Tag Archives: Interest Rates

2008-08-07 UK News Highlights

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Highlights:

ECB Leaves Interest Rates at Seven-Year High to Fight Inflation
German industrial orders drop
Western European Car Sales Fall by 6.7% in July, JD Power Says
German June Exports Rise the Most in Nearly Two Years
German Economy Contracted as Much as 1.5% in 2Q
French Trade Deficit Expands to Record as Euro Curbs Exports
Italian June Production Stalls as Record Oil Prices Damp Growth
Fall in output fuels Spanish recession fears

 
 
 
Article snip:

ECB Leaves Interest Rates at Seven-Year High to Fight Inflation (Bloomberg) – The ECBkept interest rates at a seven-year high to fight inflation even as evidence of an economic slump mounts. ECB policy makers meeting in Frankfurt left the benchmark lending rate at 4.25 %, as predicted by all 60 economists in a Bloomberg News survey. The bank, which raised rates last month, will wait until the second quarter of next year to cut borrowing costs, a separate survey shows. The ECB is concerned that the fastest inflation in 16 years will help unions push through demands for higher wages and prompt companies to lift prices. At the same time, record energy costs and the stronger euro are strangling growth. Economic confidence dropped the most since the Sept. 11 terrorist attacks in July and Europe’s manufacturing and service industries contracted for a second month. ECB President Jean-Claude Trichet will hold a press conference 2:30 p.m. to explain today’s decision.

Same as UK, less costly to address inflation now rather than support growth and address inflation later if it gets worse.

It’s been said in the US that the Fed needs to firm up the economy first, and then address inflation. To most Central Bankers this makes no sense, as they use weakness to bring inflation down.

In their view that means the Fed wants to get the economy strong enough to then weaken it.

The Fed majority sees it differently.

They agree with the above.

However, for the last year they have been forecasting lower inflation and lower growth were willing to take the chance that supporting growth would not result in higher inflation.

Now, a year later, the FOMC is faced with higher inflation and more growth than the UK and Eurozone, and systemic ‘market functioning’ risk remains.

The FOMC continues to give the latter priority as they struggle with fundamental liquidity issues that stem from a continuing lack of understanding of monetary operations.


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NYT: Too big to fail?

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Too Big to Fail?


by Peter S Goodman

Using public money to spare Fannie and Freddie would increase the public debt, which now exceeds $9.4 trillion. The United States has been financing itself by leaning heavily on foreigners, particularly China, Japan and the oil-rich nations of the Persian Gulf.

This is ridiculous, of course. The US, like any nation with its own non-convertible currency, is best thought of as spending first, and then borrowing and/or collecting taxes.

Were they to become worried that the United States might not be able to pay up, that would force the Treasury to offer higher rates of interest for its next tranche of bonds.

Also ridiculous. Japan had total debt of 150% of GDP, 7% annual deficits, and were downgraded below Botswana, and they sold their 3 month bills at about 0.0001% and 10 year securities at yields well below 1% while the BOJ voted to keep rates at 0%. (Nor did their currency collapse.)

The CB sets the rate by voice vote.

And that would increase the interest rates that Americans must pay for houses and cars, putting a drag on economic growth.

As above.

For one thing, this argument goes, taxpayers — who now confront plunging house prices, a drop on Wall Street and soaring costs for food and fuel — will ultimately pay the costs. To finance a bailout, the government can either pull more money from citizens directly,

Yes, taxing takes money directly, and it’s contradictionary.

But when the government sells securities they merely provide interest bearing financial assets (treasury securities) for non-interest bearing financial assets (bank deposits at the Fed). Net financial assets and nominal wealth are unchanged.

or the Fed can print more money — a step that encourages further inflation.

This is inapplicable.

There is no distinction between ‘printing money’ and some/any other way government spends.

The term ‘printing money’ refers to convertible currency regimes only, where there is a ratio of bill printed to reserves backing that convertible currency.

Skip to next paragraph “They are going to raise the cost of living for every American,”

True, that’s going up!


