By Craig Torres, Jeff Black & Chris Anstey - Jul 31, 2013 8:00 AM GMT+0400
The success of the next Federal Reserve chairman, be it Janet Yellen, Lawrence Summers or someone else, will depend less on their grounding in monetary policy orthodoxy than on their readiness to reach beyond it.
That flexibility defines the leaders of the world’s principal central banks: the Federal Reserve, theEuropean Central Bank and the Bank of Japan. All three responded to economic shocks by casting off institutional dogma and broadening their missions.
At the Federal Reserve, Chairman Ben S. Bernanke engineered the most unconventional experiment in U.S. monetary-policy history using trillions of dollars in direct bond purchases to lower long-term interest rates and expanding the central bank’s role as lender of last resort. Photographer: Tomohiro Ohsumi/Bloomberg
At the Fed, Chairman Ben S. Bernanke engineered the most unconventional experiment in U.S. monetary-policy history using trillions of dollars in direct bond purchases to lower long-term interest rates and expanding the central bank’s role as lender of last resort. The ECB’s Mario Draghi pushed the central bank’s goals beyond narrow price stability, pledging unlimited support to countries that sign up for fiscal restructuring. BOJ Governor Haruhiko Kuroda set out to double Japan’s monetary base to end two decades of stagnation.
“The unconventional policy is going to have to become conventional,” said Adam Posen, former Bank of England Monetary Policy Committee member who is now president of the Peterson Institute for International Economics in Washington. “Central banks are going to have to act on a wide range of assets and directly in credit markets. It is a very different world.”
Bernanke, 59, was the first to break the mold. At the start of 2009, when the U.S. economy was contracting at a 5.3 percent annual rate, the Fed chairman was preparing a step no one had taken before: more than $1 trillion of mortgage-backed securities purchases to keep credit flowing to housing markets.
In 2008, the Fed chairman had seen the financial crisis spread beyond the banking system to financial companies and securities markets. He opened special facilities to lend to U.S. government bond brokers, buy the commercial paper of U.S. corporations and banks and finance the securitized loans to students, car buyers, small businesses and credit card borrowers. Having cut the benchmark lending rate to zero by December 2008, Bernanke turned to a new approach, expanding direct bond purchases in 2009 to keep long-term rates low.
“What was incredible to me, and still even carries weight with me today, is the rapidity with which he and the broader Fed architecture moved from seeing the world from a traditional lens to the full unconventional slate of tools,” said Michael Gapen, who was then a section chief in the Fed’s Division of Monetary Affairs and is now senior U.S. economist at Barclays Plc in New York. “You are talking about a 60-day period where Bernanke turned the institution on its head and started thinking in an extremely unconventional world.”
Former Federal Reserve Chairman Alan Greenspan said in an interview that taking bold action as a central bank looks easier than it is. Central banks are creatures of legislatures, which can be suspicious of extraordinary actions, and financial markets can react in unexpected ways, he said.
Greenspan said there is an unspoken consensus about keeping in the bounds of orthodox policy that is difficult for any central banker to violate.
“If we are right, but the consensus is wrong, we are tolerated,” Greenspan said. “If we are wrong, and the consensus is right, we get pilloried. So there is an acute bias to staying with short-term policy and that is what limits the range of action.”
Sweden’s Riksbank, one of the pioneers of central bank innovation as early as the 1990s with its communications and inflation targeting regime, has lately struggled with providing more stimulus out of concern it might inflate a credit bubble. The 12-month inflation rate measured by a consumer price index was below the central bank’s 2 percent target for all of 2012, and has been negative for the last three months. Unemployment (SWUERATE) over the past year has averaged about 8 percent, while the Rikbank’s benchmark interest rate has fallen just a half percentage point to 1 percent.
