Grand Central: In A Quiet Moment, Big Decisions Loom for Fed – Real Time Economics

The Wall Street Journal’s Daily Report on Global Central Banks for Friday, July 25, 2014:

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The Federal Reserve’s next policy meeting is just a few days away, which means officials are deep into pre-meeting discussions about the coming policy statement. On the surface, little seems likely to change. The Fed is almost certain to pull back its bond purchases to $25 billion per month, leave its guidance about interest rates unchanged and acknowledge continued progress in the labor market.

Beneath the surface, Fed chairwoman Janet Yellen has groundwork to prepare for the months ahead. The bond program is set to expire in October. The Fed’s interest rate guidance is linked to the path of that bond program. The guidance therefore will need to be revised later this year when the bond program ends. The statement now says: “The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends.” After October the phrase “after the asset purchase program ends” needs to disappear and eventually the Fed will need to shift away from “considerable time.” When and how it does so is a big unanswered question which could get more attention in the months ahead.

Fed officials also are working out guidelines for how they will go about tightening credit next year, when they think the economy will be strong enough to bear higher interest rates. They need to make decisions about when to start shrinking their portfolio by letting securities mature without reinvesting the proceeds. They also need to decide how aggressively to use a new “reverse repo” tool which will help them set interest rates outside of the banking system.

This happens as some hawkish regional Fed bank presidents are becoming more vocal about wanting to raise interest rates.

All-in-all, it’s a quiet moment for the central bank. Ms. Yellen wants to be patient. But the wheels are turning on decisions down the road.

-By Jon Hilsenrath


Japan’s Inflation Slows for Second Month. Japan’s inflation rate fell for a second straight month in June, as a surge in energy costs lost steam and the Japanese economy slowed following a sales tax increase four months ago. The decline was in line with market expectations, though debate is likely to continue over whether the nation’s central bank is too optimistic about hitting its ambitious price target.

BOJ Beat: Japan Price Target Looks Difficult. Japan’s annual inflation rate in June was stable enough that it is unlikely to trigger a fresh round of monetary stimulus by the Bank of Japan. But the slight fall in consumer price gains worried some economists that the central bank is destined to miss its 2% inflation target next year, showing the BOJ’s uphill task in persuading people to believe Japan has put deflation behind it once and for all.

BOJ Chief Says Asian Economies Are Weathering Global Security Risks. Bank of Japan Gov. Haruhiko Kuroda said Thursday that Asian economies are performing well despite increasing global security risks.

Euro-Zone Private-Sector Lending Improves Slightly in June. Private-sector lending improved somewhat in the euro zone in June though it remained below year-ago levels, the European Central Bank said Friday, suggesting that credit conditions are slowly starting to improve which may in turn boost the region’s economic growth outlook.

U.K. Economy Passes Pre-Crisis Peak. Britain’s economy finally overtook its pre-crisis peak in the second quarter, official estimates showed Friday, more than six years after a global banking crisis caused a sharp downturn. The Office for National Statistics said the U.K. economy expanded 0.8% in the second quarter, an annualized rate of 3.2%. Gross domestic product at the end of June was 0.2% higher than its pre-crisis peak in the first quarter of 2008, just before the economy entered recession, the ONS said.

Russia Central Bank Raises Key Rate to 8.0%. The Russian central bank on Friday raised its key interest rate to 8% from 7.5%, and warned that if inflation risks remain high in Russia the bank will continue to increase its key rates. The Bank of Russia was widely expected to keep rates on hold, having raised them twice since early March when the Russian annexation of Crimea boosted capital flight, causing the ruble to tumble to a record low and inflation to jump.

Brazil Central Bank Signals No Rate Cuts This Year. Brazil’s central bank, in minutes published Thursday, gave a strong signal that it isn’t considering a rate reduction this year in light of continued inflationary pressure, after recent market speculation that a cut might be the bank’s next move.

