Cards dealt face-up.
Thursday February 4, 4:26 pm Eastern Time
Fed seen seeking more changes in policy mechanisms
by Isabelle Clary
NEW YORK, Feb 4 (Reuters) - The Federal Reserve on Thursday announced its latest plan to better inform financial markets about its monetary policy intentions, a move likely to be followed by further changes in the conduct of monetary policy, analysts said.
The Fed released on Thursday the minutes of the Federal Open Market Committee (FOMC) meeting on December 22 and said it would start "releasing, on an infrequent basis" its policy directive -- or the most likely next move in U.S. short-term interest rates -- right after the conclusion of FOMC meetings.
"Specifically, the Committee would do so on those occasions when it wanted to communicate to the public a major shift in its views about the balance of risks or the likely direction of future policy," the FOMC minutes said.
"I applaud the Fed's efforts toward more transparency, it's an effort in the right direction," said Scott Hein, professor of economics at Texas Tech University. "It's a gradual process and an effort on the part of the Fed to walk a fine line between providing the public with whatever information would help them and providing too much information to the detriment of monetary policy."
The Fed embarked on a policy of openness in 1994 when it started disclosing the outcome of its policy meetings on the same day.
The FOMC met on Tuesday and Wednesday and left the federal funds unchanged at 4.75 percent. It did not disclose any change in the policy directive -- called a bias when it is tilted toward an easing or tightening. This fueled some market talk the FOMC had not departed from the neutral policy stance it adopted in November when it last lowered the funds rate.
The change related to the Fed bias may not be the last, analysts said while commenting on another set of minutes recently released, those covering the 1998 Fed Board meetings on the discount rate.
The minutes of the October 5 Fed Board meeting said Fed "Governor (Edward) Gramlich raised the question of whether the Board should move to a situation in which the discount rate would be higher than the federal funds rate."
Fed Chairman Alan Greenspan remarked that "if all restrictions on borrowing were removed, (this) would mean that the discount rate would be a penalty rate" and likened the proposed new role of the U.S. discount rate "to a Lombard facility." Greenspan also stated "the mechanics of monetary policy might need to change in the future."
The minutes of a November 16 Fed Board meeting echoed that view, saying "it was understood that alternative approaches for monetary policy would be studied by the Board."
"The Fed may be considering changing the discount window mechanism and the reserve requirement mechanism," Hein said. "Fed policy has been very successful and this may be a good opportunity to look into the future in a broad setting."
Banking innovations have led to a pronounced and continued decline in reserves that commercial banks must hold at Fed banks, thus weakening one mechanism of U.S. monetary policy.
"While reserve requirements no longer serve the primary purpose of monetary control, they continue to play an important role in the implementation of monetary policy," Fed Governor Laurence Meyer told Congress last year.
Speaking on behalf of the Fed, Meyer supported the notion that the Fed should pay interests on reserves banks keep at the Fed. He also cited the use of the discount rate as a Lombard facility which would allow banks to freely borrow at the Fed's discount window lending facility, without red-tape but at a higher interest rate.
David Resler, managing director at Nomura Securities International, said paying interests on reserves and turning the discount window into a Lombard facility would allow the Fed to deal with liquidity squeezes without having to lower interest rates in an otherwise robust economy.
"If you can pinpoint the source of a squeeze in the market, you might not need to change monetary policy in a broad sense," Resler said. "When you lower rates, you dump massive amounts of liquidity in a system that does not require it when you have only a few isolated situations that require liquidity."
One of the problems tied to the decline in bank reserves is an increase in the daily volatility in the funds rate.
But Northern Trust chief U.S. economist Paul Kasriel said the Fed could have another way to deal with that issue -- dealing with the market place all day as opposed to only at a fixed time in the morning.
"We could have the Fed stand throughout the day, ready to borrow or lend on collateral. If there are too few or too much reserves in the system, dealers could come to the Fed at any time, and this would limit the fluctuations," Kasriel added.