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Re: Kohn to ROW- You hike, not us (today’s speech)

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(an interoffice email)

On Thu, Jun 26, 2008 at 7:48 AM, Karim wrote:
>   
>   
>   

Global Economic Integration and Decoupling


Vice Chairman Donald L. Kohn
At the International Research Forum on Monetary Policy, Frankfurt, Germany
June 26, 2008

For the moment, higher headline rates of inflation have shown only a few tentative signs of embedding themselves in core inflation or in longer-term inflation expectations.

>   -talking about u.s. here
>   
>   
>   

However, policymakers around the world must monitor the situation carefully for signs that the increases in relative prices globally do not generate persistently higher inflation. Additionally, in those countries where strong commodity demands are associated with rapid growth in aggregate demand that outstrips potential supply, actions to contain inflation by restraining aggregate demand would contribute to global price stability.

>   -not describing/talking about u.s. here;
>   focusing on EM primarily.
>   
>   

right, gets back to bernankes testimony a while back that the falling dollar has been a good thing as it works to lower the trade gap via increasing US exports that sustain US demand. the old ‘beggar they neighbor’ policy from the 30’s.

unfortunately for us it’s actually a ‘beggar thyself’ policy on closer examination as most mainstream economists will attest. they all say you don’t ‘inflate your way to prosperity’ by weakening your currency. otherwise latin america and africa for example would be the most prosperous places in the world

seems they are still in the mercantalist mode where exports are good and imports bad, and this policy is making us look like a bananna republic at an increasing rate.

recall from previous emails the dollar decline has been triggered by paulson succeeding in keeping cb’s from buying $US, Bush keeping oil producing monetary authorities from accumulating $US, and Bernanke discouraging foreign portfolio managers from accumulating same.

(more later on how it’s actually not happening due to fed rate policy, but they think it is)

as suspected, the $US is most likely to take another major leg down as it adjusts to a level where the trade gap is in line with foreign desire to accumulate $US financial assets which is probably a lot lower than the current 55-60 billion per month.

the ‘cost push inflation’ is pouring in through the trade channel, and the fed is increasingly taking the heat from the mainstream (not me- i’m the only one who thinks inflation isn’t a function of rates the way they do) for its apparent weak $US/inflate your way out of debt approach.

furthermore, the mainstream (and the stock market) sees the low interest rate/weak dollar policy as taking away US domestic demand as higher price for food/fuel leave less domestic income for everything else, including debt service.

that is, they see the falling dollar hurting us domestic demand more than the low interest rates are helping it.

the reality is there’s foreign monopolist- the saudis (and maybe russians)- that’s milking us for all they can with price hikes, and keeping us alive buying our goods and service and thereby keeping US gdp muddling through.

the real standard of living for most working americans has dropped by perhaps 10% as they work, get paid enough to eat and drive to work, and the rest of their real output is exported.

and our policy makers, including bernanke and paulson who’ve ‘engineered it’ think this is all a good thing- they think imports are bad and exports good and we are paying the price in declining real terms of trade.

while in my book interest rates are not a factor, the mainstream thinks they are, and the response when the inflation gets bad enough will be higher interest rates. The ‘correct’ anti-inflation rate last August was 5.25 when the fed didn’t cut.

by Jan 08 it was probably at least 7% with headline moving through 3% to get a sufficient ‘real rate.’

today it’s probably moved up to 8%+ as cpi is forecast to go through 5% over the next few months and gdp muddles through around 1%.

the mainstream (not me) will say that by having a real rate that’s too low now the fed will need a rate that much higher down the road as inflation accelerates due to over accommodative fed policy.

by the time the cost push inflation works its way to core- probably over the two quarters- the fed will ‘suddenly’ feel itself way behind the inflation curve and recognize they made a horrible mistake and now the cost of bringing down inflation is far higher than it would have been early on- just like they’ve always said.

the mainstream knows this, and now sees a fed with its head in the sand regarding inflation. they also see this weak dollar policy as subversive as it undermines the currency and inflation accelerates.

i expect there will be a groundswell of mainstream economists calling for the replacement of bernanke, kohn and the entire fomc very soon.

ironically, in my book low rates have helped moderate inflation via cost channels and have helped moderate domestic demand via interest income channels.

rate hike will add to domestic demand as net interest income of the private sectors from higher government interest payments add to personal income and demand.

