Fed governor warns of US monetary policy reversal to contain inflationary pressures

 

Thomas Hoenig, Fed chief of Kansas city, was quoted by Bloombery (hat tip Calculated Risk) as saying that there is a big risk that inflation expectations become embedded, requiring a serious policy reversal. He said consumers were gaining an “inflation psychology to an extent that I have not seen since the 1970s and early 1980s.” He said the combination of slowing growth and inflation was troublesome. He also said rising inflationary pressures are not temporary.

This is strong stuff from a known hawk, but nevertheless the tone of his comments suggests that there are serious differences of outlook inside the Fed’s open market committee. There are a few other regional Fed governors who are getting increasingly alarmed.

 

Goldman forecasts oil at $150-200 

A Goldman Sachs report warned that oil could go up to the range of $150-200pb during the next 24 months, as industry supply constraint become increasingly apparent, the FT reports. This is the same forecasts who several years ago correctly predicted the rise in oil to $100. He said OPEC’s spare capacity to cushion against any supply shocks were extremely low. While this price level is not yet discounted in the futures markets, a continued level of over $100 is now widely expected. Yesterday, the oil price hit another record, with WTI trading at $122.

 

Euro area divergences are widening

The composite PMI in the euro area remained broadly stable at 51.9 in April, but behind that steady performance were extreme variations in national levels. While

Germany expanded at record levels, France had its weakest month since 2003. In Spain output contracted in April for the fourth consecutive month, the FT reports, although not quite as severe as in March. The article said the divergences reflect different European sensitivities to the US economic slowdown, and the results would add to the ECB’s discomfort, which meets in Athens today. 

 

 

ECB to get new headquarters

The mayor of Frankfurt yesterday gave the official go-ahead for the start of the ECB’s new headquarters, to be built in the east of the city on the premises of the former wholesale market, where the ECB will construct a building with a twisted tower, 185m high. Completion is targeted for 2011.

 

Yves Leterme visits Sarko and Merkel

Le Monde has an in-depth report about Belgian PM Yves Leterme’s visit to Nicolas Sarkozy and Angela Merkel, in which we will try to dissuade fears about the future of Belgium. The article quotes a Dutch government source saying that nothing seems to be resolved, as the new coalition did not reach agreement on the most controversial issues, but only postponed the controversy until some later time. The article also quotes a Flemish source as saying that the Francophones must realise that something has changed in this country, and that continuing the status quo is not an option. So this crisis is clearly not solved.

 

 

French PM wants to accelerate efforts to end 35-hour week

Francois Fillon confirmed to MPs yesterday that the government wants the end of the 35 hours week. After the TEPA law the government is now preparing a second wave towards this objective, writes Le Figaro. It thereby counts on the trade unions’new representativeness rules that allows an working hours agreement at the company level.

 

Italian tax leak is probably unlawful

The outgoing Prodi government appears to have dug itself a huge hole. Vincenze Visco, the budget minister, probably though he was very clever when he allowed the dissemination of the entire country’s tax returns for 2005, on the flimsy legal ground that Italians have the legal right, rarely used, to demand to see other people’s tax return. But as il sole 24 ore points out in a report this morning, the country’s privacy watchdog says publishing on the internet is unlawful as it allows data to be stored, and falsified. The public prosecutor is also investigating.  

 

 

 

Martin Wolf’s seven rules of regulation

Martin Wolf has drawn up a list of seven measures to improve the regulatory frame. 1. coverage: all large financial institutions must be within the net. 2. Sufficient Capital. 3. Commitment: Originating banks ought to take an equity share in what they distribute 4. Cyclicality: insert counter-cyclical incentives 5. clarity 6. complexity: one way to reduce complexity is to trade products on exchanges 7. compensation: the incentives are currently wrong.

 

 

How to deal with sovereign wealth funds

Rony Hamaui writes in Lavoce that sovereign wealth funds are an economy-theory defying phenomenon, that is likely to lead to a massive rise in global protectionism, especially financial protectionism, as countries try to protect themselves against political takeovers from abroad. Transparency, he argues, is not the answer. What is needed is an international regulation that among others forbids any effective control of enterprises.

 

 

A new idea from the Fed

Barry Ritholtz has a story that the Fed has asked Congress to change the law so that banks earn interest on their deposits at the Fed. The idea is to take away an incentive for banks to loan surplus funds at below official rates – to give the Fed better traction in its money market operations. The rule change was supposed to become effective in 2011, but the Fed wants this implemented earlier.

 

 

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