No major changes in the Fed’s press release.
The tone on macroeconomics is reassuring. The poor growth figure for the first quarter had no impact on members of the Monetary Policy Committee.
The amount of asset purchases has been lowered by $ 10 billion and is now set at $ 45 billion. It’s the fourth reduction in a row.
The last point is the rallying Narayana Kocherlakota. Janet Yellen now enjoys unanimity.
The differences between press releases in March and April are presented in this NY Times article to read here. http://www.nytimes.com/interactive/2014/04/30/business/decoding-the-feds-statement.html
The inflation rate for the euro area in April is expected tomorrow, Wednesday 30. After the weak figure of 0.5% in March a slight increase is expected (0.8%).
This number will remain well below the 2% target. In other words, the ECB monetary policy is poorly calibrated to the objective which the ECB has set itself. A convergence towards this target is not expected before many months (the ECB’s forecast is only 1.5% in 2016).
It is because of this last point, the adequacy of monetary policy, that we should expect a change in the ECB monetary policy, not the April figure which has an anecdotal side.
Otherwise it is very disturbing.
In September 1992 during the European Monetary System crisis, the Spanish Peseta was devalued by 32% vis-a-vis the Deutsch-mark while the French Franc’s exchange rate remained stable. This situation was the source of tensions between French and Spanish producers. The increased competitiveness of Spanish products was a source of fragility in France, mainly in the south.
Last Thursday I was at a dinner in the south of France, in Narbonne with business leaders and the recrimination was the same. Due to reforms in Spain, Unit Labor Costs’ indices (ULC) do not have the same profile on each side of the Pyrenees. We can notice this point on the chart, below. In Spain at the end of 2013, the index is 17% lower than it was in the first half of 2008. In France, it is just 2.5% lower than more than 5 years ago. (All these measures are corrected for inflation). The divergence is striking and the change in competitiveness conditions can clearly be perceived. Continue reading
Indebtedness and deflation do not go well together.
I spoke about this issue a few weeks ago (see here in French) and Paul Krugman made a post on his blog this week-end (see here). Lars Svensson, speaking on Sweden, has interesting arguments on this issue. They can change our view on ECB strategy.
Indebtedness and deflation
The issue is quite simple: when there is deflation, the real value of indebtedness increases, leading to new arbitrages in households’ budget.
The higher the indebtedness, the stronger are the impact and the arbitrages. Moreover, deflation periods are usually associated with low or negative wages growth. In other words, in this context, households have to reduce their expenditures in goods and services in order to fulfill their financial liabilities. Continue reading
2014 may well end up being summarized as having been an arm-wrestling match between Janet Yellen and Mario Draghi. Simply rereading the declarations of each would be sufficiently convincing of this. For the Chairperson of the Fed, the robustness of the American economy will lead to a reduction, meeting after meeting, of the volume of assets purchased. Then, next fall, when the number will have fallen to zero, the Fed will set a schedule (6 months?) to begin raising interest rates.
On this side of the Atlantic, the discourse is different. During the last monetary policy committee meeting, Council members unanimously considered that the ECB’s monetary policy was restrictive, even with a benchmark rate of 0.25%. Consequently, it was necessary to implement a more accommodating strategy.
The ECB confirmed this policy change during the semi-annual meeting with the IMF and World Bank in mid-April. It would initially lower its key interest rate, without giving any more details about a possible negative rate for deposits for the moment. The second phase would involve the purchase of financial assets with maturities up to 10 years. A very diverse range of assets would be purchased, primarily with long maturities to keep in line with the Eurozone’s financing arrangement. Continue reading
After this week-end speeches by Mario Draghi and Benoit Coeuré, a lower euro exchange rate is expected. They said that the ECB monetary policy will probably become more accommodative (see here my yesterday’s post). Such a move for the euro currency would be welcomed as it could be a boost for exporters and a trigger for production.
The current scenario on the Euro Area is that recovery will come from outside. Internal demand momentum is still weak and cannot drive a rapid growth recovery. A higher competitiveness could push exports higher, improving then the economic outlook via a spillover on production and demand. A weaker euro could also reduce the imported disinflation. That could limit risks for deflation. In other words, a weaker euro would have a lot of virtues.
Nevertheless, looking at the euro area situation, there are two opposite arguments on euro.
According to an FT article, this morning, the ECB is now ready to definitely change its mind on monetary policy. Mario Draghi gave insights during its last press conference. He said then that the current monetary policy stance was a constraint for the economic activity (risks are on the downside) and a drag for the inflation rate to converge to the 2% target.
There will be two steps. The first would be a drop in interest rates (no precision on the possibility of a negative deposit facility rate). The second step would be a sort of Quantitative Easing. The ECB could buy a large spectrum of financial assets up to maturities of 10 years.
There is no calendar but it will conditioned by inflation rates data. We have a hierarchy and the precision that the ECB could buy rather long term assets to be consistent with the financing mode in the Euro Area.
The FT article is here http://on.ft.com/1gUGRVk