Bernanke Testimony
11/02/10 20:01
Hello Traders
We had a remarkable time bobsledding in Calgary. It is something one simply cannot miss. Impossible to explain the experience. Now, many of you understand a small piece of my psychological profile.
We are currently hosting the Olympic Winter Games here in Vancouver/Whistler, so my updates may be limited.
Fed Chairman Bernanke's written testimony (hearing postponed) outlined several steps the Fed could take to exit emergency lending and monetary policies but did not provide more information on the timing of a policy shift and retained the "extended period" language on the Fed funds target rate. Nevertheless, even as the Fed is feeling its way through the transition back to more normal policies, Bernanke's written testimony was positive for the dollar in that it provided better guidance as to what we can expect and watch ahead in terms of tools, if not timing. It also contrasts with the ECB, as Eurozone fiscal problems have slowed their plans to outline an exit strategy.
Several of the Fed's emergency programs have already naturally rolled off and Bernanke commented on other changes that could be put through. The Fed reduced the spread of the discount rate over the Fed funds target rate from 100bp to 25bp while extending the maximum maturity of discount window loans in order to improve bank access to liquidity. Bernanke said the Fed could raise the discount rate before long, but that would be more of a return to a more normal spread over the Fed funds as banks have less of a need to access emergency liquidity, rather than a signal that a Fed funds rate hike is right behind.
We had a remarkable time bobsledding in Calgary. It is something one simply cannot miss. Impossible to explain the experience. Now, many of you understand a small piece of my psychological profile.
We are currently hosting the Olympic Winter Games here in Vancouver/Whistler, so my updates may be limited.
Fed Chairman Bernanke's written testimony (hearing postponed) outlined several steps the Fed could take to exit emergency lending and monetary policies but did not provide more information on the timing of a policy shift and retained the "extended period" language on the Fed funds target rate. Nevertheless, even as the Fed is feeling its way through the transition back to more normal policies, Bernanke's written testimony was positive for the dollar in that it provided better guidance as to what we can expect and watch ahead in terms of tools, if not timing. It also contrasts with the ECB, as Eurozone fiscal problems have slowed their plans to outline an exit strategy.
Several of the Fed's emergency programs have already naturally rolled off and Bernanke commented on other changes that could be put through. The Fed reduced the spread of the discount rate over the Fed funds target rate from 100bp to 25bp while extending the maximum maturity of discount window loans in order to improve bank access to liquidity. Bernanke said the Fed could raise the discount rate before long, but that would be more of a return to a more normal spread over the Fed funds as banks have less of a need to access emergency liquidity, rather than a signal that a Fed funds rate hike is right behind.
Bernanke discussed possible ways to remove excess liquidity from the system. He outlined one scenario that included the possibility that actual policy firming would be implemented through an increase in the interest rate paid on reserves, something that has been previously discussed, but said any "sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments." On asset purchases, Bernanke does not anticipate the Fed will sell any of its security holdings in the near term and in order to manage the balance sheet, the Fed is allowing agency debt and MBS to run off as they mature or are pre-paid. He expects the balance sheet to shrink to more normal levels, with most or all security holdings consisting of Treasury securities, but also did not rule out any sales should they be needed. Any asset sales would be done gradually with clear communication to market participants.
The BoE inflation report was unequivocally dovish as the inflation fan chart showed CPI at only 1.2% based on market interest rates and quantitative easing purchases at £200bn. UBS economists note that this strongly suggests the MPC decision to end QE is a pause rather than a full-stop. BoE Governor Mervyn King himself noted that it is far too early to signal an end to quantitative easing. The Governor hammered home the importance of excess capacity building in the economy as a key reason behind a dovish report. On sterling, King acknowledged that pass-through had been weaker than expected, but also the stimulus to exports has not entirely materialized. He also dismissed fears of the UK losing its AAA rating. Forex Traders will be watching hints of ECB support of Greece as a proxy to other at risk nations.
AUDUSD and AUDNZD rose sharply after the numbers, and further gains were made as the Asia session wore on, helped in part by softer-then-expected China CPI. The OIS curve shifted to reflect an increased risk of a hike at the March 2 RBA policy meeting, with 12bp of tightening now priced versus 6.5bp before the data.
Source UBS