Comparing the Fed, the ECB, and the BoE before policies diverge
The coming week is G4 central bank week. The Federal Reserve Bank (Fed) announces its policy decision on November 3; the European Central Bank (ECB) and the Bank of England (BoE) will make policy announcements on November 4; and the Bank of Japan pushed forward its November 15-16 meeting to be held now on November 4-5.
At this juncture, G4 ex Japan monetary policy is likely to diverge sharply: the Fed is expected to announce an extension of its asset purchase program, while the ECB and BoE are not expected to increase theirs. In fact, the policy wedge between the three central banks is already wide. Despite the ECB’s enacting its covered bond purchase program, the amount is small, roughly 1.4% of Eurozone GDP (see chart below), and the central bank is sterilizing the flow – sterilizing the operation means that the ECB performs equal and opposite monetary operations to reduce bank reserves by the amount of the bond purchase program.
The chart above illustrates the size of the bond purchase programs (assets sitting on the central bank balance sheet) as a share of 2010 GDP (IMF forecast). Ostensibly, and from a bank-lending point of view, Eurozone financial conditions appear to be “healthier” than those in the UK or US.
The chart above illustrates total bank lending in the Eurozone, UK, and the US; but this may change as austerity measures in some European countries infect the stronger economies via a tightly integrated trade relationship.
Policy is already much tighter in the ECB compared to its US and UK counterparts. This discrepancy is expected to diverge, as the Fed moves into QE2 mode this week.
Rebecca Wilder
Nice informative post.
After the G-20 meet I scrolled through 2,600 articles on the subject on Google news. I read the Headlines on all 2600 of them and lead-ins on most every article although after a while I became adept at spotting the redundant feeds. This all took about 2 hours but I found most of the pieces to the puzzle.
The thing is, reading only the US/UK/MSM take on any story with geopolitical implications is perhaps the most misleading experience a person can have. For instance there were actually 2 Fin Mins who sent subordinates, (Brazil, Indonesia) but of course only one of these cases was widely reported.
More importantly, the US delegation came back with their tales tucked between their legs but that was almost impossible to notice from most of the reporting worldwide. But of course the puzzle pieces were available, just not easy to find. The main clue though was in the closing communique but these key points were excluded from nearly all of the 2600 articles:
…”move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies. Advanced economies, including those with reserve currencies, will be vigilant against excess volatility and disorderly movements in exchange rates. These actions will help mitigate the risk of excessive volatility in capital flows facing some emerging countries. Together, we will reinvigorate our efforts to promote a stable and well-functioning international monetary system and call on the IMF to deepen its work in these areas. We welcome the IMF’s work to conduct spillover assessments of the wider impact of systemic economies’ policies;…”
The key clue is exemplified by this: “Advanced economies, including those with reserve currencies,…” And in the word:”spillover”, the importance of those words though must be contrasted against what Sec. Geithner said, repeatedly, leading into the summit, that being his insistence that the US had not intentionally devalued the dollar with QE. But of course, since the summit, it has become increasingly clear that the FED now intends to take an incremental approach to QE. But if the MSM version of the summit was all that a reader had considered, that reader would most likely interpret the meeting as yet another instance of a US delegation saving the world, or, a more measured view might be that it was presented by the press as ‘business as usual’. But in truth something very unusual happened… the US was in fact taken down a notch. The emerging nations maneuvered the developed nations into a position where there was no choice but to formally agree to limit quantitative easing, and, the existing spillover effect has given the emerging nations a hassle-free opportunity to customize their capital markets with controls. There are in fact some efforts underway to use capital controls in some new and innovative ways, and the unfettered freedom to experiment with these without criticism or fear of retaliation is enabling these efforts. (Capital controls do not specifically violate WTO regulations although there are provisions which can be applied in the event of a complaint. The IMF has no jurisdiction over Capital controls, but like the WTO, the IMF position on capital controls has been negative and so there is simply negative political pressure mostly, although both institutions have stated recently that these types of protections are useful in limited applications. Most US trade agreements on the other hand require the liberalization of all cross-border financial services without exceptions). So, I suppose it is safe to say that the US has become more lenient in regards to capital controls. And this […]