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"

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 »

Bank Valuations Tank as ECB Flubs Its Stress Test

by Benn Steil and Dinah Walker
european bank valuations before and after stress test

Low market valuations (i.e., price to book ratios) for euro area banks reflect market concerns over their capital cushions, opined the Bank of England just prior to last-year’s launch of the ECB stress tests—the long-awaited results of which were published on October 26.  The tests, “by improving transparency,” said the BoE, have “the potential to improve confidence in euro area banks.” Read more »

Are Fed Doves Mucking with Future Unemployment Estimates to Justify Dovishness?

by Benn Steil and Dinah Walker
fed changing unemployment projections 2

Do Fed doves and hawks get their aviary classifications based on their cold, hard analysis of data, or is it the reverse – do they select data points to justify their dovish or hawkish perspectives?

The history of the Fed’s post-crisis focus on unemployment suggests the latter.  After June of 2013, as the figure above shows, the Fed’s estimate of the natural long-term unemployment rate begins declining in sync with the decline in the actual unemployment rate.  This suggests that FOMC members are lowering their estimates of the natural rate of unemployment to justify keeping interest rates at zero longer than they could if they stuck by their initial estimates, the 6% consensus upper bound of which is now above today’s actual 5.9% rate. Read more »

A Dovish Market Has History on Its Side in Tuning Out the Fed

by Benn Steil and Dinah Walker
Fed Transition Times

Market expectations for Fed policy have been decidedly more dovish than the Fed itself, a conundrum that is concerning San Francisco Fed economists.  As the Fed debates its rate-liftoff forward guidance this week, however, it is worth asking how much it really matters. Read more »

French Banks Play Russian Roulette

by Benn Steil and Dinah Walker
bank exposure to russia

In the fourth quarter of last year, with tensions rising between Russia and the West over Ukraine, U.S., German, UK, and Swedish banks aggressively dialed down their credit exposures in Russia.  But as the graphic above shows, French banks, which have by far the highest exposures to Russia, barely touched theirs.  At $50 billion, this exposure is not far off the $70 billion exposure they had to Greece in 2010.  At that time, they took advantage of the European Central Bank’s generous Securities Market Programme (SMP) to fob off Greek bonds, effectively mutualizing their Greek exposures across the Eurozone.  No such program will be available for Russian debt.  And much of France’s Russia exposure is illiquid, such as Société Générale’s ownership of Rosbank, Russia’s 9th largest bank by asset value ($22 billion).  With the Obama Administration and the European Union threatening to dial up sanctions on Russia, is it time for U.S. money market funds and others to start worrying about their French bank exposures? Read more »

IMF Reform and Ukraine: Amateur Hour for U.S. Economic Diplomacy

by Benn Steil and Dinah Walker
ukraine imf reform

In our March 5 post, we argued that the Obama administration linking Ukraine aid to IMF reform was disingenuous and counterproductive.  We were right: the legislation failed, congressional Republicans were angered, foreign governments were annoyed, and aid was delayed.  All for what?  Without IMF reform, Ukraine will still get every penny it would have gotten with IMF reform.  Today’s Geo-Graphic shows this.  And more… Read more »