La FED garde la main sur les taux 2 ans et laisse libre cours à l’inflation anticipée…

… Le dollar trinque, l’or salue l’évacuation du risque de changement de cap monétaire et l’écrasement des taux réels à court terme qu’il provoque.

Pas de changement de posture, donc, de la part de la FED qui continue officiellement à voir dans la remontée des taux longs une réaction normale des marchés à l’amélioration des perspectives économiques, que ses projections confortent ; ses prévisions de croissance pour 2021 sont revues à 6,5 % l’an pour la fin de l’année contre 4,2 % en décembre. La pentification de la courbe des taux ne préjugerait en rien de la nécessité de changer de cap monétaire. À ce titre, J. Powell rappelle que le niveau des taux d’intérêt est resté très bas pendant l’essentiel du cycle passé, pourtant le plus long de l’histoire contemporaine. Le changement de policy-mix ne soucie pas davantage le président de la FED qui met en avant la nécessité d’une politique de soutien à l’investissement, qu’il se donne, manifestement, comme mission de faciliter par le maintien d’une politique durablement très accommodante.

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The euro’s exchange rate is the ECB’s main concern, and so forging ahead on its chosen path is understandable

When, in September, Mario Draghi mentioned the euro exchange rate as one of the factors likely to influence the ECB’s monetary policy – alongside inflation and growth – few economists took him seriously. The euro’s rally since the spring, along with the obvious risk of a further rise if the ECB tightens monetary policy, meant that some caution was needed and made it acceptable to bend the previously established rule that the ECB bore no responsibility for the euro’s exchange rate. Seven weeks later, there no longer seemed to be any concern about this issue. Not only did eurozone economies, posting very good economic figures, appear to have coped with the euro’s rally, but the Fed had also clarified its strategy, reducing the risk of a further rise in the euro. As a result, the ECB was in theory able to relieve itself of the exchange-rate burden and make a more decisive commitment to bring its policy gradually back to normal.

Lire la suite…

China: desperately seeking growth drivers

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How bad has the Chinese economy gotten to warrant such a firm reaction by Chinese authorities in recent weeks? 

Since mid-January, the People’s Bank of China has orchestrated a 3% fall in the yuan. Our suspicions of a shift in currency policy are being confirmed  and if such a move was intended to spark volatility to discourage capital inflows the strategy has certainly been successful. And the movement could well continue because China seems to be in disarray as it faces a major problem: mopping up excess private debt in the economy while maintaining growth. It is a tall task and growing evidence suggests that the 2014 GDP growth target of 7.5% is becoming less and less credible.

Mr. Draghi Seems Quite Sure of Himself…

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The President of the ECB is confident in his ability to stare down deflation risk and bring the inflation rate up to its official target of 2%…on a 2016 horizon. Well that was reassuring; the euro celebrated the news by increasing to USD 1.386 this morning, a record since October 2011! Could we have expected anything different? Apparently not. The ECB wasn’t about to shoot itself in the foot by announcing that its forecast pointed to a deflationary scenario, tacitly recognizing that it would fail in its deflation battle.

Strong Buy Latvia!

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6%, the hypothetical differential with EMU 17 nominal interest rates required by Latvia to accompany its economic convergence over the next quarter century

+ 6: That’s how many countries have joined the European Monetary Union since 2007. At the rate we’re going, the EMU could expand from 18 to 25 members within ten years, or even more—unless, of course, it sheds a few and actually shrinks. But who’s to know, and how to know, where such a deeply dysfunctional currency bloc is heading? 

We’d love to share the enthusiasm (however perfunctory) that customarily surrounds the addition of a new eurozone member. We’d rather not be criticizing what looks like a mad scramble to glue together a steadily rising number of countries that stand next to no chance of functioning properly under the same interest rate—the ECB’s. Unfortunately, we can’t help sensing that Latvia will eventually be going the same road as Greece, Ireland, and Spain. If it does, it won’t be due to mismanagement, as some pundits may fear. It will happen because even with the best of intentions, the Latvians will be powerless to offset the impact of a monetary policy that is inherently unsuited to their situation.

Latvia’s EMU membership offers a good opportunity to step back and focus on a crucial underlying issue often overlooked by economists: fast-tracking insufficiently developed economies into the currency bloc is irresponsible policy (for a slightly different treatment, see our article of July 2012, “From High Hopes to Despair: The Missing Metric in the European Monetary Union”).

Why such a harsh judgment? Because the record shows that economies can’t converge after joining the EMU; they have to do it beforehand.

Bernanke and the Fool’s Gold of Falling Unemployment

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The last time U.S. unemployment fell below the 6.5 percent mark, the country’s GDP was growing at an annual clip of about 3 percent, real household spending was rising at nearly 4 percent a year, monthly job creation was flirting with 300,000, and annual wage growth was just over 2.5 percent. That was back in March 1994, but similar conditions prevailed in March 1987 and in December 1977. Each time around, labor utilization and capacity utilization were close to potential output—making monetary tightening to one degree or another the right choice. And each time around, a cycle of higher interest rates duly ensued. But in 2003 and 2004, the economic climate was entirely different. Not only had the jobless rate been stuck below 6.5 percent for about a decade; there wasn’t a single blip on the radar screen to suggest that the economy might overheat. So it wasn’t until mid-2004, with unemployment hovering at around 5.5 percent, that the Fed initiated a rate-raising campaign. A good many pundits would later criticize this belated adjustment, identifying it as a major inflator of the now-infamous real estate bubble.

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Thus, when it came time a few months ago to provide forward guidance on monetary policy, the Fed understandably selected the 6.5 percent unemployment mark as a key criterion for when and how to taper its quantitative easing program.

Even so, this policy choice raises a whole host of questions. A given jobless rate may in fact reflect a much shakier economy today than it would have during previous, seemingly similar periods.