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Two Fed Officials Favour Aggressive Easing Options

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http://uk.reuters.com/article/idUKTRE69F11W20101016

Two top Federal Reserve officials argued for further aggressive action by the central bank, with one saying the economy needs "much more" help and the other pointing to Japan's painful lessons.

With nearly one in ten in the U.S. labour force unable to find work and already very low inflation threatening to drop further, the U.S. central bank is expected to offer the economy more support at its next policy meeting on November 2-3.

Most analysts expect the Fed will embark on a fresh round of Treasury purchases, over and above the $1.7 trillion (1.06 trillion pounds) in longer-term assets it has already bought.

"In my opinion, much more policy accommodation is appropriate today," Chicago Federal Reserve Bank President Charles Evans told a conference hosted by the Boston Fed, repeating an argument he made earlier this month.

Boston Fed President Eric Rosengren, speaking at the same event, said Japan's drawn-out battle with deflation shows prevention may be easier than the cure, and policymakers should respond aggressively before "pernicious" deflation takes hold.

"Insuring against the risk of deflation may be much cheaper than waiting until it has occurred and then trying to address it," said Rosengren, who has a darker view of the economic outlook than some of his colleagues at the central bank.

"A gradual response may not be as effective as a more active response to arrest deflationary pressures before they become embedded in thinking that can affect household and business spending," he said.

U.S. inflation unexpectedly slowed in September even as retail sales picked up, keeping pressure on the Fed to act soon to lessen the risk of a downward price spiral.

Record low interest rates in rich countries, and the prospect of the Fed pumping more dollars into the economy, are funnelling huge capital flows into high-yielding emerging markets, pushing up their currencies. The resulting currency tensions are expected to be a live issue at meetings of the world's top finance officials in South Korea next week.

So we are now insuring against deflation, thank god we've got such economic geniuses in charge who understand basic economics and that deflation must be avoided at all costs especially in a over leveraged system.

Of course stopping the build up of such leverage may be a better policy, but then bankers wouldn't get telephone number pay days.

At least we can rest assured the bankers will stop at nothing to impoverish us all to ensure we don't get deflation.

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http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2010/10/ben_bernankes_war.html

Stephanie Flanders

Ben Bernanke declared war today - not on China, but on the possibility of deflation. he knows that a vicious cycle of slow growth, stagnant or falling prices and high unemployment poses a much greater threat to America's way of life than China's silly exchange rate.

But like it or not, the exchange rate will be caught up in the Fed's response.

In the 1930s, the deflationary trap was the gold standard. Britain left it first, and was vilified for doing so - but it was also the first major economy to recover.

The verdict of economic historians has been that it would have been better for the world if other countries had followed Britain sooner.

Now we have no gold standard (though the euro might be playing a similar role for the eurozone). But we do have a collection of countries, most of them Asian, who have created a modern version of it, by pegging their currencies to the dollar.

America can't abandon its own currency. But it can make things as uncomfortable as possible for those that choose to stick with it. Ben Bernanke may not have planned it that way, but that is exactly what the Fed's policy will do.

Let me say something about what that policy will actually be.

The message of today's speech is that chairman Bernanke thinks that US inflation is dangerously low, that unemployment is dangerously high, and that growth can and should be much faster than it is now.

You don't have to be the world's most powerful academic economist to grasp these three features of the US economy. The September inflation numbers, also out today, make clear just how serious the threat of deflation is: the annual core inflation rate last month fell to 0.8%, the lowest rate since 1961.

Also note that Ben Bernanke doesn't buy the idea - common among some US economists - that a large part of the recent rise in US unemployment is structural, meaning growth will not bring it down.

Here's the key sentence in the speech, which Paul Krugman and other US Keynesians will like:

"Overall, my assessment is that the bulk of the increase in unemployment since the recession began is attributable to the sharp contraction in economic activity that occurred in the wake of the financial crisis and the continuing shortfall of aggregate demand since then, rather than to structural factors."

But if you're the Fed chairman and your mandate is to achieve price stability and full employment, you can't just observe these facts. You also need a plan to fix them.

In effect, the speech lays out a four point plan. First, tell investors that you have a roughly 2% inflation target. Second, tell them you are perfectly willing to buy a lot more bonds to push down long-term interest rates and increase nominal spending, and you think it will work.

Third, tell them that they're still underestimating your commitment to push up inflation, and you expect to keep rates low for longer than they think. Fourth, actually go out and buy a lot more bonds and hope for the best.

