The ECB and The Fed How Did They React to the Crisis? Tomáš Holub Executive Director Monetary and Statistics Department 11 July 2012, Prague
Outline Interest rate response to the crisis Unconventional monetary policy What explains the differences? Differences in mandates and MP strategy Prohibition of monetary financing Differences in financial system Fiscal situation, asymmetries within the EA Summary and conclusions 2
CBs Key Policy Rates 6 Key interest rates (in %) 4 2 0 9/07 3/08 9/08 3/09 9/09 3/10 9/10 3/11 9/11 3/12 euro area USA GB The ECB did not reach the ZLB with its key policy rate but this difference is largely notional. The ECB started to cut rates later (in the fall of 2008), and it increased them (temporarily) in 2011. 3
Money Market Rates 6 5 4 3 Money market rates (in % p.a.) EA 3M Rate EA O/N Rate EA 1M Rate US 3M Rate 2 1 0 I.07 V.07 IX.07 I.08 V.08 IX.08 I.09 V.09 IX.09 I.10 V.10 IX.10 I.11 V.11 IX.11 I.12 V.12 In practice, money market rates in the EA fell well below the main policy rate in the periods of surplus liquidity. The ZLB was thus reached de facto (why not de jure?). 4
Fed s Forward Guidance The Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. i.e. Fed has also started to provide guidance on future interest rate outlook (unlike the ECB) 5
Unconventional Measures (i) Phase I: trying to keep market interest rates close to main policy rates, satisfy increased demand for liquidity (i.e. doing the standard job in non-standard circumstances) by: Broadening the range of counterparties and collateral Full-allotment fixed-rate tenders (ECB) Narrower corridors around the main policy rate Extending maturities of monetary operations FX swaps with other central banks, etc. 6
Unconventional Measures (ii) Overview of operations of selected central banks primarily influencing the interbank market and smoothness of financing in foreign currencies (source: central banks) Condititions of credit transactions between central bank and financial institutions FX swaps extending of broadening extension of the eligible of eligible the maturity counterparties collateral Fed x x x x BoE x x x x ECB x a) x x x SNB x x x a) related to EIB + full allotment (i.e. supplying unlimited amount at the given IR). 7
Unconventional Measures (iii) Phase II: Truly unconventional measures (i.e. leaving the standard concept) Purchases of government bonds Purchases of covered bonds or other private assets FX interventions (Switzerland, Israel) Commitment to low IRs for some period (Sweden, US in 2011) http://www.bankofengland.co.uk/education/inflation/qe/video.htm 8
Unconventional Measures (iv) Overview of operations of selected central banks primarily influencing long-term interest rates and the exchange rate (source: central banks) Outright purchase of financial assets government bonds covered bonds other private assets foreign currency Fed x x BoE x x ECB X x SNB x x x Enforced in 2010 by the Greek crisis (SMP). 9
Balance Sheet Expansion CB Total Asset Size, % of 2007 GDP 35% Eurosystem FED Bank of England 30% 25% 20% 15% 10% 5% 0% V-06 V-07 V-08 V-09 V-10 V-11 Source: Datastream, IFS The Eurosystem s balance sheet size increased somewhat less aggressively in 2008-2009, but it has caught up since mid-2011, i.e. after escalation of the EA debt crisis. 10
Eurosystem s Operations (i) 11
Eurosystem s Operations (ii) 1500 9.8.2007 3.12.2009 7.5.2010 1500 1000 15.9.2008 1000 EUR bn. 500 0 500 0 EUR bn. -500-500 -1000 2007 2008 2009 2010 2011 2012-1000 main refinancning op erations marginal lending facility longer-term refinancing operations CBPP a SMP deposit facility SMP: EUR 210 bn.; CBPP: EUR 70 bn., i.e. relatively small compared to LTRO ( EUR 1070 bn.). 12
Fed s Operations 13
Fed s Assets (Treasuries and agencies) http://www.federalreserve.gov/newsevents/files/bernanke-lecture-four-20120329.pdf 14
Fed s Liabilities http://www.federalreserve.gov/newsevents/files/bernanke-lecture-four-20120329.pdf 15
