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"

Draghi’s Dilemma

by Benn Steil and Dinah Walker
ecb rate vs national rates and inflation

The Governing Council of the European Central Bank meets on May 2, with a possible rate cut in the offing. Yet a rate cut is not the no-brainer the Bank’s critics often suggest, as today’s Geo-Graphic shows.

The ECB’s official inflation-rate target is “below, but close to, 2%.” Both Portugal and Greece have inflation under 1% , but the transmission mechanism from ECB rates to business borrowing rates in those two countries has been virtually severed by the crisis. In short, they need a rate cut, but the ECB can’t deliver them one. Read more »

Dr. Strangelove or: How China Learned to Stop Worrying and Love the Dollar

by Benn Steil and Dinah Walker
currency wars

China has since 1994 operated some form of currency peg, harder or softer, between its yuan and the U.S. dollar. While China’s state-run Xinhua news agency has in recent years railed against U.S. management of the dollar, and has called for “a new, stable, and secured global reserve currency,” this week’s Geo-Graphic illustrates why China has little incentive to press for such a thing. Read more »

Should the Fed Follow the Bank of England and Subsidize Bank Lending?

by Benn Steil and Dinah Walker
us and uk lending capitalization corrected

Last week’s Bank of England (BoE) poll of UK lenders turned up some good news: credit “availability” for both households and companies is on the rise – as we document in the upper right figure of today’s Geo-Graphic.  The Old Lady of Threadneedle Street was quick to take credit for the credit: “Lenders noted,” crowed the BoE, “that the Funding for Lending Scheme,” through which the BoE and UK Treasury have since August provided banks with cheap funds to boost their lending, “had been an important factor behind this increase.” Read more »

Greece Hurtles Toward Its Fiscal Cliff

by Benn Steil and Dinah Walker
image

The United States marches solemnly towards its fiscal cliff, awaiting only the command from the Goddess of Reason to halt. Unfortunately for Greece, that country plugged its ears back in March.

Like the United States, Greece made prior commitments on spending and taxation in order to bind itself to the mission of deficit reduction. Unlike the United States, Greece left itself little means to unbind itself. As shown in the graphic above, its massive debt restructuring in March only reduced its debt-to-GDP ratio from 170% to 150%, but in the process made further significant restructuring much more difficult. Read more »

The Fed Should Pledge to Stop Pledging for a While

by Benn Steil and Dinah Walker
pledge to stop pledging

Back in February, Benn argued that the Fed’s three-year zero-rate pledge, combined with a 2% long-run inflation target, may have been a pledge too far, given the Fed’s poor forecasting record going back decades.  The Board of Governors’ and Reserve Banks’ first three-year forecasts in October 2007, for example, were wildly off the mark: actual 2010 GDP, unemployment, and inflation were all outside the range of the 17 forecasts.  Yet at its September meeting, the Fed’s Open Market Committee extended its zero-rate pledge into 2015, on the basis of its forecast that unemployment would still be significantly above their “longer run” expectation at that time—as shown in the figure above.  But last week’s September payrolls report revealed that the unemployment rate had dropped more than anticipated, to 7.8%, putting the 6-month trend line into 2015 well within the Fed’s comfort zone.  This implies that interest rates, by the Fed’s own reasoning, may well need to rise sooner.  We think it’s time that the Fed pledged to stop pledging for a while. Read more »

Is Bernanke Right on QE3 and the Mortgage Market?

by Benn Steil and Dinah Walker
Mortgage Rates and QE3

Fed Chairman Ben Bernanke defended QE3 at his September 13 press conference by arguing that it would lower mortgage rates and increase home prices.  Over 80% of U.S. household debt is mortgage debt, so the extent to which he is right could be of considerable consequence to the future path of economic recovery.  Read more »

Benchmarking the Fed’s Dual-Mandate Performance

by Jon Hill
The Dual Mandate

The Fed has a dual mandate to pursue price stability and maximum employment.  How should these be defined?  In January, the Fed set itself a long-run inflation target of 2%, while in June the midpoint of Fed board members’ and Reserve Bank presidents’ long-run unemployment predictions was 5.6%.  Our figure above shows actual inflation and unemployment performance relative to these targets going back to 2002.  What stands out is the divergence that opens up, particularly on the unemployment front, after Lehman Brothers failed in September 2008.  The sum of the deviations reached its peak in July 2009, as shown in the small box in the upper left of the figure.  Though it has since declined fairly steadily, it is still well above zero – zero being a benchmark for fulfilling the combined mandate.  This suggests that the Fed’s doves should continue to hold the upper hand. Read more »

More Evidence That LIBOR Is Hazardous to Economic Health

by Jon Hill
LIBOR OIS and Bank CDS

Central bankers necessarily spend a great deal of time studying economic and market data that they believe to be forward-looking indicators of the economy’s health.  One such is the so-called “LIBOR-OIS spread” – the spread between the London Interbank Offered Rate (the rate at which major banks can supposedly borrow from each other, unsecured by collateral, for three months) and the Overnight Indexed Swap rate Read more »

More Evidence That LIBOR Is Manipulated, and What It Means

by Jon Hill
LIBOR v NYFR

Barclays’ admission that it deliberately understated the interest rates at which it could borrow between September 2007 and May 2009 suggests grievous flaws in the widespread process of using LIBOR (the London Inter-Bank Offered Rate) as a benchmark off which to price commercial loans, mortgages, and other forms of lending.  Our figure above illustrates this by comparing LIBOR with so-called NYFR Read more »

Can Household Risk-Aversion Measures Predict Fed Policy?

by Jon Hill
risk aversion

The so-called Taylor Rule in monetary policy suggests how the Federal Reserve should adjust interest rates based on movements in inflation and economic output.  Although the Fed has never explicitly followed such a rule, it described fairly well the path of interest rate policy under much of Alan Greenspan’s tenure as chairman. Read more »