The Federal Reserve and Bank of England Lead the Way

The pointers are clear already when looking at the yield curve in the US – the world can only hope that the European Central Bank (ECB) and Member States can stop trying to score political points and actually do something. Unfortunately, it appears that the crisis will have to deepen before the intransigence on both sides can be dissipated.

The Federal Reserve’s movement of short-dated into longer-dated securities had the desired effect of moving long-term rates lower. This is critical in providing any hope for the US housing market. Part of the success was due to the boldness in their actions, but they must realise they can do so much more.

Central banks still have plenty of weapons in there armoury. The key to any successful quantitative easing (QE) programme is not the injection of liquidity alone. More important is the statement of intent that long-term yields will remain low, and if need be, the securities will simply be held to maturity. This removes the fear that the only way for rates to go is up (as they are so low historically) and allows businesses to plan and banks to feel confident to lend.

While the scale of the plan appears large at US$400bn, the total number of government securities beyond 10 years is still well below 20%. This means the Federal Reserve can be bolder and can target long-term rates more aggressively. The Bank of England (BoE) has realised for some time the importance of having the correct mix of QE, and last week’s minutes reiterated their determination to do what is necessary. Now it’s the turn of Europe and the ECB. Being bold will allow the world’s economies to revive in 2012.


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Mark Carney Bank of England