The Fed moved aggressively last week to further expand its credit easing program. It said it would purchase $300 billion of long-term Treasury securities and increase its purchases of agency mortgage-backed securities to $1.25 trillion (from $750 billion) and of agency debt to $200 billion (from $100 billion). These purchases represent more than a quarter of the stock of agency-backed mortgages, and 8.1 percent of the stock of Treasury coupon debt. By any measure, the purchases look massive. The move to Treasury purchases is consistent with Chairman Bernanke's previous arguments that a central bank needs to be aggressive early in combating the threat of deflation. The Fed believes that the persistent deflations in the U.S. in the 1930s and in Japan in the 1990s could have been prevented by appropriately aggressive policy. The sizeable drop in U.K. gilt yields after the Bank of England announced its purchase plan may have given the Fed more conviction about the effectiveness of this policy, and the Fed could have been influenced by the slow roll-out of programs such as the Treasury Department's Public-Private Investment Fund. In any event, the action makes it clear that the Fed will continue to introduce new tools to fight economic weakness. For example, its statement last week indicated that the range of eligible collateral for the Term Asset-Backed Securities Loan Facility was likely to be expanded. The 50 basis point fall in Treasury rates after the announcement highlights that the Fed does not necessarily need to buy many trillions of dollars in assets to achieve significant results, as some have asserted. Rather, much of the power of its actions comes from market participants' knowledge that the Fed will commit whatever resources are needed to achieve its goals.
Last week, the euro area final February inflation was confirmed at 1.2 percent year on year from 1.1 percent in January, marking the first increase in headline inflation since peaking at 4.0 percent year on year in July 2008. However, analysts continue to expect inflation to fall sharply in the coming months (e.g., to 0.7 percent year on year in March). Favorable food and energy "base" effects should push headline inflation temporarily into slightly negative territory in the summer. Eurozone January industrial production data (-3.5 percent month on month; -6.1 percent vs. the fourth quarter of last year) confirmed the message from Germany and France of a further sizeable contraction in eurozone real GDP in the first quarter of the year. Next week's March survey data will also be an important release, as further significant weakening in the euro composite PMI (Purchasing Managers' Index) would start to call into question whether eurozone real GDP in the second quarter will be in a position to contract by less than in the previous two quarters. The positive news for the new members of EU came from the latest summit of EU leaders on March 20. "Old" Europe has decided to double the financial aid available for Eastern and Southern European members of the Union from $25 billion to $50 billion. Latvia and Hungary have already received a credit line (3.1 billion euros and 6.5 billion euros respectively), so their chance for additional help is considered by experts as "deeply theoretical." The next countries in line are Romania and Lithuania, and there are rumors that the former may consume a huge portion of aid.
Russia and CIS
The last weeks' published economic data in Russia witnessed another surge in unemployment, this time to 8.5 percent. All in all, February statistics show that the economy is still in the woods, with the slump in industrial production now being supplemented with contracting consumption. This was evidenced by the first fall in year on year retail sales (-4.2 percent month on month, -2.4 percent year on year) since the beginning of the crisis last autumn (over the last few months, retail sales were probably supported by spending household savings). Unexpectedly, average nominal wages were up 3 percent month on month and 14 percent year on year, perhaps due to delayed payment of January's wages. This allowed real wage growth to remain in positive territory (1 percent month on month), although growth in real wages was practically flat (0.1 percent year on year). Meanwhile, real disposable income dropped by nearly 5 percent year on year. February's industrial production has been down by 6.4 percent month on month and 13.2 percent year on year. The negative month on month estimate is especially dramatic as January had only 16 working days compared to February's 19. The year on year number seems to imply a drastic revision in the previous industrial output figures, even though they seem to be within the range of analysts' expectations. The good news is that while the economic decline continues, the speed of the descent seems to have eased. Many experts, as well as some of Russia's top officials, think that January will probably be the worst month of the year and the economy will reverse.
*** Written using materials from Bloomberg and Reuters