Will Equities continue the March to year end

The Equities have been out performing the other markets in last 3 months and have taken many aback. The Left outs have been sort of blaming on ' Liquidity Tap' in US and European Banks and faulting markets for playing this ' CLiff Hanger'.
While, Commodities and particularly Oil has fully recovered the ' Paralysis ' Much faster than thought by any one. Gold and Silver not falling in sympathy, While ' Equities' running ' blind Fold' action. The USD still remains a suspect. And, lastly bonds in US and Europe are ' dead wood'
Indian markets struggling from the brink and remains as suspect.

Will this ' contrariness ' sustain itself..? Many think Yes and more think and lurk on the background to enter.
However, the discipline investor should wait for the last episode of this Play and keep waiting for the next day till .. Markets scale a new peak. Markets are going up for end of ' selling ' season in June and likely to test the virtue of being patient But, the upcoming FOMC meeting shall be the end of the ' Game of Waiting' and shall be the decider. 

United Banking Money dousing Action: Press Releasse

For release at 8:00 a.m. EST

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity. 

These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.

As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013.

Federal Reserve Actions
The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly.

U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.

http://www.ecb.int/press/pr/date/2011/html/pr111130.en.html.

PRESS RELEASE

30 November 2011 - Coordinated central bank action 
to address pressures in global money markets

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.

These central banks have agreed to lower the pricing on the existing temporary US dollar liquidity swap arrangements by 50 basis points so that the new rate will be the US dollar Overnight Index Swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from 5 December 2011. The authorisation of these swap arrangements has been extended to 1 February 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.

As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the US dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorised through 1 February 2013.

European Central Bank Decision

The Governing Council of the European Central Bank (ECB) decided in co-operation with other central banks the establishment of a temporary network of reciprocal swap lines.  This action will enable the Eurosystem to provide euro to those central banks when required, as well as enabling the Eurosystem to provide liquidity operations, should they be needed, in Japanese yen, sterling, Swiss francs and Canadian dollars (in addition to the existing operations in US dollars).

The ECB will regularly conduct US dollar liquidity-providing operations with a maturity of approximately one week and three months at the new pricing. The schedule for these operations, which will take the form of repurchase operations against eligible collateral and will be carried out as fixed-rate tender procedures with full allotment, will be published today on the ECB’s website.

In addition, the initial margin for three-month US dollar operations will be reduced from currently 20% to 12% and weekly updates of the EUR/USD exchange rate will be introduced in order to carry out margin calls. Those changes will be effective as of the operations to be conducted on 7 December 2011. Further details about the operations will be made available in the respective modified tender procedure via the ECB’s Website.

The Inception of Federal Reserve: An acrimony

This week marked the 104th anniversary of the night that ultimately gave birth to the Federal Reserve.

On Nov. 2, 1907, John Pierpont Morgan assembled the presidents of several prominent trust companies in the library of his Fifth Avenue mansion. The illiquidity of their firms had caused what is known today as the Panic of 1907. Morgan forced those rich and powerful men to wait and worry, and by the next morning he had strong-armed them into an agreement that ended the crisis.

It wasn't the first time that Morgan, a private citizen, had come to the rescue of the financial community. And the reaction among the public, and at all levels of government, was a mixture of shame and anger. In response, Congress created a central bank six years later, on Dec. 23, 1913.

Today, as its 100th anniversary approaches, many followers of both the Tea Party and Occupy Wall Street movements are calling to "End the Fed." The rich irony here isn't that reactionaries and radicals are in agreement on something; after all, they are both passionately populist. The irony is that it was populist outrage and calls for reform that created the Fed in the first place.

The U.S. had what amounted to a central bank in its early days. The First Bank of the United States received its 20-year charter in 1791, part and parcel of Treasury Secretary Alexander Hamilton's efforts to put the young republic on a sound financial footing. Those efforts included federal assumption of the states' war debts, and were opposed vociferously by Thomas Jefferson and his allies.

It has often been observed that Americans are children of Jefferson living in Hamilton's nation, and that is most obvious in the almost continuous debate over central banking.

Populist sentiment prevailed when the charter for the First Bank of the United States wasn't renewed in 1811. The timing couldn't have been worse: The War of 1812 soon left Washington, international trade and the economy all in ashes.

To bring some order to the chaos, the Second Bank of the United States was chartered in 1816, but its renewal was vetoed in 1836 by Andrew Jackson, a president possibly even more anti-bank than Jefferson.

The next year, J.P. Morgan was born in Hartford, Connecticut.

The three decades from the demise of the second central bank to the point where the Lincoln administration began printing greenbacks to finance the Civil War were known as the years in the wilderness for American finance. Banks printed their own notes -- and let the buyer beware. Bank runs and panics were a common fact of life.

Even with the terrible economic conditions we've seen in the past few years, it's difficult today to comprehend the precarious state of business and personal finance in those days. Not only was there no central bank to restrain economic swings, there was no deposit insurance and no social safety nets. Banks were chronically undercapitalized and went bust with alarming frequency. There was no recourse for depositors. Farms and shops were foreclosed, families put on the street.

