The US economy is still too weak for the Federal Reserve to pull back from its $85bn-a-month stimulus package, the central bank said on Wednesday. In a statement after a two-day meeting, the Fed said it would leave interest rates unchanged, and will keep up its massive open-ended commitment to buy bonds and mortgage-backed securities until the job market improves substantially. The news sent US stock markets to new highs. The Fed expects the unemployment rate to fall to 7.3% to 7.5% by the end of the year, an improvement on its December forecast. But the Fed slightly lowered its economic growth forecast, saying it expects the economy to grow 2.3% to 2.8% this year, down from its December projection of 2.3% to 3%.
"Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive," the federal open market committee said in its statement. The committee appears unconcerned about inflation.
The decision to maintain its current course comes after a series of reports in the jobs, housing and manufacturing markets have suggested economic recovery is taking hold in the US. The recovery appears to have caused a split within the FOMC with some members expressing concern about the ongoing bond-buying programme, known as quantitative easing.
"Several members" of the FOMC were worried about the long-term impact of the bond-buying programme, according to minutes of the last FOMC meeting. However, according to the latest statement, only Esther George, president of the Federal Reserve Bank of Kansas City, voted against the Fed's current plan. She was "concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations," according to the statement.
5 comments:
The banking crisis in Cyprus is caused by two things
1. Cypriot banks with poor management (what were they smoking when they put most of their depositors' money in Greek bonds?) and
2. Poor regulation by the Cypriot Central Bank (what were they smoking when they turned a blind eye to this?)
You can't expect German taxpayers to endlessly bail out depositors/bondholders around the EU, especially when the warning signs are there (high interest rates for US dollar deposits in Cypriot banks, low interest rates for US dollar deposits everywhere else) because if you do so moral hazard means it will never stop. So you have to draw the line.
So small depositors will be protected and the larger ones will pay the price for, in effect, their greed: they placed their bets, they lost, so move on.
Cyprus banks need to be fixed. The smaller and better managed ones (if there are any) should be provided with ECB liquidity and after a short time, things will get back to normal.
Where the EU can help is to encourage stable European banks to open retail branches in Cyprus to get retail banking working once again.
But Merkel is right, the old Cyprus business model is broke and nobody owes Cyprus a living.
Last Friday in Brussels the Germans led Eurogroup ambush of the new president of Cyprus, demanding an immediate resolution to the country's debt crisis.
They were the ones to demand depositors take losses, although at first Mrs Merkel assured them the ordinary savers would lose just 3% of their money. Then, according to a report in the Financial Times, Wolfgang Schauble, the German finance minister, upped this to 6% and 10% for those with savings above 100,000 euros - though this version of events is disputed by German CDU MP Dr Michael Fuchs, who told Newsnight on Monday it is "not our problem" how Cyprus raised the money - as long as it is raised.
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Germany wants to avoid rewarding a country that has sold itself as a rule-free playground for Russians who want to keep their money offshore”
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This immediately nullified the explicit 100,000 deposit guarantee in the eurozone and the president of Cyprus said it would never pass through parliament.
So to focus Cypriot minds, Jorg Assmussen, the German socialist who heads the council of the European Central Bank also told them the ECB was pulling emergency funding to Laiki Bank, thus rendering it insolvent
What shocked everyone, not just Cypriots, was the sudden, tactical and coercive manner in which both the IMF and the ECB attacked the incoming Cyprus government.
It was the equivalent of the cops breaking down your door at 6am: perfectly legitimate if you have the legal right to do so, but it can seem excessive.
So Germany is left with a mismatch between intent and outcome. And the outcome could get really nasty. It is not just the contagion effect on southern Europe of seeing queues at cash machines and people going bust. Or the potential "me too" effect on Greece if Cyprus leaves.
What is being presented is a choice: stay in Europe or become part of the Brics, beholden to Russia for finance, Israel for various as yet untransparent deals, remain continually at odds with Turkey and Northern Cyprus, and once your finances have recovered, sell yourself as a kind of posh nightclub to the world.
Actually, the polls are telling us, and my colleagues on the ground report, more and more Greek Cypriots are seeing this as a viable option. Given the choice between a busted euro and a vibrant, if rule-free, future in the Russian penumbra, they may choose the latter.
The Cypriot parliament finally gave its approval late on Friday to the first two of eight measures hammered out by the government in a desperate bid to rescue an EU bailout by a Monday deadline.
MPs voted in favour of a national solidarity fund to be set up through the nationalisation of public and private sector pensions and of capital controls to prevent a run on the island's troubled banks when they are finally due to open on Tuesday after a more than week-long break.
The votes followed prolonged talks between party leaders on the package aimed at raising 5.8 billion euros ($7.47 billion) to unlock loans worth 10 billion euros or face being denied European Central Bank (ECB) emergency funds.
More contentious measures remain to be debated including a tax of up to 15 percent on bank deposits of 100,000 euros ($129,000) and more, a levy that in a slightly different form was rejected by MPs last Tuesday.
Something is missing in this story: Greece and the Greek banks were not allowed to fail and had to be rescued at any costs to keep the "Euro-spirit" alive. (Billions of Euros were spent to save the Euro by QE) - Now this principle no longer applies to Cyprus. And we all now why. And so knows Vladimir Putin: This amounts to the rescue of the bankrupt and interwoven European banking system. (Billions of Rubel-deposits are being confiscated to save the broken Euro). The Euros ECB just relocated to Moscow.
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