Robert Kahn

Macro and Markets

Robert Kahn analyzes economic policies for an integrated world.

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Showing posts for "Monetary Policy"

After the Fed

by Robert Kahn

The Federal Reserve today delivered exactly what was expected: a liftoff in interest rates from the zero lower bound, coupled with strong assurances that the future rise in interest rates will be moderate. Markets reacted hardly at all to the statement and Janet Yellen’s press conference, beyond a bit of short covering, by and large seeing the decision as a comforting first step towards normalization at a time of significant global tensions. In sum: Read more »

ECB and the Limits of QE

by Robert Kahn

Markets were clearly underwhelmed by the European Central Bank’s (ECB) easing announcement yesterday, marginally cutting its (already negative) deposit rate and extending the duration of its asset purchase program (QE). I think the Financial Times had it about right. It would have been better to do more, but what they did was helpful and it retains the capacity for further action. Still, as Ted Liu and I argued yesterday, the main channel through which QE is going to boost activity in Europe (as the Federal Reserve normalizes) is through the exchange rate, which in the context of weak global demand and emerging market capital outflows may be a modest source of stimulus. The market reaction also underscores the challenge for a central bank to communicate its intentions when the governing council is divided and it is trying to be data dependent–i.e., it is hard to communicate what you don’t know. We also agree with the FT’s bottom line: at this time, monetary policy alone cannot be expected to carry forward a robust European recovery.  Fiscal and structural policies must do their part.

European Central Bank Rate Move, a Turning Point for Europe

by Robert Kahn and Ted Liu

At the governing council’s meeting today, the European Central Bank (ECB) announced that it will cut benchmark deposit rate to -0.3 percent, extend its quantitative easing (QE) program to at least March 2017, and broaden the scope of assets purchased. On several occasions since October, ECB President Mario Draghi has hinted an easing was coming, stating that the central bank will do what they must to “raise inflation and inflation expectations as fast as possible.” There is a strong economic case for action: inflation has stalled at levels well below the ECB’s target inflation rate of below but close to 2 percent (headline inflation in October was 0.1 percent), growth remains weak, and unemployment rates are still sky high. But, as in the United States, there are growing doubts about how much a boost of QE will provide to the European economy. A few thoughts on why the ECB’s move still matters.

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Fed Holds Fire—China Matters

by Robert Kahn

The Federal Reserve’s decision to not raise rates today was the market’s consensus expectation. Nonetheless, U.S. and foreign bond markets have rallied on revised expectations for Fed policy. With four members of the Federal Open Market Committee (FOMC) now forecasting that interest rates will lift off only in 2016 or later, markets are now putting significant weight on a rate hike only next year.

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A Roadmap for Ukraine

by Jennifer M. Harris and Robert Kahn

U.S. and European efforts to resolve the Ukraine crisis seem to be finding their stride in recent days. U.S. Secretary of Defense Ash Carter ended months of “will they won’t they?” by announcing earlier this week that the U.S. would be sending heavy weaponry into Eastern Europe, and late last week EU leaders declared that EU sanctions against Russia would remain in place through the end of 2016, quelling months of anxiety around whether EU resolve on sanctions would hold.

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G20 Worries About Growth

by Robert Kahn

The central message from the G20 Summit in Brisbane last weekend was the need for more growth, and there was a clear sense after the meeting that leaders are worried. David Cameron captured the mood with his statement that “red warning lights are flashing on the dashboard of the global economy” and his concern about “a dangerous backdrop of instability and uncertainty.” While Europe came in for the most criticism (Christine Lagarde rightly worries that high debt, low growth and unemployment may yet become “the new normal in Europe”) concerns about growth in Japan and emerging markets also weighed on leaders. In the end, though, the diplomacy conducted on the sidelines was more meaningful than the growth proposals put forward at the summit.

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Japan’s Sensible Fiscal Retreat

by Robert Kahn

Surprisingly poor second quarter growth numbers in Japan have raised market expectations that there will be snap elections and a delay in the consumption tax hike that was scheduled for October 2015. GDP fell for a second consecutive quarter, by 1.6 percent (q/q, a.r), versus market expectations of a 2.2 percent increase. A huge miss. Falling corporate inventories were a large part of the story, but exports rose only modestly while household consumption and capital spending slowed. The yen sold off after the announcement, reaching a low of 117 against the dollar. Japanese stocks are higher.

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Three Central Banks

by Robert Kahn

Today’s central bank news tells us a lot about the risks and rewards of proactive central banking.

The Bank of Japan (BoJ) surprised me (and nearly everyone else ) with a dramatic expansion of its unconventional monetary policy this morning, citing renewed risks of deflation. The BOJ announced (i) an increase in the target for monetary base growth to ¥80 trillion ($730 billion) per annum from ¥60–70 trillion; (2) an increase in its Japanese government bond (JGB) purchases to an annual pace of ¥80 trillion from ¥50 trillion; (3) an extension of the average maturity of its JGB purchases to 7–10 years (3 years previously); and (4) a tripling of its targets for the annual purchases of Japan real estate investment trusts (J-REITs) and exchange-traded funds (ETFs).

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