Ben Bernanke pleases the fixed interest markets
Posted on 21 July 2009 by
As I commented on 15 July economists were expecting Federal Reserve Chairman Ben Bernanke to show how the Fed will exit the biggest monetary expansion in history in his half yearly report to the House Financial Services Committee today, and he didn’t disappoint.
He said that the economy is showing “tentative signs of stabilisation,” but that the central bank intends to maintain a “highly accommodative” monetary policy for “an extended period.” He added that “the pace of decline appears to have slowed significantly,” but “in light of the substantial economic slack and limited inflation pressures, monetary policy remains focused on fostering economic recovery.”
This latter comment highlights a difference between the Fed’s remit and that of the MPC. The overarching remit of the MPC is to keep CPI within 1% of 2% and although the state of the economy clearly impacts on the inflation rate and thus has some influence on the MPC that is very different to focussing on “fostering economic recovery.” We already know the Conservatives plan to give the Bank of England sweeping new powers, assuming they win the General Election. After 12 years without any change in the MPC’s remit, except a technical switch from RPI to CPI as the target, the Tories should also consider whether the MPC should have a broader remit.
The key to when US rates will start to rise appears to be the unemployment numbers. In a report submitted as part of his testimony Mr Bernanke said that policy will be “tightened” when the labour market improves, an economic recovery takes hold and pressures holding down inflation “diminish.”
The report added “we have a number of tools that will enable us to raise market interest rates as needed,” and said that among the five options, the interest rate on banks’ deposits with the Fed is “perhaps the most important.” and that it “will most likely be used in combination” with other methods.
Mr Bernanke’s job today was to assure markets the Fed can wind down the monetary stimulus rapidly if needed to avoid inflation but they must also avoid a premature rate increase which would risk stalling the recovery. He obviously succeeded as at the time of writing (14.30. NY time) longer dated US Treasury yields have fallen by 0.13% on the day.
This all adds to the likelihood that UK rates will also stay low for rather longer than was envisaged until recently. Where changed UK swap rates were marginally lower today and 3m Libor eased back a little further to a new all time low of 0.94%.
Categories: Bank of England, Interest rates
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