“I’ve never seen as much criticism against the Riksbank as we’re seeing right now,” Robert Bergqvist, chief economist at SEB AB in Stockholm and former head of research at the central bank, said in an interview. “The market believes the bank will be unsuccessful in getting inflation back to 2 percent,” he said, referring to a survey conducted by SEB.
Bernanke approached the financial crisis by expanding the lender-of-last-resort authority to include loans to institutions other than banks because stabilizing financial markets would create conditions to allow him to pursue his mandate to foster full employment and stable prices.
The European Central Bank, which by statute is responsible for pursuing low and stable inflation, faced the same sort of choice as the fiscal crisis swept across Europe in 2010 and began to threaten the entire euro project.
Former ECB President Jean-Claude Trichet defended the inflation mandate, raising interest rates twice in 2011, even while offering unlimited liquidity to banks across the region.
A more aggressive approach proved necessary as the crisis simmered for months. Draghi, Trichet’s successor, pushed the mission further by offering banks cash for longer than ever and pledging unlimited bond purchases for countries signing up for fiscal restructuring. Draghi, who took over the ECB in November 2011, is drawing fire from Germany’s Bundesbank for his willingness to stretch the rules. He credits the bond plan with preventing a euro breakup.
The BOJ’s Kuroda similarly abandoned the model of his predecessor, Masaaki Shirakawa, who had periodically expanded asset purchases in response to a weakening in the economic outlook or appreciation in the yen.
Kuroda, in an effort to revive credibility on price stability and growth, on April 4 unleashed a two-year program designed to double the monetary base, through purchases of securities dominated by government bonds.
“Shirakawa was convinced that deflation stemmed from weak demand and external forces, not monetary policy, whereas Kuroda sees monetary policy as the way to get out of deflation,” saidHiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo and a former BOJ official who’s unrelated to the ex-governor. “It’s possible that Kuroda could ease further if prices don’t rise, even if growth is solid -- it’s unlikely his predecessor would’ve done that.”
Both Summers and Yellen have likewise shown a readiness to embrace unconventional policies when confronting crises.
Summers was undersecretary for international affairs at the U.S. Treasury in 1994, as Mexico suffered a run on its dollar reserves after letting its currency slide. Faced with the risk of a Mexican default, a potential international crisis in financial markets, and congressional reluctance to increase U.S. aid, Summers and Treasury Secretary Robert Rubin tapped the Exchange Stabilization Fund, established in 1934 to promote orderly foreign exchange markets, for a $20 billion package to backstop Mexico.
Using the fund to backstop a foreign nation’s reserves had immediate political costs. Pressed by Representative Bernard Sanders, a Vermont independent who is now a U.S. senator, Congress eventually approved a law that made any use of the fund of more than $1 billion subject to lawmakers’ approval. Not using it might have had even higher costs as a default by Mexico might have spilled over into capital flight in other emerging markets, while also damaging U.S. growth. As it was, the limitation amendment expired in 1997.
“It without a doubt stabilized the Mexican economy, local financial markets and safeguarded deep exposures by U.S. corporations and investors,” said Lawrence Goodman, president for the Center for Financial Stability in New York, an independent research organization focused on financial markets. A default “would have had a profound impact on the U.S. economy.”
More recently, Summers, as director of the White House National Economic Council in 2009 and 2010, helped draft an $830 billion economic stimulus program and an unprecedented rescue of the auto industry.
Yellen’s role in the crisis entailed devising monetary policy for an expansion that hasn’t progressed fast enough to bring down the unemployment rate, which stood at 7.6 percent last month. She has a record of innovation as one of the architects of the Fed’s forward guidance on the short-term policy rate. Yellen also led the subcommittee that devised the publication of interest rate forecasts by policy makers for the first time in January 2012.
“Yellen is absolutely qualified as a macroeconomist dealing with monetary policy issues,” saidJohn Ryding, chief economist at RDQ Economics in New York who has worked at the Bank of England and the New York Fed. “But in terms of broader issues of flexibility in financial crisis and looking at how to get things done, I think Larry Summers more than has the edge there.”
