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The Fed and The Bank of England - Economics Weekly

The Fed and The Bank of England

Global Economics Weekly Brief



The stereotypical UK tourist abroad, if he is not understood, just shouts louder in English and flaps his arms harder, to no avail. If the penny doesn’t drop soon among their listeners, it’s a tactic that the Fed and the Bank of England might have to adopt.


Both are still trying to get people to understand forward guidance. Hopefully the Chinese will not follow this example and will better communicate what could be a sea-change in economic policy. Change as to come soon!

MPC not trigger happy. The Monetary Policy Committee has been at pains to stress that 7% unemployment will not be an automatic trigger for rates to rise. The November Minutes re-iterated that point. In its forecast where Bank Rate is left on hold indefinitely at 0.5%, inflation remains close to the 2% target. This "underlined that there could be a case for not raising Bank Rate immediately when the 7% unemployment threshold was reached." The implication is that rates could be on hold even if unemployment continues to fall fairly briskly. Wait until 2014 and then see a change in unemployment!

Win friends & influence people. The Fed wants to strengthen and clarify its policy of forward guidance. At the October committee meeting, some members thought that the current data-dependent approach was too complicated. Communication could be clearer if the Fed published a simple timetable for winding down asset purchases. Others thought that guidance could be strengthened by reducing the 6.5% unemployment rate at which the Fed would first consider raising rates. It is prepared to experiment. Forward guidance could evolve yet again before monetary policy is back to normal!

A solid core. You might be wondering why the Fed is talking about strengthening its forward guidance, when most commentators are expecting it to reduce its stimulus to the economy in the coming months. October's inflation release offered a glimpse as to why. Prices rose by just 1%y/y in October, halving from July's rate, and the Fed's target, of 2%. A large part of this fall has come from falling fuel prices, with petrol now 10% cheaper than it was this time last year. Stripping out these volatile effects core inflation is 1.7%y/y, so policymakers can afford to be relaxed about deflation. What about the rise in full time unemployment?

The US buys stuff. US consumer spending rose in October, despite concerns that the government shutdown would hurt consumer confidence. Retail and food sales rose 0.4%m/m in October, the highest monthly gain since July. A combination of low inflation, a rising stock market and higher house prices likely helped underpin the improvement in spending. After a flat September, October's pick-up will be welcomed by retailers who will be hoping this continues into Christmas. What will happen in 2014?

Guo Jin, Min Tui. The state sector advances, the private sector retreats is an expression used in China to describe the dominance of large state-owned firms. But China's new leaders are ready to reverse this. The government has said that the market will be given a "decisive" role in the economy rather than a "basic" one as all policy documents for the past 20 years have stated. We're not talking a 1980s UK-style mass privatisation, but state firms will face more competition. Having shied away from reform for a decade, China has laid the foundation for an overhaul of its economy in 2014!

Six degrees. UK graduates are more likely to be in work and more than half have high-skilled jobs (compared with 11% of non-graduates). Average pay in 2013 was £31k, compared with £21k if you finished with Highers or A-levels. Studying medicine pays the most (£46k on average) and you're most likely to be employed. However, the benefits of a graduate education are falling. 47% of recent graduates work in non-graduate roles, up from a third in 2001. And where you study matters. Two-thirds of graduates from the Russell Group work in high skilled jobs. It is just over half for other graduates.

European Youth Unemployment = 24% and rising rapidly

UK Youth Unemployment = 20% and rising rapidly

400,000 Graduates came on to the market last year in Europe

960,000 = Under 25`s are unemployed in the UK

Only one in ten school leaves takes up an apprenticeship in the UK

European Youth Unemployment to rise by another 10% + over the next 10 years

UK Help to Buy scheme - building companies over the last 12 months have been raising the basic price of a new house from £174,000 to £194,800 and making an extra 37% profit thanks to the UK governments Help to Buy scheme. Another scheme for building companies to make extra profits at the cost of the buyer who may see negative equity in the future few years! When will people learn to stop fuelling house price rises to a `quick` profit scheme for building companies! Plus, house gazumping is back with frenzy!


Spare change? The UK Government borrowed £5bn less than previously thought over 2012-13 according to revised data. Borrowing this year is £6bn lower than in the equivalent period of 2012, falling from 4.5% of GDP to 4%. Lower borrowing by local authorities and public corporations helped. So did a stronger than expected economic recovery, which lifted VAT and Stamp Duty receipts. We await the Autumn Statement on December 5th to see what this might mean for policy. What will 2014 bring?

Bluhe, deustches Vaterland. Eurozone PMIs fell to 51.5 in November from 51.9 in October indicating that economic activity continues to expand, but at a slower pace. The headline figure was dragged down by the services sector which posted the slowest rate of expansion since August. The manufacturing sector is doing much better, as new export orders in particular continue to rise. But once again it was only Germany that flourished. Business activity accelerated to a 10-month high. Unemployment in Europe is at a `very high 'level and continues to rise rapidly! Meanwhile, it contracted in France and grew weakly everywhere else!


Colin Thompson
DDL: + 44 (0) 121 244 0306

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Main T: + 44 (0) 121 244 1802

email: colin@cavendish-mr.org.uk

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http://www.cavendish-mr.org.uk

http://www.colinthompson.org.uk

The Fed and The Bank of England - Economics Weekly

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