and rate hikes will add to the cost push inflation via higher interest costs for firms.

it’ all going down hill fast, with policy makers both going the wrong way on key issues as they have the fundamentals backwards.

the only near term ‘solutions’ are near term crude oil supply responses like 30 mph speed limits which isn’t even under consideration in any form, nor are any other crude supply responses. most other alternative energy sources don’t replace crude.

medium term supply responses include pluggable hybrids that only start being produced in late 2010.

longer term supply responses include nuclear which might come on line 15 years down the road.

a collapse in world demand is possible if china/india let up on their deficit spending and growth, but so far that doesn’t seem in the cards. all their ‘tightebning’ seems to be on the ‘monetary’ side which does nothing of consequence apart from further increase inflation.

so with no supply responses on the horizon expect the saudis to keep hiking prices, and keep spending the new revenues to keep world gdp muddling through, cb’s hiking interest rates that will bring results that will cause them to hike further, and continuously declining real terms of trade for oil importers.

what to do?

cds on germany- it’s one go all go over there, and germany is the least expensive insurance.

forward muni bmas over 80 with no interest rate hedge as markets should discount the obama lead and long move up with inflation.


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Another look at Kohn’s June 11th speech

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This still reads hawkish to me:

The results of such exercises imply that, over recent history, a sharp jump in oil prices appears to have had only modest effects on the future rate of inflation. This result likely reflects two factors. First, commodities like oil represent only a small share of the overall costs of production, implying that the magnitude of the direct pass-through from changes in such prices to other prices should be modest, all else equal. Second, inflation expectations have been well anchored in recent years, contributing to a muted response of inflation to oil price shocks. But the anchoring of expectations cannot be taken as given; indeed, the type of empirical exercises I have outlined reveal a larger effect of the price of oil on inflation prior to the last two decades, a period in which inflation expectations were not as well anchored as they are today.

Nonetheless, repeated increases in energy prices and their effect on overall inflation have contributed to a rise in the year-ahead inflation expectations of households, especially this year. Of greater concern is that some measures of longer-term inflation expectations appear to have edged up since last year. Any tendency for these longer-term inflation expectations to drift higher or even to fail to reverse over time would have troublesome implications for the outlook for inflation.

The central role of inflation expectations implies that policymakers must look beyond this type of reduced-form exercise for guidance. After all, the lags of inflation in reduced-form regressions are a very imperfect proxy for inflation expectations. As emphasized in Robert Lucas’s critique of reduced-form Phillips curves more than 30 years ago, structural models are needed to have confidence in the effect of any shock on the outlook for inflation and economic activity.

This was considered the dovish part:

In particular, an appropriate monetary policy following a jump in the price of oil will allow, on a temporary basis, both some increase in unemployment and some increase in price inflation. By pursuing actions that balance the deleterious effects of oil prices on both employment and inflation over the near term, policymakers are, in essence, attempting to find their preferred point on the activity/inflation variance-tradeoff curve introduced by John Taylor 30 years ago.

So the question is whether that point was realized by a 2% Fed funds rate currently?

Such policy actions promote the efficient adjustment of relative prices: Since real wages need to fall and both prices and wages adjust slowly, the efficient adjustment of relative prices will tend to include a bit of additional price inflation and a bit of additional unemployment for a time, leading to increases in real wages that are temporarily below the trend established by productivity gains.

But it was then qualified by this return to hawkishness regarding the inflation expectations that he previously said showed signs of elevating:

I should emphasize that the course of policy I have just described has taken inflation expectations as given. In practice, it is very important to ensure that policy actions anchor inflation expectations. This anchoring is critical: As demonstrated by historical experiences around the world and in the United States during the 1970s and 1980s, efforts to bring inflation and inflation expectations back to desirable levels after they have risen appreciably involve costly and undesirable changes in resource utilization.11 As a result, the degree to which any deviations of inflation from long-run objectives are tolerated to allow the efficient relative price adjustments that I have described needs to be tempered so as to ensure that longer-term inflation expectations are not affected to a significant extent.

And the FOMC all agree that long term inflation expectations have been affected to some extent already.

