Benn Steil


A graphical take on geoeconomic issues, with links to the news and expert commentary.

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As Fed Pulls Back, the ECB and BoJ Add Trillions to Global Liquidity

by Benn Steil and Emma Smith
global liquidity - updated

All eyes and ears are on the Fed as it ponders its first rate increase in nine years.  IMF Managing Director Christine Lagarde fears a rerun of the 2013 “taper tantrum,” or what we have been calling a rate ruckus. Emerging markets are clearly vulnerable to renewed outflows, as capital chases higher yields in the U.S. and drives up the cost of dollar funding abroad. Read more »

Greece and Its Creditors Should Do a Guns-For-Pensions Deal

by Benn Steil and Dinah Walker
Greece NATO Defense Spending

IMF Chief Economist Olivier Blanchard has said that Greece needs to slash pension spending by 1% of GDP in order to reach its new budget targets.  The Greek government continues to resist, arguing that Greeks dependent on pensions have already suffered enough.  But it has yet to put a compelling alternative to its creditors. Read more »

Are Fed Watchers Watching the Wrong People?

by Benn Steil and Dinah Walker
Fed Board FOMC IoER Fed Funds

One effect of the financial crisis was to change how the Fed conducts monetary policy.  This could be long-lasting and important.

Prior to the crisis, the Federal Open Market Committee (FOMC) set a target for the so-called federal funds rate, the interest rate at which depository institutions lend balances to each other overnight.  The New York Fed would then conduct open market operations – buying and selling securities – in order to nudge that rate towards the target.  It did this by affecting the supply of banks’ reserve balances at the Fed, which go up when they sell securities to the Fed and down when they buy them. Read more »

Are China’s RMB Swap Lines an Empty Vessel?

by Benn Steil and Dinah Walker
China US Swaps Argentina

As our recent CFR interactive shows, central bank currency swaps have spread like wildfire since the financial crisis.  In 2006, the Fed had only two open swap lines outstanding, with Canada and Mexico, for just $2 billion and $3 billion, respectively.  At its high point in 2008, the Fed had fourteen open swap lines, with as much as $583 billion drawn. Read more »

Should the United States Encourage Japan to Join the AIIB?

by Benn Steil and Dinah Walker
AIIB possible voting structure

On April 15, China’s finance ministry revealed the 57 “prospective founding members” of the new Asian Infrastructure Investment Bank, of which China is the architect.   The likely founders include many U.S. allies, such as the UK, Australia, and South Korea, which the Obama Administration had lobbied not to join, seeing the AIIB as a Chinese alternative to the U.S.-architected World Bank. Read more »

Is the Fed Gonna Tighten Like It’s 1994? Or 2004?

by Benn Steil and Dinah Walker
Fed Tightening 1994 2004 and Today

How will the Fed raise rates once it starts?  Gradually, in small steps?  Faster, with larger steps?

In 2012, before becoming Fed chair, Janet Yellen argued for a later first rate-hike than would be suggested by a traditional “Taylor Rule” approach, followed by more aggressive catch-up rate hikes.  Now, however, she is suggesting that those rate hikes will be gradual and measured after all.  Almost certainly she is wary of a repeat of 1994, when the Fed began raising rates and bond markets took a pounding. Read more »

Psychology and the Oil Market

by Benn Steil and Dinah Walker
oil prices and market psychology

In his recent book, Market Madness: A Century of Oil Panics, Crises, and Crashes, our colleague Blake Clayton explains the role of market psychology in contributing to the wild price swings that have characterized the oil market over the past hundred years.   Using data from Google Books NGrams, he shows that whenever oil prices climb for an extended period comments about “running out of oil” and “running out of gasoline” proliferate. These beliefs have repeatedly proven unfounded. Read more »

Move Over Big Mac: The Law of One Price Is Lovin’ Our Little Mac Index

by Benn Steil and Dinah Walker

The “law of one price” holds that identical goods should trade for the same price in an efficient market. To what extent does it hold internationally?

The Economist magazine’s famous Big Mac Index uses the price of McDonald’s burgers around the world, expressed in a common currency (U.S. dollars), to estimate the extent to which various currencies are over- or under-valued. The Big Mac is a global product, identical across borders, which makes it an interesting one for this purpose. Yet it travels badly—cross-border flows of burgers won’t align their prices internationally. Read more »

Employment Data Suggest Fed Could Be “Patient” Until 2016—or Later

by Benn Steil and Dinah Walker
Inflation Tracks the Employment/Population Ratio

In its last two statements, the FOMC has said that it “expects inflation to rise gradually toward 2 percent over the medium term”—2 percent being its target rate. What would it take to move it there?

We looked at how many different variables correlate with the Fed’s preferred inflation measure—core PCE inflation. Oil and the dollar have been much in the news of late, but their prices have had little relationship with core PCE inflation over the past decade, as shown in the bottom-left figures above. The single variable that seems to correlate best, as seen in the top-left figure, is the employment/population ratio among adults aged 25-54 years. If we follow this ratio’s trend-line since 2013, when it began its last major upturn, this suggests that core PCE inflation won’t hit 2% until late 2016 or early 2017—as seen in the large right-hand figure. If we follow it since its trough in 2011, core PCE inflation does not hit 2% until late 2017. Read more »