Arguably, with this speech the Fed is now up to point three of the plan (though part of its strength will lie in repetition). Apparently, the fourth, "QE 2", is only a matter of time.

Naturally, the speech doesn't have details on the likely scale of the Fed's asset purchases, or what, exactly, they would buy. But Bernanke does cite the Bank of England's gilt purchases approvingly.

True, the chairman says there is a big downside to such extraordinary measures, because markets will worry about the exit path. But in his next breath he asserts that, with the new tools at the Fed's disposal - primarily the capacity to mop up excess bank reserves - this problem has now been solved. Some will doubt that this is true. But it's noteworthy that he thinks it is.

Not all the Fed governors agree on the need for more QE. As in the UK, some have been making the case in recent weeks - while others have talked up the risks. But one has to imagine, on the basis of this speech, that Bernanke believes he has a majority on his side.

Some have talked of a linkage between Fed policy and the Chinese exchange rate: if the Fed agrees not to do more QE, then the Chinese will shift the exchange rate. That is not going to happen, and it shows a misunderstanding of the Fed's own view of what it is doing.

Ben Bernanke's goal is faster US growth, higher inflation and lower unemployment. A rebalancing of the global economy - and as a small step toward that, a change in the Chinese currency - can play a welcome contribution to that goal, and will also be a sign of the Fed's success. But it's a secondary objective. America's recovery comes first. Whether the rest of the world likes it or not.

Excellent so we are just going to hope for the best! :blink::blink:

The question which this article fails to address is what happens if US unemployment is structural? You print billions/trillions and what then?

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Yes, with food, gold, clothing, commodity, travel costs, share prices, etc all increasing at massive rates Deflation is certainly a major threat.

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She's a *ucking joke

I hope that she gets paid well for her crap.

Even money she's got a pile of gold at home.

Why do I keep thinking Stephanie Flanders is a character from Viz?

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Charles Evans seems the most level headed and rational fed member I have read. Its blatantly obvious when inflation is running well under target, and unemployment well above target that a heavy easing of monetary policy is needed.

He also has brought up the great idea of price level targetting. Where the fed say came in below the 2% price target for 3 years, hitting only 1%.. that the fed will commit to 'make up' that missed 1% later.

Right now many major actors in the economy do not have confidence that the fed is willing to go 'all the way' to prevent deflation. I'm still in the camp with the gut feeling the fed will always do too little too late and follow Japan's lead. Nov 3rd is a key date. If the fed comes out with some weak tiny QE, it will be a clear sign they just aren't willing to 'go all the way'. It should honestly blow away everyone in its size to give everyone confidence.

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Charles Evans seems the most level headed and rational fed member I have read. Its blatantly obvious when inflation is running well under target, and unemployment well above target that a heavy easing of monetary policy is needed.

He also has brought up the great idea of price level targetting. Where the fed say came in below the 2% price target for 3 years, hitting only 1%.. that the fed will commit to 'make up' that missed 1% later.

...and what of the U.K. where inflation is over target?

presumably QE should be withdrawn then, shouldn't it?

people like you make me laugh - you think that some idiot central banker can pull a lever and "fix" things.

well they can't - all they do is punt the problem down the road a bit until it blows up.

oh, like around about now then.

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...and what of the U.K. where inflation is over target?

presumably QE should be withdrawn then, shouldn't it?

people like you make me laugh - you think that some idiot central banker can pull a lever and "fix" things.

well they can't - all they do is punt the problem down the road a bit until it blows up.

oh, like around about now then.

In the UK inflation is at 3.1% and trending down. So QE should be on hold for now.

The central banker can only help so much.. for example they can't tell a nation to be smart and go nuclear like France, versus being dumb and going wind like other nations. At the same time if a central bankers screws up and makes it so not enough money is in the economy, it can cause mass unemployment.

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the continuing shortfall of aggregate demand since then, rather than to structural factors

Hmmm. So what's a structural factor, if continuing shortfall of aggregate demand isn't?

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Record low interest rates in rich countries, and the prospect of the Fed pumping more dollars into the economy, are funnelling huge capital flows into high-yielding emerging markets, pushing up their currencies. The resulting currency tensions are expected to be a live issue at meetings of the world's top finance officials in South Korea next week.

They're trying to force China off their peg.

Revalue or we'll blow you up.

Fingers crossed they understand the message or we're in deep sh1t.

