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Dragjhi is Transforming ECB and it will Look more like the Federal Reserve

Marc To Market's picture




 

Given the new initiatives announced last month, of course the ECB stood pat.  However, Draghi announced the most far-reaching changes of how the central bank will conduct policy starting next year.  

 

Three important changes will take place.  In his prepared remarks Draghi focused on two, but let's put the other one on the table. With Lithuania set to join EMU on January 1, the treaties call for a rotation among the national central bank presidents for voting purposes.  The central banks from the largest countries, including Germany will vote a little more often than the central banks from the smaller countries.  

 

This is a bit like the rotation of the regional presidents as voting members of the Federal Reserve's Open Market Committee, with two exceptions.  First, in the US, the NY Fed has a permanent vote on the FOMC.  Some in Germany want the same thing for the Bundesbank, but it does not look particularly likely now.  Second, the Board of Governors at the Federal Reserve, when fully staffed, outnumber the regional presidents.  This will not be the case at the ECB, where the Executive Board is only five strong.    

 

The other two changes include a shift from monthly meetings to every six weeks, which is essentially the same as the Federal Reserve.  Draghi was clear that there was not attempt to align the meetings of the two central banks.  The reserve maintenance period has also been changed from a monthly term to a six week period.  This will produce operational changes at the member banks.  

 

The ECB is also working a releasing some record of its meetings.  It is still not clear what form they will take or how timely they will be.  The publication of the "minutes" will begin next year and we expected additional details to be forthcoming.  

 

Most of Draghi's other comments were well within expectations.  There was more technical information of about the Targeted LTROS (TLTROs) and there was another innovation:  that the TLTROs could be drawn individually or as part of a (TLTRO) group.  The dates of the TLTROs were set for September 18 and December 11.  

 

While many in observers have focused on the roughly 400 bln euros that could be borrowed from the facility in September and December, Draghi reminds investors that the funds available after the quarterly allotments could bring the total toward 1 bln euros. 

 

Last month Draghi was understood to say that interest rate policy had been exhausted, but today he seemed to backtrack a bit.  He said that a technical adjustment could not be ruled out.  It is not clear what this means, but it could be a cut in the corridor by bringing the marginal lending rate down.   

 

On the exchange rate, Draghi shed little fresh light.  It is not a policy target, but it is an important input into inflation.  Draghi did seem a bit frustrated with the euro's resilience despite the rate cuts and other measures. He said he was watching the exchange rate with "great attention."  

 

With the momentum from the stronger than expected US jobs data and the smaller trade deficit, the euro briefly slipped through $1.3600, but rebounded a bit.  Resistance is now seen in the $1.3640-60 area.  Italia, Spanish and Portuguese benchmark 10-year bond yields have eased around 5 bp, which is essentially what the US 10-year yields have risen.  While many observers will talk about how Spain's benchmark 10-year yield is poised to slip below the US yield, keep in mind that Spain's inflation is 0.2% year-over-year.  That makes its nominal yield virtually the same as its real yield.  US inflation is near 2.1%, making its real yield closer to 0.55%, about a fifth of the real yield in Spain.  

 

Lastly, we note that Draghi appeared to be singing from the same song book as Yellen regarding the use of monetary policy to address financial stability.  Like the Fed Chair yesterday, Draghi indicated that macro-prudential measures and regulation is the first line of defense, not monetary policy (price and quantity of money).   Monetary policy seems to blunt of an instrument and operates with unpredictable lags.  Macro-prudential policy and regulatory efforts are more precise and can be implemented almost immediately.  This is part of the new orthodoxy.  

 

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Fri, 07/04/2014 - 15:24 | 4925139 The Econ Ideal
The Econ Ideal's picture

"we note that Draghi appeared to be singing from the same song book as Yellen regarding the use of monetary policy to address financial stability.  Like the Fed Chair yesterday, Draghi indicated that macro-prudential measures and regulation is the first line of defense, not monetary policy (price and quantity of money).   Monetary policy seems to blunt of an instrument and operates with unpredictable lags.  Macro-prudential policy and regulatory efforts are more precise and can be implemented almost immediately.  This is part of the new orthodoxy."

 

These new "tools" are also imprecise, and are misleading as rapid solutions to financial instability. Ms. Yellen has spent her career writing about "macro-prudential policy," but none of what she prescribes would have prevented the financial crisis in 2007/8. Macro-prudential policy assumes that financial institutions are following a solid prescription of controlled risk measures, but as we know, regulators either weren't aware of the existent risks, or if they were (and many probably were), they didn't act for several reasons, among them cronyism. That glad handling isn't unique to the U.S. The losers in this era of financial repression are all of us inflicted with the ineffective centrally planned policies and regulations that stifle broad economic freedom and prosperity, in exchange for the enrichment of special interests. 

Thu, 07/03/2014 - 17:12 | 4922805 TrustbutVerify
TrustbutVerify's picture

Are Europeans so lulled by their heroin-like social programs that they'll allow this? 

Thu, 07/03/2014 - 15:18 | 4922444 pashley1411
pashley1411's picture

"macro-prudential measures and regulation" who in hell believes this?   The ECB's role is the same as the Feds; keep all the balls in the air, until it can't.  

Towards that end, the ECB will print, confiscate, suppress, and jail, everyone and everything.    Status Quo, uber alles.  

I know, I know, Cyprus is a far-away country of which they know little.

Thu, 07/03/2014 - 14:35 | 4922294 Jstanley011
Jstanley011's picture

In the race to the bottom the EU suffers a disadvantage against the US, because all the Europeans can do in a unified manner is debase their currency via their central bank. Here, in addition to the Fed, we have the advantage of a unified fiscal and regulatory regime that can undermine and degrade the real economy of the entire country directly.

Thu, 07/03/2014 - 13:31 | 4922046 Jano
Jano's picture

This is maybe a part of the new transatlantic treaty?

Thu, 07/03/2014 - 11:07 | 4921497 SAT 800
SAT 800's picture

"--with the use of monetary policy for financial stability"---I feel like Mohatma Ghandi when a reporter asked him what he thought about Western Civilization; he replied, "I think it's a good idea, we should give it a try". Is there any financial stability? Where is it ? What's it look like? Sounds like a Unicorn to me.

Thu, 07/03/2014 - 10:55 | 4921455 khaproperty
khaproperty's picture

Will not work - alone because the high court in Germany judged that ECB must not buy european treasuries to set down the interest rates in member-countries.

 EU ist not USA anyway: EU is a group of selfish states - USA ist a state of unselfish countries.

A fundamental difference.

Thu, 07/03/2014 - 10:53 | 4921453 RaceToTheBottom
RaceToTheBottom's picture

After the new EU Fed has extinguished all its powers, the new China FED will come into play.

The new world Fiat order

Thu, 07/03/2014 - 10:18 | 4921330 no more banksters
no more banksters's picture

As predicted:

"In essence, the decision means that Europe passes into a hastily, coercive federalization, in terms that serve exclusively the destructive neoliberalism. The ECB is converted into an equivalent European Fed, which means, gaining complete control of the money flow through the whole eurozone."

http://failedevolution.blogspot.gr/2012/09/lea-jacta-est-by-emperor-drag...

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