âToo Early to Declare Victoryâ Fed May Not End Bond Buying Reuters | February 02, 2011 | 12:16 PM EST Just because the U.S. economic recovery is looking up, don't think the Federal Reserve will necessarily stop its bond buying after its latest $600 billion program. While financial markets have largely dismissed the possibility the Fed could extend the program past its end-June sunset date, officials are still wrestling with whether more might need to be done. The idea of laying groundwork for an exit from the central bank's extraordinarily easy monetary policy has not yet entered into the equation. "It is too early to declare victory," Atlanta Federal Reserve Bank President Dennis Lockhart said on Monday. Kansas City Fed leader Thomas Hoenig said on Tuesday another round of bond purchases could be discussed at the Fed's next policy meeting in mid-March if the recovery flags. Fed Chairman Ben Bernanke makes a rare on-the-record media appearance on Thursday. He could provide more clarity on whether the Fed is prepared to buy more bonds on top of a current $2.3 billion total if the U.S. jobs market fails to heal. That the debate has yet to shift away from whether more bond buying might be needed indicates how much farther the Fed thinks the recovery must run before it is time to tighten policy. When the central bank issued a somber economic assessment after a policy meeting last week, financial markets were disappointed. The Fed focused on headwinds facing the recovery, while many market participants had looked for more of a nod to a brightening outlook characterized by stock market gains, stronger consumer and factory activity, and a gradually improving jobs picture. POLITICS AT THE MARGIN A rise in bond yields, particularly among longer-dated securities, suggests investors are increasingly confident the economic recovery is sufficiently on track to avoid further Fed easing actions. "For market participants ... the longer policy is kept unchanged, the more uncertainty is raised with respect to the Fed's inflation-fighting credibility," Michelle Girar, an economist with the Royal Bank of Scotland, wrote to clients. Further bond buying would surely grate on international critics of the policy who blame the latest wave for weakening the U.S. dollar and unleashing a wave of capital into emerging markets, undercutting their exports and inflating asset bubbles. At the same time, domestic inflation concerns have echoed on Capitol Hill. Lawmakers have attacked the bond buying initiative â dubbed QE2 since it is the second round of so-called quantitative easing â for stepping into the area of fiscal policy, and have proposed stripping the Fed of the full employment side of its mandate to have it focus solely on prices. The Fed guards its independence jealously and is unlikely to let fear of disapproval by politicians guide its course. But at the margins, the furor that greeted the bond buying could weigh on policymakers' minds. "The reason not to do quantitative easing three will not be as much an economic question as 'Is it politically wise ... to generate the controversy that they did last time?'," said Cary Leahey of Decision Economics in New York. UNEMPLOYMENT TOO HIGH Many analysts have revised up their growth forecasts for 2011 and pulled forward the time at which they think the central bank will begin to drain reserves from the financial system, sell off some of the mountain of assets it has bought since early 2009, and begin raising interest rates. The Fed itself will make public in two weeks new forecasts that are expected to show policymakers have also grown more optimistic on growth for the coming year. Nevertheless, the central bank has stressed after its two most recent meetings that the recovery is not strong enough to make much of a dent in an unemployment rate that stood at a troubling 9.4 percent in December. The debate over whether to extend bond buying will come front and center as soon as the next meeting of the Fed's policy-setting committee on March 16. The issue should dominate the two subsequent meetings before the program is due to be complete at the end of June. The debate over further easing will revolve around the jobs picture. Consecutive strong monthly gains in payrolls would be a reason to hold off stimulative measures, and could trump a high unemployment rate if it is clear formerly discouraged workers are reentering the job hunt. Although fears of an outright downward deflationary spiral have receded, inflation has yet to rise to the level where officials would like to see it. A measure of inflation preferred by the Fed â the personal consumption expenditures price index, excluding food and energy â in December registered it smallest 12-month gain on records that date to 1959. Inflation expectations remain low enough by some measures that some policy makers are likely to argue the Fed does not need to be in any rush to remove economy-boosting policies despite evidence growth is firming.
That's only in the case of a bankruptcy. Sovereigns don't go bankrupt. It's not like if the USG defaulted tomorrow, your house would go on the block, the way the fixtures do if you have a store and it goes belly up. In int'l terms I suppose if the dollar index crapped, some guy from Europe might be able to buy it on the cheap, but the dollar net worth you have would still be the same. You'd still be solvent (assuming you are now, of course).
Doesn't matter what oil is priced in; that's only the unit of account. European countries I'm sure pay for their oil in euros, regardless. The UK can probably pay in sterling without a problem too, as well. Oil isn't going to shoot through the roof just because some ME country decides to use euros as the unit of account instead. I don't know where this silliness comes from, but it's plain wrong.
Um, no, if oil was no longer priced in dollars, there would no longer be a need to hold so many dollars (but a need to buy whatever currency or basket of currencies oil was now priced in). The dollar would therefore crash against other currencies. The price of oil in dollar terms would soar and you Yanks would not be too happy about how much you would be paying for it or for anything else which is imported.
The ME countries are not major players in the dollar market. They're not the ones keeping its value up. Try Asia. They are major players, because they have actual industrialized economies, not supply regions dependent on selling something to the industrialized countries for them to burn. Primitive countries don't set the price for anything.
Amusingly, you are both somewhat correct, however Visaria is a lot more correct. First let's start off with ME economies having an impact on FX. Market chatter is that the bottom in EUR.USD was put in by ME names and these are continuing to bid up the pair (obviously there's no way of knowing if that's true, but that's the rumor and if it were true, ME states certainly have the means to put in a bottom in EUR.USD). The rumor that there were significant ME bids below 1.30 was circulating well before the bottom not far from that level was put in. Now, to examine the hypothetical that the ME will start encouraging payment in euros, potentially eventually demanding it (this would suit them very well, considering that if the rumor it is ME names buying up the EUR.USD pair is true, it will fill their coffers very nicely on the paper gains), this would affect the USD's reserve currency status greatly. If the reserve currency status were revoked the USD index could easily plummet another 30-60% (no idea how deep it could go, it could become a self-enforcing cycle). Unfortunately at this stage (and I consider it a near-certainty that the USD will not be reserve currency within two decades) the US will no longer be able to keep up its level of consumption. If you run the figures it is quickly obvious the only reason the US has been able to have much more consumption than the rest of the world is its currency reserve status (unlimited lending, basically). I consider this a good thing from an ethical perspective, makes the world a better and more equal place. When US dominance ends, perhaps we will have a more equal and globalized society without a single bully who can make unethical decisions unchecked by those who might oppose (UN). The only upside to the US I can see in all this, is that if this were to happen the outsourcing trend may stall and/or reverse, bringing back job creation to the US which, if you take off your rose-colored glasses, is never going to happen any other way. Edit: Also, if you think that Kuweit, Saudi Arabia and such are "primitive" you are a retard. https://www.cia.gov/library/publications/the-world-factbook/geos/sa.html
Why is 5-7 bucks a gallon unaffordable for most americans? People pay more than that in europe NOW and its not unaffordable for them. Some people are paying about $10 bucks per gallon in europe.