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Daniel Neilson

lines on the record: 89
first: 2022-10-28
most recent: 2022-10-28
sittings or episodes: 1
sources: podcast

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“I think it was this was right. So just remember what this was like, right? March 2020. Everybody experienced this in some way. If you're sitting in a financial institution or a central bank, then you experience a particular kind of panic at that moment as the whole financial system was trying to digest this very suddenly changed situation as the world started to come to terms with COVID-19. So the way that banks and central banks around the world respond to panic is I need to get into cash.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Liquidity to its own banks. That could be different from place to place. The Fed doesn't care, right? The Fed gives the dollars to the central bank, and then it's the Swiss National Bank or the ECB or the Bank of Japan that figures out how to get those dollars to commercial banks in their jurisdiction. And then it's got to get the dollars back, and then it's got to repay the FX swap back to the Fed.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Sure. Right. So What does another central bank do with the dollars? That's the first question, right? And so, you know, each central bank, let's say the Swiss national bank its own business, it has to do in its own currency, Swiss francs, but it's going to have some foreign assets, euros and dollars for the Swiss National Bank for the most part. But the Swiss banking system is like their international banks. They're going to have a lot of dollar business, including some dollar debts. So just as you said, Jack, for whatever reason, domestic banking system is having trouble coming up with the dollars it needs to pay short-term debts. The central bank, in this case maybe, for example, can activate its swap line, get dollars from the Fed, and then lend those dollars on to its own banking system. And it does that through whatever channel it normally uses to provide.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“So, how long the Fed most typically uses, extends seven-day dollar liquidity in the swap market, but it has been as little as overnight, and it's been in recent times as much as three months. They could be rolled over. So it's a seven-day loan, but you can roll it over week after week after week. And the swap lines are occurring between central banks. between technocratic policymakers around the world, there's a very high level of understanding between them. There's not going to be a lot of question of like, do you actually need this or that kind of thing? It's a pretty, I don't want to say mechanical because you have to make the call and ask, but it's going to happen. If you need the dollars, the Fed is going to do that. And we learned that in 2008. They're not going to let the global financial system fall apart. And this is swap line's a good tool for that.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“It's a lone secured by cash in another currency. So I lend you $100 and you put $105 on deposit with me. After a short period of time, you give me back my dollars and I give you back your euros. In the meantime, you can use the dollars to do whatever you need to do.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Another currency. Okay, that's an FX swap in general. Central banks can use these, and central banks have a particular advantage in the FX swap market.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“The swap lines are, first of all, super important. And as you say, a little bit hard to get your head around. First of all, the FX swaps are a standard financial instrument so we can get a little bit just by understanding what an FX swap is. It's a short-term loan in one currency secured by a deposit in another currency. It's a money market instrument, so it's a way of lending money. That's how you should think about it. There's a foreign exchange kind of aspect to it, but really it's about lending dollars for the most part, although you can do them in other currencies. With the central banks, we're always talking about dollars. So it's a short-term loan from where one party provides dollars, the other side gets dollars, and as collateral, they post a deposit in another currency, loan of one currency secured by a deposit in”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Balance sheet, quantitative easing, balance sheet goes up, quantitative tightening, it goes down, taper is when it's flat. Okay, we get that. But then this whole swap line thing, I feel like that is really impenetrable. To whom are the Fed, when they extend liquidity, what exactly are they doing? It is a loan. What is duration of that loan? Is it collateralized? How's the Fed make sure that it's paid back? And is it successful at all in injecting liquidity? And if it is, why do you think that's the case?”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Lot of participants in the financial system. If you can't buy and sell one, you need to, then that's a real major illiquidity at the very core of the system. Since the end of the global financial crisis, the Fed has established a couple of different mechanisms to get liquidity out to other central banks in an emergency because it's always had to do it on an ad hoc basis in the past. For example, in 2008, it was making up the rules as it went along. So they've tried to set down some rules now so that at the next crisis, they don't have to make it up. And we got two things. The Fed can lend repo to other central banks, can lend dollars through repo markets to other central banks. And for the top tier of central banks, there's about five of them, ECB, Bank of Japan, Canada, Swiss National Bank. They can use these swap lines, which maybe we can come to now. The swap lines are a way that the Fed can get dollars out into internationally into the global financial.