Summary
To reiterate, the Phillips curve framework is one important input to my outlook for inflation and provides a framework in which I can analyze the nature of efficient policy choices. In the case of a shock to the relative price of oil or other commodities, this framework suggests that policymakers should ensure that their actions balance the deleterious economic effects of such a shock in the short run on both unemployment and inflation.

Of course, the framework helps to define the short-run goals for policy, but it doesn’t tell you what path for interest rates will accomplish these objectives. That’s what we wrestle with at the FOMC and is perhaps a subject for a future Federal Reserve Bank of Boston conference.

This all could mean a Fed funds rate that causes unemployment to grow and dampen inflation expectations down, but not grow so much as to bring inflation down quickly is in order.

The question then is whether the appropriate Fed funds rate for this ‘balance’ between growth, employment, and inflation expectations is 2% or something higher than that.

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2008-06-19 EU News Highlights

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Highlights

Italian Unemployment Rate Rises for First Time Since 2003

Euro Central bankers think that’s a good thing for their fight against inflation. Unemployment was getting far too low for comfort.

France’s Woerth Maintains Economic Growth Forecast at 1.7%-2%

More than enough to warrant rate hikes.

French government wants more work hours

Trying to add supply to labor markets to keep wages ‘well contained.’

Zapatero Says Spain Suffering an ‘Abrupt Slowdown’

Spain had been growing too fast for comfort for the inflation hawks


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Bloomberg: Mainstream criticism of FOMC

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As mainstream economists, the Fed knows it took a very large risk when it cut aggressively, hoping its forecasts for ‘moderating inflation’ would play out, and knowing the following would happen if ‘inflation’ accelerated.

Bernanke May Regret Interest-Rate Cuts, Lawson Says

by Kim-Mai Cutler

(Bloomberg) Former U.K. Chancellor of the Exchequer Nigel Lawson said Federal Reserve Chairman Ben S. Bernanke may be “regretting” the fastest pace of U.S. interest-rate cuts since 1984 as global inflation accelerates.

The Fed reduced its benchmark rate by 3.25 percentage points to 2 percent between September and April 30 to stave off a recession following the collapse of the U.S. subprime-mortgage market. The Bank of England, also facing a slowdown, cut its key rate by 0.75 percentage point to 5 percent. The European Central Bank left rates unchanged at 4 percent for a year and signaled this month it may raise them in July.

“The Bank of England has been very cautious and careful and it has been much closer to the views of the European Central Bank,” Lawson, 76, who was finance minister from 1983 to 1989 under former Prime Minister Margaret Thatcher, said in a telephone interview. “It has not gone conspicuously the way of the Fed, where I suspect that Mr. Bernanke’s now regretting it.”

U.S. consumer prices rose 0.6 percent in May, the most since November, the Labor Department said June 13. Inflation in the euro area accelerated last month to a 3.7 percent annual rate, the fastest since June 1992, the European Union reported June 16.

Inflation caused by rising commodity prices is the biggest threat to the world economy, eclipsing concern about the seizure in the credit markets, finance ministers from the Group of Eight nations said June 14. The World Bank said on June 10 that global economic growth will probably slow to 2.7 percent this year from 3.7 percent in 2007.

Oil ‘Bubble’
Rising food prices and a “speculative bubble” in oil markets will prompt central banks to lift rates, leading to a “growth recession” where the rate of expansion is lower than historical trends, Lawson said in the interview.

Crude oil rose 95 percent from a year ago and traded at an all-time high of $139.89 a barrel in New York June 16. Corn for December delivery also traded at a record $7.915 in Chicago.

“Most of the central banks are very, very clear on just how dangerous it is to let inflationary expectations get out of hand,” he said.

Traders see a 48 percent chance the Fed will raise its target rate for overnight bank loans from 2 percent as early as August, up from 4.1 percent odds a month ago, futures contracts on the Chicago Board of Trade show. The chances of an increase in October are 99 percent, the contracts show.

Michelle Smith, a Fed spokeswoman in Washington, declined to comment on Lawson’s remarks.

‘Shallow’ Recession
The slowdown in the U.K. is going to last “longer than most people expect,” while remaining “shallow,” Lawson said. The economy, the second-largest in Europe, grew 0.4 percent in the first quarter, its weakest pace since 2005, as higher credit costs hurt construction and business services slowed, according to the Office for National Statistics.

