The Wall Street Journal’s Daily Report on Global Central Banks for Tuesday, March 3, 2015:
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Washington is abuzz these days with proposals to reform the Federal Reserve. Lawmakers want to subject its monetary policy decisions to congressional review, force it to follow strict monetary policy rules and demand the New York Fed president be confirmed by the Senate. At a Brookings Institution conference Monday, other proposals emerged, such as requiring the Fed to pursue financial system stability as one of its formal mandates and stripping regional Fed banks of power.
There is one overriding problem with all of these proposals: No consensus exists about what the Fed got wrong before, during and after the financial crisis or what exactly needs to be fixed.
Most observers agree – and Fed officials have acknowledged — the central bank failed as a bank regulator before the 2007-2009 financial crisis. But on most other points, disagreement is rampant. Did the Fed keep interest rates too low for too long before the crisis? Did it heroically prevent a repeat of the Great Depression or recklessly bailout Wall Street in its responses to the financial chaos that ensued in 2008 and 2009? Did “quantitative easing” work well, accomplish nothing, or lay the foundation for government borrowing, future inflation and financial excess? Is the New York Fed captured by the big banks it regulates? You can find reasoned responses – and many unreasoned ones — on all sides of all these questions.
A credible narrative existed about the Fed’s failings during and after the Great Depression. Its failure to act as a lender of last resort and provider of credit and money to a suffocating financial system made a bad recession and financial crisis much worse. Congress set out to expand its lending capabilities and concentrate its decision-making.
Before reforms are set out this time, it would be helpful to have a credible narrative about how to fix the place. All lawmakers seem to have right now is a general sense they want more accountability from an institution they perceive as having worked too expansively in the shadows during the crisis.
On this front, some progress has been made. The Dodd-Frank law required disclosure of all Fed lending to individual institutions with a lag. Perhaps if Congress wants to do more, it could appoint some credible blue ribbon panel – overseen by luminaries on either side of the aisle like former Fed chairman Paul Volcker, a Democrat, and George Schultz, a Republican – to get to the bottom of what went wrong at the Fed in the first place, and put forth recommendations for change.
-By Jon Hilsenrath
MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD
Foreign Banks Brace for Fed Stress Test. The Federal Reserve’s growing scrutiny of global banks has set off a scramble among foreign firms as they staff up and revamp operations to meet the central bank’s rising expectations. The Fed’s stress tests are expected to find shortcomings in risk management at the U.S. units of some foreign banks, including Deutsche Bank AG and Banco Santander SA, according to people familiar with the matter. The Fed announces preliminary results of this year’s tests on Thursday and full results on March 11.
Harker Tabbed as New Philadelphia Fed President. Patrick Harker, president of the University of Delaware, has been selected to lead the Federal Reserve Bank of Philadelphia, starting July 1. Mr. Harker is the former dean of the Wharton School of the University of Pennsylvania. He has a Ph.D in civil and urban engineering, and as master’s degree in economics.
Bernanke Says Fed Already Follows Policy Rule. Former Federal Reserve chairman Ben Bernanke said Monday that Republican efforts to force the central bank to adopt an official policy rule to conduct interest policy are redundant because the Fed already sets out clear benchmarks for its interest rate actions. “The Fed already has a rule,” Mr. Bernanke said during a panel discussion at the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy. “It’s committed to hitting a 2% inflation target and aiming for the natural rate of unemployment. These are rules.”
U.S. Inflation Undershoots Fed’s 2% Target For 33rd Straight Month. A key gauge of U.S. consumer prices sank in January, undershooting the Fed’s goal of 2% annual inflation for the 33rd consecutive month. The price index for personal consumption expenditures, which is the central bank’s preferred inflation gauge, rose just 0.2% in January from a year earlier.
Americans Say Keep Politics Out of the Fed – Reuters. Most Americans don’t know who runs the Fed, but they do believe that elected officials should stay out of its business, according to a Reuters-Ipsos poll. Just 24 percent of those polled said Congress should be allowed to have detailed oversight of the Fed, the poll shows. More than double that amount said the central bank should be left alone.
Abe Adviser Warns BOJ Against Overheating Economy. Japan’s central bank should hold fire on extra measures for some time to ensure the economy doesn’t “overheat,” an economic adviser to Prime Minister Shinzo Abe said. The inflation rate may be falling back toward zero on a drop in global oil prices, but it will “eventually start rising on its own” and likely reach around 2% by early 2016, said Etsuro Honda in an interview Monday with The Wall Street Journal.
