Comment: The Federal Reserve’s problems are nothing compared to the Bank of Japan

26th April 2011


In a week that has been shortened by the Easter break in many countries and will be further shortened for the holiday for the Royal Wedding in the UK one might think that little may happen. However from today a lot of important events will occur. If we start with the UK then tomorrow (April 27th) will bring the figures for economic growth as represented by Gross Domestic Product figures for the first quarter of 2011. At any time in a recovery these would be important but after figures for the last quarter of 2010 which showed a contraction of 0.5% these numbers will be poured over and dissected. I notice that estimates for these growth numbers are being cut but recently economists forecasts have been increasingly inaccurate, so the change in forecasts may have little significance. One matter which may well get forgotten in the melee at 9.30am tomorrow is that these preliminary numbers are based on only around 40% of the data so some caution is required. I doubt whether the mainstream media will apply appropriate caution however!

The Federal Open Markets Committee

Whilst the UK is important for the world economy in our role as a country which in percentage and absolute terms trades heavily the US economy is much more significant. Today is the first day of the latest FOMC meeting and it comes at a significant time for three reasons. The first I highlighted last Tuesday in my article on why the ratings agaency Standard and Poors had chosen to put the US economy on negative watch.

"When the President’s fiscal expansion was incepted last December many US economists almost seemed to become cheerleaders for it and the Federal Reserve’s policy of Quantitative Easing called QE2 and rushed to give economic growth forecasts of around 4% growth. This meant that the deficit looked affordable as growth of that speed would help to reduce it particularly if it was sustained for a few years. However as we have moved into the spring of 2011 it has become apparent that economic growth probably disappointed in the first quarter of 2011 and looking forward there are plenty of headwinds for the US economy."

These headwinds such as a high oil price,the disaster which hit Japan and the continuing problems in North Africa if anything seem to be getting worse. I will discuss the Japanese situation in more detail later in this article but the overall impact is that US economic growth now looks likely to be lower in the second quarter of 2011 as well as the first. If you had cut interest-rates virtually to zero and boosted the size of the Federal Reserve's balance sheet to US $2.3 trillion with your asset purchases firstly of mortgage-backed securities and latterly of US government debt you might be sitting in your seat wondering about how much impact your moves have had. In my opinion you would be right to do so.

This coincides in an accident of timing when the FOMC has made various hints which look inappropriate now.

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