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Quantitative easing in light of its US conditions, but it has a big effect elsewhere. Now, in the last, really it's only gotten started in the last couple of months, let's say since September, the Fed is now a seller, a net seller, let's say, in the treasury market. It's not quite selling. It's allowing securities to run off. So now the Fed's involvement in the treasury market has reversed. So this could disrupt the global market for US sovereign debt. And, you know, the Treasury and the Fed and a lot of smart investors are worried about the stability of that market. For example, the Taper Tantrum, for example, also at the beginning of the pandemic, there were some issues in liquidity in the Treasury market. And that could be serious because if you can't buy and sell US sovereign debt when you need to, then there's no better asset for.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Sure. They go hand in hand. They go hand in hand, and some days it's one, and some days it's the other. I think, so if we think about the balance sheet, right, the Fed, the main thing that happened during the quantitative easing period from 2020 until pretty recently until earlier this year is that the Fed was a big buyer in treasury markets. Also mortgages, but let's stick with treasuries for the moment because that treasuries are one of the paths to the global economic system. So again, the Fed was focused on U.S. economic conditions, and that was how it rationalized this process of buying treasuries. But everyone knows that the treasuries are also treasury securities, US Treasury securities, U.S. sovereign debt is money for foreign reserve accounts, official reserve accounts of central banks and governments around the world. So the Fed is thinking about”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Or probably bad if you say, well, that means that they're going to keep hiking more because the U.S. banks can take it. So you're going to see more of these consequences elsewhere that we were talking about. So I think U.S. financial instability is not on the cards really right now.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Together. So, what could we anticipate? Well, If things break down in the US financial system, that's what we saw in 2008, for example. In 2020, it basically didn't happen. The Fed intervened so fast that there were some instability, but we didn't see big institutional failures in the same way that we did in 2008. The Fed has lots of channels for intervening, and you would expect that interest rate rises would stop. Maybe interest rates would come back down. You would expect some expansion of the balance sheet. However, I want to say clearly that I think that's not the likely scenario over the next little bit because the Fed has just got done adding a huge amount of liquidity and most of that has gone into the US financial system and even into US household balance sheets. So there's actually a lot of financial resilience still there in the US financial system, which is an ambiguous signal because that's probably good in the sense if you're worried about US financial stability.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“I got it. Yeah. So I think the question really is about how might the structure of the system at a whole at the very highest level, how might that be affected by events to come? And the way you're framing the question, I completely agree with, right? Because actually if you watch the system, most of the change, most of the systemic change happens on a handful of days that we could count out, like one day per decade, something gigantic happens. And that is when most of the action, when most of the action is. It's these three or four or five sigma events, if you want to look at it that way. So first of all, the Fed knows that and they're trying to think ahead. They're trying not to have those days ever happen. That is a simple way to understand the Fed's relationship to the global monetary system. But they do happen. And when it does, that's when we get a whole new structure for how everything.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Dan, are there any historical parallels that stand out to you? You know, I'm just rereading one of my favorite books, like The Central Bankers who broke the world and the Federal Reserve in the late 1920s, like 1920s. England, the Bank of England, and the Bank of France and the Bank of Germany, they needed, they were like begging the Fed to cut interest rates so that the dollar wouldn't strengthen.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Costs are in local currency and whose income is in dollar, they benefit from that. So you have to kind of see it from the macro position because maybe those same companies have to buy inputs. Maybe they're importing some of the inputs to their process and those inputs are in dollars. So again, I'm not confident in my ability to predict exactly where this crisis is going to show up. And I wouldn't claim to. What I can do is once we start to see where the tension is, then we can fit it into an understanding of the global system. And I think that's helpful. Obviously, obviously everyone's trying to predict the future. And I think this is, you know, we can get some ideas by thinking about it this way. But in the end, there's going to be a little bit of guesswork.