Monetary Policy

  • Perhaps Japan should consider excluding food and energy like the Fed.

    Should the Bank of Japan Consider the U.S. Fed Method?

    The Bank of Japan is engaged in the most aggressive asset purchases, and yet it has largely failed to lift inflation.  National consumer prices for June will report at the end of this week.  The headline rate expects to fall to 0.3% year-over-year from 0.5% in May.  This would be the smallest increase since June 2013. 

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  • Central bank meeting minutes come from Australia and Japan.

    Market News Lightens Up

    The light news stream has spurred some position squaring by short-term momentum traders.  This is giving the dollar a somewhat heavier tone, and weighing on European equity markets.  European bonds and Treasuries are little changed, though slightly firmer. 

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  • The Fed signaled a September rate hike, but they have options.

    Survey Says: September Rate Hike

    The latest Wall Street Journal survey found that 82% of economists expect a Fed hike in September, completely dismissing a July hike, as this Great Graphic illustrates.  A December hike is more likely to occur as noted by 15% of the survey participants. 

    Last month the survey found 72% expected the hike in September, and 9% favored December.  None of the respondents thought the Fed would wait until 2016 to raise rates, which is a first for this year's surveys.

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  • It came as no surprise that Greece would get more ELA from the ECB.

    The ECB Leaves Policy Unchanged, but Greece Gets More ELA

    The ECB left policy unchanged.  The economic assessment was unchanged, in line with the staff forecasts made last month.  The asset purchases continue to go smoothly.  Inflation bottomed earlier this year, and it expects to remain low over the next several months before rising later in the year.  He saw the recent drop in oil prices as boosting the purchasing power of consumers, but did not link it to new pressure on headline inflation.  Both the supply and demand of credit has improved.

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  • The world's largest central banks are making their own path.

    Central Bank Monetary Policies Going Their Own Way

    The US dollar remains bid.  Yellen's comments and the Beige Book signal that the Federal Reserve is still on track to raise rates this year.  In contrast, as the Draghi will make clear today, the ECB is committed to completing its unorthodox easing. 

    Yesterday the Bank of Japan trimmed its inflation forecasts.  It no longer expects to hit its target until after 2018.  Many continue to expect the BOJ to provide more stimuli.  Derision met the news that China's GDP expanded by 7% last quarter.  Expect more stimuli from the PBOC.

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  • More Fed Governors join the 'hike rates this year' gang.

    Yellen Moves Yields

    Those regional Federal Reserve banks that want to hike the discount rate are gradually increasing.  Last month, the Richmond Fed joined four other regional Fed banks (Dallas, Kansas City, Philadelphia, and Cleveland). 

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  • The argument for easing monetary policy in China is getting louder.

    Is China Not Growing at its Potential Due to Monetary Policy?

    There is a debate going on about the appropriateness of monetary easing in China. Monetary policy was excessively tight in 2014 but started loosening more meaningfully from late 2014, in an attempt to cushion slowing growth, facilitate rebalancing, support reform, and mitigate financial risk. This shift in policy stance was warranted, desirable and it will serve the economy well in the short and long term.

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  • The IMF regularly reviews the US Federal Reserve.

    The IMF's Review of the US Fed is Particularly Critical

    In a normal review of the US, the IMF recently called on the Federal Reserve to drop its dot-plot tool and replace it with a single staff forecast, like the ECB.  We too have been critical of the individual macroeconomic forecasts and appropriate level of Fed funds.  We think it is a particularly noisy channel of Fed communication. 

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  • There is a need for fiscal policy as monetary policy cannot cure all ills.

    Pushing the Monetary Policy Envelope

    In a recent address to the Economic Society of Australia, the Reserve Bank Governor Glenn Stevens hit the nail on the head when he remarked, “monetary policy alone can’t deliver everything we need and expecting too much from it can lead, in time, to much bigger problems.”

    What was particularly important in this address was the (implicit) suggestion that the answer goes hand in hand with another question; what should we expect from fiscal policy?

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  • New data suggests that the BOE may raise rates earlier than expected.

    Does the Fed or BOE Blink First and Raise Rates?

    A week ago, the UK reported a largest than expected rise in average weekly earnings for the three months through April.  The 2.7% rise is the highest in four years.

    It followed a revised 2.3% increase in March, originally reported at 1.9%.  Recall that last June average weekly earnings had actually fallen by 0.2% on a three-month year-over-year basis.

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