Tag Archives: Central bank

Updates from Chicago Booth

Why central banks need to change their message
The US and European central banks thought they could manage their economies by bringing their secretive plans for interest-rate regulation into the light. But they didn’t account for an unreceptive public.
By Dee Gill – A lot of people don’t have a clue what central banks do, much less how the institutions’ ever-changing interest-rate targets ought to affect their household financial decisions. Recent studies, including several by Chicago Booth researchers, find Americans and Europeans oblivious to or indifferent to the targets’ implications.

This is a serious problem for policy makers. For a decade, monetary policy in many developed economies has relied heavily on forward guidance, a policy of broadcasting interest-rate targets that works only if the public knows and cares what its central bankers say.

“The effects of monetary policy on the economy today depend importantly not only on current policy actions, but also on the public’s expectation of how policy will evolve,” said Ben Bernanke, then chairman of the US Federal Reserve, in a speech to the National Economists Club in 2013. At critical times since 2008, forward guidance has been the Fed’s and the European Central Bank’s go-to tool for revitalizing their ailing economies and holding off widespread depression.

Forward guidance usually involves central banks announcing their plans for interest rates, which traditionally were guarded as state secrets. The openness is intended to spur investors, businesses, and households to make spending and savings decisions that will bolster the economy; typically, to spend more money during economic slowdowns and to save more when the economy is expanding.

Chicago Booth’s Michael Weber and his research colleagues, in several studies, tested the basic assumption that households will respond to forward guidance, and find it flawed. Most people, the researchers conclude, generally do not make spending and savings choices on the basis of inflation expectations. In personal financial decisions—for example, to pay or borrow money for a boat, refrigerator, or renovations, or to sock away funds for rainy days—words from central bankers hardly register. more>

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Monetary policy and Guy Fawkes lanterns

By Nick Hubble – For many dozens of years, central bankers have been managing the relationship between inflation and unemployment. Only to discover there isn’t one.

The last ten years proved the point. In fact, the relationship between inflation and unemployment has only held for a preciously short amount of time. And yet it continues to be the most influential economic theory around. That’s because it justifies monetary policy itself. The idea that governments can and must manage the economy.

I know that managing the economy through interest rates sounds like a stupid idea. But people used to believe in similar absurdities.

It’s all down to the Phillips Curve – the relationship between inflation and unemployment.

If unemployment is too high, inflation will be too low because workers aren’t cashed up enough to spend and push up prices. If inflation is too high, it’s because too many workers have too many jobs and too much income, which pushes up prices.

This theory is stupid. It ignores something called supply and demand. If prices rise because workers are cashed up and can buy more, then production increases and increases supply. That returns prices to a lower level. As commodity traders will tell you, the cure for high prices is high prices. It incentivizes supply. But to an economist, the cure for high prices is higher interest rates. Because they can’t help but meddle.

If central bankers can’t control inflation or unemployment, why put up with the problems they create? Like asset bubbles, debt booms, inequality and explicit backdoor bailouts for bankers that encourage absurd levels of risk? more>

Why Central Banks Should Offer Bank Accounts to Everyone

By Nicholas Gruen – As much as your bank presents itself as the very essence of competitive, private enterprise, it’s actually part of a public private partnership. The central bank – in the US the Fed, in the UK the Bank of England, in Europe the European Central Bank ECB) – sits at the apex of the banking system providing two fundamental services to your bank.

First each bank is connected to the monetary system with an ‘exchange settlement account’ with the central bank. So if you want to pay me, you get your bank to pay mine, with the net difference between all payments to and from each bank at the end of the day being squared up via counterbalancing payments between each commercial bank’s exchange settlement account with the central bank.

Secondly, because the deposits banks hold are such a tiny fraction of the loans they write, the central bank goes ‘lender of last resort’ to banks if they can’t meet withdrawals.

The central bank could also provide ‘iquidity in a more competitively neutral way. It couldn’t practicably assess everyone’s creditworthiness, but it could specify a set of super-safe assets against which it would automatically lend as a matter of right. more> https://goo.gl/AU8bZi

How ‘negative interest rates’ marked the end of central bank dominance

By Peter Spence – Most of the actions of central bankers – immensely powerful individuals who steer whole economies – pass largely unnoticed in everyday life.

Forcing people to face sub-zero interest rates, in theory, should boost the economy. Rather than face fees to keep their money sitting in an account, companies and consumers should prefer to invest it in more rewarding ways, or to spend it.