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Exporting country, right? So it's easy to see Turkey has been in a difficult situation. They have a lot of, their trade is big relative to their financial flows. So the changing price of the dollar could suddenly show up there. Korea and Japan have both, Japan has been actively intervening in its exchange rate. You saw the shape of the curve on that graph we had. The N has been falling relative to the dollar like everything has the Bank of Japan was intervening. Bank of Korea, there was a lot of speculation that they would intervene. So it could show up in exchange rates. An exchange rate crisis where some major currency collapses in value and that just becomes a very complex stress on their economic system. Sometimes a falling exchange rate can benefit some parties in the country. Exporters who”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“I don't think that I have guesses that are much better than anyone else's, but here's what I watch we've seen the UK guilds crisis and people have read that in terms of UK pension funds and liability driven investment. I'm not an expert on that. I know enough to sort of think it through. I think that's right. That is what drove it, but also the effect of tighter financial conditions are that any system like UK pension funds that had a little bit of instability in it or a little bit of illiquidity built into it is getting squeezed more and more. We're not going to necessarily know in advance which one pops. Afterwards we can look back and say, oh yeah, I see what they were doing. They were using derivatives in a certain way and that left them vulnerable to these changes in interest rates. So it could be UK pension funds again, right? It could be that a big move in the exchange rate really strongly affects some big”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Change pretty fast. That's going to be a slower process, obviously, than monetary policy. So maybe inflation has peaked, maybe not. It'll still be some months before we have a better sense of that. In this new world, stuff is more expensive and the dollars is now becoming more expensive. And we'll have to see how all that plays out. But each step, each step that makes dollar funding more expensive, that puts an added burden on anyone who's borrowed in dollars and anyone who's borrowed in other currencies are affected by these other interest rates. And global trade is being squeezed by changing prices in the dollar. So all of this is in an effort to clamp down on demand is squeezing financial conditions everywhere and in my view that builds up stress, although it's a little hard to say exactly where the stress is going to blow up into something.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Other countries are trying to follow, but even so, the Fed is going faster. And so those interest rate spreads in general have been widening. And that interest rate differential explains the bulk of what's happening with global interest rates. So what does all this mean? We're headed a little bit into the unknown. We've had a pandemic, a war, and a lot of disruptions that have followed from those big global events, a lot of other disruptions, people's lives changing, production systems are changing. You could follow semiconductors. You could follow all of the details. We're moving to a system which is going to be structured somewhat differently. It seems to me that the evidence says that the dollar is still calling the shots for everybody else. The dollar is confirmed at the center and everybody else has to think of themselves in relationship to the dollar. And the prices of goods are really still continuing.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Than what you see is that all four of these currencies are falling in exchange value relative to the dollar. That's not four different things. That's one thing, and that's what that is, is the dollar becoming stronger. Oh, there it is. Perfect. Yeah, this is not for independent currency movements. This is one big story, which is that the dollar is getting more valuable. I would say this is a confirmation of the dollar's role as central to the entire global system. And I think that people should look at this and see the vertical lines, the gray vertical lines, are days on which the Fed changed interest rates. And so the five that are recent, the five and 22 are all hikes. If you look back in 2020, you see a couple that are decreases at the beginning of the COVID-19 pandemic. The big story here is that the Fed is pushing up dollar interest rates.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“So, what it says is that the dollar has hiked faster and more than anyone else. So all of these spreads are currently negative. And what that means is that if you have a choice between holding your overnight money in dollars on the one hand and let's say euros on the other hand, every time the Fed hikes, then you're going to move some money from euros into dollars to take advantage of those higher rates. Not everybody can take advantage of that. Not everybody's in a position to choose between dollars or euros, but enough people are that that represents a pretty sizable flow. And when that happens, the exchange rate falls. So people are selling euros and buying dollars that raises the exchange value of the dollar relative to the euro or pushes down the value of the euro relative to the dollar. Same thing. That's happening around the world. So this is the underlying cause of dollar strength. And if you plot these four exchange rates, which I do in my post, if you look at all...”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Sure. Yeah, I love this chart. And readers of my blog will know that I spend a lot of time thinking in charts, and you've chosen two here that I really like because they're really revealing about how this works. The chart that we had up just a second ago is that's the flat system, right? That says that every central bank has to choose its own, gets to choose its own interest rate, and we measure them each as independent numbers. And the perspective that I bring to this says, no, actually this is a structured system. The dollar is the best money. So you pay a price, an abstract kind of price, if you're offering less interest than the dollar, then your currency is going to suffer one way or the other. So that's what this graph measures. How much, as you said, how much lower than the dollar are these other places? And I chose for four places that are on my mind recently, but you could extend the analysis. You could think about any official rate in this way.