In 1907, the economy had been showing multiple signs of distress. As with our recent troubles, the natural ebbs and flows of the economy were amplified and made dangerous by excessive speculation, irresponsible lending and financial engineering run amok. By one account, half the bank loans in New York City were backed only by securities as collateral.

Returning to New York at the time from an Episcopal Church convention in Richmond, Virginia, the 70-year-old, semi-retired Morgan reluctantly entered the fray.

On Oct. 21, copper prices collapsed and an attempt to corner the market by mining magnate F. Augustus Heinze and notorious banker Charles W. Morse failed. Charles T. Barney was president of Knickerbocker Trust Co., the third-largest in New York. He had backed previous ventures by Heinze and Morse, but declined to back the copper play. Nevertheless, when the attempted corner failed, Barney's long association with the pair led the trust's board to force him out. Depositors ran on Knickerbocker, and it failed the next day.

Heinze was indicted, but not convicted. Morse went to federal prison. Barney shot himself.

Bank runs, stock volatility, bankruptcies and wild rumors began caroming around financial markets. Morgan tried to instill calm while practicing triage. Operations like Knickerbocker that were too far gone were left to die. Banks, brokerages and businesses that were fundamentally sound but in distress were supported.

Morgan wasn't necessarily acting out of the goodness of his heart. In the end, the last shaky outfits standing were a few trust banks and the brokerage of Moore & Schley, which controlled Tennessee Coal & Iron. Morgan, who had founded U.S. Steel -- the first $1 billion company in the world -- in 1901, wanted Tennessee Coal in his fold. His Faustian bargain: Moore & Schley would sell Tennessee Coal to U.S. Steel for $45 million, enough money to stay solvent. In return, the healthier trusts would create a $25 million pool to support the weaker ones.

Morgan locked the principals in his library to settle the deal, sometimes taking one or another aside for some added cajoling. The climax came when he confronted the last holdout -- Edward King, president of Union Trust Co. -- at around 5 a.m. on Nov. 3. Morgan pointed to the agreement on the table and said, "Here is the place, King, and here's the pen."

President Theodore Roosevelt, legendary trust-buster, was wise enough to allow the shotgun wedding of Tennessee Coal to U.S. Steel for the greater good. Two weeks later, Oklahomawould be admitted as the 46th state -- the expansion of the nation could not be hobbled, and if Morgan got a fire-sale price for Tennessee Coal, that could be considered his fee for services rendered.

But such a price would never be paid again.

In 1908, Republican Senator Nelson Aldrich of Rhode Island convened a special banking commission devoted to creating a central bank that would respond to such crises in the future. He noted wryly that "we many not always have Morgan." Indeed, the financier died March 31, 1913.

Nine months later, The Glass-Owen bill establishing the Federal Reserve system was adopted and signed into law.

(Gregory D. L. Morris is a member of the editorial board of the Museum of American Finance, a Smithsonian affiliate, and a contributor to the Echoes blog. The opinions expressed are his own.)

Press conference Ben Berananke and Press Conference

FOMC Statement : Stands by

For immediate release

Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has increased at a somewhat faster pace in recent months. Business investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.

US Federal Reserve History and Bernanke

Monetary Policy post Lehman : Bernanke View

Chairman Ben S. Bernanke

At the Federal Reserve Bank of Boston 56th Economic Conference, Boston, Massachusetts

