The boss of America’s central bank, Ben Bernanke, is demob happy. On Wednesday, he wrong-footed the markets yet again by announcing the Federal Reserve would continue with its £55 billion-a-month bond purchases.
This is the very reverse of what Bernanke was hinting at the start of the summer when he promised to “taper” – or unwind – the monthly injection of liquidity as the United States economy showed signs of recovery, lest it caused inflation.
Bernanke’s earlier prediction of tapering sent equities down and bond yields up in the West, and caused the rapid exit of funds from the developing economies. Reason: without the Fed’s monthly financial glucose, bond prices will deflate, thus knocking the stuffing out of all asset classes – but it will send interest rates soaring. Frightened by negative market reaction to tapering, Bernanke has virtually panicked and turned tail – a bad sign in any central banker.
But Ben is retiring and has little to lose. Indeed some commentators think Bernanke took advantage of this month’s poor US jobs numbers to postpone tapering, thereby deliberately escaping becoming a lame duck in his final months at the Fed. Bears who bet on tapering lost money on Wednesday. Instead, the S&P 500 surged to a record high.
Who will replace Bernanke now that frontrunner Larry Summers, a close confidant of President Barack Obama, has ruled himself out of the running? The big money is on Janet Yellen, Bernanke’s deputy. Speculation is rife that the Fed’s decision to retain monthly bond purchases might even be down to Yellen, as she is on record as wanting to keep interest rates low until US unemployment falls.
However, don’t think the next boss of the Federal Reserve, whoever it is, has that much room for manoeuvre. Investors in the US and UK are already pricing in an interest rate hike occurring a lot earlier than the central banks or politicians are letting on, because they believe growth is reviving and a new housing bubble is in the making.
You can see this in the fact that the value of sterling against the dollar has rocketed – a clear indication that foreigners are buying pounds ahead of an anticipated early rise in British interest rates. So much for Mark Carney’s “forward guidance” about keeping rates low.
Merkel poised for third term as chancellor
Tomorrow Germany goes to the polls. With the left-wing Greens and right-wing Liberals down in the polls – the Greens have annoyed voters by wanting to mandate meat-free Thursdays – the likely outcome is a grand coalition between the main Christian Democrats and the Socialists. That should make Angela Merkel federal chancellor for a third election in a row. What will it do for the euro?
A grand coalition will likely ensure the German Constitutional Court turns a blind eye to European Central Bank (ECB) intervention in the eurobond markets to buy wobbly Spanish and Greek debt. The ECB is now a de facto lender of last resort – explicitly excluded by EU treaties and German law. Fingers crossed, that means the worst of the euro crisis is over.
Unfortunately, this compromise has been wrung out of conservative Teutonic voters at the cost of German-imposed austerity in southern Europe. Unemployment in Greece is 27.8 per cent, 26.3 per cent in Spain, and 16.5 per cent in Portugal. That remains a ticking time bomb – economically and politically.