Category: Monetary Policy

Market Participants Overreact to Fed Chair Yellen’s Testimony

Bond yields and the dollar fell.  Emerging markets and equities performed well.  The main cause appears to be Yellen’s testimony to the Senate.  

Yet this seems to be an exaggerated response.  Going over Yellen’s prepared remarks and answers to questions from the Senators, our basis understanding has not changed:  The Federal Reserve’s monetary policy and forward guidance continues to evolve and prepare investors, including those foreign sovereigns and companies that borrowed dollars, for an eventual rate hike.  

Framing Fed Chair Yellen’s Testimony and Interpreting Fed Speak

Testimony by Federal Reserve Chair Yellen is one of this week’s few highlights.  Yellen’s testimony is not about articulating a new policy, but explaining the existing policy to US Congress, and to some extent, the American people. 

Anxiously Awaiting Yellen

Amid relatively light news, the US dollar is bid.  The euro is back to the lower end of its range, straddling the $1.1300 area.  The dollar is at an eight-day best against the yen near JPY119.50.  Falling commodity prices, a soft New Zealand inflation expectations survey, and the prospects for additional easing by the Reserve Bank of Australia (March 3) and the Bank of Canada (March 4), are weighing on the dollar-bloc. 

The ECB Meeting Record Mostly Met Expectations

Minutes after the German finance ministry rejected Greece’s offer, the ECB released its first record of its recent meeting.  The only item that rises to the level of a surprise might be that the ECB considered buying corporate bonds.   

Will the ECB’s First Meeting Record Prove Purposeful?

Tomorrow is an important day for the ECB.  Yes, it does appear a Greek compromise is getting closer as the brink draws nearer.  Yes, the ECB is preparing to launch its new and more aggressive asset purchase program, just as the Eurozone real sector data and financial data are improving.  

The ECB’s Decision and U.S. Jobs…Meanwhile, at the SNB

The ECB’s decision yesterday to no longer accept Greek government bonds or state-guaranteed paper, but approving Emergency Lending Assistance (ELA) by the national central bank remains a key talking point today. The timing of the decision, following the meeting between new Greek Finance Minister Varoufakis and Draghi but before Varoufakis met with German Finance Minister Schaeuble is particularly intriguing. 

Another Central Bank Eases and Grexit Talk Subsides

The Reserve Bank of Australia joined the chorus of central banks to ease policy.  The 25 bp rate cut was not a major surprise but it did catch many a bit off-guard as recent data and the pace of the Australian dollar’s decline had prompted many to push out the expectation to next month. 

Testing Central Bank Balance Sheet Limits

When the Swiss National Bank lifted its cap on the franc, many thought they understood the message.  It had reached the end of its rope.  Some suggested the ownership structure of the SNB (owned by the Swiss cantons and individuals vs the stock exchange) opposed a further expansion of its balance sheet (~80% of GDP) vs ~20-25% in the UK and US by comparison. 

Quantitative Easing – What you should know about it!

On 22nd January 2015, European Central Bank announced its plan to revive Eurozone’s stagnant economy agreeing to pump in €60 billion ($69 billion) per month thus grabbing headlines. Quantitative Easing (QE) is not an unfamiliar policy in the financial world.  When short-term interest rates are closest to zero and the central bank can no longer ease policy by simply adjusting the price of its reserves, then it aims to adjust the quantity of reserves.