October 18, 2011

The Effects of the Great Recession on Central Bank Doctrine and Practice

The financial crisis of 2008 and 2009, together with the associated deep recession, was a historic event--historic in the sense that its severity and economic consequences were enormous, but also in the sense that, as the papers at this conference document, the crisis seems certain to have profound and long-lasting effects on our economy, our society, and our politics. More subtle, but of possibly great importance in the long run, will be the effects of the crisis on intellectual frameworks, including the ways in which economists analyze macroeconomic and financial phenomena.
In particular, the crisis has already influenced the theory and practice of modern central banking and no doubt will continue to do so. Although it is too early to know the full implications of recent events for central bank doctrine and operations, I thought it would be worthwhile today to highlight and put into context some of the changes, as well as the continuities, that are already evident. My remarks will focus on how central banks responded to recent challenges related to the conduct of both monetary policy and the promotion of financial stability and how, as a result of that experience, the analysis and execution of these two key functions may change.
The Monetary Policy Framework
During the two decades preceding the crisis, central bankers and academics achieved a substantial degree of consensus on the intellectual and institutional framework for monetary policy. This consensus policy framework was characterized by a strong commitment to medium-term price stability and a high degree of transparency about central banks' policy objectives and economic forecasts. The adoption of this approach helped central banks anchor longer-term inflation expectations, which in turn increased the effective scope of monetary policy to stabilize output and employment in the short run. This broad framework is often called flexible inflation targeting, as it combines commitment to a medium-run inflation objective with the flexibility to respond to economic shocks as needed to moderate deviations of output from its potential, or "full employment," level. The combination of short-run policy flexibility with the discipline imposed by the medium-term inflation target has also been characterized as a framework of "constrained discretion."
Many central banks in both advanced and emerging market economies consider themselves to be inflation targeters, prominent examples including those in Australia, Brazil, Canada, Mexico, New Zealand, Norway, Sweden, and the United Kingdom. Although they differ somewhat in the details of their policy strategies, policy tools, and communication practices, today virtually all inflation-targeting central banks interpret their mandate flexibly--that is, they treat the stabilization of employment and output in the short term as an important policy objective even as they seek to hit their inflation targets over the medium term. Several other major central banks, such as the European Central Bank (ECB) and the Swiss National Bank, do not label themselves as inflation targeters; however, they have incorporated key features of that framework, including a numerical definition of price stability, a central role for communications about the economic outlook, and a willingness to accommodate short-run economic stabilization objectives so long as these objectives do not jeopardize the primary goal of price stability.
How does the Federal Reserve fit into this range of policy frameworks? The Federal Reserve is accountable to the Congress for two objectives--maximum employment and price stability, on an equal footing--and it does not have a formal, numerical inflation target. But, as a practical matter, the Federal Reserve's policy framework has many of the elements of flexible inflation targeting. In particular, like flexible inflation targeters, the Federal Open Market Committee (FOMC) is committed to stabilizing inflation over the medium run while retaining the flexibility to help offset cyclical fluctuations in economic activity and employment.
Also, like the formal inflation targeters, over time the Federal Reserve has become much more transparent about its outlook, objectives, and policy strategy. For example, since early 2009, the Federal Reserve's "Summary of Economic Projections" has included the FOMC's longer-run projections, which represent Committee participants' assessments of the rates to which economic growth, unemployment, and inflation will converge over time. These projections are conditioned on the assumptions of appropriate monetary policy and no further shocks to the economy; consequently, the longer-run projections for inflation in particular can be interpreted as indicating the rate of inflation that FOMC participants judge to be most consistent, over time, with the Federal Reserve's mandate to foster maximum employment and stable prices. These longer-run inflation projections are thus analogous to targets although, importantly, they represent the Committee participants' individual assessments of the mandate-consistent inflation rate, not a formal inflation goal of the Committee as a whole.¹ 
To what extent, if at all, has the pre-crisis consensus framework for monetary policy been changed by recent events? In part because they recognized the benefits of continuity and familiarity during a period of upheaval, central banks generally retained their established approaches to monetary policy during the crisis; and, in many respects, the existing frameworks proved effective. Notably, well-anchored longer-term inflation expectations moderated both inflation and deflation risks, as price-setters and market participants remained confident in the ability of central banks to keep inflation near target in the medium term. The medium-term focus of flexible inflation targeting also offered central banks latitude to cushion the effects of the financial shocks on output and employment in the face of transitory swings in inflation. In particular, they were able to avoid significant policy tightening in mid-2008 and early 2011, when sharp increases in commodity prices temporarily drove headline inflation rates above target levels. Finally, for central banks with policy rates near the zero lower bound, influencing the public's expectations about future policy actions became a critical tool, as I will discuss further shortly. The commitment to a policy framework that is transparent about objectives and forecasts was helpful, in many instances, in managing those expectations and thus in making monetary policy both more predictable and more effective during the past few years than it might otherwise have been.
However, the recent experience did raise at least one important question about the flexible inflation-targeting framework--namely, that although that framework had helped produce a long period of macroeconomic stability, it ultimately, by itself, was not enough to ensure financial stability. Some observers have argued that this failure should lead to modifications, or even a replacement, of the inflation targeting approach. For example, since financial excesses tend to develop over a relatively longer time frame and can have significant effects on inflation when they ultimately unwind, it has been suggested that monetary policy should be conducted with reference to a longer horizon to take appropriate account of financial stability concerns.² 
My guess is that the current framework for monetary policy--with innovations, no doubt, to further improve the ability of central banks to communicate with the public--will remain the standard approach, as its benefits in terms of macroeconomic stabilization have been demonstrated. However, central banks are also heeding the broader lesson, that the maintenance of financial stability is an equally critical responsibility. Central banks certainly did not ignore issues of financial stability in the decades before the recent crisis, but financial stability policy was often viewed as the junior partner to monetary policy. One of the most important legacies of the crisis will be the restoration of financial stability policy to co-equal status with monetary policy.