Summers’s record suggests he wouldn’t hesitate to engage the White House, Congress or the Treasury in policies as he needed them. Such reach, though, could be risky if it involves the Fed in politics or credit policies that favor specific industries.
While both Summers and Yellen are “great academic economists,” Yellen would probably be more mindful of the Fed’s political independence, said Julia Coronado, chief economist for North America at BNP Paribas in New York and a former member of the Fed board staff.
“She has been dedicated to the institution for much of her professional life and believes deeply in the mission of the Fed and its independence,” Coronado said.
Every crisis requires central banks to balance policy innovation with public credibility. Too little action can create doubts about a central bank’s power and effectiveness, while too much action can bring raise suspicion of overreach.
“Reputation comes from being credible for a long time,” said Michael Bordo, director of the Center for Monetary and Financial History at Rutgers University in New Brunswick, New Jersey. “In crisis periods, the essence of central banking is to act decisively and boldly.”
By Jeff Kearns & Joshua Zumbrun - Jul 31, 2013 11:00 PM GMT+0400
The Federal Reserve said persistently low inflation could hamper the economic expansion and pledged to keep buying $85 billion in bonds every month.
“The committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington.
Federal Reserve Board Chairman Ben Bernanke in Washington, DC. Photographer: Win McNamee/Getty Images
Workers prepare to mount the side panel of a semi trailer to the frame at the Wabash National Corp. facility in Lafayette, Indiana. Photographer: Daniel Acker/Bloomberg
Policy makers left unchanged their commitment to hold the target interest rate near zero as long as the jobless rate remains above 6.5 percent and the outlook for inflation over one to two years doesn’t exceed 2.5 percent. Photographer: Tim Boyle/Bloomberg
Chairman Ben S. Bernanke and his colleagues are debating when employment gains will be sufficient to warrant tapering bond buying that has swelled the Fed’s balance sheet to a record $3.57 trillion. Some policy makers have said the purchases, aimed at fueling growth and reducing 7.6 percent unemployment, risk creating asset-price bubbles.
The statement contained no new language on the conditions for maintaining the current pace of asset purchases. The Fed repeated the pledge it has used since September that it will continue the purchases until the U.S. labor market outlook has improved substantially.
“The bottom line for the Fed is the downside risks for the economy are diminishing,” he said. “If price gains decelerate to the point they worry about deflation, that might give them some pause” on tapering.
Stocks remained higher and Treasuries pared losses after the statement. The Standard & Poor’s 500 Index rose 0.7 percent to 1,697.21 at 2:49 p.m. in New York. The yield on the 10-year Treasury note was 2.6 percent compared with 2.61 percent yesterday.
Price increases have stayed below the central bank’s 2 percent target for more than a year. Bernanke told lawmakers July 17 that low inflation poses a risk to the economy, and policy makers “will act as needed” to ensure it rises toward their goal.
St. Louis Fed President James Bullard dissented from the previous Fed statement, saying the committee should “signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings.” He didn’t dissent today.
The Fed statement’s new language on the risks of too-low inflation language may have been included in part to satisfy Bullard’s concerns after his dissent at the previous meeting, Vitner said.
The central bank said its bond purchases will remain divided between $45 billion a month ofTreasury securities and $40 billion a month of mortgage-backed securities. The Fed also will continue reinvesting securities as they mature.
Policy makers also left unchanged their commitment to hold the target interest rate near zero as long as the jobless rate remains above 6.5 percent and the outlook for inflation over one to two years doesn’t exceed 2.5 percent.
The Fed said that the economy “expanded at a modest pace during the first half of the year.” In the previous statement, it described the expansion as “moderate.”
Housing has been “strengthening, but mortgage rates have risen somewhat, and fiscal policy is restraining economic growth,” the Fed said in its statement.
