Hoy sí

Bernanke explicó QE2 para el público en el Washington Post el jueves pasado. El párrafo clave es el siguiente:

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

Justifca otra ronda de relajamiento cuantitativa (quantitative easing, or QE) con base en lo siguiente:

1. Funcionó en el pasado (en la primera ronda).
2. Con sólo anunciar la intención avanzó la bolsa de valores.
3. Promoverá crecimiento económico: bajando las tasas de interés hipotecarias; bajando los rendimientos de los bonos corporativos (lo que promoverá inversión fija); elevando los precios accionarios, lo que, por enriquecer a los consumidores, puede impulsar más gasto.

En otras palabras, la Fed considera que otra ronda de QE se transmitirá a la economía por que los mismos canales que una decisión de política moonetaria normal (una reducción en la tasa de política monetaria).

Pero con una excepción: antes no se justificaban decisiones de política monetaria por su efecto en los precios accionarios.

Hoy sí.

Sígueme en Twitter: @gsignoret

More Web jewels found today

Tim Duy's Fed Watch, Too Little:

Federal Reserve policymakers must be pleased with themselves. Market participants have fallen in line like lemmings off a cliff pursuing the obvious trades as the excitement over quantitative easing builds. Equities, bonds, commodities are all up. Dollar is down. Perhaps more importantly, measured inflation expectations have trended higher. Psychology is a powerful thing. Like leverage. ... (keep reading).

Prajakta Bhide et al (Nouriel Roubini's Economonitor), What's ahead for the Fed?:

An anemic and subpar U.S. recovery amid balance-sheet repair, weak demand, slack in the economy and disinflationary pressures has always been our baseline scenario. By the summer of 2010, the disinflationary bias in expectations had become more evident, and the economy—lacking a self-sustained recovery—had started heading toward a dangerous stall speed. We vocally expressed our concerns around deflation/stagnation/double-dip scenarios and called for more policy action, while recognizing that the effects on the real economy would be limited. (Keep reading.)

Jon Hilsenrath and Jonathan Cheng ($WSJ), Fed Gears Up for Stimulus:

The Federal Reserve is close to embarking on another round of monetary stimulus next week, against the backdrop of a weak economy and low inflation—and despite doubts about the wisdom and efficacy of the policy among economists and some of the Fed's own decision makers. (Keep reading.)

Marshall Eckblad ($WSJ), Banks Turn Their Reserves to Profit:

Call it steroids for bank profits.

The biggest U.S. banks virtually doubled their collective earnings in the third quarter just by injecting $8.1 billion into net income from funds they had set aside to cover loan losses.

There are 18 commercial banks in the U.S. with at least $50 billion in assets, and together they earned an adjusted $16.8 billion in the third quarter. Of those profits, nearly half, or 48%, were from drawing down what bankers call loan-loss reserves, according to an analysis by Dow Jones Newswires. A year ago, the same 18 banks earned $6.2 billion in quarterly profits; at that time, they added more than $7.8 billion to the same reserves, a move that reduced their profits. The analysis omits a $10.4 billion noncash charge to earnings that Bank of America Corp. disclosed during the third quarter. (Keep reading.)

Power and Policy Team update (English)

Italy no-confidence vote on Wednesday
The vote will be a test to see if Berlusconi’s ruling coalition can survive the defection a breakaway faction of 33 members (Gianfranco Fini and his new Future and Liberty group). It’s not clear what the result will be. The motion was brought by opposition parties, not by the breakaway faction, and the Future and Liberty group considers itself center-right (same as ruling government coalition).
(FT)

U.S. Fed considers “symbolic shift”
The Wall Street Journal reports that the Fed is considering a “modest but symbolically important change in the management of their massive securities portfolio “ in a meeting next week, in the wake of a slowdown in growth. It might use the cash it receives fom mature mortgage-bond holdings to buy new mortgage or Treasury bonds, instead of allowing its portfolio to slowly shrink. Here is the complete article.

Koreas
North Korea continues to threaten the South with retaliation, in response to a series of war drills planned by the South to start on Thursday. These exercises are considered by the North as a direct military invasion. (NYT)

Pakistan and Afghanistan
According to the Pakistani president, the war against the Taliban is being lost. The international community, he said, has failed to win hearts and minds. These declarations were made just before his visit to the UK, with whom relations are tense after the accusations following the document leaks, which accused Pakistan of playing a double game in the Afghan war, and David Cameron’s cozy visit to India. (The Guardian)

Patrick Signoret and Isabel Gil

Hamilton interprets Bernanke

James Hamilton explains how to interpret the Treasury's $20 bn in supplementary loss protection mentioned by Bernanke in his 13 January 2009 speech about the recent blowing up of the Fed's balance sheet. Full interpretation today would require foreknowledge of how much the Fed will end up lending through its latest facility, TALF:

Bernanke also discussed some of the Fed's new plans:

In addition, the Federal Reserve and the Treasury have jointly announced a facility that will lend against AAA-rated asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. The Federal Reserve's credit risk exposure in the latter facility will be minimal, because the collateral will be subject to a "haircut" and the Treasury is providing $20 billion of capital as supplementary loss protection. We expect this facility to be operational next month.

Here at least we have a number-- $20 billion-- that will give us some idea of what Bernanke assesses the ballpark risks to be. If, for example, we see that the Fed lends $100 billion in this program, I'd take that to mean he's thinking the underlying assets are really worth at least 80 cents on the dollar; if $200 billion, we're talking about 90 cents on the dollar. If this gets into the hundreds of billions, it's hard to see how $20 billion would be regarded as a significant equity cushion.

Thanks, James Hamilton.

Fed: -75 bp; commodity prices will flatten

The Fed decision is out: -75 basis points to 2.25%.

Comments:

1. Dissent is up. Plosser and Fischer both voted for "less aggressive action." In the January 30 FOMC meeting, Fischer alone dissented, preferring "no change" in the monetary policy rate. On January 22, Mishkin was absent, thus didn't vote; those present voted unanimously.
   
2. FOMC members recognize accelerating inflation and upward shifting inflation expectations, but hold to their view that weak demand will pull inflation rates down.
   
3. In particular, they expect commodity prices to stabilize. They appear not to embrace Jeffrey Frankel's favorite explanation for rising commodity prices in times of recession--the current low level of real interest rates--given that their rate decision of today will contribute to it.
   
4. Nor do they seem to agree with former Fed Chair Alan Greenspan, who said in a recent interview about his own low interest rate policy, "You can't do that any more."