Grand Central: Fed Could Face Tougher Inflation Questions In Days Ahead – Real Time Economics

The Wall Street Journal’s Daily Report on Global Central Banks for Monday, June 23, 2014:

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Here’s a question we in the press corps should ask Janet Yellen at her next press conference, or maybe some lawmaker should try at her semiannual testimony in July: Should the Fed have a memory?

The Fed’s preferred measure of inflation has run below its 2% objective for 24 straight months. When the Commerce Department releases its May reading of the personal consumption expenditure price index on Thursday, it will likely extend that streak to 25 months.

Should the central bank allow inflation to run above target for some time to make up for the long stretch it has been below target?

That’s a pertinent because the inflation terrain could be shifting on the Fed. The PCE price index was up 1.6% in April from a year earlier, an uptick from gains of 1.1% in March and 0.9% in February. Fed officials expected inflation to firm to 1.5% by year end. If the March trend holds it might already be there, begging all kinds of questions.

Ms. Yellen implied last week that if inflation moves to the 2% objective more quickly than the central bank expects, then it could raise short-term interest rates sooner than planned.

“If the economy proves to be stronger than anticipated by the Committee, resulting in a more rapid convergence of employment and inflation to the FOMC’s objectives, then increases in the federal funds rate target are likely to occur sooner and to be more rapid than currently envisaged,” she said.

But the Fed chairwoman also has implied the Fed will be patient about inflation as it approaches or even if it exceeds the target. She seems to see the mandate for patience encoded in the “balanced approach” officials say they’ll take in meeting their two objectives of low-steady inflation and maximum employment.

“If the distance from achieving an objective is particularly large, it would be consistent with the balanced approach that we would tolerate some movement in the opposite direction on the other objective,” she said. TRANSLATION: The Fed might let inflation drift above 2% for a time if unemployment is very high.

Does the long run of below-target inflation give the Fed even more time to act? Ms. Yellen hasn’t really addressed that question.

For now she doesn’t seem to think it’s a dilemma she’ll need to resolve.

“The recent evidence we have seen, abstracting from the noise, suggests that we are moving back gradually over time toward our 2% objective and I see things roughly in line with where we expected inflation to be,” she said.

That view could be tested Thursday.

-By Jon Hilsenrath


Citigroup Fights to Recover From ‘Stress Test’ Failure. Citigroup’s direction and Chief Executive Michael Corbat’s fate are, to a significant extent, in the hands of the Federal Reserve. The firm is prohibited from raising its dividend or increasing its stock buybacks, two investor-pleasing moves it was expected to make. Passing next year’s stress test has become an overriding focus for Mr. Corbat.

Will Fed Tolerate Inflation Above 2%? Do You Mean CPI or PCE? One of the biggest debates right now over the outlook for inflation is whether the Fed would allow inflation to overshoot its 2% target for some period of time. But the Fed’s choice of target is important. The Fed targets the personal consumption expenditures price index, not the better-known consumer price index. And PCE inflation is persistently lower than the CPI.

Fitch Report: Fed’s Reverse Repos Are Reshaping the Securities-Borrowing Market. Although it’s only in a testing phase, a Federal Reserve program aimed at improving central bank control over short-term interest rates is already reshaping the markets where dealers go to finance their bond-trading positions.

BOJ Says It’ll be Ready When It’s Time to Normalize Policy. Like the Fed, which has found that ending its extraordinary support for the U.S. economy requires patient planning and careful communication, the Bank of Japan is already preparing for the Day After.

BOJ Kuroda Sees CPI Falling Near 1% Over Summer Bank of Japan Gov. Haruhiko Kuroda said Monday that the nation’s embryonic inflation may hit a bump over the summer but will rise toward 2% after that, essentially rejecting speculation that a moderation in price increases near-term could spur the central bank to action – Dow Jones Newswires

IMF Girds for Market Storms Ahead. What’s one of the International Monetary Fund’s top priorities? Preparing the global economy for financial volatility as the Fed exits its easy money policies.

Euro-Zone Business Activity Slows in June. Business activity in the euro zone slowed for a second straight month in June, a sign that the recovery continued to be modest as France struggled to generate economic growth.

