Blogs: Kathleen M. Packard
Beware. Monetary policy is evolving. You have been warned. The QE Taper is underway. The tip of higher interest rates is not appearing on the horizon.
“Monetary policy will be geared to evolving conditions in the economy,” Fed Chair Janet Yellen said recently. “And the public does need to understand that as those views evolve, the committee’s views on policy will likely evolve with them.”
“Communicating those intentions clearly without roiling the markets has proved challenging for the once-secretive institution....Yellen suggested that the first rate hike could come “something on the order of around six months” after the Fed stops pumping money into the economy through its bond-buying program this fall.”
So interest rates may go up as the Fed adjusts to an era in which free lunch will be abandoned. But Yellen does not want to shake us up. Markets beware. The Fed will “to provide as much clarity as is reasonably certain, given that the economic developments in the economy are themselves uncertain,” said Yellen. “But we will try as hard as we can not to be a source of instability here.”
The Wall Street Journal’s Jon Hilsenrath observed: “The Federal Reserve has been linking its plans for short-term interest rates to the path of the unemployment rate. It dropped that direct connection and said it would look at a broader array of indicators in deciding when to start raising short-term interest rates, including labor market conditions, inflation and financial conditions. The Fed still thinks it will keep rates near zero ‘for a considerable time’ after its bond buying program ends. The program is on a path to be completed late this year.”
But wait, Yellen may have committed the sin of premature transparency. Peter Coy of Bloomberg Businessweek wrote: “Janet Yellen may have just committed the first substantial blunder of her chairmanship of the Federal Reserve. The mistake: being specific when the occasion called for generality. “The more experienced [Ben] Bernanke knew to avoid clarifying deliberately vague statement language,” Michael Feroli, chief U.S. economist at JPMorgan Chase, wrote in a client note after the financial markets reacted badly.”
Wall Street may still prefer fairy tale monetary policy. Perhaps Yellen should reread Alice in Wonderland:
“If we walk far enough," says Dorothy in The Wizard of Oz, "we shall sometime come to someplace.” Just when you think the world’s economy has turned a corner, it turns out there is another corner. Still, new Fed Chief Janet Yellen has remained optimistic, telling Congress: “The economic recovery gained greater traction in the second half of last year.”
The traction slipped in January, however. As the Wall Street Journal’s Eric Morath and Neil Shah observed: “A hiring chill hit the U.S. labor market for the second straight month in January, reflecting employers’ reluctance to take on new workers despite some of the nation’s strongest economic growth in years.” They noted: “The soft hiring numbers join a recent cavalcade of mixed economic data on exports, housing and manufacturing. These trends, coupled with worries about emerging markets, have unsettled investors and stoked doubts about a stronger global recovery.
The confounding performance, particularly the weaker payroll gains, comes after months of mounting enthusiasm among many businesses, consumers and investors about stronger expansion
Then in February, jobs grew by 175,000 – prompting speculation that the economy was warming up. The New York Times reported: “While analysts cautioned that the report on Friday from the Labor Department was hardly cause for celebration, it eased fears of another prolonged slowdown, which had been raised by weak figures for hiring in December and January and mixed signals from recent releases of other data. The improvement last month led some experts to conclude that a hard winter, not a fundamental downshift, was the prime mover behind the economy’s lackluster performance at the end of 2013 and the beginning of 2014.”
Some economists blame harsh winter weather for the early 2014 slowdown, but the fact remains that the economy keeps stumbling before the promised takeoff
Moreover, the world’s economies are as usual working at cross purposes. The Economist noted that the Fed’s shift to a less expansionary monetary policy is only half the story: central banks in the euro area and Japan, the world’s second- and fourth-biggest economies (at market exchange rates), are still moving in the opposite direction.
In Japan, the government of Shinzo Abe is striving to exorcise the deflation that has haunted its economy for a decade and a half, in part through a bond-purchasing scheme on a par with America’s. If Japan is confronting the ghost of deflation past, the euro zone is spooked by deflation yet to come.
In another article, the Economist waxed optimistic but warned that “amid the new-year cheer, it is worth remembering that almost every year since the financial crisis upbeat expectations have been disappointed. The biggest danger this time round is the optimism itself.”
The Wall Street Journal has reported that in Ghana, Christian preachers are called for mercy from central bankers. Drew Hinshaw wrote: “A rising U.S. dollar has stirred many pastors here into nightly prayers for their fallen currency to rise again.”
“I command the resurrection of the cedi! In the name of Jesus!’ preached evangelist Nicholas Duncan-Williams of a megachurch called Action Chapel, recently. Then he addressed Satan: ‘Take your hands off the central bank!’
The value of African currencies has been falling. Elsewhere in the developing world, similar problems have developed. The value of Costa Rican colon, for example, recently fell 10 percent in one week. In February, Kazakhstan devalued its currency by 19 percent.
While Bitcoin collapse captures the headlines, the real crisis is the vanishing purchasing power of currencies in developing countries. It is not just the well-publicized problem nations like Venezuela and Argentina that are experiencing problems. As nations struggle to maintain exports, the temptation to devalue their currencies remains.