Kansas City Fed President Esther George dissented for the fifth meeting in a row, continuing to cite concern record accommodation may create financial and economic imbalances and increase long-term inflation expectations.
Bernanke, 59, said on June 19 that the FOMC may start scaling down bond buying later this year and halt it around the middle of 2014 as long as the economy performs in line with the committee’s expectations.
In semi-annual testimony to Congress on July 17, Bernanke said the labor market is “improving gradually” and that asset purchases “could be reduced somewhat more quickly” if the economy improved faster than expected. At the same time, he said the current pace of purchases “could be maintained for longer” if the employment outlook worsens.
None of the 54 economists in a July 18-22 Bloomberg News survey said they expected the central bank to alter the pace of purchases today. Fifty percent forecast that the Fed will first reduce bond buying at its Sept. 17-18 gathering.
Policy makers concluded their meeting today after a Commerce Department report today showed the world’s largest economy expanded at a 1.7 percent annual rate in the second quarter, more than economists forecast, as companies accumulated inventories at a faster pace. Growth in the first quarter was revised down to a 1.1 percent rate.
The gain in second-quarter gross domestic product showed the economy is overcoming the drag created by an increase in the payroll tax that took effect in January as well as across-the-board federal budget cuts known as sequestration, which began in March.
Growth will quicken as the impact from budget cuts wanes, Bernanke said in his congressional testimony. FOMC participants growth of 2.3 percent to 2.6 percent this year. Given today’s GDP report, the economy would have to expand 3.2 percent in the second half to meet the lower end of Fed forecasts.
“We threw a pretty serious body blow to the economy this year in terms of the tax hikes and budget cuts,” said Josh Feinman, the New York-based global chief economist for Deutsche Asset & Wealth Management, which oversees $400 billion. “That’s taken a toll on growth in the first half of the year, and it’s going to have some lingering effects into the second half.”
A Labor Department report in two days may show that employers added 185,000 workers to payrolls in July and the jobless rate fell to 7.5 percent from 7.6 percent, according to the median forecasts in a Bloomberg survey of economists.
“There seems to be an increasing perception that the domestic economy is doing quite well,”Andrew Wilkinson, the chief economic strategist at Miller Tabak & Co. in New York, said before the FOMC statement. “That was really played out in payrolls.”
Payrolls have risen an average of 201,830 per month over the past six months. U.S. employers added 195,000 workers in June for a second straight month, the Labor Department said July 5, capping 12 months of advances above 100,000 for the longest such streak since May 2000.
At the same time, the jobless rate remains well above the Fed’s long-term unemployment forecast of 5.2 percent to 6 percent. Inflation is also lagging behind the Fed’s 2 percent goal: consumer prices rose 1 percent in May from a year earlier, according to an index followed by the Fed.
Borrowing costs have risen on speculation that an improving economy will prompt the Fed to taper bond buying.
The yield on the 10-year Treasury note soared to an almost two-year high of 2.75 percent on July 8 from 2.19 percent on June 18, the day before Bernanke said the Fed may consider reducing bond purchases this year if the economy performs in line with the central bank’s forecast. The yield rose yesterday 0.01 percentage point to 2.61 percent.
U.S. stocks have rallied amid better-than-estimated corporate earnings. The Standard & Poor’s 500 Index advanced 18 percent this year through yesterday.
Bernanke lowered the Fed’s target interest rate near zero in December 2008 and has since embarked on three rounds of asset purchases to spur a recovery from the deepest recession since the Great Depression and keep the economy expanding.
The third round of quantitative easing may mark Bernanke’s final stimulus campaign. His term as Fed chairman ends in January, and President Barack Obama said in an interview last month that Bernanke has been at the Fed “longer than he wanted.” Larry Summers, former director of Obama’s National Economic Council, and Fed Vice Chairman Janet Yellen are the top candidates to succeed him.
