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.

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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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 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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The ECB meets tomorrow and is expected to remain on hold.  Of the 44 market participants surveyed by Bloomberg, only one thought that the ECB would lower interest rates at this week’s meeting.  Markets do seem to hope, and may be pricing in to some extent, a more dovish tone from Governor Draghi, but at a time when the Fed is continuing expansionary policies, and the Bank of Japan is set to join them, the unwillingness of the ECB to do more stands out.

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For those interested in policy coordination and exchange rate policy, last week was both entertaining and informative.  U.S. Treasury official Lael Brainard’s G-20 background briefing last Monday, interpreted by some as signaling a green light to Japan for further yen depreciation in support of growth, was followed by statements that seemed to repudiate, support, then reinterpret the statement. The result was significant volatility in foreign exchange markets.  I suspect that was the opposite of what was intended.  Beyond the noise, events last week signal a policy environment where countries have great latitude to take measures that have significant effects on exchange rates.  “Currency wars” is hyperbole, but it’s capturing something real.

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Jeremy Stein’s speech  today–“Overheating in Credit Markets:  Origins, Measurement, and Policy Responses”–provides valuable insight on the issue of credit bubbles that could result as a consequence of current Federal Reserve policy.  As such, it speaks to the upcoming debate over the Fed’s exit strategy.  It’s a must read.

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One interesting footnote to the Fed’s decision today to introduce quantitative thresholds–that it expects to keep rates low at least as long as unemployment exceeds 6.5%, their inflation forecast doesn’t exceed 2.5%, and long term inflation expectations are well anchored–relates to the fiscal cliff.

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