Global monetary policy and the Fed: vive la difference

 

Mr Bernanke insists his stimulus programme is tied to economic conditions

The Fed is not going to be spooked out of its exit strategy by a few weeks of market jitters. That was one clear message on Wednesday from Chairman Ben Bernanke.

Another unspoken lesson was that from now on countries with different economies are going to need to have different monetary policies as well.

That is why investors bought fistfuls of dollars after the Chairman spoke, even as they sold pretty much everything else. It may take a long time for monetary policy to get 'back to normal' - but today's best guess is that America will get there before anyone else.

It sounds obvious, that countries in different stages of economic recovery should get different monetary policies to match. But in the past few years the major advanced economies' monetary policies have been pretty similar; certainly a lot more similar than their recoveries. With the partial exception of the European Central Bank, they have all, in Ben Bernanke's phrase, had their feet firmly on the gas.

He has now confirmed that he does not expect that to be true in six months' time. By then, he suggested, the central bank of the world's largest economy expects to be starting to inject less money into the markets each month, with the quantitative easing (QE) programme finishing entirely by the summer of 2014. (The market term for the first stage is "tapering" - but, as far as I can see, in all the fuss the word 'taper' has not crossed Ben Bernanke's lips.)

Two things to note about that timetable. First, it's only part one. The end of new asset purchases doesn't mean a higher official interest rate right away.

The new FOMC forecasts show that 15 out of 19 members of the Fed's policy committee expect the first rate rise to be 2015 or later. And even a rise of one percentage point would still leave interest rates at a historically low rate. It would not be "normality'.

The second key point, repeated again and again by Chairman Bernanke, is that the path to the end of QE is "economically dependent". It depends on the recovery continuing, despite this year's federal budget cuts. And it depends on the unemployment rate continuing to fall, from 7.6% now to around 7% next summer, and 6% or 6.5% in 2015..

To state the obvious - none of that is anything like a sure thing. But the biggest wild card of all may well be inflation.

The Fed's preferred measure of US inflation is now running at an annual rate of just 1.05% - the lowest in 50 years. If, at the end of the year, that number doesn't look like it is heading back to the Fed's target of 2%, the FOMC will not be happy toning down QE.

So, there are good reasons to think the Fed's exit might turn out to be even slower than planned.

But if events do unfold roughly as the US central bank expects, we found out today that the Fed's foot could be off the accelerator within a year.

The world's other central banks are about to re-learn the true meaning of central bank independence. It's hard enough to be independent of government. Now they also have to be independent of the Fed.

 
Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

So it's goodbye from me

After 11 years at the BBC, I'm leaving for a new role in the City.

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  • rate this
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    Comment number 104.

    @88 sieuarlu
    Possibly in the US although I doubt that. Certainly not in UK. Any weakening of the Govt debt via inflation can only be done to any great extent by asset acquisition by more debt.

    The inflation, in the meantime, however leads to bigger Benefits bills, greater costs, more stagnation leading to more unemployment leading to yet bigger Benefits payouts, greater borrowing & bigger debt

  • rate this
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    Comment number 103.

    101.sieuarlu

    I don't think you have done the sums!

    The banks are multiply trillions in a hole with non-performing debt or debt that will be non-performing as soon as rates rise - WHICH THEY HAVE TO DO for Capitalism to recover.

    This debt and the secured assets related to it must be sold off in a fire sale - that is the banks MUST go bankrupt properly - they are now, but still being propped up.

  • rate this
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    Comment number 102.

    @97 sieuarlu
    Not so in the UK. Our inflation comes from taxation on top of rising oil, gas & electricity prices, weakening currency raising costs of imports, especially food and other increased taxes & costs, such as postage, rail & bus fares.

    At the moment there are plenty of goods and in some cases not ENOUGH money chasing them.

  • rate this
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    Comment number 101.

    99"The debt must be expunged"

    Its neither possible nor desirable.US debt is the real world currency.US Treasury obligations are traded every second of every day all over the world.It is the most trusted asset there is, even more than gold.That's because if the US economy that backs it up fails, there won't be much of the rest of the world anyway.Money managers take this fact of life as gospel.

  • rate this
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    Comment number 100.

    98"When are the Fed going to start tackling the rising US debt of, currently $16.5 trillion"

    I's not their job, they have no power over the debt.That's the function of lawmakers, Congress and the President.The FED is a fine tweaker that acts by raising and lowering short term interest rates they charge banks and other mechanisms.Treasury has the real clout.It can print as much as it cares to.

  • rate this
    -1

    Comment number 99.

    The debt must be expunged - we must collapse the financial system as we cannot possible afford to bail it out.

    We have to recognise that it is a busted flush that we cannot recover or save.

