January 2, 2017
The Age of Trump
by Joseph E. Stiglitz
January 2, 2017
by Joseph E. Stiglitz
December 16, 2016
The ringgit opened lower for the last trading day of the week, dampened by external sentiment, a dealer said.
At 9am, the ringgit was traded at 4.4660/4690 versus the US dollar from 4.4440/4480 at yesterday’s closing.
The strengthening of the US dollar due to the recent announcement by the Federal Reserve on interest rates has affected Asian currencies as well as emerging market currencies, and Malaysia is not excluded.
FXTM Research Analyst Lukman Otunuga said from a technical standpoint, the dollar is heavily bullish on the daily timeframe with yesterday’s hawkish surprise sending the US Dollar Index to fresh 14-year highs above 102.50.
“The dollar’s strength could become a key theme in 2017 as the improving sentiment towards the US entices bullish investors to propel the greenback higher,” he said in a statement.
Against a basket of major currencies, the ringgit traded higher. Vis-a-vis the Singapore dollar, the ringgit rose to 3.0945/0983 from 3.1049/1096 and versus the yen, it improved to 3.7758/7796 from 3.7846/7894 yesterday.
Against the British pound, the local currency appreciated to 5.5320/5380 from 5.5873/5949, while against the euro it rose to 4.6518/6563 from 4.6851/6921.
May 11, 2016
Staggering amounts of dubious/illicit money are involved. No small wonder the rich are getting richer and the gap between the filthy rich and the miserable poor is widening. The rest of us in between are suffering suckers who are made to bear the burden of heavy taxes.
It makes me wonder what central bankers and monetary and fiscal authorities around the world are doing to keep the financial system honest.–Din Merican
December 11, 2015
by Anatole Kaletsky
The Federal Reserve is almost certain to raise US interest rates at its next policy meeting, on December 15 and 16. The first US rate increase since June 2006 will be a pivotal moment for the global economy, launching what Mohamed El-Erian calls the “great policy divergence,” with repercussions in every region and financial market. The impact will be particularly powerful in emerging countries, where currencies are vulnerable to a rising dollar and tightening liquidity conditions in the US. Project Syndicate’s commentators – some of the world’s preeminent economists and policymakers – have examined the issue from four broad angles.
What is the immediate and longer-term outlook for US monetary policy?
The Fed’s leaders have repeatedly said that they plan to raise interest rates much more slowly than in previous periods of monetary tightening. Such assurances from central bankers cannot always be trusted, but Fed Chair Janet Yellen’s promises to move more gradually than in the past are credible, because the Fed is genuinely determined to push inflation higher and to ensure that it never again falls much below 2%.
Nobel laureate Joseph Stiglitz provides further grounds for discounting the likelihood of faster tightening. Instead of trying to control inflation, according to Stiglitz, the Fed’s main concern now is to reduce unemployment and counteract inequality. To do this, the Fed must continue to stimulate the US economy with easy money. Even the quarter-point rate hike expected at the Fed’s upcoming policy meeting is, in Stiglitz’s view, dangerous and premature.
Moreover, while the Fed’s official responsibility is to manage the US economy, its leadership fully understands the international impact of Fed decisions. Thus, Harvard’s Carmen Reinhart, an authority on global debt crises, believes the Fed will “favor gradualism” to avoid wreaking havoc in emerging economies that are overloaded with dollar debts. In a related argument, Barry Eichengreen, the Berkeley economic historian, suggests that US monetary policy is now effectively “Made in China,” because China’s efforts to stabilize the renminbi have already tightened US monetary conditions by the equivalent of the quarter-point rate hike expected on December 16.
Is gradualism the right approach?
Like Stiglitz, UNCTAD’s Richard Kozul-Wright argues that a rate hike in December would be premature and opposes any tightening at all: If the Fed “follows through on raising interest rates,” this could cause serious trouble for the global economy, and especially emerging markets, because of “the enormous tsunami of debt bearing down on households, businesses, banks, and governments.”
But many economists who focus on risks to financial stability believe that the Fed should have tightened rates earlier and now needs to move faster than planned. Gita Gopinath of Harvard University objects to what she calls the Fed’s “dollar distraction,” whereby US policymakers have deviated from their inflation-fighting mandate because of unnecessary concern about the dollar’s strength. In a similar vein, Stephen S. Roach, former chief economist of Morgan Stanley, argues that the Fed has already made a “fatal mistake” by keeping interest rates so low for so long, thereby transforming monetary policy “from an agent of price stability into an engine of financial instability.”
