Most participants to the FOMC July meeting noted that, provided that the economy were to evolve broadly as they anticipated, it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee’s “substantial further progress” criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum-employment goal.
Following the conclusion of its Monetary Policy Review, the ECB has updated its monetary policy strategy. The main evolution is the replacement of the ambiguous “below, but close to two percent” inflation target by an unambiguous two per cent inflation target over the medium term. The Governing Council’s commitment to this target is symmetric, meaning that negative and positive deviations from this target are considered as equally undesirable. In line with the Federal Reserve’s new average inflation targeting framework, the ECB acknowledges the necessity to tolerate above target inflation in order to anchor long term inflation expectations at two percent. The second change is the introduction of climate risk as an input in the Central Bank’s monetary policy operational framework. In this article, we analyse the rationale, the technicalities and the potential implications of these changes.
The Federal Reserve has so far resisted the general compulsion to implement negative interest rates among the world’s major advanced central banks. Fed Chairman Jerome Powell has repeatedly insisted that the Fed is not considering a negative interest rates policy (NIRP). But what if there is a sudden policy turnaround? Beyond what it has already done, the Fed has quite a limited number of policy options it might consider to prop up the US economy and foster its recovery from the Great Virus Crisis. As prominent economists like Kenneth Rogoff convincingly argue, NIRP might be the most efficient option at the Fed’s disposal. A turnaround on this issue is far from granted, but were it to happen it would usher a new era with tremendous economic, financial and geopolitical consequences for the world.
From its latest moves, it appears that the Federal Reserve has two important messages for the markets and for everyone else. 1. Don’t fight the Fed. 2. Don’t expect any guidance from the Fed.
These two messages are two facets of the same “puzzle and conquer” strategy that seeks to provide support to the economy and to the markets while preventing the spread moral hazard and the build-up of self-fulfilling market bubbles. This strategy is risky as it may err on either side by untertaining a haze of uncertainty over its course of actions. However, it is probably the best strategy as long as the macro outlook and the fiscal side of the policy mix equation remain difficult to project.
TThe FOMC April 28 meeting minutes provide some glimpse into the Federal Reserve’s early assessment of the crisis triggered by the coronavirus pandemic, the outlook for the US economy over the coming months and quarters. Fed Chair Powell testimony on May 19 before the US Senate Committee on Banking, Housing and Urban affairs offers additional insights into the Fed’s current thinking and options to contain the economic impact of the coronavirus crisis and to speed-up the recovery of the US economy.
There are at least two ways to read the decision rendered by the German Constitutional Court – BundesVerfassungsGericht or BVerfG – on May 5, 2020 (BVerfG, Urteil des Zweiten Senats vom 5. Mai 2020), in the case opposing the ECB to a group of complainants claiming that the Frankfurt-based monetary institution went beyond its legal mandate, when it decided in March 2015 to launch a large scale asset purchase programme (APP) targeting first and foremost government bonds. We can read it through the lenses of an Economic Policy or through the lenses of a Constitutional law and Politics. From both perspectives, the ruling contains useful insights that clarify some complicated institutional questions and shed light on economic policy options available to the ECB and to EU/Eurozone Member States. The fact that this ruling comes in the midst of an unprecedented global economic crisis, stemming from the radical measures enacted all over the world to combat the coronavirus pandemic, makes it even more critical for investors to understand its rationale and contending claims.
A Pandemic OMT – P-OMT – might well be the most appropriate solution in the current context – and perhaps the only one that is available, especially if discussions around a common Eurozone fiscal package fail to produce meaningful results – in order to support individual Eurozone member countries, while preserving the overall financial stability of the Eurozone and the autonomy and credibility of the ECB.