Turkish Central Bank Demands Dollars. Turkey’s central bank demanded Thursday that local lenders convert their euro-denominated reserves to dollars, in a move to safeguard mandatory deposits from currency fluctuations and losses following the European Central Bank’s decision to cut a key interest rate below zero.

Bangladesh Central Bank Intervenes As Ramadan Remittances Pour In. With celebrations marking the end of Ramadan just days away, money is pouring into Bangladesh from the country’s millions of migrant workers abroad. That’s good news for families, but a headache for the country’s central bank, which said it would intervene in foreign-exchange markets in an effort to prevent a sharp rise in the value of the local currency, the taka.

Greenspan Says Bubbles Can’t Be Stopped Without ‘Crunch’ –MarketWatch. Former Federal Reserve Chairman Alan Greenspan thinks the U.S. economy will do all right in the near term, buoyed by a strong equity market. But he said he remains worried that we could be facing another false dawn.


It has become a common refrain: “It’s too hard to get a mortgage.” But is it true? An analysis from economists at Goldman Sachs concluded that along almost every dimension, mortgage credit is tighter than during the 2000-2002 period, before lenders really relaxed their standards.



-Mexico’s central bank releases minutes from its July 11 meeting


-ECB’s Constancio speaks in Bangkok at 6 p.m. local time (1100 GMT)


Is Involuntary Part-time Employment Different after the Great Recession? Despite overall improvement in the U.S. labor market, the number of people working part-time jobs because they can’t find full-time work remains high. “As the economy continues its recovery from the Great Recession, we expect the number of those working part time for economic reasons to fall,” write Maria E. Canon, Marianna Kudlyak and Marisa Reed in an article published by the St. Louis Fed.

China Gingerly Taking the Capital Account Liberalization Path. Bruegel visiting scholar Guonan Ma writes that he and Robert N. McCauley, a senior adviser at the Bank for International Settlements, analyzed eight measures of capital openness and found, “China has been financially less open than India on average over the past decade, contradicting the conventional wisdom and other, more widely known measures of financial openness.”

Global Banks Appear to Cut Russia, Ukraine Exposure, But Not By Much. Bankers tend to abhor risk. Especially geopolitical conflicts involving a nuclear power. So risk managers around the world probably smiled Wednesday when the numbers came out showing their exposure to Russian creditors fell in the first quarter.

Lithuania Entry Will Strengthen Power of ECB’s Executive Board: Lithuania’s entry into the euro zone from January will raise membership of the European Central Bank’s governing council to 25 and trigger a new system of rotating votes. Analyzing the implications of that change for the balance of influence within the governing council, Silvia Merler of the Bruegel think tank finds it will increase the power of the six ECB officials—the executive board—at the expense of national central bank governors from small countries.


The cost of food has risen in recent years, but the Fed can’t do much to bring down grocery bills, writes Megan McArdle in a Bloomberg View column. “Food prices aren’t increasing because of bad monetary policy; they’re increasing for a number of reasons, which are as varied as pig viruses and a billion Chinese consumers who have started eating higher on the food chain. Fed policy doesn’t cause those things, and it can’t fix them, either.”

The Fed in Denial: Economist Simon Johnson writes in Project Syndicate, “senior Fed officials seem to have slipped back into their pre-2008 ways, ignoring concerns about dangerous financial-sector behavior – even when those concerns are expressed by members of the US Senate Banking Committee. This is…dangerous, because the Fed’s political position is much more precarious than its leadership seems to realize.


-Happy birthday to the Bank of England: Its royal charter was sealed on July 27, 1694, 320 years ago Sunday.

-New applications for U.S. unemployment benefits plunged last week, reaching an 8½-year low and offering the latest signs of strength in the labor market.

– Weaker growth in the U.S., China and several important emerging markets forced the International Monetary Fund to downgrade its forecast for the global economy this year to 3.4%, down from its April forecast of 3.7%.

– Irish residential prices surged in June, government figures Thursday showed, fueling concerns that severe shortages of properties following the country’s real-estate crash are leading to a new and dangerous price boom.

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25 July 2014 | 11:09 am – Source:

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