The Wall Street Journal’s Daily Report on Global Central Banks for Monday, September 8, 2014:
BLACKSTONE ’S TAKE: A MIXED ECB VERDICT IN GERMANY AMID DIVERGENT ECONOMIC SIGNALS
The German judges’ scorecards are in regarding last week’s package of interest rate cuts and planned purchases of asset-backed securities and covered bank bonds by the European Central Bank.
And it looks like a split decision.
The president of Germany’s central bank opposed Thursday’s decision, because he preferred more time to gauge the effects of stimulus measures that were already in train before acting again.
But in an interview with German radio that aired Sunday, the country’s other ECB policymaker, executive board member Sabine Lautenschläger defended the decision.
“The low interest rates are justified,” said Ms. Lautenschläger, a former top Bundesbank official, citing economic weakness in the 18-member euro bloc.
It isn’t unheard of for Germany’s contingent on the ECB to see things differently.
Most famously, Mr. Weidmann railed against the bank’s decision two years ago to create an open-ended bond purchase plan, called Outright Monetary Transactions, and has maintained his opposition even though the facility has never been used and is credited with helping resolve the bloc’s debt crisis.
Ms. Lautenschläger’s predecessor, Jörg Asmussen, backed OMT and defended it publicly, even in testimony before Germany’s constitutional court. It’s harder for the six-member, Frankfurt-based executive board to stake out vastly different positions in public from ECB President Mario Draghi—just as it is for Federal Reserve Governors to do so in the U.S. (though Mr. Asmussen did dissent occasionally on rate cuts). The Bundesbank has a freer hand in that respect.
More broadly, Germany’s economy itself is sending mixed signals. The economy shrank 0.6% annualized in the second quarter from the first, or 0.2% on a quarterly basis, but that was after strong first-quarter expansion of around 3% annualized.
Survey reports suggested a weak start to the third quarter, but hard data have held up pretty well. Industrial production jumped 1.9% on the month in July, the sharpest rise in over two years.
A report Monday showed German exports increased 4.7% in July from June. That propelled Europe’s largest economy to a trade surplus of EUR22.2 billion, well above economists’ forecasts. Taken together, the figures signal that annualized growth may be stronger than JPMorgan Chase’s forecast of 1.5% this quarter.
Whether the ECB’s decision last week was the correct one or not, German’s export-reliant economy should benefit further from the decline in the euro that appeared to be a primary goal of the latest stimulus measures
With Germany’s inflation rate at just 0.8%, far below the 2% level set by the ECB for the eurozone as a whole, it has little to fear from an outbreak of inflation.
And that may help Mr. Draghi ultimately win the deciding vote on his policies: German public opinion.
-By Brian Blackstone
MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD
Jobs Report Leaves Fed in No Hurry To Alter Views on Slack or Rates. The fact that unemployment hasn’t fallen since the July meeting —and that job growth slowed in August— suggests Federal Reserve officials won’t make big changes to the signal they’re sending about rates when they meet Sept. 16 and 17.
Fed Debate on Rate Guidance Heats Up. Fed officials are entering a deepening debate about the guidance they give the public about their interest-rate plans, an issue likely to get attention at their September meeting. Since March, the Fed has said it doesn’t expect to raise short-term interest rates from near zero for a “considerable time” after its bond purchases are completed. With that bond program on course to end in October, officials are contemplating how and when to alter the low-rate assurances. Some are uncomfortable with the vague commitment implied in the guidance to keep rates down over some undefined period and instead want guidance that reflects how the economy is performing.
August’s Job Gain Suggests A Tougher Path To Full Employment. Achieving what Fed officials view as the economy’s long-run unemployment rate may take longer in the wake of the release of the August employment report. According to a Federal Reserve Bank of Atlanta online tool, if the August payroll gain of 142,000 were sustained over coming months, it would take two years to get unemployment down from 6.1% in August to 5.5%.
Fed’s Rosengren: ‘Significant’ Slack Calls for ‘Patient’ Monetary Policy. Boston Fed President Eric Rosengren said Friday the central bank has seen enough progress on its employment and inflation goals to move toward a more data-driven policy outlook, although he added he sees no urgency to raise rates soon. “Significant slack remains, and thus monetary policy needs to be patient in removing stimulus,” he said.
