The Federal Reserve’s first policy meeting of 2015 avoided any u-turns, leaving in place existing signals that the recovery is on track and that it will be “patient” before raising interest rates amid low inflation. The statement sets the stage for intense discussions in the weeks ahead as the central bank decides whether to raise interest rates in June or hold fire amid tumbling inflation.
1. What did the Fed signal on rates?
The Fed said in December it would be “patient” on rates, meaning that it was unlikely to act for at least the subsequent two meetings of its Federal Open Market Committee. It reiterated that guidance on Wednesday. That suggests increases will be off the table at its meetings in March and April, making June the earliest likely date for a rise. The Fed’s next meeting on March 17 and 18 will be critical as it considers possible changes to its “patience” language.
2. What was the economic assessment?
The Fed reflected America’s strengthening economic performance in a series of amendments to its previous language. Activity is now expanding at a “solid” pace, a step up from the “moderate” expansion it saw in December. Job gains were described as “strong” rather than “solid”. And the Fed said energy prices had “boosted household purchasing power” — which could augur well for consumer spending. It made no mention of December’s surprisingly weak wage numbers.
At least, that is what we all fervently hope. A larger programme than expected of quantitative easing gets under way shortly.
It will amount to around €1.14 trillion or €60bn a month between March 2015 and September 2016. The Germans have by and large reacted negatively to this long-delayed announcement.
The newspaper Frankfurter Allgemeine, Germany’s equivalent of the Financial Times, went as far as to accuse the ECB of “burying the principles of currency union”, warning that the QE boost was equivalent to the total annual turnover of Germany’s well-entrenched, family-run companies.
Sabine Lautenschlager, the German representative on the ECB board, expressed concern that the decision would encourage member states to run up more debts. However, it was also reported that the head of the Berlin based DIW Institute, economist Marcel Fratzscher, approved the programme of bond purchases on the basis that it would make the euro more stable, protect Germany’s foreign investments, and give a boost to exports.>> Read More
Once upon a time, everyone was shocked when one after another central bank adopted what previously was unthinkable: a Zero Interest Rate Policy, or ZIRP. Then, on June 5, the ECB added “awe” to the equation when it became the first major central bank to push rates negative. The move was meant to shock depositors into pulling their money out of banks and into risk assets. It failed, which is why 2 days ago the ECB took awe to the next level when it added QE to NIRP. It did however succeed in one thing: pushing $1.4 trillion in Euro area government debt into negative interest rate territory and right into an abyss that screams deflation.
As JPM nots, the chart below shows an estimate of the amount of Euro area government bonds with longer than 1-year maturity trading at negative yields over time. Around €1.4tr of Euro area government bonds are currently trading with negative nominal yields, almost all of them of core euro governments of up to 5 years maturity. Back in June, before the ECB’s shift to negative depo rate, the amount of euro area government bonds with longer than 1- year maturity trading negative was virtually zero.
German central-bank President Jens Weidmann didn’t vote in favor of the European Central Bank’s program to buy large amounts of bonds, according to excerpts of a newspaper interview to be published Sunday.
The ECB’s governing council, of which Mr. Weidmann is a member, on Thursdayapproved the plan to buy more than €1 trillion ($1.12 trillion) of debt securities, including government bonds, with newly created money. The plan is aimed at boosting inflation in the eurozone.
But Mr. Weidmann said he didn’t see a need for the program, according to excerpts of the interview to be published in German newspaper Welt am Sonntag.
“Inflation is very low at the moment, but this is driven by the low oil price. Therefore there are many reasons to assume that the low inflation is a temporary phenomenon,” the Bundesbank president is quoted as saying.>> Read More
Those curious to learn why Greece is the only country excluded form the ECB’ QE (for now) as the soon to be former Greek PM Samaras said moments ago…
GREEK PM SAMARAS SAYS WITHOUT CLOSING THE CURRENT REVIEW, GREECE WILL BE EXCLUDED FROM ECB BOND-BUY PROGRAMME
… will not find any additional information in the ECB’s supplement on its asset purchase program. Neither will they learn why something that is in effect monetary financing, and is prohibited by Article 123, is not monetary financing. However, they will learn that the proceeds from the ECB’s money printing can be used “to buy other assets and extend credit to the real economy.” The ECB adds that “In both cases, this contributes to an easing of financial conditions.” Actually the only thing it will contribute to is making the world’s billionaires into the world’s trillionaires.
