Grand Central: Draghi and Praet Try to Show Resolve on Bond Purchases – Real Time Economics

The Wall Street Journal’s Daily Report on Global Central Banks for Friday, April 17, 2015:

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HILSENRATH’S TAKE: DRAGHI AND PRAET TRY TO SHOW RESOLVE ON BOND PURCHASES

Martin Leissl/Bloomberg News

Message to markets from the European Central Bank: It is not going wobbly on quantitative easing.

On a panel at the International Monetary Fund Thursday, ECB Executive Board member Peter Praet dismissed chatter in financial markets that the central bank might cut short its bond purchase program once inflation starts moving higher. It wasn’t discussed at the ECB meeting this week, Mr. Praet said, and he reminded listeners that the central bank’s policy statement says the program of 60 billion euros of purchases each month will continue until at least September 2016. The ideas of tapering purchases before then or the timing of the program’s end are “out of our mind,” he said.

Some policymakers such as Slovenian central banker Bostjan Jazbec and ECB executive board member Yves Mersch have signaled the program could end or slow down sooner if the inflation goal is reached more quickly than expected, an idea that has gotten wind in markets of late.  But the ECB’s top brass is pushing back hard against the idea. ECB President Mario Draghi earlier in the week also dismissed it.

This week’s rhetoric from top ECB officials is an example of central bankers trying to demonstrate resolve to shift market expectations about the economic outlook. All the way back in the late 1990s, Ben Bernanke – then a Princeton University economist – ridiculed Japanese policy makers for lacking the will to prevent a drift down into debilitating deflation. What the Japanese needed, he said, was a willingness to do whatever it takes to reach the goal. Former Fed Chairman Paul Volcker did the same thing – in the opposite direction – to get inflation down with crushingly high interest rates in the U.S. in the 1980s.

To convince investors the ECB is serious, Mr. Draghi and Mr. Praet know they need to show they are willing to follow-through on ECB programs. Bond market measures of inflation expectations in Europe haven’t moved much even with the launch of European quantitative easing, a sign investors aren’t giving them the benefit of the doubt. Now Greece appears once again on the verge of crisis. European policy makers are going to need heavy doses of both resolve and wisdom in the months ahead.

-By Jon Hilsenrath

MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD

Weak Economic Data Lowering Odds of Fed Rate Increase in June. A patch of soft economic data has created uncertainty inside the Federal Reserve about when to start raising short-term interest rates, reducing the probability of a move by midyear. Most Fed officials see the first-quarter growth slowdown as temporary, but they will need time to make sure a rebound is in store.

What Fed policy makers said Thursday:

Bloomberg News

Fischer Sees Signs of Pickup in U.S. Wages. U.S. wages may be starting to rise, a development that could help Fed officials feel more confident that sluggish U.S. inflation also will gain traction, Fed Vice Chairman Stanley Fischer said Thursday during an IMF/WSJ panel in Washington, D.C..  He also told CNBC the effect of the winter slowdown on the Fed’s policy decisions, depends on “how quickly we come out.”

Lockhart: Recent Weakness Calls for Caution on Rate Rises. “I think waiting a while longer improves the chances of seeing confirmation from incoming data that the economy is on the desired path,” Atlanta Fed President Dennis Mr. Lockhart said in a speech in West Palm Beach, Fla.

Mester: ‘Comfortable’ Raising Rates Soon If First-Quarter Slowdown Proves Transitory. “If it turns out that the incoming information shows that growth is regaining momentum after the first-quarter slowdown and more broadly supports my forecast, I would be comfortable with liftoff relatively soon,” Cleveland Fed President Loretta Mester said in a speech in New York. 

Rosengren: Conditions Not Yet Met to Support Rate Increases. Given the Fed’s current inflation and job market performance goals, “I do not think that either condition has been met” to support raising moving short-term rates off of their current near-zero levels, Boston Fed President Eric Rosengren said in the text of a speech delivered in London. He also said the dollar’s strength is crimping U.S. growth and may require the Fed to delay raising interest rates.

Alex Brandon/Associated Press

How Citadel and the Fed Crossed Paths Before the Hedge Fund Hired Bernanke. The news that former Fed Chairman Ben Bernanke will become a senior adviser to Citadel, the Chicago-based hedge fund, has renewed attention on the tendency of former regulators and economic policy makers to move to financial institutions once leaving office. Mr. Bernanke told the New York Times he was aware of such sensitivities and chose to go to Citadel, in part, because it “is not regulated by the Federal Reserve and I won’t be doing lobbying of any sort.” It’s true that Citadel is not directly regulated by the central bank, but here’s a quick tour of ways the Fed and Citadel have crossed paths in the past.

Fed Is Expected to Shift on Muni Bonds. In a change of heart, the Federal Reserve will allow big U.S. banks to use some municipal bonds to meet new rules aimed at ensuring they have enough cash during a financial-market meltdown, according to people familiar with the matter.