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Charles Evans seems the most level headed and rational fed member I have read. Its blatantly obvious when inflation is running well under target, and unemployment well above target that a heavy easing of monetary policy is needed.

He also has brought up the great idea of price level targetting. Where the fed say came in below the 2% price target for 3 years, hitting only 1%.. that the fed will commit to 'make up' that missed 1% later.

Right now many major actors in the economy do not have confidence that the fed is willing to go 'all the way' to prevent deflation. I'm still in the camp with the gut feeling the fed will always do too little too late and follow Japan's lead. Nov 3rd is a key date. If the fed comes out with some weak tiny QE, it will be a clear sign they just aren't willing to 'go all the way'. It should honestly blow away everyone in its size to give everyone confidence.

Gavyn Davies view last week on PLT aa3.

http://blogs.ft.com/gavyndavies/2010/10/14/should-the-fed-adopt-a-price-level-target/

Third, what happens if the Fed is simply unable to hit its PLT, so that the shortfall of the price level relative to target just keeps getting bigger, year after year? I can see that proponents of the PLT might like this, because it would shift the balance of the argument on the FOMC towards more and more QE as the price shortfall kept getting larger through time. But the Fed’s wider credibility would not be enhanced if it were demonstrated repeatedly that it could not actually hit its own chosen price target. In fact, this could backfire, by highlighting the impotency of monetary policy at a time when the economy is stuck in a liquidity trap.

In face of uniquely difficult circumstances, the Fed is being forced to use some very unfamiliar new weapons. A price level target would be one too many

I think we're in a similar position to early 2008 when the usual suspects were recommending buying long oil futures in readiness for $600 a barrel. They know what's coming and want to get ahead of it this time around. Of course, acting before we have another round of collapsing prices brings the hyperinflationists out to play. That's inevitable.

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They're trying to force China off their peg.

Revalue or we'll blow you up.

Fingers crossed they understand the message or we're in deep sh1t.

Surely you mean you hope the Chinese blink, during the Cold War the Russians ALWAYS backed down the Cuban missile crisis being the best example, the Soviets where ultimately pragmatic and didn't want to start a war.

Now you have China with face to save, an economy that needs to grow to prevent widespread social unrest etc... I'm not convinced that the Chinese will back down like the Soviets did. China may possible gamble that they can weaken the US by allowing them to print and see which nations social structure breaks first. Anyone think the US would actually hold together under real stress?

http://www.telegraph.co.uk/finance/comment/liamhalligan/8068335/Chinas-not-the-villain-if-the-West-tries-to-debase-its-debt-through-QE.html

The annual meetings of the International Monetary Fund in Washington are supposed to generate some kind of resolution. Instead, all we got was posturing and a slew of pious speeches saying that "co-operation is crucial".

What is now clear is that some of the world's leading economies are deliberately debasing their currencies in order to make their exports more competitive and lower the real value of the massive debts they owe the rest of the world.

Tempers are rising, as are protectionist sentiments. Across the globe, governments are talking about "aggressive tariff barriers" and "trade retaliation" - language that hasn't been used by mainstream peacetime politicians since the mid-1930s.

Yet instead of knuckling-down and addressing the urgent task of building some kind of an agreement to contain a fully-blown currency conflict, world leaders last Sunday urged the IMF only to "study the issues", and "play a stronger role in monitoring how the policies of each member state affects the others".

This was a pathetic response. The concluding statement of the fund's policy-setting committee meekly pledged to "work toward a more balanced pattern of global growth, recognising the responsibilities of surplus and deficit countries".

To his credit, even the IMF's own managing director, Dominique Strauss-Kahn, labelled such language "ineffective". The governments controlling the IMF simply kicked the tough conversations into the long grass – postponing them until the Seoul G20 summit in early November at the earliest.

More of Halligan on this at the link.

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Hmmm. So what's a structural factor, if continuing shortfall of aggregate demand isn't?

Good catch.. I'd like to hear his opinion on the structural.

We debate that on this forum, like regulatory barriers, technological unemployment, free trade etc.. But I've never heard a central banker blame one of those things for 'structural unemployment'.

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They're trying to force China off their peg.

Revalue or we'll blow you up.

Fingers crossed they understand the message or we're in deep sh1t.

Yep the only way is to print hardcore until these asiatic nations are forced off the peg. I guess another outcome is no matter how hard they print the Asian nations buy up every dollar, then hey - free stuff for everyone courtesy of Asian friends.

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  • 152 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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