Policy Normalisation
Although today has been quiet from a data perspective we have had some notable speeches and announcements, the implications of which are in some respects rather nuanced although negative sentiment continues to weigh on Sterling.
The US Treasury announced an expansion of the Supplementary Finance Program (SFP) to 200bn. The program involves bond issuance by the Treasury, draining liquidity from the system as the cash is deposited with the Fed. It is expected that this approach will supplement more traditional tools such as reverse repos, term deposits and the discount rate in order to normalise reserves. Although the move is not explicitly hawkish, it is a necessary precursor for interest rate tightening.
In the UK MPC member Adam Posen gave a balanced speech this morning. His central point was a reiteration of the BoE position that Quantitative Easing could conceivably be expanded if future data were to suggest it was necessary, however the market sold off on this. His rhetoric was notably shrill on the question of inflation, where he warned that those betting on “high” inflation “will lose money”.
In the US Fed Chairman Bernanke reiterated his position that rates would remain low for an extended period. Secretary of the Treasury Timothy Geithner reiterated the need to carefully reign in the fiscal deficit.