The Confluence of Liquidity and Macro Policies
Manoj Pradhan, Morgan Stanley
Despite their best efforts, central banks have not been able to make a distinction between liquidity policy and macro policy. While this is understandable for DM central banks with policy rates close to zero, EM central banks have also seen the distinction between the two blur. Take the example of recent EM easing. So far in 2012, the central banks of Chile, Israel, India and Hungary have all surprised markets by delivering more easing than had been expected (Hungary didn't hike at all, against expectations of a hike). Of the four, India's ‘easing' was only a cash reserve ratio cut of 50bp with no change in the policy rate. However, despite a pointed remark in the RBI's statement that the time was not yet appropriate for monetary policy to be eased, the CRR cut remains a clear signal of forthcoming traditional macro easing in March or April (see RBI Cuts CRR by 50bp; Urges Cut in Fiscal Deficit to Allow Interest Rate Cuts, January 24, 2012). A 50bp RRR cut by the PBoC in December also provided a similar signal to markets. EM policy-makers have never been shy about using liquidity measures, but the degree to which they are employed now is a magnitude higher than has been the case historically.
FX: The Bernanke ‘Put’ is Back
Kasper Kirkegaard, Senior Analyst, Danske Bank
The FOMC meeting was not expected to be the market mover it turned out to be. However, if the Fed was looking to send bond yields lower, it certainly succeeded. The yield on 10-year government bonds is back below 2% and the dollar is weaker.
FOMC and GDP: Low Rates Stay
John E. Silvia, Chief Economist, Wells Fargo
This weeks messages from both the FOMC (Federal Open Market Committee) and Friday’s GDP release were that interest rates will remain low—the positive—but that there will be no near-term exit for debtors—public and private—from their deleveraging and rationalizing of spending.The FOMC indicated that current easy monetary policy will remain in place through 2014. Although, by examining the preferences of individual members, it was also clear that some preferred to raise rates earlier—some preferred much earlier. In addition, the FOMC stated its inflation expectation for the long run to be 2 percent for the overall, not core, PCE deflator.
United States – Federal Reservations
Chris Jones, Economist,TD Bank Financial Group
Bond markets were taken by surprise this week when the Federal Reserve committed to keep interest rates near zero through 2014 – 18 months longer than previously announced. Yet those left scratching their head need only look at this morning’s disappointing GDP release to understand why the Fed did what it did. While the economy grew 2.8% in the fourth quarter – its best quarterly showing since mid- 2010 – the strength mainly came from rebounding inventory investment. Growth in domestic demand, key to a more robust recovery, decelerated dramatically. Indeed the data made clear that this is an economy that has fallen short of expectations and is short on momentum. The Fed is doing all that it can to change that. But further monetary easing isn’t what is going to provide the jolt the economy needs.
Compiled by David Song, Currency Analyst
