For a central bank that has faced criticism for sparking the problems the US economy is facing today given former Fed Chairman Greenspan’s aggressive reduction in interest rates over the course of 2001, Dallas Fed President Richard Fisher’s comment that monetary policy is akin to adding “stimulus” to the punch bowl seems surprisingly candid. However, he was also the sole dissenter in the vote for the last rate cut by the Federal Reserve on January 31 and has proven to be an inflation hawk in the past, suggesting that he remains cautious to vote for another round of rate cuts in March. Nevertheless, fed fund futures are betting on a 50bp reduction and with 9 other members on the FOMC showing little hesitance to slash rates further, Fisher may be the lone dissenter once again.
Yield Spread Analysis 02/05 – 02/12
Given some of the economic news released over the past week, it is somewhat surprising that we haven’t seen greater shifts in global fixed income markets. Indeed, despite a 25bp rate cut by the Bank of England, both short-term and long-term yields in the UK have actually risen as recent inflation data – though softer than expected – suggests that the central bank won’t be quick to cut rates again next month. Meanwhile, Australian government bonds proved to be the exception as far as big changes go, as short-term yields jumped 27bp over the course of the week following the Reserve Bank of Australia’s expected rate hike. Furthermore, the RBA’s Quarterly Policy Statement indicated that the bank remains hawkish, and as long as credit markets remain healthy and economic conditions don’t deteriorate severely, they will likely leave rates on hold throughout the year.
Looking ahead to this week, Wednesday’s BOE Quarterly Inflation Report may support Gilt yields, as upside inflation risks may leave the central bank sounding hawkish. On the same day, US Retail Sales could shake up Treasuries if the news continues to point towards falling consumption and a possible recession.
For a full schedule of upcoming event risk, see the DailyFX Calendar.
US Fed: Still Adding To The Punch Bowl?
[B]For a central bank that has faced criticism for sparking the problems the US economy is facing today given former Fed Chairman Greenspan’s aggressive reduction in interest rates over the course of 2001, Dallas Fed President Richard Fisher’s comment that monetary policy is akin to adding “stimulus” to the punch bowl seems surprisingly candid. However, he was also the sole dissenter in the vote for the last rate cut by the Federal Reserve on January 31 and has proven to be an inflation hawk in the past, suggesting that he remains cautious to vote for another round of rate cuts in March. Nevertheless, fed fund futures are betting on a 50bp reduction and with 9 other members on the FOMC showing little hesitance to slash rates further, Fisher may be the lone dissenter once again.
Do you think the Fed has more rate cuts in store? Join the discussion in the [B]DailyFX Fed Watch Forum[/B].[/B]
Richard Fisher, Federal Reserve Bank of Dallas President (Voting Member)
“The Fed has to be very careful now to add just the right amount of stimulus to the punch bowl without mixing in the potential to juice up inflation once the effect of the new punch kicks in.” – February 7, 2008
Janet Yellen, Federal Reserve Bank of San Francisco President (Alternate Voting Member)
“I consider it most probable that the US economy will experience slow growth, and not outright recession, in coming quarters. Current indicators point to continued anemic growth for at least the first half of this year as well as significant downside risks even to those weak expectations…an important objective of Fed policy is to mitigate the possibility that such a negative feedback loop [of weakening growth, leading to weakening credit] and could develop and take hold.” – February 7, 2008
Dennis Lockhart, Federal Reserve Bank of Atlanta President (Alternate Voting Member)
“With the surge in energy prices last year, recent measures of inflation have been elevated and above my personal comfort zone as a policymaker.” – February 8, 2008
William Poole, Federal Reserve Bank of St. Louis President (Non-Voting Member)
“I think the best bet is that we will not have a recession.” However, Poole also says, “There is no question that the odds (of recession) are higher than they used to be.” Regarding inflation expectations, he notes, “So far we’re standing with very sticky shoes on that slippery slope. We do watch it very closely; there’s no question that there’s a risk.” – January 12, 2008
ECB: Neutral For Now, But Will the Next Policy Move Be a Rate Cut?
[B]European Central Bank President Jean-Claude Trichet’s hawkish rhetoric has been hard to ignore over the past year, and he has yet to step away from his focus on price stability. However, it is worth noting that during the most recent ECB press conference, Trichet dropped the phrase noting that the “Governing Council remains prepared to act pre-emptively so that second-round effects and upside risks to price stability over the medium term do not materialize.” Furthermore, instability in the financial markets remains a critical issue in not only the Euro-zone, but in the UK, US, and most other global economies. As a result, it is becoming apparent that the ECB may finally be shifting to a more neutral to dovish stance, albeit at a snail’s pace.
How do you think this will impact the Euro? Discuss the topic with DailyFX analysts and other traders have to say about it in the DailyFX EUR/USD Forum.
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Jean-Claude Trichet, European Central Bank President
“The firm anchoring of inflation expectations over the medium and long term is of the highest priority to the Governing Council, reflecting its mandate. Against this background, the Governing Council remains committed to preventing second-round effects and the materialization of upside risks to price stability over the medium term. As the reappraisal of risk in financial markets continues, there remains unusually high uncertainty about its overall impact on the real economy.” – February 7, 2008
“There was no call for increase of rates, but there was also no call for decrease of rates. It is important to note both factors.” – February 11, 2008
Jose Manuel Gonzalez-Paramo, European Central Bank Executive Board Member
“Deciding to keep rates on hold, we took into account all possible risks. At the moment we see that there exists a large risk of a rise in prices in the medium term - and this was reflected in our decision.” – February 7, 2008
Axel Weber, European Central Bank Governing Council Member
“My view is different. We have indeed pointed to the downward risks to growth but we still consider growth that is near or slightly below the potential rate of around 2 percent as most likely (scenario) for economic development. It would be an over-interpretation to say that we are on the brink of an economic slowdown, which on its own could rein in inflation so strongly and then in turn lead to a swift easing of tension.” – February 11, 2008
Joaquin Almunia, EU Economic and Monetary Affairs Commissioner
“Most indicators in January point to an easing of growth, and clearly Europe will not be immune to the impact of record high oil prices, the strong Euro and a marked slowdown in the US. As such, we expect growth this year to be lower than the 2.4 percent and 2.2 percent we forecast last autumn for the EU and the Euro area respectively.” – February 7, 2008
Compiled by Terri Belkas, Currency Analyst, [I]Forex Capital Markets LLC, DailyFX.com
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