James Bullard, a non-voting member of the FOMC, called them a ‘bit stale’. He was referring to the Minutes of the Fed’s late July/early August policy meeting released last week. The widely quoted message, delivered in no uncertain terms in the Minutes, was that, unless the news flow ‘pointed to a substantial and sustainable strengthening in the pace of the economic recovery’, additional easing would be warranted. That is not quite the way Bullard sees it. He noted that the economy has picked up over the past month and is not weak enough to warrant more easing.
Charles Evans, another non-voting member of the FOMC, thinks otherwise and also took the opportunity last week to say so. In respect of Fed easing, he thought there ‘was a lot of reason to do more’ and also that interest rates should stay where they are so long as the unemployment rate remained above 7 percent. This week the spotlight falls on the Fed Chairman who will get his turn to say what he thinks on Friday at the Fed’s symposium in Jackson Hole, Wyoming. Mr. Bernanke will review the backdrop for growth and monetary policy along with the options and course of action available to the Fed for providing more support for the economy. While the Chairman may draw from the Minutes, what he won’t say is that they are stale. Equally, he is unlikely to say there is a lot of reason for more stimulus.
As for any suggestive comments by the Chairman on policy, examples might relate to an extension of the extended-period message on interest rates or to a twist on ‘Operation Twist’ in the direction of mortgagebacked securities. However, the Fed’s view is still one of moderate growth for the economy over the coming quarters followed by a gradual pick up in 2013 and while the risks may be tilted to the downside, it is doubtful the take-away will be the hint of another QE programme. That will leave the markets having to wait for the FOMC’s mid-September meeting to see how the cards fall.
However, there could be action before then. The ECB meets next week, a week before the FOMC, and will announce the detail on the framework it intends for effecting a smooth functioning of monetary policy, some of which, in relation to bond market intervention, was leaked over the past week.
It started with Der Spiegel, which revealed that the ECB was considering buying government bonds whenever spreads exceeded a critical level on German Bunds. That was followed by the Daily Telegraph, which not only confirmed Der Spiegel’s story, but also took it further by noting that various technical committees were being left to draft the detail of the modus operandi.
Next came Die Welt and Reuters with their own stories that the ECB was considering setting a ‘yield cap’ for its bond purchases (as distinct from a yield spread), but that it would not make the cap public. The Reuters story also confirmed that the ECB would buy bonds in the secondary market and in shorter maturities.
Without adding to last week’s revelations, Jorg Asmussen, a Governing Council member of the ECB, confirmed in a speech at the outset of this week the manner by which Mr. Draghi indicated the ECB would provide bond market support.
All will be revealed on 6 September at the ECB’s next policy meeting, but what the leaks confirm is exactly what Mr. Draghi said at last month’s press conference would happen. This was that the options open to the ECB would be reviewed in producing measures to ‘repair’ the transmission mechanism for effecting monetary policy. Equity markets have gone far enough for now in anticipation of this.
Next week the ECB will deliver on its modus operandi but what could drive equity markets higher is what is expected the week after next and the day before the FOMC meets. This is the ruling by the German Constitutional Court on the legality of the European Stability Mechanism, a key instrument for policy stabilisation, and on the Treaty underlying the fiscal compact. A favourable ruling on top of the ECB’s framework for aiding the transmission in effecting a smooth functioning of monetary policy would complete the stage required for the implementation of the ECB’s support mechanism and that should be greeted with a strongly positive reaction in equity markets, particularly for the eurozone.

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