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“And compared them to the dollar. So this is how much lower are these rates relative to the Fed funds rates. So just tell us what is the significance of here where now the Japanese rates are 3% lower than what the Fed is doing.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Green is Korea, yellow is the Bank of Japan rate, which is still at zero, I think, mildly negative. Orange is the Bank of England GBP, British pound rate. And you'll note that the British pound and the South Korean Central Bank, they had a little bit of a head start earlier this year. However, the Federal Reserve has rapidly caught up, and now the Federal Reserve has the highest rates pretty much in town when it comes to developed markets, obviously emerging markets like Brazil have in the teen rates, double-digit interest rates. And so this is a chart. that a lot of some folks watching this might have seen, but Dan, what I love about Yuri work, you took these charts and added a little detail, which is you looked at Bank of Japan, Bank of Korea, Bank of England, and the European Central Bank.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“So, the Federal Reserve act with a long and variable lag on U.S. economy, the U.S. economy, which has been slow to slow. It's interesting the Fed says only a couple interest rates sensitive, but it's like housing and autos are pretty big part of the U.S. economy. But they've been much quicker on deteriorating international financial conditions. So let's put up this chart. This is of very short-term interest rates by different central banks. The dark red is the federal funds rates, so the US.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“See other kinds of liquidity crises like that bubble up. Smaller and larger crisis was fairly big, but not at a global scale, right? It wasn't enough to destabilize the global financial system. So the Fed doesn't really have to respond to that. I think we're going to see increasing, increasing tension, and it looks to me very much like financial pressures are rising all around the world faster than US activity is responding to higher interest rates. That leads me to the quote that you read, Jack, which is I think a liquidity event, a financial event outside of the US is starting to seem more likely and frankly looks like it will be coming sooner than US activity drops off. And that, I think, is a worrying thought.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“That the Fed is tightening, tightening, tightening financial conditions. The biggest effect that we're seeing of that is around the world. In Japan, in the UK, in Korea, in Europe in certain ways, in Switzerland, we're seeing that. And all of that is at least in part driven by the Feds making overnight funding in dollars more expensive. That's pushing up pressure in the system everywhere. If the Fed is only looking for a result, an outcome of this policy in U.S. productive activity, then I think there's quite a high risk and an increasing risk that something is going to break in some other place. And we don't quite know where yet, but we get some indications. Other than the US before the Fed sees the result that it wants to see in US activity. So I think we could see, we already saw a crisis in UK sovereign debt.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Where those international financial conditions are mentioned, it doesn't say anything about the dollar, about the US dollar as the central clearing trading currency for the entire global economic, trade and financial system. That function of the dollar is not mentioned. But everyone who knows markets and everyone in a central bank that's not the Fed, and frankly probably everyone in the FOMC meeting all know that in fact it's dollar monetary policy that drives world monetary policy. And so any U.S. rate decision has a big effect everywhere else. My suspicion is that they know that perfectly well, but because of the laws, the acts of Congress that create the Fed and create their jobs, they're not really in a position to discuss that in the minutes of the Fed. It's not something they can just go out and say. They must know that that's what's happening. The end result of all this is”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Where mortgage rates key off of a lot of the activity keys off of the ability of purchasers to borrow. But for the most part, there's been no decline in U.S. activity. After that meeting, just earlier this week, we saw third quarter GDP, US GDP at plus 2.8% higher than expected. And September inflation was still very high, over 8%. So what does this say? The Fed has been tightening, tightening, tightening, and is not really having an effect on U.S. economic activity. They're acting on a theory that says that when you raise interest rates, that should bring down demand and that should bring down GDP and it should bring down prices with it. That's what they're trying to do. That's what the minutes say that they're trying to do. If you read it, if you read the whole thing, what you also see is that there's almost no mention of international financial conditions.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Sure. Yeah, thanks. This is about my commitment to the art of Fed watching. I wrote that piece thinking about the minutes from the September FOMC meeting, so the previous meeting and looking ahead to the next one, which is next week. One of the interesting tidbits, if you read those things in their entirety, is that the Fed observes that they've been raising interest rates pretty fast, fastest increase that we've got on record. Certainly a huge change from the last 15 years. And so far, the response in the US economic system, US GDP, U.S. prices has been minimal. They say a couple of highly interest sensitive sectors have responded. You can think about housing, for example, where the”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“So, in other words, the European Central Bank is just doing the best it can to keep up. If it doesn't hike interest rates, the You're in the college system, you're a very accomplished academic, and academia, it's a competitive world. And if you're a grad student getting your PhD, every hour that you're not reading, you're competing against someone who is reading, you know, and every hour that the ECB has its rates below the Fed, that's another hour where Europeans say, hey, I'm actually going to deposit my money in American financial system and generate 3% instead of getting 0.75%. So Christine Lagarde said, hey, we got to fight and we're going to go to 1.50%. Now I want to pick open a chart. Actually, before we get into that chart, Dan, you had a fantastic quote from your article called Dear Dollar on your soon-parted newsletter, which I recommend everyone check out. I'll read from it now. The likelihood is increasing that an international liquidity crisis will emerge before the Fed.