Howard Davies, former Deputy Governor of the Bank of England, points out that it is “justifiable to increase interest rates in response to a credit boom, even though the inflation rate might still be below target.” And Nobel laureate Robert Shiller agrees, warning that excessively low interest rates have created “overheated asset markets – real estate, equities, and long-term bonds – [which] could lead to a major correction and another economic crisis.”
On balance, considering that the Fed is under fire from both directions, perhaps the expected timing of a modest tightening of monetary policy is about right, says former IMF chief economist Kenneth Rogoff. He points out that US interest rates will remain low even after several quarter-point increases. The real risk of monetary tightening, he suggests, is political: “If the Fed starts hiking, it will be blamed for absolutely every bad thing that happens in the economy for the next six months to a year, which will happen to coincide with the heart of a US presidential election campaign.”
I agree with Rogoff. The coming rate move is now so universally expected that it will have little financial or economic impact. The sense that monetary policy is starting to normalize will help to reassure investors and businesses, thereby dispelling lingering memories of the 2008 financial crisis.
Winners and losers
Economists are almost unanimous that the main effects of the Fed rate hike will be felt outside the US. Harvard’s Jeffrey Frankel fears a “possible repeat of previous episodes, notably in 1982 and 1994, when the Fed’s policy tightening helped precipitate financial crises in developing countries.”
The key problem, says Jose Antonio Ocampo, former UN Under-Secretary for Economic Affairs, is the dollar’s dominant reserve-currency status, which means that monetary policy in emerging economies is overly influenced by the US. In the future, however, this vulnerability will be lessened by the Chinese renminbi’s inclusion in the basket of reserve currencies that the International Monetary Fund uses to set the value of its Special Drawing Right (SDR), says Yu Yongding, Director of Global Economics at the Chinese Academy of Social Science.
Even in the short term, admission to the SDR could help by convincing markets that China’s currency adjustment in August was not the start of a big devaluation. That would relieve downward pressure on other emerging-market currencies, especially in Asia, according to Lee Jong-Wha, director of Korea University’s Institute of Asia Research. Nouriel Roubini, who famously forecast the 2008 financial crisis, agrees that “a correction has already occurred in emerging markets, limiting the need for further adjustment when the Fed moves.”
Turning to the US and Europe, most Project Syndicate commentators, with the notable exception of Stiglitz, believe that the first US rate hike will have limited impact on economic activity directly. Although Shiller and Roach express serious concerns about the buildup of debt and high asset prices in developed countries, both Roubini and Berkeley’s Brad DeLong downplay concerns about financial instability, because interest rates will remain low by historic standards for many years, even after Fed tightening begins.
The lessons of zero interest rates
Stiglitz criticizes the Fed for neglecting its legal mandate to promote “maximum employment” in favor of a narrow focus on inflation that is no longer relevant. By contrast, I believe that the Fed has effectively abandoned inflation targeting and thereby “buried monetarism,” implying a welcome return to the Keynesian emphasis on minimizing unemployment, even if that means higher inflation.
DeLong, however, contends that five years of zero interest rates have failed to end stagnation and believes that the only thing the Fed has effectively abandoned is hope of accelerating economic growth. Instead of giving serious consideration to unfounded theories speculating that excessively low interest rates could, under certain conditions, discourage growth and investment, the Fed should have committed itself even more decisively to zero or even negative rates.
Adair Turner, Chairman of the Institute for New Economic Thinking, agrees that more radical policies are needed. To overcome stagnation government should run bigger deficits, financed directly by printing money. To avert financial crises, credit creation by banks needs to be controlled directly or even eliminated altogether, in favor of direct lending to businesses by savers through capital markets.
Almost all of these commentators agree that monetary policy should focus on economic growth, not financial stability (tougher regulation is needed to achieve that). Davies disagrees, as do Shiller and Roach, but they fail to explain how growth can be accelerated if monetary policy is tightened to avoid credit bubbles.
Meanwhile, economists who believe that further monetary loosening is required to pull the world out of stagnation must look elsewhere. They can pin their hopes on China, where monetary policy will become more expansionary, according to Fudan University’s Zhang Jun, or on Europe, where the European Central Bank is providing increasingly powerful stimulus as monetary union evolves into a “deeper political union,” according to ECB President Mario Draghi.
The final bastion of radical monetary-policy experimentation is Japan. Koichi Hamada, chief economic adviser to Prime Minister Shinzo Abe, provides a reminder that seems all the more relevant as the US experiment comes to a close: “The belief that monetary policy does not matter is the most dangerous idea in economic history.”
