Commentators pored over yesterday’s FOMC statement, which remained largely unchanged. Inflation is seen as unlikely; deflation is a possibility; high unemployment is expected to continue; and the Fed plans to keep rates low for an “extended period”.
Reactions were unsurprised, muted and largely uncritical. Three interesting thoughts stand out:
1) The Economist asks why the Fed is happy to keep cyclical unemployment so high when they believe inflation is such a distant threat;2) One of the few changes in FOMC wording was that household spending is “expanding” where previously it was “stabilising”. But October consumer bankruptcies are up 8.9% month-on-month, and there are signs of consumer cutbacks;3) And bond dealers warn the Treasury that stimulus costs to the Fed might rise before the base rate does.
The Bank of England has expanded its quantitative easing programme by £25bn, “a gradual ending of the flow of QE”. Meanwhile, there are rumours that the ECB will start unwinding part of its stimulus as early as December.
China is even less likely to appreciate the renminbi than it was. The World Bank has revised up its growth forecast for China, but revised down its current account surplus, from 9.8 per cent last year to 5.6 per cent this year, and 4.1 per cent in 2010. China won’t want to harm its export market while exports are falling relative to imports. A researcher at Lombard argues that China is not going to lead the world economy, as the country is not producing less and spending more: quite the reverse. She argues the increasing number of Chinese manufactured goods can only be sold at the expense of other countries’ market share, and she predicts a further deflationary shock for the global economy.
The US lost 203,000 jobs in October, more than expected but less than September. And don’t take heart from good manufacturing jobs data: it will be more than offset by a decline in service employment.
Sweden – currently holding the EU presidency – has suggested removing general limits on hedge fund leverage. This is a contentious issue. As Soros argues, increased leverage is one common cause of bubbles (“leverage cycle” charts).
And a consensus is forming around the likelihood of new bubbles: Felix Salmon agrees with Roubini’s recent piece (“The mother of all carry trades”). Salmon says:
“Every move upwards in US stocks or gold or the Aussie dollar or junk-bond indices is another step in exactly the wrong direction: it’s a step towards yet another massive crash. And it’s all being turbo-charged by Fed policy. If there’s a painless way out of this situation, I can’t see it.”