today handicapped a competition between Yellen and Donald L. Kohn, her predecessor as Fed vice chairman. Irwin concluded it could go either way on the merits, but Yellen may be the more politically expedient choice:

The president has a choice between two very qualified, experienced central bankers for the job, with the differences between them more subtle variations in style and temperament than any vast chasm in monetary policy views. Against that backdrop, if he passes over Yellen, who would be the first woman in the job and has been endorsed by Wall Street economists and many in Congress, he’ll face tough questions on why.

Read the full piece here.

“After three years of money-pumping, quantitative easing is evidently doing nothing to bring the country to full employment, which is one of the two tasks the Fed exists to perform,” Guardian finance and economics editor Heidi Moore (@moorehn) wrote at the start of this month. That’s one reason “it’s worth examining whether QE has outlived its usefulness”:

The hard news is this: it’s a smart idea for the Fed to taper, to start opening the door for the end of stimulus. It’s not a smart idea because the economy is healthy – it isn’t – but because the economy needs to come off life-support and breathe for itself.

Quantitative easing is a drug that seems to be long past its due date. After three years, the returns are in: there are likely no more benefits coming to the economy from holding down interest rates and buying up mortgage bonds.

The economy isn’t recovering, Heidi writes; it’s “in some kind of unresponsive fugue state that we’ve arbitrarily chosen to call a ‘recovery.‘” Read the full analysis here.

Good midday and welcome to our live blog coverage of Ben Bernanke’s eagerly awaited remarks on two topics he uniquely owns: quantitative easing and Ben Bernanke. There’s a chance the Fed chair will use his press conference this afternoon to show them both the Out door.

There’s money on the line. Markets will be listening for signals that the Federal Reserve bank plans to wind down its $85bn in monthly asset purchases known as quantitative easing. For nearly five years the stimulus program has helped markets find confidence in a discouraging landscape. Bernanke has signaled that it won’t last forever. But it was supposed to last until the economy – and specifically the unemployment rate – improved. Or until rising interest rates grew too worrisome.

Neither has happened. The landscape remains discouraging, with unemployment at 7.3% and job market participation at an all-time low. Inflation has yet to rise to the 2% target Bernanke has proposed (he calls it the “objective” rate).

Clearly, easing isn’t working. Unless it is, and the numbers would be even more terrible without it. For two days the fed’s open markets committee (FOMC) has been discussing this and other questions. This afternoon Bernanke is expected to indicate what the group decided.

Additionally Bernanke may talk about his own plans to step down as Fed chair, a seat he’s occupied since President George W Bush appointed him in 2006. The conclusion that Bernanke will leave when his current term expires at the end of January is so foregone that the secret struggle to replace him already has produced public losers.

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