    BANKRUPTCY (and a fire sale) is the only way forward.

    We must rid the future of the errors of the recent past.

    Until this deleveraging takes place we cannot re-start trade or money's rational price.

  • rate this
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    Comment number 98.

    When are the Fed going to start tackling the rising US debt of, currently $16.5 trillion.
    When we see this reducing then it will be clear that progress is being made before it becomes mathematically impossible to do so.

  • rate this
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    Comment number 97.

    Inflation means money supply is growing faster than the economy. There's more currency units chasing relatively fewer goods & services driving the prices of them up.Money is easier to come by.Old expensive debt can be paid back with newer cheaper currency and more is left over for business expansion, capital investment, consumer purchases.If under control it's very desirable.3% OK ,2% is too low.

  • rate this
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    Comment number 96.

    94 Inflation is not a solution, it's one possible consequence of overextended credit that can't be paid back.The alternative is default, deflation, recession, depression.That's where the US was and is escaping from.Europe remains there and will stay there as long as the ECB retains it tight money policy to protect lenders.

    Am I afraid of inflation? Hardly, I'm counting on it.It's long overdue.

  • rate this
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    Comment number 95.

    US capitalism needs interest rate hikes to discipline China. They're coming.

  • rate this
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    Comment number 94.

    93

    I agree that inflation does not just happen. It has a variety of causes. However, it must not be marketed as a solution as it could be described as the Fifth Horseman.

    What is needed is a return to honest fundamentals where money has a true value. No doubt there will be some inflation as a consequence of such a policy but the rationale is different as it seeks a true prosperity.

  • rate this
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    Comment number 93.

    90 Inflation has winners & losers.Winners are those who borrowed money at low fixed interest rates and will get an inflation adjusted income.Losers are those who loaned money at fixed rates or are on fixed incomes.Inflation isn't the cause of economic & social crisis, it's a result of mismanagement by deregulating and reckless speculation or govt overspending.Flip side is the depression we're in.

  • rate this
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    Comment number 92.

    Do people like Bernanke, Geitner, Greenspan know what they're doing with their hands on the helm and tiller of the US economy?NO! They advocated legislation that led to recreate the same conditions as in the 1920s that led to the great depression with the same result. Deregulation led to easy credit, fueled a huge speculative bubble market in an asset class where the asset was the only collateral.

  • rate this
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    Comment number 91.

    Projections of what will happen are notoriously inaccurate.The smartest economists know they can't really foresee the future.For example they haven't foreseen the problems in Turkey or Brazil.Will these have dire consequences for those economies? Nobody knows.Projections for China's perpetual growth at recent rates are ludicrous but they just keep coming.India and China have bleak outlooks.

  • rate this
    +1

    Comment number 90.

    Those arguing for inflation should be careful. Those of us who were around forty years ago saw the destructive forces that inflation can ignite causing both economic and social crises.

    What we need is stability to put our economic and commercial methodologies back into order so that it is possible for honest people to make an honest and decent living.

    Anything else is a waste of time .

  • rate this
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    Comment number 89.

    Inflation has to rise eventually. For those people who wished the cheap money, they got what they wanted but they didn't look into the T&C.

    "Be careful what you wish for"

  • rate this
    -1

    Comment number 88.

    The FED needs to keep pumping money into the economy until we start to see some inflation.That's been the path out of every economic downturn since the great depression of the 1930s.By increasing the money supply the value of money and past fixed rate debt goes down while the value of goods and services goes up.This means escape from past debt and money for business expansion, personal wealth

  • rate this
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    Comment number 87.

    US economy lost $5TN to $10TN in RE equity, credit that IS part of the money supply even if it doesn't say so in Samuelson's or Friedman's texts.Printing money was the only way to replace it and get the economy back on track.It's been too little too slowly but it is happening.Meanwhile energy independence, robotic factories, insourcing are game changers.US will not bail out others this time

  • rate this
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    Comment number 86.

    "Another unspoken lesson was that from now on countries with different economies are going to need to have different monetary policies as well."

    That would require the end of the Euro.Germans will resist QE which would devalue their purchasing power, the PIIGS and other failed EZ economies need it desperately to have any chance of survival.Euro was a particularly dumb idea even by EU standards.

  • rate this
    +1

    Comment number 85.

    SF suggets "The Fed is not going to be spooked out of its exit strategy... one clear message on Wednesday from Chairman Ben Bernanke." ..."the biggest wild card of all may well be inflation." (S.Flanders.) Juxtaposed with the UK "debt has now risen to 75.29% of gross domestic product (GDP) up from 71.1% of GDP at the end of May 2012. My prophecy "inflation will rise"

 

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