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Asia at risk if US, China slow down, yen weakens: Chase MD
He puts US growth at 1% this year; says China could see more capital flight.
by Vikram Khanna
[SINGAPORE]
A coming slowdown in economic growth in the US, China and Europe combined with uncertainties in Japan could mark the start of another phase of the Asian crisis, according to the chief economist and managing director of Chase Manhattan Bank.
In an interview with BT, John Lipsky forecast that US growth would probably slow to about one per cent this year, compared with 3.4 per cent in 1998, which would limit the ability of the US to serve as a locomotive for the world economy.
The slowdown would be driven by a further widening of the US external current account deficit, a decline in capital investment growth following lower corporate profits, and weaker housing activity.
Mr Lipsky pointed out that an important additional cause of the slowdown would be a decline in consumer spending growth to only around 2 per cent this year, from 4-5 per cent in 1998.
This would result partly from a waning of the "wealth effect" (spending driven by increases in wealth arising from, for example, stockmarket gains) as well as lower real wage increases.
Mr. Lipsky noted that one of the key reasons for the "surprising strength" of consumer spending last year was that inflation was overestimated, which led to higher-than-expected real wage increases and thus an "unanticipated windfall" in purchasing power. This will not carry over into 1999, he said, adding that corporate restructuring and layoffs would further depress real wage growth.
Given declining inflation and a slowing economy, the US Federal Reserve will cut interest rates this year, according to Mr Lipsky.
"With inflation at one per cent, it's hard to justify a Fed funds rate of 4.75 per cent," he said, adding that the rate would probably be cut by a total of 75 to 100 basis points in the course of the year.
With regard to the Chinese economy, Mr Lipsky pointed to a number of "risk perceptions". One was that capital flight might be increasing.
He suggested this could be a possible explanation for the fact that the increase in China's reserves in 1998 (about US$5 billion) was well below the aggregate of the current account surplus (US$45 billion) and net foreign direct investment (US$40 billion).
If indeed capital flight is occurring and is rising, this would heighten market perceptions of a future yuan devaluation, Mr Lipsky said.
He added that while investors are generally sympathetic to the Chinese government's reform efforts, "there is a perception that it is trying to do too many things at the same time". China has announced intentions to clean up its state owned enterprises, reform its banking system, boost exports and tackle rising unemployment.
Perceptions of a coming yuan devaluation could put pressure on the Hongkong dollar, Mr Lipsky said.
He pointed out that markets could come to doubt Hongkong's ability to tolerate further sharp declines in asset prices -- which would be necessary if there is a sudden loss of exchange-rate competitiveness relative to China. This in turn would raise fresh doubts about the sustainability of the Hongkong dollar's peg to the US dollar and heighten investor uncertainty.
In Japan, Mr Lipsky pointed to the need for the government "break the deflationary psychology" prevalent in the country. "Japanese policy should not be oriented to maintaining any particular level of the exchange rate, but to reviving domestic demand", he said, noting that the country's policymakers were still "describing goals in exchange rate terms" -- as evidenced by the Japanese Prime Minister's recent endorsement of "target zones" for currencies.
However, Mr Lipsky said he was hopeful that Japan would eventually succeed in reviving domestic demand -- a side-effect of which would be a weakening of the yen against the US dollar. But this in turn could lead to new pressures on Asian economies, especially Korea and Taiwan.
In sum, if the US economy slows, China's growth falls off, and the yen weakens, there is a risk that Asia's crisis will enter another phase, Mr. Lipsky said.
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One would be hard-pressed to find another with as much influence on the U.S. Federal Reserve as New York-member Chase.
Combine all the above w/ recent reports from Thailand, including a severe report from a prominent economist and ex-DPM, w/ what we know to be true of the HK economy. Add substantial deflationary activity in Singapore and PRC economies, the situation in South America, very poor forecast for Mexican economy, defined slow-down in Europe,...I think the cards have been dealt, pretty much, face-up.
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Extreme Speculation
Y2K problems, of both the genuine and staged nature, at oil refineries.
It would be the recent luck of those residing in non-Japan East Asia should the price of gold move to a substantially higher level prior to their personal finances recovering with sufficient funds to purchase it. Such a circumstance might even be arranged.
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