“This is the hangover after the binge,” Lawson said. “It’s going to be very, very difficult for the next two to three years for the global economy.”

The U.K. won’t adopt the euro in place of the pound as a global slowdown heightens tensions between members of the 27- nation European Union, Lawson said. Ireland vetoed the bloc’s new government treaty June 13, sinking an agreement that needed ratification by all EU countries.

“There are going to be considerable strains within the euro area,” Lawson said. “There are going to be a number of countries that found the single currency satisfactory during the benign period, that are now going to hurt much more under these difficult conditions.”


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Bloomberg: Poole jumps in

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The Fed’s mission is to not let a relative value story turn into an inflation story.

When food/fuel prices rise, consumers have less to spend on other things; so, they should moderate to keep it all a relative value story.

But even though core CPI hasn’t gone up as fast as headline (YET), it has gone up to 2.3%. Rather than stay the same or go down; so, the relative value story is slowing turning into an inflation story.

And my guess is that most of Congress isn’t going to like the idea that the Fed’s job is to keep wages ‘behaving’ (suppressed) when food/fuel goes up, as Poole states below:

Poole Says Fed Needs to Help Prevent Wage Increase

by Kathleen Hays and Timothy R. Homan

(Bloomberg) The Federal Reserve needs to prevent the public’s expectation that inflation will accelerate from spurring demands for higher wages, William Poole, former St. Louis Fed President, said today.

“You want to keep wages behaving,” Poole said in an interview on Bloomberg Television. Once the public’s anticipation of rising prices begins to stoke demands for higher wages, “the jig is up” and inflation becomes harder to eradicate.

The public’s outlook for annual inflation over five years stood at 3.4 percent in June, up from 2.9 percent the same month last year, according to the Reuters/University of Michigan Survey.

Comments by Fed Chairman Ben S. Bernanke and other policy makers this month have compelled traders to increase bets the central bank will start to lift the main lending rate later this year to keep rising food and energy costs from influencing labor agreements and other prices.

“We should be moving sooner rather than later,” Poole said, referring to an interest-rate increase.


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RE: BOE letter

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(an interoffice email)

>
>   On Tue, Jun 17, 2008 at 7:58 AM, DV wrote:
>
>   Mervyn King was required this morning to write a letter to the
>   Chancellor explaining why inflation was greater then 3% in the UK
>   (released this morning at 3.2% vs. 3% previously). The letter follows
>   and was taken as dovish by the markets as it seemed to have more
>   emphasis on the weakening economy then additional upside inflation
>   risks.
>
>   DV
>

Letter to the Chancellor

The CPI inflation rate for May, to be published at 9:30 am tomorrow by the Office for National Statistics, is 3.1%. That is more than one percentage point above our target of 2%. Under the terms of the remit you have given us, I am, therefore, writing an open letter to you today on behalf of the Monetary Policy Committee. As requested by the National Statistician, in order to avoid conflict with the release of the official statistic, in this case the CPI, the Bank of England will publish this open letter at 10:30am.

Our remit specifies that an open letter should explain why inflation has moved away from the target, the period within which we expect inflation to return to the target, the policy action that the Committee is taking to deal with it, and how this approach meets the Government’s monetary policy objectives.

Why has inflation moved away from the target?
Inflation has risen sharply this year, from 2.1% in December to 3.3% in May. That rise can be accounted for by large and, until recently, unanticipated increases in the prices of food, fuel, gas and electricity. These components alone account for 1.1 percentage points of the 1.2 percentage points increase in the CPI inflation rate since last December. Those sharp price changes reflect developments in the global balance of demand and supply for food and energy.

In the year to May:

  • world agricultural prices increased by 60% and UK retail food prices by 8%.
  • oil prices rose by more than 80% to average USD123 a barrel and UK retail fuel prices increased by 20%.
  • wholesale gas prices increased by 160% and UK household electricity and gas bills by around 10%.

The global nature of these price changes is evident in inflation rates not only in the UK but also overseas, although the timing of their impact on consumer prices differs across countries. In May, HICP inflation in the euro area was 3.7% and US CPI inflation was 4.2%. As described in our May Inflation Report, inflation is likely to rise significantly further above the 2% target in the next six months or so.

