Category Archives: Monetary policy

At the Fed: What did come next?

September 22 the Federal Reserve initiated “Operation Twist” where they announced that they would start restructuring its debt by buying up long bonds with the proceedings from short bond sales, with the aim of lowering the long-term yields. As I mentioned in my post on that occasion, the Fed and Ben Bernanke had then exhausted the three main ways of conducting unconventional monetary policy as defined by Bernanke himself in a paper from 2004: I. Shaping Interest-Rate Expectations; II. Altering the Composition of the Central Bank’s Balance Sheet;  III. Expanding the Size of the Central Bank’s Balance Sheet. In case nothing new would happen to the American economy, the obvious … Continue reading

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Draghi says Hello and cuts the ECB interest rate

Today, new ECB president Mario Draghi led the Governing Council of the ECB in its meeting on monetary policy decisions. It turned out to be an interest cut, as the interest rate on main refinancing operations was decreased from 1.5% to 1.25%. The move was mainly motivated on falling inflation expectations and an expectation of dampened economic activity (with emphasis on downside risks). As such this is a move that is consistent with inflation targeting, and it appears that the ECB under Drahgi will continue the practice to let interest-rate decisions be guided by short-run developments in real economic activity, while securing that inflation expectations are held in check. Hence, … Continue reading

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Trichet says Goodbye and SMP peaks at 173 bn. €

Today marks the last day of Jean-Claude Trichet’s tenure as president of the European Central Bank. Bild am Sonntag interviews him on the occasion. In terms of being the main person responsible for the ECB’s mandate of price stability, he has been a success. The inflation measure used by the ECB has moved quite closely around the value which after some introductory opaqueness is stated as close to, but not above, 2%. Surely, during the peaks of the financial crises there were upward and downward swings, but on average you would not call Trichet a man that leaves a bank with little anti-inflation credibility. What he does leave is a … Continue reading

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Come on Baby, Let’s Do the Twist!

After yesterday’s press release by the Fed, many commentators started talking about “Operation Twist” even though no such thing is mentioned in the release. Accompanying the press release on the Federal Reserve site, was, however, a document containing the term in parenthesis. Some could immediately be confused or even scared by this. Would this be yet an addition to the endless series of acronyms that has emerged during the financial crisis? Troubled and Worthless Interest-bearing Securities Task-force? Luckily not. It just reflects a return to the old days. And “twist” actually means what it says: “twist.”  In 1961, the Kennedy administration and the Fed engaged in an operation of selling … Continue reading

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ECB public debt purchases by numbers

I wrote last week about the ECB’s renewed purchases of public Euro debt (in particular Spanish and Italian). Now the actual numbers are out, and the confirm what market participants signaled: The ECB was not in for a small operation. The ECB purchased for around 22 billion Euros, thereby raising its stock of debt purchased under the Securities Markets Programme to 96 billion Euros. An unprecedented increase in the stock of almost 30 %. Today, the ECB will suck up the associated liquidity created (and will do so the next week, and the next . . . ). From a weekly perspective, the operation appeared successful as bond yields have … Continue reading

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Commitment in action: Federal Reserve’s interest-rate “path”

It is a big shame that today’s FOMC meeting is one of those not to be followed by a press conference and a Q&A with Ben Bernanke. The policy decision is one of the more spectacular in recent times. Not because the Fed decided to keep the target for the Federal Funds Rate within the 0–0.25% range, where it has been since December 2008. The big news, however, is that the non-move is accompanied by an explicit commitment to keep it there for the next two years (if current conditions continue). This is very specific compared to previous talk about keeping rates low for “an extended period” (which has been … Continue reading

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ECB buys public debt again: Otmar Issing voices strong critique

In a rare Sunday press release (August 7) , the President of the ECB, Jean-Claude Trichet (on behalf of the Governing Council), hailed the fiscal and structural measures of Spain and Italy and their commitments—along with other member countries—to strictly adhere to “fiscal targets”. Then he emphasized that countries are sovereign states that themselves should honor their own “signature as a key element in ensuring financial stability in the euro area as a whole“. (Oh, and he supports the joint statement of the same day by France and Germany, which is not surprising given the occasional word-by-word similarities.) Then he concludes that the Securities Markets Programme (SMP) will be activated. … Continue reading

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Steady as she goes: The ECB keeps policy rate unchanged again

After having raised the key policy interest rate in April (from 1 to 1.25 %), the ECB kept it unchanged on June 9, thus repeating their “non-action” of May. This is a somewhat bold and perhaps unconventional move by a central bank whose overriding legal mandate is price stability. Given their own definition of price stability as meaning an annual Euro-wide HICP-inflation rate not above 2%, you would have thought that the increase in April would have been followed by further increases. After all, HICP-inflation is currently above 2.5%, and unemployment is falling slightly (continuing the downward adjustment, which I have argued earlier could have been the trigger for the … Continue reading

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