Category Archives: Federal Reserve

Fed Rate Increase Looking Less Likely

How little resolve our central bank has. We said we thought Fed was unlikely to raise rates, or if it did, it would be at most 25 basis points between now and year end., which falls in the category of being cosmetic. The central bank has been particularly, one might say unduly, attentive to the […]

AIG’s Connolly: "Crisis of Capitalism is Upon Us"

It’s one thing to read an apocalyptic alarm from, say, a blogger or a newsletter writer. It’s quite another to see it coming from an analyst at a large institution, in this case AIG. Bernard Connolly is deeply critical of central banks, not just of their recent actions but also of their very existence, and […]

ECB: "Litterbin of the Last Resort"

We’ve read from time to time that European banks have been launching deals, and not particularly good ones at that, solely for the purpose of using those securities as collateral for loans from the ECB. However, we hadn’t seen a longer-form treatment of that phenomenon. The Economist has decided to step into the breach. The […]

Central Banks Use Flawed Macroeconomic Models

The headline summarizes the observations of economist Paul De Grauwe, who takes central banks to task for their reliance on so-called Dynamic Stochastic General Equilibrium models (DSGE). De Grauwe objects to some of the fundamental assumptions embedded in them (consumers are rational and all have the same preferences, any disruptions are the result of external […]

Baum: Fed’s Hawkishness Overrated

A solid column from Bloomberg’s Caroline Baum on what she sees as the market’s irrational expectations for the Fed. Key points: Investors focused on Bernanke’s remarks about inflation and the dollar, when he also stressed the less than robust growth outlook The last time the central banks said it saw inflationary risks predominating it wound […]

Tett: Will Banks Remain on Japan Style Life Support Indefinitely?

We wondered ever since the Fed established and then repeatedly increased the size of its Term Auction Facility, which now provides $150 billion of support to the US banking system, how the central bank would ever be able to wind down this program. It certainly can’t do it when the financial system is fragile, and […]

Quelle Surprise! Imports Lowering Inflation and Complicating Fed’s Job

A good paper at VoxEU reaches a conclusion that seems expected, yet has been contested in academic research, namely, that imports have lowered US inflation. As we have discussed in other posts, this has far more important policy implications than obvious at first blush. The Fed has been looking at inflation as strictly a domestic […]

Traders Versus Roubini on Inflation, Dollar

The Financial Times’ John Authers, who called a market turn in bonds in early June of last year, sees another major shift in sentiment on the outlook for inflation and the dollar: For months, through all the volatility of the credit crisis, one bet has been enough to make profits. It is very simple: bet […]

Like It or Not, the Credit Default Swaps Market is Too Big to Fail

A piece by John Dizard in the Financial Times, “Get used to underwriting big lenders,” made me realize a bit of cognitive blindness. Central banks are committed to backstopping the credit default swaps market. Of course, that should be obvious. The Bank of England, ECB, Fed, and other central banks have intervened in various ways […]

Has the Fed Painted Itself in a Corner?

Without a doubt, the Federal Reserve now faces the most difficult financial and economic climate in our collective memory. And it is increasingly apparent that its options are constrained. Although it is premature to arrive at definitive judgments, it’s nevertheless worth asking whether some of these limitations were unwittingly self-created. Friday’s market rout, triggered by […]

Thomas Palley: "Defending the Bernanke Fed" (We Beg to Differ)

I’ve been quite taken with Thomas Palley’s few but very high quality posts, particularly since they have often made bold, persuasive arguments. Today, however, he does himself a disservice by giving a well written but conventional (among US academic economists) defense of the central bank’s conduct. Note that he deals only with monetary policy (he […]

Should the Fed Be Independent?

An article in today’s Wall Street Journal, “Insider Joins Critics of the Fed, Faulting Credit-Crisis Programs,” discusses at some length a recent speech by Richmond Fed president Jeffrey Lacker in which he took issue with some of the Fed’s recent financial services industry rescue efforts. The article itself failed to do justice to his speech, […]

Fed On Hold Till the Fall (Despite Calls to Raise Rates)?

It appears the US central bank got taken to the woodshed at a conference hosted by the New York Fed for overly aggressive rate cuts, but despite jeering from the peanut gallery, it looks likely that the Fed will hold pat until at least the fall. While I have no idea of how representative his […]

No Free Lunch: Fed Buying Less at Treasury Auctions Thanks to New Facilities

There’s been a lot of hand-wringing about the alphabet soup of new Federal Reserve facilities having hidden costs and generating unintended consequences. The biggest focus of concern is that the assets that the central bank has taken on may come a cropper, leaving the taxpayer holding the bag. Reader Lune has pointed out some examples […]

Fed Considering Adding Foreign Currency Instruments to Facilities

Note: this post has been shortened from its original version due to an error pointed out by alert readers. Apologies! The Term Auction Facility is considered within the Fed and by the Street to be a success, even though academic studies have found that the TAF did not achieve its intended goal of reducing risk […]