Monetary Policy Tools
While central banks may have left their monetary policy frameworks largely unchanged through the Great Recession, they have considerably widened their set of tools for implementing those frameworks. Following the crisis and the downturn in the global economy that started in 2008, central banks responded with a forceful application of their usual policy tools, most prominently sharp reductions in short-term interest rates. Then, as policy rates approached the zero lower bound, central banks began to employ an increasingly wide range of less conventional tools, including forward policy guidance and operations to alter the scale and composition of their balance sheets.
Forward guidance about the future path of policy rates, already used before the crisis, took on greater importance as policy rates neared zero. A prominent example was the Bank of Canada's commitment in April 2009 to keep its policy rate unchanged at 1/4percent until the end of the second quarter of 2010, depending on the outlook for inflation.³ This commitment was successful in clarifying for market participants the bank's views on the likely path of policy rates and appears to have helped reduce longer-term interest rates, thus providing additional policy accommodation. In 2010, the Bank of Japan, which faced ongoing deflation in consumer prices, also used conditional forward guidance, saying that "The Bank will maintain the virtually zero interest rate policy until it judges, on the basis of the ‘understanding of medium- to long-term price stability,' that price stability is in sight, on condition that no problem will be identified in examining risk factors, including the accumulation of financial imbalances."⁴ 
Some central banks provide forward guidance directly by releasing forecasts or projections of their policy rate. This practice had already been adopted by the Reserve Bank of New Zealand (in 1997), the Norges Bank (in 2005), and the Swedish Riksbank (in 2007). Each of these central banks used those projections during the financial crisis to indicate that they were likely to keep rates at low levels for at least a year.
In the United States, the FOMC introduced language in its March 2009 statement indicating that it anticipated rates to remain at low levels for an "extended period," and at its August 2011 meeting the Committee elaborated by indicating that it anticipated rates would remain low at least through mid-2013.⁵ The FOMC continues to explore ways to further increase transparency about its forecasts and policy plans.
In addition to forward guidance about short-term rates, a number of central banks have also used changes in the size and composition of their balance sheets as tools of monetary policy. In particular, the Federal Reserve has both greatly increased its holdings of longer-term Treasury securities and broadened its portfolio to include agency debt and agency mortgage-backed securities. Its goal in doing so was to provide additional monetary accommodation by putting downward pressure on longer-term Treasury and agency yields while inducing investors to shift their portfolios toward alternative assets such as corporate bonds and equities. These actions also served to improve the functioning of some stressed financial markets, especially in 2008 and 2009, through the provision of market liquidity.
Other central banks have also used their balance sheets more actively than before the crisis, with some differences in their motivations and emphasis, in part reflecting differing financial structures across countries. For example, the Bank of England has used large-scale purchases of medium- and long-term government securities as its preferred tool for providing additional stimulus; it expanded the size of its asset purchase program earlier this month out of concern about possible slowing of domestic and global economic growth. The Bank of Japan has acquired a wide range of assets, including government and corporate bonds, commercial paper, exchange-traded equity funds, and equity issued by real estate investment corporations. The ECB purchased privately issued covered bonds between July 2009 and June 2010 to improve liquidity in a key market segment; it recently announced plans to resume such purchases in November. The ECB has also bought the sovereign bonds of some vulnerable euro-area countries, "to ensure depth and liquidity in those market segments which are dysfunctional," although the monetary effects of these purchases have been sterilized through offsetting operations.⁶ 
In most cases, the use of balance sheet policies for macroeconomic stabilization purposes has reflected the constraints on more-conventional policies as short-term nominal interest rates reach very low levels. In more normal times, when short-term policy rates are not constrained, I expect that balance sheet policies will be rarely used. By contrast, forward guidance and other forms of communication about policy can be valuable even when the zero lower bound is not relevant, and I expect to see increasing use of such tools in the future.
Financial Stability Policy
Even as central banks were innovative in the operation of their monetary policies, they were forced to be equally innovative in restoring and maintaining financial stability. Serving as a lender of last resort--standing ready in a crisis to lend to solvent but illiquid financial institutions that have adequate collateral--is, of course, a traditional function of central banks. Indeed, the need for an institution that could serve this function was a primary motivation for the creation of the Federal Reserve in 1913. The Federal Reserve's discount window is an example of a facility that operates in normal times to provide very short-term liquidity to depository institutions. Most other central banks have facilities with similar features that are generally aimed at banks that find themselves with temporary liquidity needs. During the crisis, as short-term funding markets failed to function normally, central banks around the world acted forcefully to channel liquidity to institutions and markets by lengthening the terms of their lending, increasing the range of collateral accepted, and expanding the set of counterparties with which they would undertake operations.
To help stabilize the financial system and facilitate the flow of credit to households and businesses, the Federal Reserve responded to the dislocations in funding and securitization markets by dramatically increasing the amount of term funding that it provided to banks, establishing new lending facilities for nonbanks, and providing funding to support the operation of key markets. Elsewhere, including Canada, the euro area, and the United Kingdom, central banks introduced similar facilities or expanded existing facilities to boost the provision of liquidity in their local currencies. The types of facilities have varied across countries commensurate with differences in financial systems. In the euro area, where the banking sector plays a relatively large role in financial intermediation, the ECB focused on increasing liquidity to banks. Similarly, the Bank of England sought to improve banks' liquidity positions by allowing them to exchange illiquid mortgage-backed securities for U.K. treasury bills for up to three years.
One of the lessons of the crisis was that financial markets have become so globalized that it may no longer be sufficient for central banks to offer liquidity in their own currency; financial institutions may face liquidity shortages in other currencies as well. For that reason, the Federal Reserve established bilateral currency swap agreements with 14 foreign central banks during the financial crisis. The swap facilities have allowed these central banks to borrow dollars from the Federal Reserve to lend to banks in their jurisdictions, which has served to ease conditions in dollar funding markets globally. Similarly, the ECB established bilateral swap lines with several other central banks in Europe to exchange euros for their respective currencies.
