There were three developments surrounding Fed policy that stood out last week.
First, the Fed’s statement in its latest Monetary Policy Report that the share prices of social media and biotech firms appeared “substantially stretched.”
Second, a series of news stories with major investors and Wall Street financiers calling for the Fed to start to normalize monetary policy and think about rate rises.
Third, Fed Chair Janet Yellen’s testimony to a Senate committee that included the statement that rates could be raised sooner if the labour market improves more quickly than anticipated.
While Yellen’s reflections on the labor markets and investors’ views of Fed policy are part of the normal evolution of a policy consensus in a democratic society, the Fed’s mention of the share prices of two specific stock sectors was a surprise.
Economists and central bankers have for years debated how monetary policy should react to booms in asset prices and the risk of financial instability, a debate that most recently hit the headlines following the annual report by the Bank for International Settlements (BIS).
The Fed’s statement about the stock prices of social media and biotech firms is thus an example of how central banks initially will react when they perceive that certain assets are inflated.
LIST OF LAST WEEK’S CENTRAL BANK DECISIONS:
- Sri Lanka holds rates, sees inflation in mid-single digits
- Mauritius holds rate, expects steady stance to end-2014
- BOJ maintains policy stance, trims 2014 growth forecast
- Chile cuts rate 25 bps, will consider further reductions
- Canada holds rate, neutral about next change in policy
- Ukraine hikes rate 300 bps to 12.5% to boost hryvnia
- Brazil holds rate steady at 11.0% "at this moment"
- Turkey cuts repo, overnight borrowing rates 50 bps
- South Africa raises rate 25 bps but still below neutral
- Egypt raises rate 100 bps in preemptive strike vs inflation
- Pakistan maintains rate, inflation expectations benign
TABLE WITH LAST WEEK’S MONETARY POLICY DECISIONS:
|COUNTRY||MSCI||NEW RATE||OLD RATE||1 YEAR AGO|
This week (Week 30) five central banks will decide on monetary policy, comprising the countries of Nigeria, Hungary, New Zealand, Russia and Trinidad and Tobago.
TABLE WITH THIS WEEK’S MONETARY POLICY DECISIONS:
|COUNTRY||MSCI||DATE||CURRENT RATE||1 YEAR AGO|
|TRINIDAD AND TOBAGO||25-Jul||2.75%||2.75%|