Speculation Fed purchases may slow has also lifted mortgage rates. The interest rate on a 30-year fixed home loan climbed to 4.31 percent last week, according to data compiled by Freddie Mac. The rate jumped a record 35 percent in 10 weeks ended July 11 to a two-year high of 4.51 percent, the data show.
The increase hasn’t derailed a housing-market rebound that has helped fuel economic growth. Sales of new homes rose in June to the highest level in five years, pointing to gains in residential construction that will support the expansion in the second half of the year.
The S&P/Case-Shiller index of home prices increased 12.2 percent in the 12 months through May, a report showed yesterday.
AvalonBay Communities Inc. (AVB), the second-largest U.S. apartment real estate investment trust by market value, exceeded analyst estimates in its second-quarter earnings report and said rental housing is showing “strong” fundamentals.
“The U.S. economy is better positioned for growth today than it has been at any time since the downturn,” Timothy Naughton, chief executive officer of the Arlington, Virginia-based company, said in a July 25 earnings call. “Growing confidence combined with significant improvements in consumer and corporate balance sheets are translating into stronger consumption and investment.”
The FOMC began its third round of so-called quantitative easing in September with $40 billion in monthly mortgage bond purchases, adding $45 billion in monthly Treasury purchases in December.
The central bank will probably buy a total $1.32 trillion in bonds under its current purchase program, according to the median estimate in the Bloomberg survey. It will probably halt the asset purchases in the second quarter of next year, according to half of the economists.
-- With assistance from Steve Matthews in Atlanta. Editors: James Tyson, Christopher Wellisz
The MSCI Asia Pacific Index of regional equities lost 0.4 percent by 1:16 p.m. in Tokyo, trimming the first monthly advance since April to 2.1 percent. India’s S&P BSE Sensex fell 1 percent and Japan’s Topix Index (TPX) slipped 0.6 percent while the Shanghai Composite Index rose 0.6 percent. Standard & Poor’s 500 Index futures were little changed. The won fell 0.7 percent as the ringgit headed for the weakest close since 2010 and the Australian dollar slid 0.4 percent. Gold climbed 0.5 percent.
The Topix, posting the biggest gain among the largest developed markets tracked by Bloomberg this year with a 33 percent advance, is up 0.5 percent this month, after retreating in June and May. Photographer: Kiyoshi Ota/Bloomberg
July 31 (Bloomberg) -- Jonathan Garner, Hong Kong-based chief Asia and emerging-market strategist at Morgan Stanley, talks about the economic outlooks for China and Japan, and his investment strategy. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
July 30 (Bloomberg) -- Mark Mobius, executive chairman of Templeton Emerging Markets Group, talks about the Chinese government's plans to reduce overcapacity, the outlook for Chinese and Asian markets, and investment strategy. He spoke with Bloomberg's Tony Jordan in Bangkok yesterday. (Source: Bloomberg)
July 29 (Bloomberg) -- Lewis Wan, Hong Kong-based chief investment officer at Pride Investments Group Ltd., talks about China stocks and his investment strategy. He speaks with Zeb Eckert on Bloomberg Television's "On the Move." (Source: Bloomberg)
July 29 (Bloomberg) -- Geoffrey Lewis, global market strategist at JPMorgan Asset Management, talks about China's economic outlook and financial market. Lewis also discusses Federal Reserve monetary policy. He speaks from Singapore with Zeb Eckert on Bloomberg Television's "On the Move." (Source: Bloomberg)
The Fed has indicated its $85 billion monthly bond purchases could be trimmed should the U.S. economy meet its forecasts, though Chairman Ben S. Bernanke has said there’s no fixed schedule for tapering stimulus. The government may say today that gross domestic product growth slowed last quarter, while employment data are also scheduled this week. Chinese President Xi Jinping pledged to stabilize growth while pursuing reforms, the official Xinhua News Agency said yesterday.