As lender of last resort, a central bank works to contain episodes of financial instability; but recent events have shown the importance of anticipating and defusing threats to financial stability before they can inflict damage on the financial system and the economy. In particular, the crisis illustrated some important benefits of involving central banks in financial supervision. Among these benefits are the facilitation of close and effective information sharing between supervisors and the providers of backstop liquidity, especially during crises; the ability to exploit the substantial overlap of expertise in the making of monetary policy and financial stability policy; and the usefulness of the information supervisors gather about economic and financial conditions for monetary policy. Appreciation of these benefits is leading to larger roles for central banks in financial supervision. For example, the Bank of England received expanded powers and responsibilities for financial stability with the establishment of a prudential regulator as a subsidiary of the bank and the creation of a separate Financial Policy Committee within the bank that will identify, monitor, and take action to reduce systemic risks. In the euro area, the newly created European Systemic Risk Board, which is chaired by the president of the ECB and includes the governors of all European Union central banks, draws heavily on central bank expertise, including analytical, statistical, and administrative support from the ECB. In the United States, the Federal Reserve has reoriented its existing supervisory activities to incorporate a broader systemic focus; it also has been assigned new responsibilities for financial stability, including supervisory authority over nonbank financial institutions that are designated as systemically important by the Financial Stability Oversight Council and new backup authorities for systemically critical financial market utilities.
The Integration of Monetary Policy and Financial Stability Policies
As I noted earlier, in the decades prior to the crisis, monetary policy had come to be viewed as the principal function of central banks; their role in preserving financial stability was not ignored, but it was downplayed to some extent. The financial crisis has changed all that. Policies to enhance financial stability and monetary policy are now seen as co-equal responsibilities of central banks. How should these two critical functions fit together?
At an institutional level, as I have already suggested, the two functions are highly complementary. Monetary policy, financial supervision, and lender-of-last-resort policies all benefit from the sharing of information and expertise. At the Federal Reserve, for example, macroeconomists help design stress-test scenarios used by bank supervisors, while supervisors provide information about credit conditions to macroeconomic forecasters. Threats to financial stability, and their potential implications for the economy, are thoroughly discussed at meetings of the FOMC.
An important debate for the future concerns the extent to which it is useful for central banks to try to make a clear distinction between their monetary and financial stability responsibilities, including designating a separate set of policy tools for each objective. For example, throughout the crisis the ECB has maintained its "separation principle" under which it orients changes in its policy interest rate toward achieving price stability and focuses its unconventional liquidity and balance sheet measures toward addressing dysfunctional markets. The idea that policy is more effective when separate tools are dedicated to separate objectives is consistent with the principle known to economists as the Tinbergen rule.⁷ 
In practice, the distinction between macroeconomic and financial stability objectives will always be blurred to some extent, given the powerful interactions between financial and economic conditions. For example, monetary policy actions that improve the economic outlook also tend to improve the conditions of financial firms; likewise, actions to support the normal functioning of financial institutions and markets can help achieve the central bank's monetary policy objectives by improving credit flows and enhancing monetary policy transmission. Still, the debate about whether it is possible to dedicate specific policy tools to the macroeconomic and financial stability objectives is a useful one that raises some important practical questions. A leading example is the question of whether monetary policy should "lean against" movements in asset prices or credit aggregates in an effort to promote financial stability. In my view, the issue is not whether central bankers should ignore possible financial imbalances--they should not--but, rather, what "the right tool for the job" is to respond to such imbalances.⁸ 
The evolving consensus, which is by no means settled, is that monetary policy is too blunt a tool to be routinely used to address possible financial imbalances; instead, monetary policy should remain focused on macroeconomic objectives, while more-targeted microprudential and macroprudential tools should be used to address developing risks to financial stability, such as excessive credit growth. Prudential tools can be structural or cyclical in nature. Examples of structural prudential tools are measures to ensure adequate levels of capital and liquidity in the banking sector or to increase the resiliency of the financial infrastructure. Examples of cyclical prudential tools include varying caps on loan-to-value ratios on mortgages, as Korea and Hong Kong have done; dynamic provisioning for losses by banks, as employed in Spain; time-varying margin and haircut rules; and countercyclical capital requirements, as have been set out in BaselIII. In principle, structural and cyclical prudential tools could both damp the buildup of imbalances and bolster the resilience of the financial sector to a decline in asset prices by increasing its capacity to absorb losses. The diverse tools of financial regulation and supervision, together with appropriate monitoring of the financial system, should be, I believe, the first line of defense against the threat of financial instability. However, the effectiveness of such targeted policies in practice is not yet proven, so the possibility that monetary policy could be used directly to support financial stability goals, at least on the margin, should not be ruled out.
Conclusion
The financial crisis of 2008 and 2009 will leave a lasting imprint on the theory and practice of central banking. With respect to monetary policy, the basic principles of flexible inflation targeting--the commitment to a medium-term inflation objective, the flexibility to address deviations from full employment, and an emphasis on communication and transparency--seem destined to survive. However, following a much older tradition of central banking, the crisis has forcefully reminded us that the responsibility of central banks to protect financial stability is at least as important as the responsibility to use monetary policy effectively in the pursuit of macroeconomic objectives.
An evolving consensus holds that central banks can dedicate separate toolkits to achieving their financial stability and macroeconomic objectives, but this consensus must be viewed as provisional. Certainly, those toolkits appear to be much better stocked today than before the crisis: monetary policy tools that can be brought to bear if necessary include the management of the central bank's balance sheet and, to a greater extent than in the past, communication about future policies. Financial stability policy encompasses, as the first line of defense at least, a range of microprudential and macroprudential tools, both structural and varying over the cycle, supported by enhanced monitoring and analysis of potential risks to systemic stability. Clearly, understanding and applying the lessons of the crisis will take some time yet; both theorists and practitioners of central banking have their work cut out for them.

