Benn Steil

Geo-Graphics

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

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Showing posts for "Financial Markets"

Could China Have a Reserves Crisis?

by Benn Steil and Emma Smith
China reserves

Last summer, U.S. lawmakers were condemning China for pushing down its currency, arguing that it was still “terribly undervalued.” But those days may be long gone.  Chinese and foreigners alike have been stampeding out of RMB, leaving the Chinese central bank struggling to keep its value up and prevent a rout. Read more »

Rate Hikes or Balance Sheet Reductions? How Should the Fed Tighten?

by Benn Steil and Emma Smith
Fed tightening

This post originally appeared in Foreign Affairs online.

On January 27, the U.S. Federal reserve held interest rates steady and, in a modest nod to a market that has been consistently more fearful about the economy than the Fed itself, dropped a line from its December statement saying that the risks to the outlook were “balanced.” Read more »

Our Mini Mac Index Flame-Broils The Economist—Yet Again

by Benn Steil and Emma Smith
FFFFFF-0

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

The Economist magazine’s famous Big Mac Index uses the price of McDonald’s Big Macs 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. Read more »

How Low Can Mario Go?

by Benn Steil and Emma Smith
Graph

In September 2014 the European Central Bank lowered its deposit rate to an all-time low of -0.2 percent, after which ECB President Mario Draghi declared that rates were “now at the lower bound.” What he meant by this was that, by the ECB’s calculations, banks would find holding cash more attractive than an ECB deposit at rates below -0.2 percent, so there was no scope for encouraging banks to lend by pushing this rate lower. The ECB therefore turned to asset purchases, whose efficacy is much in debate, in an effort to ease policy further. Read more »

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 »

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 »

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 »

Which Countries Should Fear a Rate Ruckus?

by Benn Steil and Dinah Walker
EM bond yields taper reaction

For many Emerging Markets, May 22, 2013 is a day that will live in infamy.  It marks the start of the great Taper Tantrum, when Ben Bernanke’s carefully hedged remarks on prospects for slowing Fed asset purchases triggered a massive sell-off in EM bond and currency markets. Read more »