“The market will pore through every word in that statement,” Bob Van Munster, head of Australian equities at Tyndall Investment Management Ltd. in Sydney, which oversees about $21 billion, said by phone, referring to the Fed’s post-meeting announcement. “The overall message is we are coming to an end of quantitative easing but we are going to manage it according to the data that comes out.”
The Topix’s decline was led by utility shares on the busiest day of Japanese earnings with Panasonic Corp., Mitsubishi UFJ Financial Group Inc. and Honda Motor Co. among those reporting. Twelve of the 33 industry groups fell, with volume 20 percent below the 30-day intraday average. The gauge is headed for a 0.8 percent gain this month.
South Korea’s Kospi (KOSPI) Index fell 0.1 percent today, poised for a 2.7 percent advance in July, while Australia’s S&P/ASX 200 Index climbed 0.9 percent, rising for an eighth day in the longest stretch of gains since January. Indian stocks fell for a sixth day, the longest losing run in almost four months, led by losses in banks and consumer shares.
China will maintain steady second-half expansion amid “extremely complicated domestic and international conditions,” the Xinhua report said. The government is targeting 7.5 percent growth this year, a goal that could be under threat after a second quarterly slowdown. The central bank resumed its reverse repo operation yesterday for the first time since February to ease a cash squeeze in the money market.
The Shanghai Composite Index increased as property developers, cement companies and appliance makers rallied.China Vanke Co. and Poly Real Estate Group Co. advanced at least 5 percent. The gauge, which doubled in 10 months through August 2009 as the government poured $652 billion of stimulus into building roads, railways and housing, has tumbled about 43 percent from its high, destroying $748 billion in market value, data compiled by Bloomberg show.
Gross domestic product in the U.S. probably climbed 1 percent in the second quarter, after expanding 1.8 percent in the first three months of 2013, according to the median of 84 estimates compiled by Bloomberg. Payrolls data, to be released Aug. 2, will show employers added 185,000 workers in July, after increasing 195,000 in June, a separate survey shows. The jobless rate probably fell to 7.5 percent from 7.6 percent, according to economists’ projections.
The Bloomberg Dollar Index, which tracks the greenback against 10 major peers, was little changed at 1,026.90 after adding 0.3 percent yesterday to cut a 1.3 percent drop in July. The yen was steady at 98.04 per dollar, near a one-month closing high reached July 29, and was little changed at 130 per euro, after weakening 0.1 percent yesterday and gaining 0.4 percent July 29. The euro was little changed at $1.3258.
The ringgit slipped 0.7 percent to 3.2475 per dollar, bringing its drop in July to 2.7 percent, a third month of depreciation, after Fitch Ratings cut the nation’s credit outlook to negative from stable, citing rising debt levels.
The decline pushed the ringgit beyond the limits of the Bollinger band, signaling a reversal may be imminent, data compiled by Bloomberg show. That’s the biggest deviation in developing markets. Stochastic oscillators also showed the ringgit is oversold.
India’s rupee weakened 0.8 percent to 60.98 per dollar, sliding for a third day, according to data compiled by Bloomberg. The Reserve Bank of India Governor Duvvuri Subbarao held the keyinterest rate at 7.25 percent yesterday and said measures taken this month to tighten cash supply “will be rolled back” as the currency stabilizes.
The Australian dollar fell to 90.38 U.S. cents after sliding the most since June 19 yesterday. The currency is down 1.3 percent in July. Reserve Bank of Australia Governor Glenn Stevens said yesterday that inflation data may indicate there is room for cuts to benchmark borrowing costs. Traders saw a 95 percent chance that the RBA will cut its cash rate by 25 basis points, or 0.25 percentage point, at its Aug. 6 meeting, swaps data yesterday compiled by Bloomberg showed.
Industrial metals rose on the London Metal Exchange, with nickel adding 1.1 percent, copper gaining 0.9 percent and aluminum climbing 0.5 percent. Silver was up 0.8 percent.