Economic outlook : Ben Bernanke

Chairman Ben S. Bernanke

Economic Outlook and Recent Monetary Policy Actions

Before the Joint Economic Committee, U.S. Congress, Washington, D.C.

October 4, 2011

Chairman Casey, Vice Chairman Brady, and other members of the Committee, I appreciate this opportunity to discuss the economic outlook and recent monetary policy actions.
It has been three years since the beginning of the most intense phase of the financial crisis in the late summer and fall of 2008, and more than two years since the economic recovery began in June 2009. There have been some positive developments: The functioning of financial markets and the banking system in the United States has improved significantly. Manufacturing production in the United States has risen nearly 15 percent since its trough, driven substantially by growth in exports; indeed, the U.S. trade deficit has been notably lower recently than it was before the crisis, reflecting in part the improved competitiveness of U.S. goods and services. Business investment in equipment and software has continued to expand, and productivity gains in some industries have been impressive. Nevertheless, it is clear that, overall, the recovery from the crisis has been much less robust than we had hoped. Recent revisions of government economic data show the recession as having been even deeper, and the recovery weaker, than previously estimated; indeed, by the second quarter of this year--the latest quarter for which official estimates are available--aggregate output in the United States still had not returned to the level that it had attained before the crisis. Slow economic growth has in turn led to slow rates of increase in jobs and household incomes.
The pattern of sluggish growth was particularly evident in the first half of this year, with real gross domestic product (GDP) estimated to have increased at an average annual rate of less than 1 percent. Some of this weakness can be attributed to temporary factors. Notably, earlier this year, political unrest in the Middle East and North Africa, strong growth in emerging market economies, and other developments contributed to significant increases in the prices of oil and other commodities, which damped consumer purchasing power and spending; and the disaster in Japan disrupted global supply chains and production, particularly in the automobile industry. With commodity prices having come off their highs and manufacturers' problems with supply chains well along toward resolution, growth in the second half of the year seems likely to be more rapid than in the first half.
However, the incoming data suggest that other, more persistent factors also continue to restrain the pace of recovery. Consequently, the Federal Open Market Committee (FOMC) now expects a somewhat slower pace of economic growth over coming quarters than it did at the time of the June meeting, when Committee participants most recently submitted economic forecasts.
Consumer behavior has both reflected and contributed to the slow pace of recovery. Households have been very cautious in their spending decisions, as declines in house prices and in the values of financial assets have reduced household wealth, and many families continue to struggle with high debt burdens or reduced access to credit. Probably the most significant factor depressing consumer confidence, however, has been the poor performance of the job market. Over the summer, private payrolls rose by only about 100,000 jobs per month on average--half of the rate posted earlier in the year.¹ Meanwhile, state and local governments have continued to shed jobs, as they have been doing for more than two years. With these weak gains in employment, the unemployment rate has held close to 9 percent since early this year. Moreover, recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead.
Other sectors of the economy are also contributing to the slower-than-expected rate of expansion. The housing sector has been a significant driver of recovery from most recessions in the United States since World War II. This time, however, a number of factors--including the overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and the large number of "underwater" mortgages (on which homeowners owe more than their homes are worth)--have left the rate of new home construction at only about one-third of its average level in recent decades.
In the financial sphere, as I noted, banking and financial conditions in the United States have improved significantly since the depths of the crisis. Nonetheless, financial stresses persist. Credit remains tight for many households, small businesses, and residential and commercial builders, in part because weaker balance sheets and income prospects have increased the perceived credit risk of many potential borrowers. We have also recently seen bouts of elevated volatility and risk aversion in financial markets, partly in reaction to fiscal concerns both here and abroad. Domestically, the controversy during the summer regarding the raising of the federal debt ceiling and the downgrade of the U.S. long-term credit rating by one of the major rating agencies contributed to the financial turbulence that occurred around that time. Outside the United States, concerns about sovereign debt in Greece and other euro-zone countries, as well as about the sovereign debt exposures of the European banking system, have been a significant source of stress in global financial markets. European leaders are strongly committed to addressing these issues, but the need to obtain agreement among a large number of countries to put in place necessary backstops and to address the sources of the fiscal problems has slowed the process of finding solutions. It is difficult to judge how much these financial strains have affected U.S. economic activity thus far, but there seems little doubt that they have hurt household and business confidence, and that they pose ongoing risks to growth.
