America Hooked on drugs? Ulrich
Kater talks about the FED's
decision to continue its mild-sounding
'quantitative easing.'
Hooked on 'FED Drugs', U.S. Moves Ahead of Europe (Handelsblatt, Germany)
"It still appears that the U.S., at least, has survived the
most dangerous self-experiment in economic history - because the last few decades
have been just that: a self-experiment with financial anabolic steroids. Overall,
Americans have tackled their problems more energetically than Europeans,
preventing the zombification of the banking sector. Apparently,
the Americans knew how to brew a financial crisis, but they also know how to suck
it up again."
Federal Reserve Chairman Ben Bernanke: Looked on as economist and soothsayer, Bernanke and the FED's Open Market Committee have decided to keep selling Treasury bonds with money printed by the FED itself: How long can this go on?
Financial
steroids instead of detox: The FED continues its bond
purchases. That is surprising, says Ulrich Kater. But
for the chief economist of DekaBank, it is not
exactly the end of the world.
For
central banks, everything revolves around communication. Here the central banks
are trying to “hold the hand” of markets and the economy, and provide them with
a long-term outlook for monetary policy. And then this: The reduction in bond
purchases, which seemed a certainty, will, for one, not take place; and two,
the U.S. central bank, also known as the U.S. Federal Reserve, won't even provide
a date for such a step. The market is, to put it mildly, taken by surprise.
Treasury yields plummet, and on the currency markets, the U.S. dollar loses
more than one cent of its value against the euro.
The
first conclusion one can derive from this is that even central banks have to
take it slow. Those who think that central banks have access to better data,
better models, or better empirical data than others participating in the
financial markets have new evidence that such is not the case. The most recent
figures on the U.S. economy were not convincing enough to necessitate beginning
to reduce financial stimulus. On this, recent commentary on the issue from the
Federal Reserve Board, not least by Federal Reserve Chairman Ben Bernanke, had
gone too far.
In
particular, the recovery showed signs of a slow-down in the U.S. housing market.
The FED took this into account in its statement, noting that the effect of
higher market interest rates on the economy should be awaited before moving
forward with plans to tighten monetary policy.
So
where do we go from here? To some here and there, this episode may be somewhat reminiscent
of the European Central Bank. In late summer 2011, still under the leadership
of then-President Trichet, the ECB
had sought a way out of its ultra-expansionary monetary policy and had already
implemented two interest rate hikes, when economic the data rapidly deteriorated.
Indeed, Trichet’s successor, Mario Draghi, quickly went back in the opposite direction.
Are
these all signs that this extreme monetary policy can no longer be abandoned,
as some experts fear? I think not. There are a number of economic developments
that indicate - at least in the United States - that an economic recovery from
the financial crisis continues. Perhaps not as quickly as market participants had
thought, however.
It
still appears that the U.S., at least, has survived the most dangerous
self-experiment in economic history - because the last few decades have been just
that: a self-experiment with financial anabolic steroids. After the growth of
industrialized nations declined in the 1970s and unemployment rose, attempts were
made to boost growth by liberating the financial sector. These governments
deregulated the markets and simultaneously provided them with cheap money. The
bursting of the credit bubble nearly suffocated the more mature, industrialized
nations, which are only now slowly regaining consciousness.
In
comparison with European countries, the Americans are further along in their
recovery from the financial crisis: There, large banks were forced to
recapitalize. In about 500 cases, using a standard process, small institutions
were liquidated: after protecting insured deposits, uninsured deposits were -
in extreme cases - included in the process. In addition, banks were subjected
to credible stress tests.
A
huge new regulatory package has passed through their legislative bodies, half
of which still remains to be implemented. In the private sector, households are
in the process of moving away from historically-high levels of debt, and the
housing market has been de-cluttered. Overall, Americans have tackled their
problems more energetically than Europeans, preventing the zombification
of the banking sector. Apparently, the Americans knew how to brew a financial
crisis, but they also know how to suck it up again.
The
FED's new task was: put an end to the paradigm of
unlimited support for the financial markets that over recent years had become
entrenched in the minds of most market participants. The U.S. central bank
actually mastered the first part of the exercise reasonably well. It clearly
announced its intentions, and although there was a brief period of turbulence,
the markets have swallowed the new forecasts, the interest on Treasury bonds
was slightly higher than before but not out of control, and collateral damage,
in emerging-market assets for example, has proven manageable. Here one must
always keep in mind that central banks are under no pressure to tighten
monetary policy, because there is no sign of inflation. Historically, one does
well to wait for the effects of such announcements before actually setting
aside such extreme phases in monetary policy.
Posted By
Worldmeets.US
It
may be that the prospect of interest rate hikes alone has cast a pall on expectations
for the economy. The FED is now waiting this out. The most likely outcome will
be that recovery will continue and that a reduction in bond purchases will
begin in the coming months - or at the latest in the first half of 2014. As
Federal Reserve Chairman Bernanke said, it will depend on economic developments
of which even he cannot be certain. Here, even central banks have to move with
caution.