ECB Draghi: Need to See Deterioration of Inflation Expectations Over Medium Term Before QE. The European Central Bank needs to see inflation expectations in the euro zone deteriorate before embarking on large-scale asset purchases, its president said Saturday. Speaking in an interview with Dutch newspaper De Telegraaf, ECB President Mario Draghi said “a deterioration of inflation expectations over the medium term” would need to happen before the central bank would undertake quantitative easing.

ECB Likely to Keep Interest Rates Low Until 2016. The European Central Bank is unlikely to raise interest rates from record lows until 2016, when the euro-zone economic recovery gains pace, ECB Governing Council member Ewald Nowotny said in a newspaper interview.

Analysts Skeptical New ECB Loans Will Get to Firms in Need. Euro-zone banks are due to repay €12.6 billion in three-year loans this week, more than three times the €3.7 billion repaid last week. That banks are repaying the LTROs is noteworthy because the European Central Bank recently announced that it is unleashing an additional loan to euro-zone banks later this year. That means the ECB is providing more funds, even as banks are repaying loans early.

Nearly Third of Euro-Zone Banks May Have to Raise Capital. Nearly a third of Euro-zone banks think they may have to raise capital to weather upcoming stress tests, according to a poll by consultant Ernst & Young LLP. In an anonymous survey of 294 banks across Europe, 22 said they expect to have to raise capital following stress tests and 43 said they “may need to.” According to Ernst & Young, 30% of Euro-zone lenders couldn’t rule out capital raising, with 8% saying they believe they will likely have to. Banks in Germany are the most confident that they won’t have to go down this route, while banks in Spain are the least confident.

ECB Will Be Ready to Oversee Banks, Chief Supervisor Says. The European Central Bank faces an enormous task preparing for its new role of overseeing the euro zone’s most important lenders, but will have the new single supervisory mechanism ready by early November, chief banking supervisor Danièle Nouy said Monday.

ECB Says Fixing the Fix Won’t Fix FX. Changing the way that currencies benchmarks, or “fixes,” are calculated is an alluring idea for mending problems unearthed by the year-old investigation into the FX market. But the ECB says simply reforming the process used to set prices would not fix the issue.

Beijing’s Overhauls Get Short Shrift. Long-term economic overhauls that China’s leadership promised are taking a back seat to short-term needs as Beijing wrestles with a slowing economy and a foot-dragging bureaucracy. In the more-than-six months since the Communist Party announced the restructuring package, economic growth has slowed more quickly than leaders anticipated, prompting a series of stimulus measures.

Gauge of China’s Factory Activity Hits Seven-Month High. A gauge of China’s factory activity showed fresh signs of strength in June, pointing to improvement in the world’s second-largest economy as export demand improves and a government stimulus program takes hold.

Economists React: China’s Factories Back in Business.

U.K. Interest Rates Won’t Return to Precrisis Levels, Says BOE’s Haldane. Britons shouldn’t expect borrowing costs to rise to the levels that prevailed before the global financial crisis, and instead should accustom themselves to a “new normal” for the Bank of England’s benchmark interest rate of between 2% and 3%, the central bank’s new chief economist said in an interview published Saturday.

BOE Dove Says Time to Raise Rates Near. Britain’s recovery has become entrenched and the Bank of England should start to raise interest rates in the coming months to reflect the stronger economy, one of its most dovish policymakers said in The Daily Telegraph Monday.

Colombia Raises Rates, Doubles Forex Intervention. Colombia’s central bank raised its key lending rate for a third straight month Friday to cool an expanding economy and said it will aggressively increase its intervention in foreign exchange markets to get its currency to weaken against the dollar.

Mexican Central Bank Divided Over Rate Cut. The Bank of Mexico’s surprise decision to cut interest rates earlier this month came in a split decision, as several members of the board saw more risks than benefits to further lowering borrowing costs.

Move on Money-Market Rates Shows Philippines Intent on Tightening. The Philippine central bank’s decision to pay higher interest on its special deposit accounts—a tool it uses to control liquidity in the market – represents a change of direction for the Bangko Sentral ng Pilipinas, and an intensification of recent moves to tighten policy.

