Central bank watch

Key global central banks have mostly held the line in February.  The notable exception is the Bank of England, which modified its forward guidance, although this was more changing guidance to suit the current settings of policy rather than changing policy in light of the economy approaching guidance thresholds

Disappointing data in the US has tilted the risk of some kind of change to policy, with gold and bonds rallying.  Key indicators like payrolls, the ISM index, retail sales and housing market activity have all disappointed in a way that cannot be entirely explained by weather.

The FOMC meeting minutes didn't suggest this softness would change the current tack for policy, with QE tapering continuing at a steady rate.  Recent speeches also seem to suggest the threshold for modifying the current pace of tapering will be higher than some softer data and would more likely require some meaningful changes to full year forecasts.

It also seems that the Fed would be much more open to changing forward guidance rather than QE, given the relative costs involved. But so far the market is doing the work for them, with the recent rally in bonds likely to cushion the weakness seen in housing markets.

The Fed may end up taking a leaf out of the Bank of England's book by changing guidance given the unemployment rate threshold of 7% is only months away.  The FOMC have hedged their statements a bit better given inflation is well below target, while the BoE are projecting inflation around their 2%.

Nevertheless, the BoE have dropped the single employment measure to be more encompassing of labour market conditions, with the diagram on the left from the BoE's most recent Inflation Report. The closer the line is to the center of the spiderweb, the closer the variable to more normal levels

In particular, they continue to see significant slack in terms of hours worked, at least compared to assessments since 1992.

Its important to remember that monetary policy is currently very loose, so the BoE won't wait to wait for labour market conditions to return to that inner part of the web before raising interest rates.  Indeed, it has been surprised by how quickly labour market conditions improved over the course of 2013, so it seems likely that they will be moving earlier than they are currently projecting.

The ECB are stuck with an entirely different problem, with the Bank still poised to do something more but its not sure what to do.  The recovery in activity has continued in the last few months, but inflation has been sliding.

The ECB currently doesn't believe its on the path to deflation, but you don't want to wait for that to happen before reacting.  It does appear that the ECB will cut interest rates again, but most are suggesting that some kind of quantitative easing will be required.

But doing this under the Euro is much more difficult given the restrictions on buying sovereign bonds.
The BoJ has largely left its stance unchanged as it waits to see the impact of a rise in consumption taxes in April.  Growth has been a little bit weaker than expected in Q1, but so far they have got inflation on a trajectory that it hasn't been on for many years. So its wait and see mode for the BoJ.