Perhaps unsurprisingly, the European Central Bank’s €1.1tn quantitative easing bazooka has provoked a more extreme reaction from the German press than in other eurozone countries, where most of the media has so far stuck to the straight news.
Bild, Germany’s top-selling newspaper, is taking a dim view.
On its website (first picture below) it asks: “What is happening to our money now? The European Central Bank abolishes sickly eurozone countries’ millions in debt.”
The Munich-based Süddeutsche Zeitung claims that Draghi has launched QE “against all criticism” (picture two).
The global edition of Germany’s business newspaper, Handelsblatt, has the headline: “ECB goes all in” (picture three) and also points out that the move was made “over German objections”.
France’s Le Monde takes a more moderate stance, pointing out that the debt-buying scheme “aims to reignite the economy and ward off the risk of deflation in the eurozone” (picture four)
ECB President Mario Draghi did a series of interviews with the German press prior to today’s announcements in an attempt to gain the favour of the German public.>> Read More
“Differenty this time?” or “Einsteinian Insanity’?
With The ECB set to announce a QE4EVA-esque bond-buying initiative within the next hour or two, we thought it worth looking at just what The Fed’s balance-sheet experiment did for inflation expectations (the key narrative that is driving Draghi’s decision) and economic growth (what every politician is demanding Draghi help with)…
The European Central Bank has left interest rates unchanged, ahead of a landmark announcement on quantitative easing later on today.
The ECB’s 25-member governing council kept its main interest rate at the current record low of 0.05 per cent. Banks in the region will continue to pay 0.2 per cent on a portion of their reserves parked at the central bank.
The council is set to reveal the details of its large-scale sovereign bond-buying programme at 1.30pm in Frankfurt (2.30pm in London), after months of intense speculation on whether president Mario Draghi could overcome political controversy and splits between policy makers on the central bank’s governing council to win convincing support for a QE package.
A fall into deflation for the first time in more than five years in December all but confirmed that the ECB would embark on quantitative easing this month.>> Read More
Larry Summers, who was favourite to run the US Federal Reserve until Congressional opposition thwarted his effort, has given a downbeat assessment of the likely success of quantitative easing in the Eurozone.
Speaking at the World Economic Forum in Davos on Thursday morning, he gave many reasons he thought the ECB’s actions would be less effective than the Fed’s.
“I am all for European QE,” he said, “the risks of doing too little far exceed the risks of doing too much…but it would be a mistake to see Euorpean QE as a panacea”.
1. What is the ECB going to do?The ECB is widely expected to announce that it will accelerate and broaden its efforts to expand its balance sheet.
2. How will it do this?The ECB is currently buying two types of assets: covered bonds and ABS. Covered bonds are bank-issued bonds frequently backed by a pool of mortgages the bank retains some of those exposures on its balance sheet rather than selling all of it to other investors. It is also buying asset-backed securities; mostly consumer and small business loans packaged by banks. In addition, the ECB is expanding its balance sheet by granting more low interest rate loans to banks under a program called Targeted Long-Term Repo Operations (TLTRO). However, an older lending program is expiring (LTRO), and as banks repay these funds, it reduces the ECB’s balance sheet. As deflationary pressures strengthen, and growth continues to be revised down (ECB in December, World Bank and IMF this month), the ECB wants to expand its balance sheet more aggressively. It is widely expected that the ECB will announce a plan to buy sovereign bonds.
3. Is this quantitative easing? There is no agreed upon definition of quantitative easing or QE. The Federal Reserve did not refer to its Treasury and Agency purchases as QE, but rather called it credit easing. To the extent that QE has a meaning, it refers to a monetary policy aimed at increasing the size (quantity) of a central bank’s balance sheet. In addition to sovereign bonds, the Bank of Japan buys corporate bonds, commercial paper, ETFs, and REITs. The ECB will widen the range of assets it buys to include sovereign bonds. It may also buy the super-nationals, such as the EU and European Investment Bank bond, and possibly the bonds issued to provide support to a number of peripheral countries. Arguably, it should be willing to buy any asset it accepts as collateral.