ECB Monetary Policy after the TLTRO

The second TLTRO of the ECB, on December the 11th, has brought EUR 129.8bn of liquidity on the market. This will not be sufficient and the European monetary authorities will have to put in place new instruments, probably at the next ECB meeting on January the 22nd.

Two remarks on the ECB monetary policy
1 – The ECB has two instruments: interest rates and liquidity. The first is close to 0 at 0.05% for the refi rate. The ECB is constrained by the Zero Lower Bound. To reach a more accommodative monetary policy the ECB will have to increase liquidity to the financial and banking sector. Last November Mario Draghi took a formal commitment to increase the ECB balance sheet by EUR 1 000bn by the end of June 2016. It will then converge to the level seen in March 2012. The main reason for this liquidity is the will to rapidly curb inflation expectations
2 – In the ECB monetary policy framework, liquidity injections are temporary. It’s true for short-term operations but it is also what is seen for longer operations. Currently 2 operations that have been done, one at the end of 2011 and the other in February 2012 are reimbursed now. Their duration was 3 years. It’s an important difference with what is done by the Fed where long-term operations are purchases.

The operation of December the 11th has increased liquidity by EUR 129.8bn. With the previous operation of September the 18th which provided EUR 82.6bn the total amount is EUR 212.4bn. This is way below the EUR 400bn targeted by the European monetary authorities and announced at Draghi’s press conference on June the 5th (see here paragraph 6). Continue reading

The ECB is now Ready to take the risk of Unconventional Policies

Mario Draghi and the unanimity of the members of the Monetary Policy Committee of the ECB are ready to deeply change their point of view and to adopt unconventional policies. This is the point to remember of the press conference on April 3.
This means a particular interpretation which is that members of the Monetary Policy Committee of the European Central Bank consider that with a benchmark rate at 0.25 %, the policy is probably restrictive. The innovation is there. Monetary policy in the Eurozone faces the constraint of non-negativity of interest rates (ZLB Zero Lower Bound) and the need for other instruments to be more accommodative.

Mario Draghi said it clearly:
With the current monetary policy, risks are still on lower activity and are also on an inflation rate permanently below the target of 2 % and even below the path that was defined in March 2014.

So there is 3 points to remember in the words of Mario Draghi Continue reading

What Profile for the US Monetary Policy?

The Fed strategy can be summarized this way

1 – The Fed sees a lower risk to the economy. Growth forecasts have been revised upwards in 2014. In March GDP growth rate was expected in the range [2.9 – 3.4] with a middle range growth rate at 3.15%. The forecast in June is in the range [3 – 3.5] with a middle range growth rate at 3.25%. Nevertheless for 2013 the central rate was revised  slightly downwards to 2.45% as central rate midpoint against 2.55% in March.
The unemployment rate is revised downwards in 2013 to 7.25% in mid-range against 7.4% in the March forecast. For 2014 the expected unemployment rate is 6.65% in June versus 6.85% in March. Continue reading

Remarks on the Fed

There is lots of discussion on the Fed’s new strategy that could be presented by Ben Bernanke during his press conference. The preferred scenario seems to be one where the US central Bank will reduce its asset purchases to USD 60bn instead of 85. It could be done next September. But nothing will be said on the future path of these purchases. It will be data dependent.

On this decision the most important part will be the reasons of this change. We see that macro data in the USA are not so strong Continue reading

China, Euro Area, Bernanke: Elements from the last 24 hours

Growth is not on an upside trend, that’s the conclusion we can have after surveys publications today in China and in the Euro Area. In both regions, activity was shrinking in May.

In China the manufacturing sector synthetic index was down at 49.6 below the threshold of 50 that separates improvement (above 50) and deterioration (below 50). This is the first time since last October that the index is below 50. Continue reading

United States: Discussions on the Federal Reserve Strategy

For the second time in a row, the minutes of the monetary policy committee meeting of the Federal Reserve really has raised concern. Discussions that are published in this document show that some members of the FOMC have asked to stop the Quantitative Easing strategy. (Quantitative Easing is a program in which the Federal Reserve buys USD 85bn of assets (MBS for 40 and TBonds for 45) each month). Some of them would like to stop it at the end of the year. This discussion is based on the economic scenario for the US economy. If the robustness of the US economy and its capacity to create new jobs are perceived as sufficient then asset purchases could be reduced and then stopped. It is not necessary to go too far and to buy assets for too long if the economy is going better as this purchase strategy could create disequilibria that could at the end harm the economy.

Those supporting the QE strategy are not convinced that the economy is robust enough to stop the purchases. We clearly feel here their reluctance to change their priorities too quickly. Continue reading