BOJ - Hike and Hold

BOJ - Hike and Hold
US Fed – Focused on Inflation, But Ignoring Everything Else?
BOE – A Divided Board

As we’ve said frequently over the past few weeks, yield curves around the world have been shifting in tandem as the concerns of bond traders have been pertinent to all markets. Longer-term yields actually saw the biggest change over the past two days amidst flight to safety as geopolitical tensions escalate with Iran. Additionally, equity markets have started to show signs of toppling with China’s benchmark Shanghai Composite index plunging 8.8 percent in a single session. Economic reports have not helped the case either, as signs begin to emerge that both expansion and inflation are slowing globally.
Looking ahead, although the European Central Bank is widely anticipated to hike rates at their March monetary policy committee meeting, traders do not foresee much upside potential beyond 3.75 percent as the Euro-zone yield curve has started to invert.

BOJ: Hike and Hold

Now that the Bank of Japan has proven their independence with a 25bp hike, the central bank has expressed that rates will remain low for quite a while:

[U]Toshihiko Fukui, Bank of Japan Governor

[/U]“At this point in time we are completely open about what the future monetary policy should be like specifically. But our basic view is that, assuming the economy continues to expand smoothly under price stability, making gradual adjustments to interest rate levels in line with economic and price developments, while keeping accommodative monetary conditions backed by very low interest rates for now, is the key to supporting sustained growth.” – February 23, 2007

“The global economy is expanding, with growth spreading to more regions. We expect the Japanese economy to show solid growth.” – February 22, 2007

“I sometimes hear concerns that the falling savings rate may weaken the potential growth rate of the Japanese economy, but if accumulated financial assets play an effective role as risk money, they can help boost the growth rate even when the savings rate is low.” – February 26, 2007

[U]Koji Omi, Japanese Finance Minister

[/U]“We’ve been saying all along that we hope the Bank of Japan supports the economy through monetary policy, so that Japan’s economic recovery is sustained. But monetary policy issues, including specific interest rate levels, are up to the bank (to decide). I respect the decision it made at its policy-setting meeting.” – February 23, 2007

[U]Hiroko Ota, Japanese Economics Minister

[/U]“I think the timing of the next rate hike will depend on economic conditions. Since the BOJ has said that it will maintain very accommodative monetary conditions, I expect the Bank to make the (next hike) decision in line with this stance.” – February 23, 2007

[B]US Fed - Focused on Inflation, But Ignoring Everything Else?

[/B]The Usual Hawks:

[U]William Poole, St. Louis Federal Reserve Bank President (Voter)

[/U]“If we get surprises because we are running on the high side of anyone’s inflation objective that suggest inflation is not likely to be on a downward trend, then I think what I would advocate is that we ought to be ready to raise rates.” – February 21, 2007

[U]Richard Fisher, Dallas Federal Reserve Bank President (Non-Voter)

[/U]When asked if 2 percent is the maximum rate of inflation that the Fed is comfortable with: “I don’t like to be pinned down on a number. I will be personally … much more comfortable when we get that well below 2 percent, and I’ll leave it at that.” – February 26, 2007

The Typical Doves:

[U]Janet Yellen, San Francisco Federal Reserve Bank President (Non-Voter)

[/U]“At this stage, the predominant risks center on whether inflation will continue to move down gradually.” – February 26, 2007

[U]Susan Schmidt Bies, Federal Reserve Bank Governor (Non-Voter)

[/U]“We are seeing significant deterioration in one small part (subprime) of the mortgage loan market. Not all of those will default, and I don’t think there will be a huge impact on other parts of the mortgage market.” – February 26, 2007

A gloomy warning from the most prominent central banker:

[U]Alan Greenspan, Former Federal Reserve Chairman

[/U]“When you get this far away from a recession invariably forces build up for the next recession, and indeed we are beginning to see that sign. For example in the US, profit margins?have begun to stabilize, which is an early sign we are in the later stages of a cycle.” – February 26, 2007

BOE – A Divided Board

Since August 2005, no policy change by the Bank of England has been by a unanimous vote, and the current monetary policy committee is clearly no different. However, while it appears that everyone is optimistic about growth, views vary sharply in regards to inflation:

The Staunch Dove:

[U]David Blanchflower, Bank of England MPC Member

[/U]“I expect inflation to be back at target by late spring/early summer 2007?and be below target at the two-year horizon?The output gap in my view continues to increase in size, suggesting that the potential for the economy to grow in a non-inflationary way is substantial.” – February 26, 2007

The Ardent Hawk:

[U]Andrew Sentence, Bank of England MPC Member

[/U]“The underlying worry is that we have seen a combination of a rise in inflation and demand picking up? the worry is that the pick-up in demand will perpetuate the rise in inflation and companies find it easier to push up prices, and the increase in inflation is longer and perhaps more sustained than would be consistent with the inflation target?As demand picked up in 2006, we saw more inflationary impact come through, so my reading is that we need to keep demand under reasonably good control in 2007 while inflation comes back on track.” – February 23, 2007

Political officials (especially those looking towards attaining the role of Prime Minister) maintain a particularly rosy view of the economy:

[U]Gordon Brown, UK Chancellor of the Exchequer

[/U]“Since 1997, we have become the most stable major economy in the world, and we have risen from bottom of the rich nations in terms of wealth per head to second. With growth becoming stronger and more balanced, business investment rising, and inflation set to fall, we have all the conditions in place for continued stable growth in the years ahead.” – February 26, 2007