Fed’s Plosser: Fed Should Raise Rate Rates “Sooner Rather Than Later.” “I am not suggesting that rates should necessarily be increased now,” Philadelphia Fed President Charles Plosser said in a speech Saturday. That said, preparing to raise interest rates sooner than many now expect “may allow us to increase rates more gradually as the data improve, rather than face the prospect of a more abrupt increase in rates to catch up with market forces, which could be the outcome of a prolonged delay in our willingness to act,” he said.
ECB Executive Board Member Lautenschlager Defends Rate Cut. The European Central Bank’s decision to reduce interest rates to record lows last week was necessary to prevent the risks of too-low inflation, the German member of the ECB’s six-member executive board said on Sunday. “The low interest rates are justified,” Sabine Lautenschlager said in an interview Sunday with radio broadcaster Deutschlandfunk. “The fact is that the growth we see in the euro zone as a whole is too moderate not to want to generate a growth spurt with low interest rates.” – Dow Jones newswires.
ECB’s Chief Economist Says Measures to “Buy Time.” The array of measures announced by the European Central Bank Thursday can only buy time and isn’t a substitute for countries to enact needed reforms, ECB Executive Board member Peter Praet said Friday. “We made very clear that monetary policy can only buy time and not solve the structural problems of our society,” he said.
Japan GDP Shrinks at Fastest Pace in More Than Five Years. Japan’s economy contracted in the second quarter at the fastest pace since 2009, dealing a blow to Prime Minister Shinzo Abe’s efforts to re-energize the economy with pro-growth steps. Revised data released Monday showed that the country’s gross domestic product contracted an annualized 7.1% in the April to June quarter from the previous three-month period as businesses as well as consumers retrenched after the government raised the sales tax.
Bad News Piles up for Japan’s Economy. Monday’s revelation that the Japanese economy shrank more than previously reported in the three months through June is showing how a sales-tax hike in April is taking a greater toll than at first hoped.
Kuroda Comments Spark Debate Over Weak Yen. Long an exporting powerhouse, Japan Inc. used to embrace a weakening of the yen with open arms, but with its industrial structure changing, there’s debate over whether a further fall in the yen could be too much of a good thing.
U.K. Pound Slumps After Scottish Independence Poll. The British pound plummeted to a near nine-month low Monday, while Scotland-focused stocks also fell, whacked by a poll over the weekend showing that the number of those favoring Scottish independence had eclipsed those opposing a split for the first time since the referendum campaign began. 5 Things to Consider Ahead of Scotland’s Independence Vote
Mexico’s Central Bank Holds Rates Steady. Mexico’s central bank on Friday said economic growth has improved in recent months, boosted by external demand, while the bank kept interest rates unchanged though inflation remains stubbornly above its target.
Hungary Central Bank To Buy Sour Bank Assets to Boost Lending. Hungary’s central bank is in the process of setting up an asset manager to buy banks’ non-performing loans and assets that turned sour due to the 2008 financial crisis. “This asset manager [entity] will be able to handle the problem of non-performing loans to a great degree so that banks’ funding costs would fall, their profitability increases, liquidity improves and willingness to take risks rises–with the result that lending would increase,” Adam Balog, deputy governor at the National Bank of Hungary said Friday in a speech — Dow Jones Newswires
Ebola’s economic toll on Africa is starting to emerge. The flow of goods across many African frontiers, from Congolese copper crossing the Botswana border to used cars driven into Nigeria, is seizing up on fears that traders could be carrying or catch the killer virus. The trade slowdown comes on top of a drop in tourism and the suspension of commercial flights to West African cities as well as Nairobi, a continental hub.