Another factor likely to weigh on the U.S. recovery is the increasing drag being exerted by the government sector. Notably, state and local governments continue to tighten their belts by cutting spending and employment in the face of ongoing budgetary pressures, while the future course of federal fiscal policies remains quite uncertain.
To be sure, fiscal policymakers face a complex situation. I would submit that, in setting tax and spending policies for now and the future, policymakers should consider at least four key objectives. One crucial objective is to achieve long-run fiscal sustainability. The federal budget is clearly not on a sustainable path at present. The Joint Select Committee on Deficit Reduction, formed as part of the Budget Control Act, is charged with achieving $1.5 trillion in additional deficit reduction over the next 10 years on top of the spending caps enacted this summer. Accomplishing that goal would be a substantial step; however, more will be needed to achieve fiscal sustainability.
A second important objective is to avoid fiscal actions that could impede the ongoing economic recovery. These first two objectives are certainly not incompatible, as putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term. Third, fiscal policy should aim to promote long-term growth and economic opportunity. As a nation, we need to think carefully about how federal spending priorities and the design of the tax code affect the productivity and vitality of our economy in the longer term. Fourth, there is evident need to improve the process for making long-term budget decisions, to create greater predictability and clarity, while avoiding disruptions to the financial markets and the economy. In sum, the nation faces difficult and fundamental fiscal choices, which cannot be safely or responsibly postponed.
Returning to the discussion of the economic outlook, let me turn now to the prospects for inflation. Prices of many commodities, notably oil, increased sharply earlier this year, as I noted, leading to higher retail gasoline and food prices. In addition, producers of other goods and services were able to pass through some of their higher input costs to their customers. Separately, the global supply disruptions associated with the disaster in Japan put upward pressure on prices of motor vehicles. As a result of these influences, inflation picked up during the first half of this year; over that period, the price index for personal consumption expenditures rose at an annual rate of about 3-1/2 percent, compared with an average of less than 1-1/2 percent over the preceding two years.
As the FOMC anticipated, however, inflation has begun to moderate as these transitory influences wane. In particular, the prices of oil and many other commodities have either leveled off or have come down from their highs, and the step-up in automobile production has started to reduce pressures on the prices of cars and light trucks. Importantly, the higher rate of inflation experienced so far this year does not appear to have become ingrained in the economy. Longer-term inflation expectations have remained stable according to surveys of households and economic forecasters, and the five-year-forward measure of inflation compensation derived from yields on nominal and inflation-protected Treasury securities suggests that inflation expectations among investors may have moved lower recently. In addition to the stability of longer-term inflation expectations, the substantial amount of resource slack in U.S. labor and product markets should continue to restrain inflationary pressures.
In view of the deterioration in the economic outlook over the summer and the subdued inflation picture over the medium run, the FOMC has taken several steps recently to provide additional policy accommodation. At the August meeting, the Committee provided greater clarity about its outlook for the level of short-term interest rates by noting that economic conditions were likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. And at our meeting in September, the Committee announced that it intends to increase the average maturity of the securities in the Federal Reserve's portfolio. Specifically, it intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less, leaving the size of our balance sheet approximately unchanged. This maturity extension program should put downward pressure on longer-term interest rates and help make broader financial conditions more supportive of economic growth than they would otherwise have been.
The Committee also announced in September that it will begin reinvesting principal payments on its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities rather than in longer-term Treasury securities. By helping to support mortgage markets, this action too should contribute to a stronger economic recovery. The Committee will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability.
Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector. Fiscal policy is of critical importance, as I have noted today, but a wide range of other policies--pertaining to labor markets, housing, trade, taxation, and regulation, for example--also have important roles to play. For our part, we at the Federal Reserve will continue to work to help create an environment that provides the greatest possible economic opportunity for all Americans.