Yuan Will Stabilize Despite Recent Weakness, China Central Bank Vice Gov. Says. The Chinese currency will be relatively stable in the long run despite its recent weakness against the U.S. dollar, Yi Gang, vice governor of the People’s Bank of China, said Tuesday. ”Compared with a basket of currencies, the yuan is still strong,” Mr. Yi told reporters on the sidelines of China’s annual meeting of its legislature – Dow Jones Newswires.
India Releases New Monetary Policy Framework. The Indian government and the Reserve Bank of India have agreed on a monetary policy framework that will make managing inflation the key determinant in the central bank’s policy decisions. As part of the framework, the RBI will aim to lower inflation to 4%, with a band of 2 percentage points on either side, by the financial year ending March 2017 and keep it around that level.
Australia Central Bank Holds Rates. Australia’s central bank kept its benchmark interest rate unchanged at a record low 2.25% Tuesday to avoid stoking an overheating housing market that risks derailing a fragile economic recovery.
Ukraine Central Bank Raises Benchmark Rate to 30%. Ukraine’s central bank jacked up its refinancing rate to 30% as part of a package of measures aimed at stabilizing the country’s financial system. The rate rise, which will take effect Wednesday, was announced Tuesday by central bank chief Valeria Gontareva. The rate currently stands at 19.5%.
Inflation in Developed Economies Halved in January. The annual rate of inflation across the world’s developed economies more than halved in January, reaching its lowest level since the recession that followed the global financial crisis. That widespread disinflation is likely to prompt further cuts in benchmark interest rates or other easing measures by central banks around the world, adding to a flurry of such moves in the first months of 2015.
We’re at our Lowest Level of Misery in 56 Years, Thanks to Gas Prices. By one measure, the U.S. economy is the best it’s been since the presidency of Dwight Eisenhower. The recent plunge in inflation has helped drive the U.S. Misery Index to its least miserable level since the spring of 1959. The Misery Index was proposed by the economist Arthur Okun in the 1970s, while he was a scholar at Washington’s Brookings Institution. When Mr. Okun proposed the index, the U.S. was in the grip of stagflation — a period of both high unemployment and high inflation. To capture the era’s misery, Mr. Okun proposed simply adding the unemployment rate and the annual inflation rate into a new number.
– U.S. Senate Banking Committee holds a hearing on “Federal Reserve Accountability and Reform” in Washington at 2:30 p.m. EST
– Fed’s Yellen speaks on “Bank Regulation and Supervision” at the Citizens Budget Commission’s awards dinner in New York at 8:15 p.m. EST
Fed’s Regional Banks Are ‘Unconstitutional,’ Brookings Paper Says. The Federal Reserve’s 12 regional banks are “unconstitutional” and contribute to the popular misperception that the central bank is a privately-owned institution not fully accountable to the public interest. That’s according to Peter Conti-Brown, assistant Professor of legal studies and business ethics at The Wharton School of the University of Pennsylvania, in a working paper for the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy.
A Financial System is Still Dangerously Vulnerable to a Panic. The Fed’s powers to act as lender of last resort need to be restored and strengthened, write Glenn Hubbard and Hal Scott in the Wall Street Journal. “Dodd-Frank restrictions on the Federal Reserve’s powers to act as lender-of-last-resort, coupled with restrictions on federal guarantees for bank deposits and money-market funds, pose a threat to U.S. and global financial stability.
The Eurozone Recovery Means Greece Has Less Leverage Than It Thinks. After weeks of brinkmanship between Greece and the eurozone, one might think the outlook for Europe was bleak,” writes Simon Nixon in the Journal. “Yet focusing on Greece only tells part of the story. Equally important to the long-term fate of the currency bloc is growing evidence that the recovery is strengthening, thanks to a weaker currency, which has fallen 19% against the dollar since the start of 2014; a falling oil price, which is likely to add up to 1.5 percentage points to the level of output this year, according to Huw Pill, chief European economist at Goldman Sachs; and the lower borrowing rates and boost to confidence from the European Central Bank’s new government-bond buying program due to start this week.”
– U.S. personal spending fell in January for the second straight month due in part to the drop in gasoline prices, though inflation-adjusted outlays climbed.
– Switzerland’s economy posted better-than-expected growth in the fourth quarter, the last before a shift in the central bank’s policy that sent the Swiss franc soaring – Dow Jones Newswires.
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