Explaining the Differences Why the ECB started to cut interest rates later than the Fed? Why they started to hike in 2011, while the Fed was QE-ing? Why has the ECB not adopted Fed-like forward guidance? Why has the ECB been reluctant to buy GBs in massively? Why has the ECB relied on providing financing to banks? Why the ECB cannot solve the debt crisis? 16
Explaining the Differences Why the ECB started to cut interest rates later than the Fed? Why they started to hike in 2011, while the Fed was QE-ing? Why has the ECB not adopted Fed-like forward guidance? Why has the ECB been reluctant to buy GBs in massively? Why has the ECB relied on providing financing to banks? Why the ECB cannot solve the debt crisis? 17
Inflation 6 5 4 3 2 1 0-1 -2-3 Inflation (y/y in %) 9/07 3/08 9/08 3/09 9/09 3/10 9/10 3/11 9/11 3/12 euro area USA GB The Fed was easing even in periods of rising inflation, while the ECB was apparently more concerned about price developments. 18
US Inflation: Headline vs. Core 5 4 US inflation (Total vs. core PCE; y/y in %) 3 2 1 0-1 -2 I.05 I.06 I.07 I.08 I.09 I.10 I.11 Total Excluding food and energy The Fed traditionally puts a lot of weight on core inflation (http://www.federalreserve.gov/newsevents/speech/mishkin20071020a.htm). Not obvious that this is right, but anyway 19
Differences in Mandates ECB/ESCB: The primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union... Fed: the Board of Governors and the FFOMC should seek to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. 20
Prohibition of Monetary Financing ECB/ESCB: Article 123 (ex Article 101 TEC): 1. Overdraft facilities or any other type of credit facility with the ECB or with the NCBs in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or NCBs of debt instruments. 21
Two Historical Extremes http://www.federalreserve.gov/newsevents/files/bernanke-lecture-one-20120320.pdf 22
Two More Pictures from Bernanke Lecture 1: Origins and Mission of the Federal Reserve http://www.federalreserve.gov/newsevents/files/bernanke-lecture-one-20120320.pdf 23
CB s Web Site Search Results Fed ECB BuBa Inflation 6 500 22 400 1 377 Core inflation 3 960 1 020 494 Employment 8 510 6 410 1 148 Hyperinflation 296 243 27 Deflation 1 530 1 130 96 Great Recession 1 460 606 79 Bank run 6 370 2 180 983 24
Explaining the Differences Why the ECB started to cut interest rates later than the Fed? Why they started to hike in 2011, while the Fed was QE-ing? Why has the ECB not adopted Fed-like forward guidance? Why has the ECB been reluctant to buy GBs in massively? Why has the ECB relied on providing financing to banks? Why the ECB cannot solve the debt crisis? 25
Structure of the Financial System J.-C. Trichet: Our response to the crisis has been carefully calibrated to the financial and economic structures of the euro area. In particular, we needed to bear in mind that the euro area s financial system is predominantly bank-based. Take the structures of private credit outstanding as an example: recourse to banks makes up more than 70% of non-equity external finance in the euro area. By comparison, in the US the equivalent proportion is only around 30%. This reflects the fact that the US financial system is primarily market-based. In the euro area, guaranteeing steady access to credit for households and companies largely means preserving the viability of the banking system. Banks play such a dominant role in our economy that it was appropriate to focus our non-standard measures on the banking sector. http://www.ecb.int/press/key/date/2009/html/sp090612.en.html 26
Structure of the Financial System Bank claims on private sector (in % of GDP) Stock market capitalization (in % of GDP) 160 160 140 140 120 120 100 100 80 60 EA USA 80 60 EU-27 USA 40 40 20 20 0 2005 2006 2007 2008 2009 2010 2011 0 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat, IMF Euro area has a bank-based financial system. Market-based finance is much more important in the US. 27