FED Statement : Twisting the Yield Curve

For immediate release

Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time.

Will Ben Bernanke make the Markets Twist or Turn

There is a large following to the Bernanke's Anti Keynesian Moves to over come the cyclical effects of the Capitalist Economies in the bookish Sense. Albeit, there is now hardly any economy that is not capital oriented.
The Q now is will Ben Bernanke do what markets are despondently expecting out of FOMC..?
It is reasonable that, Markets are in for Turn than any Twist...

1) The Unlocking Formula for the Money idling in the Bonds, will take place in ' slow motion' and that is what Big Ben and Co expects, therefore the Short term Interest rates are kept to the lowest in last FOMC meeting.

2) US Data barring the Unemployment nos is satisfactory and is not showing any signs of worsening up and even the Beige Book had the record for the same.

3) Dissent in FOMC's last meeting had been severe and had prompted for the vehement opposition. The Enlarged discussion by one day suggest a more divided house.

4) Ben Bernanke is most likely to keep the other tools to fight the slow down in Hand than Spend it Now.

5) The large International Opposition to FOMC Easing shall Curtail Any expeditious ' Twist '

All in All Markets are likely to take this ' Easy ' but in immediate terms it shall be Dollor + and Market -ve

China PMI, US housing Market and FOMC delusion Next week

Week ahead economic calendar [19 - 23 Sept] 
Central bank policymaking under the spotlight
ƒ FOMC and MPC updates to be watched for signs
of further stimulus
ƒ Flash PMIs for China and Eurozone to provide
first insight into September growth trends
The highlights of the week are updates on US and UK central 
bank policymaking and flash PMI surveys for China and 
Eurozone.
The US Federal Open Market Committee (FOMC) decision
on Wednesday will be watched for the possibility of additional
stimulus. Options may include buying more government
bonds, switching from shorter-term to longer-term bonds to
help reduce mortgage and other long-term debt interest
rates, or cutting the 0.25% interest rate it pays on the $1.7
trillion of excess reserves that banks hold at the Fed, as this
should stimulate bank lending.  However, there is a concern
that banks, already under financial strain, could be hurt
further by any reduction in mortgage lending margins or any
lowering of the excess reserve interest rate. Furthermore,
with Bernanke still expecting the recovery to regain
momentum later this year, there is a distinct possibility that
the Fed will do nothing.
The Bank of England elected to do nothing at its September
Monetary Policy Committee (MPC) meeting, but the minutes
from the meeting are likely to  indicate that the MPC grew
increasingly worried about the fragility of the economic
recovery following a raft of weak data. Both Spencer Dale
and Martin Weale have moved away from their hawkish
stances, and others may have joined Adam Posen in voting
for additional stimulus.
The first indicators of the health of the global economy in 
September will be provided by flash PMI data for China and 
the Eurozone. PMIs showed manufacturing roughly
stagnating in both China and the Eurozone in August, down
sharply since the start of the year, while growth of services
slipped closer to stagnation in the Eurozone. Perhaps of
greatest interest will be whether growth in Germany – the
Eurozone’s main growth driver in the early stages of the
recovery – continues to disappoint as the financial crisis hits
confidence. A steep slide in business confidence in the
European banking sector (see chart) suggests that further
weakness in the wider economy lies ahead.

The UK Household Finance Index (HFI), compiled by Markit,
will provide the first insight into consumer spending, savings
and debt trends in September, as well as inflation
expectations, house prices and job security. Households
reported the sharpest deterioration in their finances since the
survey began last month, exceeding even that seen during
the worst point of the recession.
A snapshot of the US housing market will be provided by the
National Association of Home Builders (NAHB) index, which
remained at a very depressed level in August.    
Tuesday
German producer prices data will highlight supply chain price 
pressures. Rates of increase accelerated, both in annual and
monthly terms in July. Next up for Germany is the ZEW
survey. A slump in investor confidence was seen last month.
Elsewhere in the single currency area, Italian industrial
orders and sales numbers are published.
US housing starts will be watched as a guide to the health of 
the housing market and construction industry. Meanwhile,
weekly Redbook and ICSC store chain sales will give a
handle on consumer spending patterns.
Central bank committees in both Hungary and Turkey meet
to determine monetary policy.
Wednesday
Japan publishes its monthly trade report early Wednesday
morning. Markit’s PMI™ manufacturing survey showed new
export business falling for the sixth successive month in Markit Economic Research
August, with respondents attributing this to ongoing yen
strength and subdued demand from China.  
What PMI panellists in Japan linked the fall in exports to..
Source: Markit. Size of words linked to number of times cited by companies.
The minutes from the Bank  of England’s Monetary Policy 
Committee (MPC) August meeting will be eagerly awaited for 
signs that the MPC moved closer to voting for another round
of asset purchases. Public sector borrowing numbers will
highlight whether the government is on track to meet its
deficit reduction target. The government will want a repeat of
the big fall in public sector borrowing recorded in July, but
weaker-than-expected economic growth points to a growing
risk that the target will be missed.
In the US, weekly MBA mortgage applications are released
ahead of existing home sales numbers and the Federal Open 
Market Committee (FOMC) interest rate announcement. 
Despite the clamour for looser policy, the Fed is unlikely to 
announce a third round of asset purchases, known as QE3, 
next week. The Czech National Bank also meets to discuss
monetary policy.  
Thursday
Markit and HSBC publish the Flash China Manufacturing
PMI™ early Thursday morning. Analysts will watch these
numbers closely after business conditions deteriorated for a
second successive month in August.

   All eyes will then be on the publication of the flash PMI™
surveys for France, Germany and the euro currency area as
a whole. August’s Eurozone PMI survey pointed to the
slowest rate of economic growth for two years, as the
region’s recovery almost ground to a halt. The risk of the
Eurozone slipping back into contraction has therefore risen.
September data will round off the Q3 picture. Additionally,
industrial orders and consumer confidence numbers for the
Eurozone are published, while the Confederation of British
Industry (CBI) releases industrial trends data for the UK.
In the US, weekly jobless claims (both initial and continued)
and the Federal Housing Finance Agency (FHFA) house
price index are published.  
Friday 
The week ends on a relatively quiet note, with the publication
of French consumer confidence and business climate data in
advance of Italian trade and retail sales numbers.

NOTE : 1) FOMC is unlikely to make announcement and is likely to
disappoint market. 2) Expect advance declaration by some companies.