There are interesting developments of late by the US Federal Reserve and The Bank of Japan. First, the Federal Reserve introduced a long-term U.S. inflation estimate, with most officials aiming to anchor public expectations at a 2 percent rate.
Officials also downgraded their forecasts for growth this year, seeing a deeper contraction as the credit crunch tightens. Some officials saw a risk of broad declines in prices, a pattern that could worsen the recession by making debts harder to repay.
The introduction of a long-term inflation goal helps bring the Fed closer to the central banks of the euro region, U.K. and other countries that set targets for price increases. The forecast contrasts with the warnings of some economists that record U.S. budget deficits and injections of liquidity by the Fed risk causing inflation to spiral in coming years.
Increased clarity about the Federal Open Market Committee or FOMC’s views regarding longer- term inflation should help to better stabilize the public’s inflation expectations, thus contributing to keeping actual inflation from rising too high or falling too low.
The FOMC at its January meeting kept the benchmark interest rate at a range of zero to 0.25 percent, and reiterated its commitment to use its balance sheet to help thaw frozen credit markets.
While policy makers discussed the possibility of starting to buy longer-term Treasuries to help ease financial strains, most judged that the step would only modestly improve conditions in private credit markets.
The FOMC concluded that existing plans to purchase debt issued or backed by government-chartered housing-finance companies, and to support securities backed by consumer loans, were likely to be a more effective way to use the Fed’s balance sheet,
Fed policy makers warned that there was no indication that the housing sector was beginning to stabilize and a number of them worried last month that commercial real estate could deteriorate sharply in the months ahead.
Meanwhile, The Bank of Japan announced it will buy corporate bonds for the first time, widening its asset-purchase program to prevent a shortage of credit from deepening the recession.
The central bank will buy as much as 1 trillion yen ($10.7 billion) in bonds rated A or higher from March 4 to Sept. 30. The policy board kept the overnight lending rate at 0.1 percent in a unanimous vote.
Governor Masaaki Shirakawa commented that the economy will remain in a severe state next quarter and companies will continue to struggle to obtain financing as investors shun risk. With the key rate close to zero, the central bank is buying assets from lenders to lower longer-term borrowing costs, and its next moves may include adding stocks as collateral and purchasing more government bonds.
The only policy options the bank has available to it are to either accelerate or deepen existing corporate financial- support measures.
The central bank also said it will extend programs in place to buy 3 trillion yen of commercial paper and provide unlimited collateral-backed loans to financial institutions until September. It will also continue accepting lower-rated assets as collateral until December.
The bank will purchase as much as 1 trillion yen of bonds with maturities of up to one year at competitive auctions with minimum set yields bout 5 trillion yen of those securities are outstanding in Japan, and about 90 percent of them are rated at least A. Overall corporate bonds in issue total 44 trillion yen. The assets on the central bank’s balance sheet expanded 15 percent since September last year to 124.1 trillion yen as of February 10 this year.
Lenders are hoarding cash at the central bank because it pays 0.1 percent on their excess deposits there, the same as the benchmark borrowing cost. From actions of these two central banks, we can see that they implemented these measures to ease concerns companies are having about liquidity and funding. Unfortunately, they have to assume that conditions for banking and corporate financing will remain very severe. And most interestingly they are running out of room to help the economy.
By Chodechai Suwanaporn
Source: Fiscal Policy Office / www.fpo.go.th