GA Trade Mar-Apr interactive - page 7

E C O N O M I S T ’ S C O R N E R
ince February 1, the Federal
Reserve has a new Chair. Janet
Yellen is the first woman to lead the
most important central bank in the
world. Financial markets took the
transition from Ben Bernanke to her
very relaxed, as both largely share
the same policy vision. But while Mr.
Bernanke had to steer the U.S. and
with it the global economy through
the Great Recession, Ms. Yellen's
main task will be to gradually
remove the policy stimulus. The
timing and dose of the withdrawal
will be critical. If the Fed acts too
fast, it might choke the economic
recovery. If it acts too slow, it might
create asset price bubbles and higher
inflation. So what type of monetary
policy can we expect from Chair
The start of the tapering, the modera-
tion of asset purchases, last December
already removed one of the biggest
uncertainties in that respect. Over the
past two Federal Open Market
Committee (FOMC) meetings, the Fed
has reduced the pace of its monthly
asset purchases to USD 65bn from
USD 85bn. Barring any unexpected
deteriorations in the economic or
geopolitical outlook, I expect that the
tapering will continue at a moderate
pace, so that the asset-purchase
program will end in the second half
of the year.
With the wind-down of asset pur-
chases under way, the Fed's main
policy "instrument" in 2014 will be
communication. Most importantly,
Janet Yellen will try to further
strengthen the forward guidance – the
Fed’s attempt to verbally influence
rate hike expectations – to convince
financial markets that the first
tightening of monetary policy is still
far off.
Changing the guidance, e.g. by
lowering the unemployment rate
threshold, might however undermine
the credibility of the forward guid-
ance, instead of strengthening it.
Leaving the guidance unchanged is
no feasible option either, as it does
nothing to delay rate hike expecta-
tions. The actual unemployment rate
has, after all, almost reached the 6.5%
threshold as specified by the Fed. A
related challenge is that nominated
Vice Chair Stanley Fischer is a critic
of forward guidance. Opposing views
at the helm of the Fed about its main
policy instrument certainly do not
help to send a clear message.
One major risk is, therefore, that the
Fed's communication through forward
guidance will become increasingly
ineffective. As a result, markets could
begin to advance rate hike expecta-
tions and push general yield levels
higher. Preventing yields from rising
too fast might become Ms. Yellen's
main challenge in 2014.
Monetary Policy in 2014 –
Yellen’s Main Challenge
German American Trade Mar/Apr 2014
Volkswagen Says It Plans to
Invest $7 Billion in North
Volkswagen AG said it plans to make
a sport utility vehicle tailored for the
North American market and will
invest $7 billion in the region as it
seeks to increase sales. Europe's
largest automaker reiterated its goal
of selling 1 million Volkswagen and
upscale Audi vehicles annually in the
United States by 2018 as it launches
more locally made cars. The com-
pany said the move was a sign of
renewed commitment to the market
after a sales decline by its core VW
brand, which continues to achieve
low U.S. quality scores.
Siemens to Supply $2.6
Billion U.S. Offshore Wind
Siemens AG, Europe’s biggest
engineering company, agreed to
supply turbines to the $2.6 billion
Cape Wind project, the first offshore
wind farm planned in the U.S.
Siemens will install 130 of its 3.6
Megawatt turbines at the facility that
is now seeking financing for con-
struction in Massachusetts waters,
the Munich-based company said.
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Dr. Harm Bandholz, CFA
Chief U.S. Economist
UniCredit Research
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