The May Report set out three main reasons for this:

  • The increase in oil prices will continue to pass through to the costs faced businesses.
  • Rising wholesale gas prices are expected to lead utility companies to announce further tariff increases. There is considerable uncertainty about their size and timing.
  • The depreciation of sterling, which has fallen some 12% since its peak last July, has boosted the prices of imports and will add to the pressure on consumer prices.

The Committee’s central projection, described in its May Inflation Report, was for CPI inflation to rise to over 3 1/2%% later this year. But in the past month, oil prices have risen by about 15% and wholesale gas futures prices for the coming winter have increased by a similar amount. As things stand, inflation is likely to rise sharply in the second half of the year, to above 4%. I must stress, however, that there are considerable uncertainties, in both directions, around this, and any such projection is particularly sensitive to changes in domestic gas and electricity charges.

There are good reasons to expect the period of above-target inflation we are experiencing now to be temporary. We are seeing a change in commodity, energy and import prices relative to the prices of other goods and services. Although this clearly raises the price level, it is not the same as continuing inflation.

There is not a generalised rise in prices and wages caused by rapid growth in the amount of money spent in the economy. In contrast to past episodes of rising inflation, money spending is increasing at a normal rate. In the year to 2008 Q1, it rose by 5 1/2%, in line with the average rate of increase since 1997 – a period in which inflation has been low and stable. Moreover, in recent months the growth rate of the broad money supply has eased and credit conditions have tightened. This will restrain the growth of money spending in the future.

Over what period does the MPC expect inflation to return to the target?
It is possible that commodity prices will rise further in the coming months – oil prices have now been rising for four years. But in the absence of further unexpected increases in oil and commodity prices, inflation should peak around the end of the year and begin to fall back towards the 2% target. Nevertheless, each monthly rise in food, energy and import prices will, by pushing up the overall price level, affect the official twelve-month measure of inflation for a year. So CPI inflation is likely to remain markedly above the target until well into 2009.

I expect, therefore, that this will be the first of a sequence of open letters over the next year or so. The remit for the Monetary Policy Committee states that:

“The framework takes into account that any economy at some point can suffer from external events or temporary difficulties, often beyond its control. The framework is based on the recognition that the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances. Attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output”.

The Committee believes that, if Bank Rate were set to bring inflation back to the target within the next 12 months, the result would be unnecessary volatility in output and employment. So the MPC is aiming to return inflation to the 2% target within its normal forecast horizon of around two years, when the present sharp rises in energy and food prices will have dropped out of the CPI inflation rate. Nevertheless, the Committee is concerned about the present and prospective period of above-target inflation. It is crucial that prices other than those of commodities, energy and imports do not start to rise at a faster rate.

That would happen if those making decisions about prices and pay began to expect higher inflation in the future and acted on that. It could also happen if employees respond to the loss of real spending power that results from higher commodity prices by bidding for more substantial pay increases. Pay growth has remained moderate. But surveys indicate that higher inflation has already had an impact on the public’s expectations of inflation. For that reason, the Committee believes that, to return inflation to the target, it will be necessary for economic growth to slow this year.

A slowdown is already in train. Moreover, as described in the Committee’s May Inflation Report, the prospective squeeze on real incomes associated with higher inflation, together with the reduced availability of credit, is likely to lead to a further slowing in activity this year. This will reduce pressure on the supply capacity of the economy and dampen increases in prices and wages. What policy action are we taking? Since December, Bank Rate has been reduced three times, to stand at 5%. When setting Bank Rate the Committee has faced a balancing act between two risks. On the upside, the risk that above-target inflation could persist explains why the Committee has not responded more aggressively to signs that the economy is slowing. On the downside, the risk is that the slowdown could be so sharp that inflation did not just return to the target but was pulled below. This explains why Bank Rate has been reduced at a time when inflation is above the target.

The MPC will discuss at its July meeting the implications of the latest inflation and other economic data for the balance of these risks. That analysis will be described in the minutes, published two weeks later, and a fully updated forecast will be presented in the August Inflation Report. The path of Bank Rate that will be necessary to meet the 2% target is uncertain. The MPC will continue to make its judgement about the appropriate level of Bank Rate month by month.

