US Fed: Has the Bailout Come to an End?

Various Federal Reserve officials continue to issue commentary suggesting that they will leave rates steady at their next meeting in June. Indeed, Fed Chairman Bernanke put the pressure on financial institutions to continue raising capital, signaling that they may no longer be receiving help from the central bank. Furthermore, many officials are confident that the 325bps worth of rate cuts enacted since last September are enough to prevent the economy from sliding into recession.

Ben Bernanke, Federal Reserve Chairman

“Recent events have also demonstrated the importance of generous capital cushions for protecting against adverse conditions in financial and credit markets…Importantly, capital raising and balance sheet repair allow for the extension of new credit, which supports economic expansion. I strongly urge financial institutions to remain proactive in their capital-raising efforts. Doing so not only helps the broader economy but positions firms to take advantage of new profit opportunities as conditions in the financial markets and the economy improve.” – May 15, 2008

Donald Kohn, Federal Reserve Vice Chairman (Voting Member)

"The recent news on inflation has been mixed. Core inflation has moderated a little so far this year. However, we have seen no relief from the pressures of rising prices for energy and food; thus headline inflation has been quite elevated." – May 20, 20008

"With the information now in hand, it is my judgment that monetary policy appears to be appropriately calibrated for now to promote both rising employment and moderating inflation over the medium term." – May 20, 2008

Frederic Mishkin, Federal Reserve Governor (Voting Member)

“…not all asset price bubbles are alike. Asset price bubbles that are associated with credit booms present particular challenges, because their bursting can lead to episodes of financial instability that have damaging effects on the economy…monetary policy should not try to prick possible asset price bubbles, even when they are of the variety that can contribute to financial instability. Just as doctors take the Hippocratic oath to do no harm, central banks should recognize that trying to prick asset price bubbles using monetary policy is likely to do more harm than good. Instead, monetary policy should react to asset price bubbles by looking to the effects of asset prices on employment and inflation, then adjusting policy as required to achieve maximum sustainable employment and price stability.” – May 16, 2008

Charles Evans, Federal Reserve Bank of Chicago President (Alternate Voting Member)

“…even given the financial turmoil, the stance of monetary policy is accommodative and supportive of growth.” – May 14, 2008

Janet Yellen, Federal Reserve Bank of San Francisco President (Alternate Voting Member)

“I consider the current level of monetary accommodation to be appropriate. That, together with the fiscal package, should be sufficient to promote a gradual step up to moderate economic growth later this year.” – May 14, 2008

ECB: Trichet Shows No Signs of Swaying

Price stability remains the name of the game in the Euro-zone, as ECB President Trichet continues to tout its importance, especially as energy and food prices skyrocket. Furthermore, with the Federal Reserve – one of the most dovish central banks in the world – signaling that they will not cut rates further, the ECB will face far less pressure to do the same despite instability in the financial markets.

Jean-Claude Trichet, European Central Bank President

"What we say at this moment (is) be very careful not to embark into...second round effects...Price stability and credibility in price stability in the medium term is the best way to have a high level of sustainable growth and sustainable job creation." – May 19, 2008

Lucas Papademos, European Central Bank Vice President

“The ECB is committed to preserving price stability and the prospects for enhanced efficiency and higher longer-term growth in the euro area are improving.” – May 15, 2008

Lorenzo Bini Smaghi, European Central Bank Executive Board Member

“The rise in headline inflation must remain temporary and limited to food and energy prices, and not spill over other sectors of the economy. From this standpoint, the gravest danger is to index wages to inflation and, in particular, to inflation of external origin. This is a well-known finding in the economic literature and broadly confirmed by experience….The second error to avoid is to tackle the effects deriving from a supply shock, like that connected to the increase in the oil price, with policies to stimulate demand.” – May 15, 2008

Vitor Constancio, European Central Bank Governing Council Member

It was always clear that there would be a deceleration in European growth in the second half of this year. I think there are no risks of recession in Europe or in Portugal.” – May 16, 2008

Richard Lee is a Currency Strategist at FXCM.