November 8, 2015
by Kenneth Rogoff
Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. His most recent book, co-authored with Carmen M. Reinhart, is This Time is Different: Eight Centuries of Financial Folly.
Nothing describes the United States Federal Reserve’s current communication policy better than the old saying that a camel is a horse designed by committee. Various members of the Fed’s policy-setting Federal Open Markets Committee (FOMC) have called the decision to keep the base rate unchanged “data-dependent.” That sounds helpful until you realize that each of them seems to have a different interpretation of “data-dependent,” to the point that its meaning seems to be “gut personal instinct.”
In other words, the Fed’s communication strategy is a mess, and cleaning it up is far more important than the exact timing of the FOMC’s decision to exit near-zero interest rates. After all, even after the Fed does finally make the “gigantic” leap from an effective federal funds rate of 0.13% (where it is now) to 0.25% (where is likely headed soon), the market will still want to know what the strategy is after that. And I fear that we will continue to have no idea.
To be fair, deciding what to do is a very tough call, and economists are deeply divided on the matter. The International Monetary Fund has weighed in forcefully, calling on the Fed to wait longer before raising rates. And yet central bankers in the very emerging markets that the IMF is supposedly protecting have been sending an equally forceful message: Get on with it; the uncertainty is killing us.
Personally, I would probably err on the side of waiting longer and accept the very high risk that, when inflation does rise, it will do so briskly, requiring a steeper path of interest-rate hikes later. But if the Fed goes that route, it needs to say clearly that it is deliberately risking an inflation overshoot. The case for waiting is that we really have no idea of what the equilibrium real (inflation-adjusted) policy interest rate is right now, and as such, need a clear signal on price growth before moving.
But only a foaming polemicist would deny that there is also a case for hiking rates sooner, as long as the Fed doesn’t throw random noise into the market by continuing to send spectacularly mixed signals about its beliefs and objectives. After all, the US economy is at or near full employment, and domestic demand is growing solidly.
While the Fed tries to look past transitory fluctuations in commodity prices, it will be hard to ignore rising consumer inflation as the huge drop of the past year – particularly in energy prices – stabilizes or even reverses. Indeed, any standard decision rule used by central banks by now dictates that a hike is long overdue.
But let’s not make the basic mistake of equating “higher interest rate” with “high interest.” To say that 0.25%, or even 1%, is high in this environment is pure hyperbole. And while one shouldn’t overstate the risks of sustained ultra-low rates to financial stability, it is also wrong to dismiss them entirely.
With the decision about raising rates such a close call, one would think that the Fed would be inclined to do it this year, given that the chair and vice chair have pretty much told the market for months that this will happen. The real reason for not hiking by the end of the year is public relations.
Let’s suppose the Fed raises interest rates to 0.25 basis points at its December meeting, trying its best to send a soothing message to markets. The most likely outcome is that all will be fine, and the Fed doesn’t really care if a modest equity-price correction ensues. No, the real risk is that, if the Fed starts hiking, it will be blamed for absolutely every bad thing that happens in the economy for the next six months to a year, which will happen to coincide with the heart of a US presidential election campaign. One small hike and the Fed owns every bad outcome, no matter what the real cause.
The Fed of course understands that pretty much everyone dislikes interest-rate hikes and almost always likes rate cuts. Any central banker will tell you that he or she gets 99 requests for interest-rate cuts for every request for a hike, almost regardless of the situation. The best defense against these pressures is to operate according to utterly unambiguous criteria. Instead, however good its intentions, the net effect of too much Fed speak has been vagueness and uncertainty.
So what should the Fed do? My choice would be to have it explain the case for waiting more forthrightly: “Getting off the zero bound is hard, we want to see inflation over 3% to be absolutely sure, and then we will move with reasonable speed to normalize.” But I also could live with, “We are worried that if we wait too long, we will have to tighten too hard and too fast.”
Throwing out the rulebook made sense in the aftermath of the 2008 financial crisis. It doesn’t anymore. And today’s lack of clarity has become a major contributor to market volatility – the last place the Fed should want to be.
It’s wrong to vilify the Fed for hiking, and it’s wrong to vilify it for not hiking; if it is such a close call, it probably doesn’t matter so much. But, at this critical point, it is fair to ask the Fed for a much clearer message about what its strategy is, and what this implies for the future. If Fed Chair Janet Yellen has to assert her will over the FOMC for a while, so be it. Somebody on the committee has to lead the camel to water.