By Benjamin Cole at Marcus Nunes’ Historinhas | Recently Federal Reserve Bank President Charles Plosser opined that even periods of mild deflation could be welcome in the United States, and that Fed should have but a lone goal, and ideally that is zero inflation.
NEW YORK | By Ana Fuentes | Thursday was Janet Yellen’s big day. In front of the Senate Banking Committee she ran through her prepared speech (released by the Fed on Wednesday) and acknowledged “the risks” of injecting QE steroids to the U.S. economy for too long. However, she argued, inflation is still too low and unemployment rate, too high. “The benefits exceed the costs” of the Fed’s current policies, she said. Will we see any tapering soon? Certainly, but not yet.
LONDON | By Barclays analysts | In a surprise move, the ECB cut the refi rate by 25bp to 0.25% and left the deposit rate unchanged at zero. It also extended its fixed-rate, full-allotment facility to all refinancing operations by one year, at least until mid 2015. The ECB clearly signalled that it is concerned about persistently low inflation, even if deflation risks are contained. We will only know more about how long the ECB thinks low inflation will last next month when it publishes its macroeconomic forecasts. We see euro area inflation in 2014 dropping to 1.0% from the forecast 1.4% this year.
THE CORNER TEAM | Put the champagne in the freezer. Against most expectations, the ECB lowered its main refinancing rate to 0.25 percent on Thursday in order to encourage the eurozone’s recovery. Mario Draghi took this measure responding to a slump in inflation that has sparked fears the economy could stall, years after financial crisis broke and years after most other central banks did the same thing.
LONDON | By Barclays analysts | EM markets are likely to enjoy supportive conditions over the next few weeks. The resolution of the US government shutdown, expectations of QE tapering pushed further into 2014, the emergence of some EM re-coupling to stronger global manufacturing and still-attractive EM valuations should all be helpful factors. Liquidity considerations are likely to become a less important market driver, and higher-yielding EM assets, particularly in EM credit, should attract further support where bottom-up fundamentals allow.
MADRID | By Luis Arroyo | It is possible, as we have seen over the past few years, that no matter how much the Central Banks increase their money emissions, it won’t change people’s preference for liquidity. It isn’t clear that an increase in banking credit will swell investment either, especially if investors own a higher than normal debt stock and if they don’t see a clear future profitability. The same applies to families.
WASHINGTON | By Pablo Pardo | Robert Schiller has always been an advocate of a moderate government intervention in financial markets. He also criticised the Federal Reserve’s Quantitative Easing (QE) because he considered that asset prices are not among the areas of central banks. However, political reality seems to go in the opposite direction of the new Nobel winner.
SAO PAULO | By Marcus Nunes | The fact that Ms Yellen is a dove today does not imply that she would tolerate rising inflation tomorrow. She will need to persuade the markets, and the public, of that in the coming weeks.
THE CORNER | As expected, U.S. President Barack Obama appointed Janet Yellen as the Federal Reserve’s next leader, the first woman in the 100-year-history of the central bank. Among her first words: “More needs to be done to strengthen the recovery,” even though progress has been made, and: “too many Americans still cannot find a job and worry how they will pay their bills and provide for their families.” Were those hints about how she will deal with QE? Although she is considered a dove, some analysts believe that is a bit overstated. Anyway Obama called her “tough”, joking that it was not just because she was born in Brooklyn.
SAO PAULO | Bu Marcus Nunes | What Japan needs to do is keep doing what Abenomics said it would. Since their explicit target is 2% inflation, they will have to ‘factor out’ the tax increase. In the past they didn’t and we know what happened. If the BoJ’s Kuroda does his job well Japan has a fighting chance to progress, and the median calculation of economists that expect a short-term contraction following the tax will not pan out.