The wash of quantitative easing has created problems that have been compounded by bad fiscal and monetary policies in developing nations. Pastors in Ghana are doing something about the problem. But governmental authorities need to do more than pray.
Greece has been trying to raise revenue – so it raised the price of parking plates for luxury cars. That has resulted in Greeks abandoning their cars, turning in their plates, or using fake ones. The New York Times Suzanne Daley noted: “Greeks have long had a love affair with cars, buying more of them per capita than many of their European neighbors. But these days, the country has become a vast graveyard of abandoned automobiles, one more measure of hard times.”
Call it the law of unexpected consequences. But even as some macrodata improves in Greece, other numbers continue to deteriorate. Matt Vasilogambros wrote in National Journal: “ Over the past four years, Greece has experienced a collapse of economic and social order so profound that it has all but eradicated the relaxed, sunny lifestyle the nation long enjoyed. Most of Greece's 11 million people have been strongly affected by what is known as ‘the correction,’ or simply ‘reform; —the austerity measures mandated by the other members of the European Union in the aftermath of Greece's economic crisis, and which have radically altered Greek life in ways that, however fiscally necessary, are proving socially and politically intolerable.”
In a review of Greece’s economy early in the year, the Economist’s Charlemagne columnist wrote: “Ahead of schedule, Greece has closed its scary deficit and moved into primary budget surplus (ie., before interest payments). Yields on ten-year bonds have fallen below 8T, from a peak of well over 40% at the height of the Grexit panic. The government plans to issue fresh debt later this year. Some foreign investors are testing the waters of the Aegean. Competitiveness is being restored. Greece has enjoyed a bumper tourist season. This year should see the first GDP growth after six years of recession.” Charlemagne went on to observe:
As Howard Beale famous proclaimed in Network: “I don't have to tell you things are bad.” Vasilogambros wrote: “Polls suggest that nearly everyone in Greece still thinks the country's situation is bad—a perception that may not change quickly enough to avert a collapse of the current governing coalition and a showdown with the Troika.”
It's going to take at least two years for the Greek people to actually feel the positive effects of reform, says Yanos Gramatidis, a former president of the American-Hellenic chamber. Until then, it's up to the government and the business community to increase communication with the public. That's simply not happening right now, Gramatidis says, which is why the outrage remains.
America may have just celebrated the 50th anniversary of the Beatles’ appearance on the Ed Sullivan show, but elsewhere in the world, there is a whole lot of shaking going on – from Caracas to Kiev.
“The seeds of the crisis were sown in good times. Emerging markets were in fashion after the Federal Reserve and other developed economies’ central banks slashed interest rates to accelerate growth. Countries hooked on the inflows were rocked last year when Federal Reserve Chairman Ben Bernanke began to signal a bond-buying taper,” wrote Peter Coy in Bloomberg Businessweek.
Now countries such as India, Indonesia, South Africa, and Turkey are in a bind: They still need foreign money to pay for big deficits in their current account, which is the broadest measure of trade and investment income. But if they hike interest rates dramatically to keep attracting investors’ money to their bond markets, they may kill economic growth.
Coy went on to observe: “The countries in the worst shape are suffering from both economic and political crackups, says Jan Randolph, director of sovereign risk for IHS Global Insight (IHS). One or the other alone isn’t usually fatal.” Politics and economics go together and such crises seem to be on the increase.
The Miami Herald’s Andres Oppenheimer has commented on the dangerous path being taken by Venezuela, which already had an inflation rate above 50 percent last year: “ When I interviewed the head of the International Monetary Fund’s Western Hemisphere division last week, he didn’t mince words about the possibility of Venezuela descending into even greater economic chaos. Alejandro Werner, the senior IMF official, said there is a “high” probability that Venezuela, which already has the world’s highest inflation rate, will see even higher rates this year.”
The London Telegraph’s Roger Bootle defends the Fed against charges it is undermining emerging markets. He noted that some critics “have argued that the flood of money pumped into the system by the Fed was causing wealth-holders to put some of these funds abroad, thereby artificially depressing the value of the dollar on the exchanges and boosting their own currencies.
This, they said, was increasing US competitiveness and thereby depressing economic activity in the rest of the world – as well as causing asset bubbles.
Last week some of the self-same individuals were berating the US for reducing the amount of QE that it was doing, (this is the policy known as tapering), thereby supposedly drawing capital back into the United States, increasing the value of the dollar and depressing emerging market currencies and asset prices.
Some people think that if the US continues to taper, the pressure on the emerging markets may end up as a crisis of the sort that overwhelmed many Asian countries in 1997-8
Bottle concluded “that growth in the emerging markets this year is likely to be about 4.5pc. That would be the same as last year but well down from the growth rates achieved in the previous decade, largely because of the marked slowdown in the big four BRIC economies.
What’s more, unless there are some dramatic structural reforms, growth is likely to continue about this sort of rate in the years ahead. In my view, the roots of this growth slowdown lie in the real economy, not in variations in the Fed’s policy.
There is plenty of blame to go around and more will be apportioned before the global economy is truly on the road to recovery.
BY KATHLEEN M. PACKARD: