Busch: Central Bank Surprise!
The Bank of England surprised the market todayby increasing the supply of liquidity for it's quantitative easing program instead of announcing it would end the program. In classic two-handed economist talk, the central bank said, "On the one hand, there is a considerable stimulus still working through from the easing in monetary and fiscal policy and the past depreciation of sterling. On the other hand, the need for banks to continue repairing their balance sheets is likely to restrict the availability of credit, and past falls in asset prices and high levels of debt may weigh on spending."(Seriously, you can't write stuff like this as no one would believe me....)
The Bank of Englandcommittee agreed to extend its program of buying government and corporate debt from $125 billion to $175 billion. The new program is expected to take up to three months to complete. The markets had been anticipating an end to the program and the announcement caused big moves. The British pound fell 150 pts, short end UK rates fell 15-20 basis points, and the FTSE rallied 1.45%.
The European Central Bankdoes not have an official quantitative easing program, but has discussed buying covered bonds.
Therefore, there wasn't nearly as much drama involved today after the ECB announced no change in policy.
ECB chief Trichet did surprise by saying that positive quarterly growth rates would return in 2010. This helped boost the Euro ag the US dollar and stem the rally in the buck overall. He did state explicitly that governments should prepare and communicate realistic fiscal stimulation exit plans. He added that no new fiscal stimulus was not warranted. (Maybe he should review cash-for-clunkers?)
Next week, the Federal Reserve will hold two day meetings and discuss a similar topic. The Fed's current quantitative easing program has used $237 billion of $300 billion allocated for purchases of government debt. At it's current pace, the program is expected to be completed by the end of September. The Fed will also be looking at two market supporting programs the TAF and TALF. The TAF was to support banks who didn't want to use the discount window and the TALF was to support the securitization market.
Both programs have been deemed successful, but both programs are not being fully utilized.
The Fed has already decreased the amount of TAF available for auction.
The TALF program was envisioned to be as large as $1 trillion, but has only used $30 billion.
The Fed will have to walk a very fine line on telling the market not to continue to expect these financial backstops versus pulling back too soon. The political pressure will be enormous not to exit too soon with unemployment hovering at 10%. A point not lost on Ben Bernanke who will be up reappointment in January.
Given Rahm Emanuel's "Chicago Way" of politics, I'm sure at some point he'll remind Bernanke of what needs to be done......