The IMF; Monetary Policy Will Never Be the Same again

Nov 20 • Mind The Gap • 5005 Views • 3 Comments on The IMF; Monetary Policy Will Never Be the Same again

One of the key economists at the IMF, Oliver Blanchard, has shared his thoughts this morning on monetary policy including ZIRP (zero interest rate policies) and quantitative easing. He notes what many in the analyst community already knew given the example of Japan; that once you engage in ZIRP there is very little opportunity for escape in the medium (or possibly longer) term. He also suggests that the USA could have already exited ZIRP if inflation had been higher through the five year period the zero interest rate policy has been adopted. As a consequence Mr. Blanchard now believes that the ZIRP measure will be with us for some time and the USA (in particular) will have enormous problems extracting itself from it.

Unfortunately Mr. Blanchard failed to offer alternative solutions to ZIRP and QE and this is where investors and macro economic policy ‘engineers’ should sit up and take notice. One of the brightest guys in any room, surrounded by some of the most respected economists, can offer up no solutions to the malaise the USA and Europe is in, other than punitive interest rates for society as a whole and buying assets from banks allowing them to continue with their ‘high level’ games.

The disconnect is incredulous; Main Street goes to hell in a handcart whilst the DJIA reaches record highs and we should be extremely worried. Worried as to the eventual consequences and concerned that if that’s the best ‘they can do’ then a stagnant domestic economy in Europe and the USA is baked in.

“We should not dismiss the possibility, raised by Larry Summers that we may need negative real rates for a long time. Countries could in principle achieve negative real rates through low nominal rates and moderate inflation. Instead, we are still facing today the danger of an adverse feedback loop, in which depressed demand leads to lower inflation, lower inflation leads to higher real rates, and higher real rates lead in turn to even more depressed demand.”

Japanese exports rise whilst a record trade deficit for October is posted

A surge in car shipments helped Japanese exports rise to their largest annual increase in over three years in October. The 18.6 percent increase in exports in the year to October came in ahead of the median market forecast for a 16.5 percent rise and jumped from an 11.5 percent gain in September, data by the Ministry of Finance showed on Wednesday. However, Japan also logged a record October trade deficit on the back of fuel purchases.

China’s central bank has stated that it will end normal intervention in the currency markets, a more definitive remark than it has previously made when outlining its plans to liberalise the renminbi. However, no details or timetable for reforms were given

Federal Reserve Bank of Chicago President Charles Evans, a voter on policy this year, said the Fed may buy a total of $1.5 trillion in bonds in their QE programme that started in January 2013 to ensure steady employment gains. Ben Bernanke did not drop any hint on when the Fed would start to slow its asset purchases from $85bn a month, referring only to “coming meetings”, but his remarks suggest a taper is still possible at the Federal Open Market Committee’s December meeting. Meanwhile US funds have place big multibillion-dollar bets on a euro bank recovery over the past four months in the belief that the region’s stuttering economic recovery will soon start to gather steam.

Market snapshot

Asia-Pacific bourses were mixed in the overnight session, after a loss of momentum in the US markets, with Japanese trade data failing to inspire investors and the Nikkei. The MSCI Asia Pacific Index sank 0.5 percent. The ASX 200 closed down 0.85%, the CSI 300 up 0.53%, the Hang Seng up 0.18% and the Nikkei down 0.33%.

European bourses are mixed; STOXX down 0.05%, CAC down 0.11%, DAX is flat with the UK FTSE down 0.22%. The DJIA equity index future is up 0.11%, SPX up 0.04% and the NASDAQ up 0.07% all three indices suggesting that the USA markets will open up marginally.

NYMEX WTI oil is up 0.11% at $93.44 per barrel, with NYMEX nat gas up 0.31% at &3.57 per therm. COMEX gold is down 0.22% at $1270.70 per ounce with silver up 0.08% at $20.35 per ounce.

Forex focus

The yen rose 0.1 percent to 100.07 per dollar early in London time. It depreciated to 100.44 on Nov. 15th, the weakest since Sept. 11th. Japan’s currency gained 0.1 percent to 135.40 per euro after earlier depreciating to 135.95, its lowest level since October 2009. The yen rose versus all 16 of its major peers as a decline in Asian and European equities boosted demand for haven assets.

The pound rose 0.1 percent to $1.6142 early London time after advancing to $1.6149 on Nov. 18th, the highest level since Oct. 28th. Sterling gained 0.2 percent to 83.39 pence per euro. The pound approached a three-week high versus the dollar before the Bank of England published the minutes of this month’s policy meeting at which officials kept interest rates at a record low.

Bonds

Benchmark 10-year yields rose one basis point, or 0.01 percentage point, to 2.72 percent early in London trading. The yield is below its average over the past decade of 3.51 percent. The price of the 2.75 percent note due November 2023 fell 2/32, or 63 cents per $1,000 face amount, to 100 9/32. Japan’s 10-year yield was little changed at 0.61 percent. It climbed to 0.645 percent earlier this week, a one-month high.