Robert Kahn

Macro and Markets

Robert Kahn analyzes economic policies for an integrated world.

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Showing posts for "Monetary Policy"

The Federal Reserve Tapers: In Search of Calmer Waters

by Robert Kahn

Yesterday’s decision by the Federal Reserve’s policy committee to modestly reduce (“taper”) its purchases of U.S. Treasury and mortgage-backed securities was a turning point in a number of respects.  After a long period of public debate that roiled markets, the Federal Reserve has at last begun what is likely to be a gradual and well-telegraphed exit from its period of extraordinary stimulus.  Together, last week’s fiscal deal and the Federal Reserve’s taper decision appears to have marked the start of a period of relative calm where U.S. macro policy uncertainty will be far less of a driver of markets. That’s good news for the global economy.

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The Fed: No Taper and Little Clarity

by Robert Kahn
U.S. Federal Reserve Board Chairman Ben Bernanke holds a news conference following the Fed's two-day Federal Open Market Committee (FOMC) meeting in Washington September 18, 2013. (Gary Cameron/Courtesy Reuters) U.S. Federal Reserve Board Chairman Ben Bernanke holds a news conference following the Fed's two-day Federal Open Market Committee (FOMC) meeting in Washington September 18, 2013. (Gary Cameron/Courtesy Reuters)

The first move is the hardest.

The Federal Reserve defied expectations and did not reduce, or taper, its purchases of Treasury and MBS securities today, leaving them at $85 billion per month.  The economic projections accompanying the statement suggest a significant divergence of views about the prospects for recovery and the outlook for interest rates.  It suggests little concern about a rapidly increasing balance sheet.  What comes next depends on the data, a message the Fed has been sending for some time.  Markets reacted sharply, with stocks and commodities spiking, while bond yields and the dollar fell on the news that policy would remain easy for longer.  Good for U.S. financial conditions, but if you were looking for clarity, today probably didn’t provide it.

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Europe’s December Surprise?

by Robert Kahn
European Central Bank (ECB) president Mario Draghi speaks during the monthly ECB conference in Frankfurt on July 4, 2013. \ Courtesy Reuters European Central Bank (ECB) president Mario Draghi speaks during the monthly ECB conference in Frankfurt on July 4, 2013. \ Courtesy Reuters

Over the past year, Europe has enjoyed calm financial markets.  At the core of the market’s comfort were two assumptions about policy. First, that the European governments would do just enough to keep the process of European integration moving forward. Second, that the ECB would, in the words of Mario Draghi, do “whatever it takes”  to save the euro. The centerpiece of the ECB’s subsequent efforts was expanded liquidity (through long-term repurchase operations and easier collateral requirements for banks to access ECB liquidity) and a commitment to purchase government bonds to support countries return to market (the OMT program).  Even many pessimists who fear that Europe is trapped on a unsustainable, low-growth trajectory remain optimistic that Europe will do what it takes to navigate the near term risks.  It may be time to question that optimism.

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The IMF’s Outlook: Less Growth, Inadequate Policies

by Robert Kahn
Courtesy Reuters Courtesy Reuters

The IMF is out with a global update and a statement on Europe.  Unsurprisingly, it has revised its outlook down (again).  It still, optimistically, expects a return to growth in Europe next year, but it recognizes the risks are on the downside.  A few points to highlight.

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The Unapologetic Regulator

by Robert Kahn

Jaret Seiberg has an excellent summary of Ben Bernanke’s speech and Q&A today on financial sector regulation and reform.  This follows on Dan Tarullo’s speech Friday that highlighted the need for additional capital aginst short-term wholesale funding, an earlier Jeremy Stein discussion on liquidity regulation and the value of price-based regulation (rather than quantitiative limits on bank size favored by some in Congress), and similar comments by the OCC.  We now have as clear a signal as possible that U.S. regulators are ready, in Seiberg’s words, “to go beyond Basel 3 to impose to additional capital requirements on the biggest banks…[using]…a combination of a more restrictive leverage limit, a capital surcharge based on reliance on short-term debt, and a long-term debt requirement.” It also underscores the divergent approaches toward reform in the U.S. and Europe, where, against the backdrop of weak growth and credit constraints, the pressures appear to be leading to a slower, more bank-friendly path.

The Shrinking U.S. Labor Force and Fed Policy

by Robert Kahn

Does the large drop in the U.S. labor force participation rate justify a monetary policy that is easier, for longer, than suggested by our models or the Fed’s current description of its policy?  Chris Erceg and Andy Levin, two senior researchers at the Fed now on leave at the IMF, argue yes.  Their analysis will provide fuel to the monetary policy doves who argue the Fed is failing to meet its employment mandate, and points to a battle ahead.  But it doesn’t really settle questions about whether monetary policy is an effective tool for bringing these workers back into the work force, or whether it can be done without creating inflationary pressure (which speaks to other leg of the Fed’s mandate). Still, their paper is an important read.

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Why Abenomics Matters

by Robert Kahn

Last week, I wrote on the ECB’s meeting and the case for easing credit conditions in the periphery (a recommendation that they didn’t heed, though pressure to act is building).  I ignored the upcoming Bank of Japan (BoJ) meeting.  My wife’s comment the next day summed it up well:  “you blogged on the wrong central bank.”

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Cyprus: Hope Trumps Reality

by Robert Kahn

Cyprus has reached a tentative agreement with the IMF-EU-ECB team (Troika) on the economic program that will be backed by its €10 billion rescue package.  The IMF will put €1 billion, small in absolute terms and relative to the one-third share that it has had in most of its European programs but a very high share (563 percent) of Cyprus’ contribution, or quota.  The plan is for European political approval in coming days, followed by legislative approval where needed during the course of April, and IMF Board approval in early May.  If Cyprus passes all the prior actions required in the program, it could get the first drawing on the package in mid-May, well ahead of their early June debt maturities.

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