The Federal Reserve speaks: Fearful symmetry

May 1st 2013, 21:45 by G.I. | WASHINGTON, D.C.

THE Federal Reserve, as widely expected, stood pat today, reaffirming its commitment to near zero interest rates until unemployment fell to 6.5% or lower, and continuing to buy $85 billion of Treasury and mortgage-backed bonds until the jobs market improved substantially.

But its otherwise ho-hum statement jolted markets with this new line: “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.”

How Mrs Thatcher smashed the Keynesian consensus

Apr 9th 2013, 14:13 by G.I. | WASHINGTON, D.C.

[Greg Ip] In March 1981, 364 eminent British economists published a letter to Margaret Thatcher in The Times condemning her plans to hike taxes even as her monetarist attack on inflation plunged the economy ever deeper into recession. The signatories wrote:

There is no basis in economic theory or supporting evidence for the Government’s belief that by deflating demand they will bring inflation permanently under control and thereby induce an automatic recovery in output and employment … [P]resent politics will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.

Kill bill

Will the deficit finally spur America to replace dollar bills with coins?

Mar 16th 2013 | Washington, DC |From the print edition
[Greg Ip] EARLIER this year the blogosphere was full of calls for America to pay its bills by minting a $1 trillion platinum coin. That idea has mercifully died, but the fiscal pressures that gave birth to it have provided the impetus for a less nutty variant: phasing out the dollar bill in favour of a dollar coin.

What QE means for the world: Positive-sum currency wars

Feb 14th 2013, 23:24 by G.I. | WASHINGTON, D.C.

Brazil’s finance minister coined the term “currency wars” in 2010 to describe how the Federal Reserve’s quantitative easing was pushing up other countries’ currencies. Headline writers and policy makers have resurrected the phrase to describe the Japanese government and central bank’s pursuit of a much more aggressive monetary policy, motivated in part by the strength of the yen.

The clear implication of the term “war” is that these policies are zero-sum games: America and Japan are trying to push down their currencies to boost exports and limit imports, and thereby divert demand from their trading partners to themselves. Currency warriors regularly invoke the 1930s as a cautionary tale. In their retelling, countries that abandoned the gold standard enjoyed a de facto devaluation, luring others into beggar-thy-neighbor devaluations that sucked the world into vortex of protectionism and economic self-destruction.

But as our leader this week argues, this story fundamentally misrepresents what is going on now, and as I will argue below, what went on in the 1930s. To understand why, consider how monetary policy influences the trade balance and the exchange rate.

The global economy: Phoney currency wars

The world should welcome the monetary assertiveness of Japan and America

Feb 16th 2013 |From the print edition
OFFICIALS from the world’s biggest economies meet on February 15th-16th in Moscow on a mission to avert war. Not one with bombs and bullets, but a “currency war”. Finance ministers and central bankers worry that their peers in the G20 will devalue their currencies to boost exports and grow their economies at their neighbours’ expense.

Emerging economies, led by Brazil, first accused America of instigating a currency war in 2010 when the Federal Reserve bought heaps of bonds with newly created money. That “quantitative easing” (QE) made investors flood into emerging markets in search of better returns, lifting their exchange rates. Now those charges are being levelled at Japan. Shinzo Abe, the new prime minister, has promised bold stimulus to restart growth and vanquish deflation. He has also called for a weaker yen to bolster exports; it has duly fallen by 16% against the dollar and 19% against the euro since the end of September (when it was clear that Mr Abe was heading for power).

The economics of the platinum coin option: Platinomics

Jan 9th 2013, 4:04 by G.I. | WASHINGTON, D.C.

In the many years I’ve spent scrutinizing monetary policy, I had never devoted more than a thought to coins. In the scheme of all things monetary, they seemed, well, pocket change.

Needless to say, the prospect of the Treasury issuing a $1 trillion platinum coin to circumvent the debt ceiling changes that. I won’t repeat the details; you can get up to speed by reading Matthew O’Brien of The Atlantic here and my colleague here. If nothing else, unpicking the consequences is a fun exercise. I’ve concluded the economics are more complicated and more benign than appreciated, but the political consequences are graver.

The Fed’s new thresholds: The mandate is willing but the tools are weak

Dec 13th 2012, 2:00 by G.I. | WASHINGTON, D.C.

[Greg Ip] Low inflation and full employment have been statutory goals of the Federal Reserve since 1977, but its officials always felt more comfortable with the first than the second. After all, in theory monetary policy can’t alter unemployment in the long run.

But the stubbornly weak economy of recent years prompted some at the Fed to question their historical neglect of the second half of their mandate. “The Fed’s dual mandate … has the force of law behind it,” Charlie Evans, president of the Federal Reserve Bank of Chicago, said in September, 2011.  “So, if 5% inflation would have our hair on fire, so should 9% unemployment.”

Monetary policy, the unintended consequences: QE through the looking glass

Nov 29th 2012, 21:37 by G.I. | WASHINGTON, D.C.

Even if you follow central banking, you may not have heard much about Jeremy Stein. He’s a highly regarded finance economist from Harvard University who became a governor this year, and since then he has given only one speech. But judging by the contents of that speech, Mr Stein’s profile seems bound to grow.

The subject of the speech was the Fed’s large scale asset purchases (LSAPs), colloquially known as quantitative easing (QE). It had none of the tantalizing hints about coming Fed actions that attract headlines. Rather, it mucked about in dark, abstruse corners of corporate finance, devoting three of its 19 pages to academic references.

Free exchange: The mystery of Jackson Hole

Central bankers wonder why success eludes them

Sep 8th 2012 | from the print edition

[Greg Ip] IMAGINE that the world’s best specialists in a particular disease have convened to study a serious and intractable case. They offer competing diagnoses and treatments. Yet preying on their minds is a discomfiting fact: nothing they have done has worked, and they don’t know why. That sums up the atmosphere at the annual economic symposium in Jackson Hole, Wyoming, convened by the Federal Reserve Bank of Kansas City and attended by central bankers and economists from around the world*. Near the end Donald Kohn, who retired in 2010 after 40 years with the Fed, asked: “What’s holding the economy back [despite] such accommodative monetary policy for so long?” There was no lack of theories. But, as Mr Kohn admitted, none is entirely satisfying.

The ECB’s new bond purchase programme: Not too little, possibly too late

Sep 6th 2012, 15:23 by G.I. | WASHINGTON

[Greg Ip]

SINCE the euro crisis erupted, the European Central Bank has been torn between its legal and philosophical aversion to financing governments and its duty as lender of last resort. Today, it appears to have reconciled the two, erring on the side of the latter.

At the end of its governing council meeting today, the ECB announced the much-anticipated details of how it would resume intervening in the region’s government bond markets. Using its newly christened Outright Monetary Transactions (OMT), it will buy sovereign bonds of one- to three-year maturity, provided the issuing country has agreed to a fiscal adjustment programme with either the European Financial Stability Facility, or its successor, the European Stability Mechanism.