ECB’s Praet Says QE Will Not End Early. The European Central Bank’s bond-buying program will likely run at least until September 2016 as previously announced, its Chief Economist Peter Praet said Thursday. In announcing a sizable asset-purchase program and a specific time frame for its implementation, “we are very strongly confident, unfortunately, that is what will be needed,” Mr. Praet said during an IMF/WSJ panel discussion in Washington, D.C.. There aren’t discussions now about tapering bond purchases or a time to exit the program, he said.

Bloomberg News

Constancio: ECB Policy Needs to Stay Accommodative. ECB Vice President Vitor Constancio said Thursday the economic recovery in Europe remains “gradual and moderate,” underscoring the need for loose monetary policy in the eurozone for the foreseeable future.

Why did the ECB just expand the range of bonds for QE?  Is the ECB preempting difficulties in finding sufficient eligible bonds to fulfill the mandate of its government bond-buying program amid a world of ever decreasing yields? On Wednesday the central bank added new agencies to its list of issuers with bonds eligible for its monthly €60 billion ($63.79 billion) quantitative easing program. Beside government bonds, the expanded list of issuers includes government agencies and supranational institutions in the eurozone but so far don’t include corporates.

ECB’s Draghi Requested to Testify in Italian Court. A court in the southern Italian town of Trani has called on ECB President Mario Draghi to testify in a trial against ratings firm Standard & Poor’s and some of its employees, according to the lawyer of one of the plaintiffs who said there is no charge against Mr. Draghi nor any investigation involving him.

European Prices Fall for Fourth Month.  Consumer prices across the European Union fell for the fourth straight month in March, but at a slower rate, a sign that the threat of a slide into deflation is easing as central banks launched new stimulus measures and energy prices steady.

India’s Rajan Okay With Fed Move Toward Higher Rates. India’s central bank chief signaled Thursday he’s at peace with Fed interest rate increases when they arrive, despite past misgivings. “I don’t think we expect the Fed to remain on hold forever,” Reserve Bank of India Governor Raghuram Rajan said as part of a panel discussion in Washington. “At some point the Fed has to decide it’s appropriate and start moving. We have to adjust to that,” he said.

GRAPHIC CONTENT

Europe is Running Low on Children. Figures released by the European Union’s statistics agency on Thursday show the 28-nation bloc is running low on children. People aged under 15 years accounted for 18.6% of the population in 1994, but just 15.6% in 2014. Eurostat estimates the rate of decline will slow in the coming decades, but just 15% of the population will be children in 2050.

FORWARD GUIDANCE

FRIDAY

-World Bank Group and International Monetary Fund spring meetings in Washington. Follow the WSJ’s streaming coverage .

-7:30 a.m. EDT: Germany’s Schaeuble and ECB’s Weidmann speak in Washington, D.C.

-12:30 p.m., EDT, ECB’s Coeure appears on a panel at UBS event in Washington, D.C.

SATURDAY

-World Bank Group and International Monetary Fund spring meetings in Washington

-12:00 p.m. EDT, ECB’s Draghi holds a press conference in Washington, D.C.

-1:30 p.m. EDT: Bank of Mexico’s Carstens speaks at a press conference in Washington, D.C.

-1:30 p.m. EDT): Germany’s Schaeuble and ECB’s Weidmann speak in Washington, D.C.

SUNDAY

-World Bank Group and International Monetary Fund spring meetings in Washington

-1:30 p.m. EDT: BOJ’s Kuroda speaks to the Economic Club of Minnesota in Wayzata, Minn.

RESEARCH                                                                                                                                      

Watering a Lemon Tree: Heterogeneous Risk Taking and Monetary Policy Transmission. “We…show that monetary policy can become less effective than desired in stimulating output due to a feedback between the deterioration of asset quality and the reduction of loan demand elasticity,” Dong Beom Choi, Thomas M. Eisenbach and Tanju Yorulmazer wrote in a New York Fed staff report. 

COMMENTARY

A Grexit Might Be Good for the Euro. “So here’s an interesting question for all those participating in the crowded trade to beat up on the euro: Would the world love the common currency more, or less, the day after Grexit?” Mark Gilbert writes in a Bloomberg View column. “Might the departure of the weakest member actually be good for the euro’s value? The law of unintended consequences could kick in, sparking a wave of contagion as traders start to speculate against other euro members by driving their bond yields higher. Or it could prove cathartic, excising the weakest member of the euro gang and restoring stability to the monetary union project.”

BASIS POINTS

Chile’s central bank left its monetary policy rate unchanged at 3.0% on Thursday, as economic growth remains anemic while inflation remains above the central bank target range.

Vladimir Putin said Russia has seen the worst of the economic troubles caused by Western sanctions and plunging oil prices, striking an upbeat tone in his annual call-in program.

India’s top central banker, Raghuram Rajan, has been given extra security as police investigate a threatening email that was sent to him. While a Mumbai police official would not elaborate on the content of the email Thursday, he said there was a good chance it was a hoax.

Earnings for British workers continued to rise in February amid falling unemployment, providing a lift to living standards that comes as welcome news for Prime Minister David Cameron less than three weeks before a closely fought general election — Dow Jones Newswires.

Happy 47th birthday to the Central Bank of Malta, established on April 17, 1968.

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17 April 2015 | 11:08 am – Source: blogs.wsj.com

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