Explaining the Differences Why the ECB started to cut interest rates later than the Fed? Why they started to hike in 2011, while the Fed was QE-ing? Why has the ECB not adopted Fed-like forward guidance? Why has the ECB been reluctant to buy GBs in massively? Why has the ECB relied on providing financing to banks? Why the ECB cannot solve the debt crisis? 28
Forward Guidance ECB: Why not? I don t know Fed: Moving towards more transparency under Bernanke http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120620.pdf http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm http://www.federalreserve.gov/newsevents/files/bernanke-lecture-four-20120329.pdf 29
Explaining the Differences Why the ECB started to cut interest rates later than the Fed? Why they started to hike in 2011, while the Fed was QE-ing? Why has the ECB not adopted Fed-like forward guidance? Why has the ECB been reluctant to buy GBs in massively? Why has the ECB relied on providing financing to banks? Why the ECB cannot solve the debt crisis? 30
Fiscal Situation in the EA and US Government deficit (in % of GDP) Government debt (in % of GDP) 0-2 -4 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 100 80 60-6 -8 40 20-10 -12 Euro area (17 countries) US (Federal gov't) United Kingdom 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Euro area (17 countries) United Kingdom US Federal debt held by the public The aggregate EA fiscal situation is not worse than in the USA or UK. The problem is country-level heterogeneity and political (sociological, economic, institutional, etc.) infeasibility of pooling the debt. Selective monetization is also not possible (see above). 31
Fiscal Situation in the EA 32
Sovereign Risk in the EA 30 10Y gov't bond yileds (Maastricht criterion) 25 % p.a. 20 15 Euro area Belgium Germany in 10 5 Ireland Greece Spain 0 2006M01 2006M05 2006M09 2007M01 2007M05 2007M09 2008M01 2008M05 2008M09 2009M01 2009M05 2009M09 2010M01 2010M05 2010M09 2011M01 2011M05 2011M09 2012M01 France Italy Portugal Prior to the crisis, there was little differentiation between bond yields of the individual EA countries moral hazard; Now high risk premia charged on the EA s periphery. 33
Business Cycle Asymmetry in the EA 10% Annual real GDP growth 8% 6% 4% 2% 0% EA17 Germany Ireland Greece -2% Spain -4% France -6% Portugal -8% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f Originally a rather symmetric shock turned into a strongly asymmetric one due to fiscal problems in the EA periphery. This makes the single monetary policy difficult. 34
Conclusions In the end, the Fed and ECB did similar things during the crisis in terms of market IRs and BS-expansion, even though using different tools (and the ECB perhaps more reluctantly). The two central banks have different pieces of information coded in their genes. They operate in different financial systems. The euro area suffers from the weakest link problem that is impossible to solve by monetary policy (which should respond to the EA-wide aggregates). 35
Thank you for your attention www.cnb.cz Tomas.Holub@cnb.cz 36
Annex (BoE, SNB, CNB) 37
Bank of England Source: Bank of England 38
Swiss National Bank 1,30 1,25 1,20 1,15 1,10 1,05 1,00 4/11 5/11 CHF/EUR exchange rate 3.8. 10.8. 17.8. 6.9. 300 250 200 min. 1,20 CHF/EUR 150 6/11 7/11 8/11 9/11 10/11 11/11 12/11 1/12 2/12 3/12 4/12 FX interventions since March 2009; 100 50 0 SNB's foreign currency investments (bil. CHF) EUR USD ostatní 07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1 Since September 2011 a floor on the CHF/EUR exchange rate at CHF/EUR 1.20. http://www.cnb.cz/miranda2/export/sites/www.cnb.cz/en/monetary_policy/monitoring/download/1104_cbm.pdf 39
Czech National Bank CB Total Asset Size, % of 2007 GDP 35% 30% CNB 25% 20% 15% 10% 5% 0% V-06 V-07 V-08 V-09 V-10 V-11 There has been a traditional liquidity surplus in the Czech Republic; no unconventional measures during the crisis. 40