Central Bank Reserve Managers More Cautious as Fed Tapers. Central bank reserve managers across the world are ready to take a more cautious approach to investment as the U.S. Federal Reserve continues to reduce its monetary stimulus, with the full effect of such tapering still to be felt so far as demand for riskier assets is concerned.


Fed officials have consistently overestimated the U.S. economy’s strength for years. The downward-sloping evolution of the central bank’s forecasts for economic growth in 2014 is a case in point. This chart provides a look back at the central bank’s official forecast range for annual growth in 2014 since that year became part of the forecast horizon, in 2012, through last week’s meeting.



-ECB’s Mersch speaks at 1200 GMT

-Bank of Israel releases a policy statement at 4 p.m. local time

-ECB’s Nowotny speaks in Vienna at 1515 GMT


-BOE’s Carney, Bean, McCafferty and Miles present the inflation report to the Treasury Committee at 0830 GMT

-Philadelphia Fed President Plosser speaks about the economic outlook and monetary policy at the Economic Club of New York at 7:45 a.m. EDT

-ECB’s Nowotny speaks to Parliament at 1200 GMT

-National Bank of Hungary releases a policy statement after its rate-setting meeting at 1300 GMT

-ECB’s Coeure speaks in Frankfurt at 1350 GMT

-New York Fed President Dudley speaks at a CPA conference in San Juan, Puerto Rico, at 2 p.m. EDT

-San Francisco Fed President Williams speaks at Stanford Law School in San Francisco at 6:30 p.m. EDT

-Central Bank of the Republic of Turkey releases a policy statement


-ECB’s Linde speaks in Valencia at 1200 GMT

-ECB’s Weidmann speaks in Halle at 1300 GMT


-BOE’s Carney speaks as the bank releases its June 2014 Financial Stability Report at 0930 GMT

-Richmond Fed President Lacker speaks about investing in people as an economic growth strategy in Lynchburg, Va. at 8:30 a.m. EDT

-St. Louis Fed President Bullard speaks about monetary policy and income inequality at the Council on Foreign Relations in New York at 1:05 p.m. EDT

-Czech National Bank releases a policy statement


-The Bank of Thailand releases its monetary policy report


Student Debt Hurting Homeownership for Blacks More than Whites. Is student loan debt causing young adults to retreat from the housing market en masse? No, but it’s having some impact, and the debt burden appears to be hitting black borrowers harder than whites, says a recent paper from researchers Jason Houle of Dartmouth College and Lawrence Berger of the University of Wisconsin-Madison.


Fed Chairwoman Janet Yellen’s assurance that valuations are within “historical norms” isn’t overly reassuring, writes James Mackintosh for the Financial Times. Yellen’s “predecessor-but-one, Alan Greenspan, talked of ‘irrational exuberance’ in the stock market in 1996. The forward price-to-earnings ratio of the S&P 500 is now almost exactly where it was then.”

There’s evidence that U.K. property prices could be peaking, writes Alen Mattich for the Journal. “If that’s correct, the question then is whether prices stabilize at current levels or the market starts to buckle under the weight of its own excesses.”

Polish central bank Governor Marek Belka is Europe’s worst central banker, and he should be fired if he doesn’t resign, writes Mark Gilbert in a Bloomberg View column. “Central bank independence has to be sacrosanct, and has to be seen that way. Belka’s fellow central bankers should have a quiet word and persuade him to go.”

Although it is incomplete, and lacking common deposit insurance, the “half a banking union” that the European Union is in the process of establishing will be “transformative and positive,” write former Bank of England rate setter Adam Posen and Nicolas Veron of the Bruegel think tank.


-Canada’s annual rate of inflation rose in May at its fastest pace in over two years and exceeded the Bank of Canada’s closely watched 2% target, powered by increases in energy and meat costs

-Happy anniversary to Donald Kohn, whose term as Fed vice chairman began eight years ago today and ended exactly four (busy) years later

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23 June 2014 | 10:59 am – Source:

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