Alarmingly, traders and analysts are now worried that even negative rates will not be enough to keep us going through the next economic crisis, whenever it arrives.

In total, five central banks have now turned to negative rates – those of Denmark, the eurozone, Switzerland, Sweden and most recently Japan.

As central bank interest rates fall, so does that return. But private banks have been unwilling to pass on negative rates to their customers, eroding their own profits. more> http://goo.gl/qnPA11

Central bank cavalry can no longer save the world

By David Chance – In 2008 central banks, led by the Federal Reserve, rode to the rescue of the global financial system.

Seven years on and trillions of dollars later they no longer have the answers and may even represent a major risk for the global economy.

The flow of easy money has inflated asset prices like stocks and housing in many countries even as they failed to stimulate economic growth. With growth estimates trending lower and easy money increasing company leverage, the specter of a debt trap is now haunting advanced economies, the Group of Thirty said. more> http://tinyurl.com/pjwar4k

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The Eight Fictions Of Central Banking

By Steve Denning – Fiction: “The absence of higher inflation is sufficient license for the Fed to continue its present course.”

Reality: The real danger of long periods of free money and subsidized credit is significant capital misallocation and mal-investment, which undermine long-term growth or financial stability.

Fiction: “Highly accommodative monetary policy through QE provides broad support to the economy.”

Reality: Current policy helps the rich, but does little for workers and retirees or those seeking unemployment. more> http://tinyurl.com/pvsps83

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The government-dominated bond market

By Felix Salmon – This chart alone suffices to explain why the markets care so much about the taper: central-bank buying accounts for $1.6 trillion €” more than half €” of the total demand for bonds in 2013. Meanwhile, private banks are taking the opposite side of the trade: while they were huge buyers of bonds in 2007 and 2008, they’re net sellers in 2013 and 2014, more or less completely negating the buying pressure from pension funds, insurance companies, bond funds, and retail investors. In 2014, it seems, substantially all the net demand for bonds is going to come from the official sector.

The good news is that this large transfer of money from the official sector’s left hand to its right hand is slowing down. more> http://tinyurl.com/opym5y6

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Yellen Says, Yes, the Fed Makes the Rich Richer

By By Matthew C. Klein – When confronted with concerns about people struggling to live off fixed incomes, Yellen agreed that “low interest rates harm savers, it’s absolutely true.” Harming at least some savers, however, may be part of the plan, at least if Yellen agrees with Charles Evans, the president of the Federal Reserve Bank of Chicago. He has argued that the threat of wealth confiscation by negative interest rates is necessary to restore spending and “risk-taking” back to “normal levels.”

These admissions suggest the Fed‘s leaders believe that the central bank boosts the economy chiefly by enriching certain people in the hope that they go out and spend their newfound wealth.

Congress could get around these unsavory side effects by enacting broad-based tax cuts or by having the Treasury send checks directly to every American. more> http://tinyurl.com/k2jysr3

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100 Years Later, Was The Federal Reserve A Good Idea?

By Gerald P. O’Driscoll Jr. – With the Fed in its centennial year, Janet Yellen facing confirmation hearings in the Senate, and questions swirling over whether the Fed will enact “tapering,” many monetary scholars are asking: Was the Fed a good idea?

Monetary policy cannot over the medium- to long-term systematically influence real variables, like the number of jobs created. Even in the short run, monetary policy’s track record is mixed at best. Witness the Fed’s inability to generate a normal economic recovery – especially in employment – despite unconventional monetary policy.

The big question is whether the Fed has outlived its purpose and competitive banking and a commodity standard should take its place. There are no near-term prospects for ending the Fed. Longer term, it would a formidable but not impossible. Whether that particular goal is achievable, fundamental monetary reform is a necessity. more> http://tinyurl.com/q8drkeo

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London to become center for trading in Chinese yuan

CBC News – London is now ahead of any other financial center in the race to become an important hub for yuan trading, after the Chinese central bank granted London-based institutional investors a quota of 80 billion yuan ($12.7 billion) to invest in Chinese stocks.

Osborne said China’s state-owned banks will be allowed to expand their operations in Britain by setting up wholesale branches.

Britain and China signed an agreement in June to have their central banks swap 200 billion yuan for £20 billion ($32 billion), giving U.K. financial institutions more access to large amounts of yuan than had been available in the past outside of China. more> http://tinyurl.com/mv3gt9m

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