How does this approach meet the Government’s monetary policy objectives?
Over the past decade, inflation has been low and stable. Volatility in commodity, energy and import prices means that inflation will now be less stable but it does not mean that inflation will persist at a higher rate. The Committee will maintain price stability by ensuring that the rise in inflation is temporary and that it returns to the 2% target. In the short term, this commitment should give those setting prices and wages some confidence that inflation will be close to the target in the future. That will minimise the slowdown in economic activity that will be necessary to ensure that inflation does fall back. In the longer term, price stability, as our remit states, is “a precondition for high and stable levls of growth and employment”.

We have seen in the past how the need to reduce inflation from persistently high levels has required prolonged periods of subdued economic growth. The resulting instability in our economy deterred investment and contributed to poor economic performance over a longer period. The Monetary Policy Committee remains determined to set interest rates at the level required to bring inflation back to the 2% target, and I welcome the opportunity to explain our thinking in this open letter.

I am copying this letter to the Chairman of the Treasury Committee, through which we are accountable to Parliament, and will place it on the Bank of England’s website for public dissemination.

Thanks, seems the risk of crude rising continuously due to demand continues to be downplayed by the world’s central bankers even though it has been the case for several years, so they continue to pursue policies that in their models are designed to at least support demand.

I continue to suggest mainstream history will not be kind to them.


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Watch for foreign USD borrowings

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It’s about that time of the cycle when emerging market governments borrow low interest USD rather than pay the higher interest rates of their local currency.

Makes no sense at the macro level by often the treasuries of these nations are incented to do this.

This external, USD debt tends to drive the USD down and add to US exports, as it adds to international financial instability.

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Statement from Meltzer

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I like this not so much for his suggestion as for his assessment of the Fed.

This both expresses the market view of the Fed and the Fed’s own expressed concern that their previous actions could contribute to elevated inflation expectations.

“I think they should put interest rates up and worry about inflation. What do I think they’ll do? I think they’ll delay,” says Allan Meltzer, a professor of political economy at Carnegie Mellon and noted Fed watcher. “The Fed is spineless in response to pressures from Congress and pressures from Wall Street.”

In contrast, my best guess is the Fed is ready to act quickly to restore a ‘real rate’ ASAP as ‘market functioning’ risk subsides, no matter how weak the economy my get.

IMHO, it was blind fear of 1907/1930/gold standard deflationary tail risk that caused the Fed to cut rates into a triple negative supply shock, not a lack of resolve vs. inflation that pushed their ‘balance of risks’ towards ’emergency’ cuts with much talk of being ‘nimble’ regarding ‘taking them back’.

The immediate deflation risk was seen to be coming from the housing collapse.

While housing remains weak, it is no longer perceived to pose the same broad-based deflationary risk. Instead, it is showing signs of leveling off, and with GDP and personal income muddling through, housing looks to be muddling through at current levels as well.

NOTE: In August, the Fed didn’t cut because inflation was deemed too high, and it’s a lot higher now.

I don’t expect ‘ordinary’ recession risks to keep them from moving to put a brake on what they see as elevating inflation expectations.

Even Yellen the Dove is ready to hike. They all believe low inflation is a necessary condition for optimal long-term growth and employment, and inflation is now by far the greatest risk to long-term growth and employment.

And they all agree the cost of slow growth now to reign in inflation is far less then the cost of bringing down inflation later should it continue to get worse. In the ‘balance of risks’, inflation is a risk because it is perceived as a crucial risk to long-term growth.

They also agree that their dual mandate is, therefore, met by keeping inflation low, which automatically optimizes long-term growth and employment.

The remaining dove position is that inflation isn’t a problem, as evidenced by low core reports and well-anchored wage demands, and that the current output gap is sufficient to keep inflation expectations from elevating and bring inflation down to desired levels over the next few years.

That position is quickly losing support as evidenced by two actual dissenting votes and a growing movement to the hawk side as perceived deflationary tail risk subsides, inflation expectations show signs of elevating and food/crude/import prices remain firm as they are further supported by the fiscal package.


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