Printed Press Coverage of FOMC Statement… ECB Steals the Show

June 25, 2009

Reporting today in the Financial Times, Wall Street Journal and  New York Times stressed that Fed policymakers are in difficult circumstances, endeavoring to steer a balanced approach and retain sufficient flexibility to adapt to an uncertain future without creating undue surprise to market participants.

Edmund Andrew’s entitled his NYT article “Fed Maintains Status Quo, Keeping Interest Rates Near Zero” and quotes former Fed Governor Mishkin and close Bernanke confidante as agreeing that an accommodative stance is the correct call for the currently slack economy but adding that policymakers must guard against the perception of “enabling fiscal irresponsibility.”  It’s a small eye of the needle that must be thread.

Sudeep Reddy and Geoffrey Smith proclaim in the Journal, “Fed Reserved as Slump Eases… Lack of New Action Disappoints Investors” and talks about policymakers having to “grapple with complex pressures.”  The compromise of quashing earlier speculation about a near-term interest rate increase but taking no action to reverse the upward drift of long-term rates is unlikely to satisfy anybody completely.

Krishna Guha’s FT reprise also stresses the trade-off nature of the statement, noting more upbeat feelings about current economic conditions without any radical reappraisal of the guarded outlook.  Officials perceive reduced risk of deflation but a big output gap that will prevent the emergence of inflation anytime soon, and they are reluctant to begin rewinding stimulus yet but predisposed not to expand on already announced quantitative easing.

All three papers imply that yesterday’s biggest monetary policy news came from the ECB, which injected EUR 442 billion at 1.0% in its first 12-month refinancing tender.  Refinancing liquidity jumped by some 40%.  The ECB’s operation’s popularity underscored the growing view that the refinancing rate is unlikely to drop any further.  Euribor rates out to a year fell but by not as much as one might imagine.  Banks have much more high powered money and the assurance of reserves for some time to come — subsequent one-year tenders are planned for September and December — but may not use the opportunity to expand lending in what remains a dim economic landscape.

To underscore the last point, Euroland industrial orders today were reported to have declined by 1.0% in April, 2-1/2 times greater than expected and the most since a 2.6% drop in January.  Yes, orders are dropping more slowly, 8.2% at an annualized pace in the three months between January and April after a 54.4% annualized plunge in the four months from September to January.  But a decrease in orders of 8%+ remains seriously steep, and casts doubt on demand in the euro area being adequate to support a recovery once the task of inventory building is met.  The35.5% plunge in orders between April 2008 and April 2009 was a new low for the move in the on-year data series.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

Tags: ,


Comments are closed.