Grand Central: Yellen and Lagarde Take Stock of Lessons from Crises Past – Real Time Economics

The Wall Street Journal’s Daily Report on Global Central Banks for Wednesday, July 2, 2014:

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The two most powerful women in finance gather Wednesday for an International Monetary Fund address in Washington D.C. on financial stability.

Federal Reserve chairwoman Janet Yellen will be speaking in honor of Michel Camdessus, the Frenchman who ran the IMF’s responses to more than a decade of emerging market financial crises from 1987 to 2000. Ms. Yellen will then take questions from Christine Lagarde, who emerged as the IMF’s current leader after crisis spread to the developed world.

What did these women learn while rising to power in an epoch of financial turmoil?

“Financial crashes can be extremely costly, and their clean-up excessively long and complex,” Ms. Lagarde said in May. “Financial stability is an essential policy objective, and one that is here to stay.”

From there, however, she has more questions than answers.

“Do we know, for instance, how much a 100 basis points increase in interest rates can deliver in terms of financial stability? Do we even agree on how to define financial stability? Should we measure it in terms of credit growth, asset price growth, or leverage? And what is the link between financial stability and inflation?”

Ms. Yellen’s current concerns, enumerated in a press conference last month, include: Growth in leveraged lending, loose underwriting standards in some loan markets, low market volatility, shrinking risk spreads in high-yield bonds, reach-for-yield behavior, and the exposure of banks and investors to a sudden rise in interest rates.

This activity is moderate, she quickly added, and wouldn’t shift the Fed away from easy money policies meant to spur economic growth. Those policies might breed the kind of risky financial behavior that worries Ms. Yellen. But she noted “we are using supervisory tools and regulations both to make the financial system more robust.”

The men who ran the financial system in the time of Mr. Camdessus had the benefit of a script to guide their thinking. It included light-touch regulation, open markets, a policy focus on low and stable inflation and an understanding that the Fed would clean up messes after they occurred by cutting interest rates.

There’s no script any more. These ladies are going to have to figure it out as they go along.

-By Jon Hilsenrath


Global Central Banking in 2014, A Second Quarter Update for 24 Economies. Five years after the global recession of 2009, economic growth remains troublingly weak and inflation uncomfortably low in many developed economies. Several emerging-market economies are expanding more slowly than in the past while inflation remains high. And housing prices appear frothy in some countries. Many of the world’s central banks held policy steady in the second quarter, but some made moves or indicated they are preparing to act in the months ahead. Here’s a guide to the individual outlooks for central banks around the world , compiled by our global staff of reporters and editors.

Lew to Press China on Yuan Appreciation. U.S. Treasury Secretary Jacob Lew said Tuesday he will press China in high-level talks next week to allow its currency to appreciate amid evidence Beijing is suppressing the value of the yuan. China’s rising level of foreign-exchange reserves was just one indication Beijing is keeping a lid on its currency.

French PM Calls On ECB To Launch QE. France’s prime minister Manuel Valls said he wished the European Central Bank would carry out asset purchases to support the euro zone’s economies and to bring down the value of the euro on currency markets. In an interview with Les Echos,  he hailed the ECB’s decision in early June to lower its rates, calling the move “a strong signal.”  “But I wish for a central bank which could go further, notably in purchasing assets on markets. Monetary policy can’t be only about interest rate moves,” he said.

Euro-Zone Producer Prices Continue Falling. Prices of goods leaving the euro zone’s factory gates fell for the fifth straight month in May, an indication that the currency area won’t soon escape a period of low inflation that may hinder its recovery.

U.K. Home Prices Hit New Record High. U.K. house prices rose to a fresh record high in June as demand continues to outpace the supply of properties for sale, a survey showed Wednesday. The increase in the average U.K. price was driven in particular by a further rise in the value of London homes which were almost 26% higher in the second quarter of this year than the same period a year ago, the largest increase since 1987, the lender said. The average cost of a property in London is now GBP400,404, 30% above the previous series peak.

Hong Kong Dollar Turns Stronger, Triggering Intervention. The demand for the city’s currency has risen recently, partly because of increased corporate demand for commercial activities, such as mergers and acquisitions and dividend payments, the Hong Kong Monetary Authority said in an emailed statement to media on Tuesday.