-ECB’s Nowotny speaks in Zurich at 1615 GMT
-Bank of Japan releases minutes of its Aug. 7-8 policy meeting at 8:50 a.m. local time
-ECB’s Liikanen speaks in Helsinki at 0930 GMT
-BOE’s Carney speaks in Liverpool at 1045 GMT
-Fed Gov. Tarullo testifies before the Senate Banking Committee in Washington on Dodd-Frank implementation at 10 a.m. EDT
-ECB’s Nowotny speaks in Hamburg at 1145 GMT
-National Bank of Hungary releases minutes of its Aug. 26 meeting at 1200 GMT
-ECB’s Praet speaks on panels in Milan at 1230 GMT and 1345 GMT
-BOE’s Carney, Shafik, Weale and Miles testify on inflation before the Treasury Select Committee at 1345 GMT
-ECB’s Mersch speaks in Frankfurt at 1500 GMT
-New Zealand’s central bank releases a policy statement at 9 a.m. local time
-The Philippines’ central bank releases a policy statement
-Indonesia’s central bank releases a policy statement
-ECB’s Lautenschläger speaks on a panel in Milan at 0645 GMT
-Serbia’s central bank releases a policy statement at 1000 GMT
-Central Bank of Brazil releases minutes of its Sept. 2-3 policy meeting
-ECB’s Cœuré speaks on panels in Milan at 1345 GMT and 1515 GMT
-ECB’s Draghi speaks in Milan at 1900 GMT
-Bank of Korea releases a policy statement
-Bank of Russia releases a policy statement at 0930 GMT
Fed Must Remain Vigilant For Financial Stability Risks: Paper. The Fed’s prolonged policy of low interest rates and asset buys has helped to ease financial conditions but also creates the risk of market bubbles that should keep policy makers on their toes, a new paper from two prominent Fed staffers says. Following the global financial crisis, central bank officials have increasingly recognized financial stability as the Fed’s unwritten third mandate – on top of its goals of keeping prices stable and employment humming. The findings from New York Fed economist Tobias Adrian and Nellie Liang, director of the Fed board’s Office of Financial Stability Policy and Research, reinforce that new focus.
Did Unemployment Benefits Boost Jobless Rate? Only Slightly, Fed Paper Says. The extension of unemployment benefits offered during and after the Great Recession had very little to do with boosting the jobless rate, a new Fed paper says. A number of economists, including some Fed officials, have argued the benefits extension to unprecedented levels — as much as 99 weeks in some states — may have dampened incentives for a proactive job search. However, economists Andrew Figura and Regis Barnichon find the data do not bear out that hypothesis.
How Much Money is the Fed Printing? Is the Fed indeed “printing money like crazy these days?” asks the St. Louis Fed’s FRED Blog. “The currency in circulation (technically called the currency component of M1) is indeed increasing, but there is no indication that it is accelerating.”
“There was a whiff of desperation about the announcement, which was reassuring,” the New York Times’s Paul Krugman writes about the ECB decision last week to cut interest rates and move toward launching an asset-purchase program. “Europe, which is doing worse than it did in the 1930s, is clearly in the grip of a deflationary vortex, and it’s good to know that the central bank understands that. But its epiphany may have come too late. It’s far from clear that the measures now on the table will be strong enough to reverse the downward spiral.”
The ECB “spent a long time being a noncombatant in the global currency wars,” Richard Barley writes in the Journal’s Heard on the Street column. “But it has decisively entered the fray as it seeks to boost its balance sheet by €1 trillion through fresh loans and securities purchases.”
Should the Federal Reserve choose to maintain its “megaportfolio” of bond investments over coming years, it will run the risk of being transformed by politicians into the U.S. equivalent of a sovereign wealth fund, writes David Malpass in The Wall Street Journal. Mr. Malpass, who served in the Reagan and George H.W. Bush administrations, urges the central bank to announce a “clear portfolio wind-down process” that would ensure it is able to concentrate on monetary policy rather than investment management.
Changes to the Federal Reserve’s institutional structure and the nature of the FOMC’s meetings are needed to guard against a repeat of the regulator’s failings in the run up to the financial crisis, write three Swarthmore College academics. They write that the Fed “was aware of potential problems brewing in the financial system, but was largely unconcerned by them” and gave little weight to dissenting views.
-Brazil’s inflation accelerated in August, pushing the 12-month rate above the ceiling of the central bank’s target range, mainly because of an increase in transportation prices.
-China’s weak demand for electronics parts and other goods made in Asian countries has economists scratching their heads.
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