By Bilal Hafeez 20-09-2019

Top Picks: Monetary Policy & Inflation

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28th September

Threats to Central Bank Independence: High-Frequency Identification with Twitter (Bianchi, Kung, Kind) Academic paper finds that Trump tweets demanding the Fed cut rates does impact market pricing. Cumulatively, his tweets have lowered market expectations of Fed policy rate by 10bps.

Consumers Price Beliefs, Central Bank Communication, and Inflation Dynamics (Bank of Japan) Argues that prolonged periods of low inflation make the central bank’s inflation target less relevant for consumers. Instead, targeting price level (rather than the change in prices – inflation) would have more impact.

Credit Easing Versus Quantitative Easing: Evidence from Corporate and Government Bond Purchase Programs (Bank of England) BoE finds that buying corporate bonds was more effective than QE in reducing credit spreads, especially for higher-rated bonds.

Zero Lower Bound Risk according to Option Prices (San Fran Fed) Fed uses option prices and finds market has 24% probability that Fed policy rates will hit lower bound by end-2021.

New Weapons for the ECB (Project Syndicate) Former Greek finance minister, Yanis Varoufakis, argues that the ECB’s current toolkit will only lead to further right-wing populism as economic stagnation continues. Instead, he argues for the creation of “ECB conversion bonds” which effectively converts up to 60% of a country’s debt to low yielding bonds at ECB rates. This would allow for fiscal stimulus. Instead, he argues for the creation of “ECB conversion bonds” which effectively converts up to 60% of a country’s debt to low yielding bonds at ECB rates. This would allow for fiscal stimulus.


20th September

There’s so much criticism of monetary policy these days – much of it justified. One of the toughest criticisms is that it is leading to more monopolies. Aside from this, there is a role for more macro-pru policy and changes in the goals of policy.

Jerome Powell’s Dilemma (Project Syndicate) Top economists Carmen and Vincent argue that Powell is helping Trump get re-elected by neutralising the negative impacts of Trump’s trade policy.

Macroprudential Policy Could Have Reduced Imbalances in The Euro Area (VOX) Academics argue that country-specific macropru policy, such as adjusting LTV values for mortgages, are more affective in reducing Euro imbalances rather than ECB policy.

Could Ultra-Low Interest Rates Be Contractionary? (Project Syndicate) House of Debt authors Mian and Sufi and Princeton Prof Ernest Liu argue that big companies disportionately benefit from low rates and drive out competition. This reduces productivity and growth.

Hitting the Elusive Inflation Target (Chicago Fed) Argues that part of US’ inflation undershoot has been due to its symmetric inflation target. Allowing inflation overshoots is instead a better approach.


13th September

What Happens if Trump Tries to Fire Fed Chair Jerome Powell? (Brookings) It’s a bit more complicated than you think. Essentially, Trump would need cause (“inefficiency, neglect of duty, or malfeasance in office.) to remove him. Powell could sue if he felt it was unfair.

Did Dudley Do Right? (Project Syndicate) Prof Barry Eichengreen makes the case for the Fed and other central banks to make public their concerns about the policies of the government.

SNB – Between A Rock and a Hard Place (Pictet) Argues for more Swiss FX intervention to keep CHF weak, rather than rate cuts.


6th September

Central Banking’s Bankrupt Narrative (Project Syndicate, 4 min read) Prof Roger Farmer argues that aside from monetary policy not working, fiscal policy will also be ineffective. Instead, he argues that recessions are caused by asset market crashes and so policy should focus on that.

Estimating the economic impact of a wealth tax (Brookings, 3 min read) Makes the case for a wealth tax on the top 0.1% of Americans (see chart). Argues that it is more likely to work compared to other attempts in Europe which had a broader target. This is gathering support from various Democrat Presidential candidate.

Negative Interest Rates and Inflation Expectations in Japan (San Fran Fed, 8 min read) They find that inflation expectations actually fell after the BoJ introduced negative rates in 2016. They warn against cutting rates below zero.

Do Monetary Policy Announcements Shift Household Expectations? (Dallas Fed, working paper) They find Fed policy rate move surprises DO impact households’ economic confidence, but surprises on forward guidance and QE DO NOT. This questions the efficacy of unconventional policy.

ECB corporate QE and the loan supply to bank-dependent firms (ECB, working paper) – The central bank finds that corporate QE did increase bank lending. This suggests the ECB will restart such programmes soon.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)

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