Inflation Expectations Among Japan Firms Fail to Accelerate. Inflation expectations in the boardrooms of Japan Inc. have not risen over the last three months, a Bank of Japan survey on corporate price forecasts shows, an indication of the difficulty the central bank faces in convincing the nation that 2% price growth will take root – Dow Jones Newswires.

Bank of Russia Not Concerned About Ukraine Risks for Russian Lenders. The Ukrainian crisis caused major turmoil in Russia’s financial sector but the Bank of Russia now has no concerns about Ukraine-related risks for Russian lenders and hopes that credit card giants Visa and MasterCard will continue operations in Russia, the central bank chairwoman, Elvira Nabiullina, said Tuesday.

Hungary’s Currency Weakens on Government Plan to Convert Loans. Hungary’s currency weakened sharply on Tuesday in reaction to the government’s latest plan to ease the debt burden for foreign-currency borrowers at the expense of banks, with a European Union warning that the country may return next year under strict budget oversight adding to the forint’s slide.

Romania’s Central Bank Keeps Key Rate At 3.5%. Romania’s central bank Tuesday held its key lending rate unchanged at 3.5% for the third consecutive meeting, in line with market expectations, but lowered the reserve requirements for foreign currency deposits to 16% from 18% previously, news agency Mediafax reports.

Brazil’s Tombini: Inflation to Remain High. Brazil’s inflation will remain high, but within the target range this year, central bank President Alexandre Tombini said Tuesday. “Twelve-month inflation should remain high, in part as a result of the food-price shock earlier this year,” he said in comments published by the bank.

Philippine Central Bank: Recent Tightening Will Make Rate Adjustments More Effective. Recent policy tightening actions by the Philippine central bank will make future interest rate adjustments more effective in attaining their goals, Bangko Sentral ng Pilipinas Gov. Amando Tetangco said Wednesday – Dow Jones Newswires.


The nearly $9 billion settlement between the BNP Paribas SA and the U.S. would be a record for a sanctions violation case. But the bank would pay a relatively low amount when compared to the volume of alleged illicit transactions.


-Fed Chairwoman Janet Yellen will speak on financial stability at 11 a.m. EDT at the International Monetary Fund in Washington, and take questions from IMF Managing Director Christine Lagarde

-BOE’s Haldane speaks on a panel at 1600 GMT in London

-Poland’s central bank issues a policy statement.


Rise in Partisan Conflict is a Drag on U.S. Economy. Partisan political bickering is driving up government budget deficits and holding down job creation, business investment and overall U.S. economic growth, according to new research from the Federal Reserve Bank of Philadelphia.

Why Inflation Is Very Low, and Why It Matters. In an essay, economists from the Cleveland Fed dissect the recent decline in inflation and lay out its implications for the future, drawing on extensive research on inflation measurement and forecasting.


The recovery since BOE Gov. Mark  Carney took over from Mervyn King on  July 1, 2013, has certainly been remarkable, writes Simon Nixon in the Journal. “But was this really due to Mr. Carney? Few outside the BOE think so. Monetary policy normally works with a lag of about a year, which suggests the crucial decisions were taken before he joined.”

As Britain booms, France stagnates, writes Alen Mattich in the Journal. “It’s an obvious outcome, argue some economists, pointing to the fact that the U.K. operates its own monetary policy, while France is constrained by the euro. So where the Bank of England has kept liquidity gushing into the economy, France–along with large swathes of the single currency region–has suffered from overly tight policy. Except that’s not quite the whole story.”

Inflation hawks are on the warpath, but their fears are greatly exaggerated, writes Dean Baker for Al Jazeera America’s website. “While there may be little basis for concern about inflation, there are considerable grounds for concern about weak growth, and this was true even before the release of data showing the economy shrank at a 2.9 percent annual rate in the first quarter of 2014.”

Unhappy members of the euro zone should consider launching a second monetary union that would allow them a competitive devaluation against Germany and be better designed than the first effort, writes Jacques Melitz, professor emeritus, Heriot-Watt University.  “The creation of a separate monetary union by the discontented members would bring them exchange rate adjustment relative to Germany, which is the single most important exchange rate adjustment that they need,” Mr. Melitz writes.


-Thailand’s consumer-price index in June backed off recent highs, reflecting the military junta’s steps to control energy and other prices to keep consumption buoyed.

-If you see smoke pouring out of the European Central Bank’s new building in Frankfurt, don’t panic. The ECB on Wednesday is beginning a test of the fire safety system that involves “artificial smoke.”

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