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“That is compounded by the other problem you mentioned, which is central banks, the ECB and the Fed and other central banks are all raising interest rates to try to slow down demand or something like that because they want to bring inflation down. But as you said, inflation is coming from a pretty limited number of spots. The energy crisis right now being one of the big ones. Supply chain disruptions still a factor, maybe a little bit less than six months ago or year ago. But also, but that's still happening. These things are not necessarily going to be affected by interest rate rises. So I think we're headed for a messy time where policymakers are pushing certain buttons, but those buttons are not directly connected to the thing that they're trying to fix. So it could get messy while the effects of tighter policy flow through the economic system.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“And interest rates, they talk that way and they might even believe it sometimes. But what economic theory doesn't help us with very much, but what a lot of market participants would say is kind of obvious, is that there's a close relationship between short-term interest rates in the different regional or national monetary systems. And the dollar is the one that sets the tune for everybody else. So the ECB maybe can get a little bit of leeway, but they're not really free to just look around and see what Eurozone inflation looks like and raise or not raise. They have to always be thinking about the distance between Eurozone short-term interest rates and the Fed short-term interest rates and whether that's getting wider or narrower.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Sure, sir. Well, the opposite, this idea that the system is flat and that everybody can do their own thing is, as I said, I think wrong. And or at least mostly wrong. And what's right, what is more helpful as you're indicating, Jack, is that all of these central banks are interacting within one system and that system is anything but flat. The ECB is the number two central bank in the world. And that means it's ahead of all the other central banks in the world except the Fed. And the Fed is meeting next week widely expected that the Fed will be hiking. The baseline of my view is that the Fed is going to hike, the ECB's got to hike too. So they can talk about monetary policy in a lot of different ways and economics, the theory of economics, you know, which dominates the way that central bankers talk about what they're doing says that there's a relationship directly between inflation.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Dan, you were telling me that the reason that the European Central Bank is hiking interest rates, the stated reason that they're giving is to fight inflation. And yes, raising interest rates does fight inflation. But the best kept secret, excuse me, the worst kept secret in economics is that the bulk of European inflation is due to the energy story. And the ECB can print money, can print euros, but it cannot print oil, cannot print natural gas. If hiking interest rates is somewhat very ineffective in fighting supply chain inflation on the energy side, why is Christine Lagarde hiking interest rates so drastically? And I'll give you a hint. You were saying that the ECB is hiking by 75 basis points this week because something else is going to hike by a similar amount next week.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“On what's happening in Japan and that these things can be more or less independent. Inflation is high in one place, so you get higher interest rates there, but inflation is lower somewhere else, you get lower interest rates there, as though everyone's free to make their own independent choice. And that perspective has led people to read a lot into some language changes in the ECB statement yesterday. Very, really pretty wordsmithing type of stuff, very small edits to the way they're communicating their forward guidance are leading people to say that this looks like a dovish turn from the ECB. This, I think, is probably, this is probably a misinterpretation because that idea comes from the idea that this is a flat system. That idea is wrong. The system is not flat. And so interpretations based on that perspective, I think, are missing the point.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Is that there's not a lot of contraction coming? Maybe we can get into some of the weeds on that because there's some more technical aspects that they did start to work with. We'll be watching that in the weeks to come. The big picture, I mean, you pointed to it already, Jack, is there some misinterpretation of what the ECB is doing? And this is something that I've been thinking about and have been writing about in advance of the decisions. I haven't incorporated all of yesterday's news into this yet, but I think the perspective stands. I think that there is a perspective out there that the global monetary system is flat. What I mean by that is that this idea is that each central bank is kind of free to make its own policy. Fed does its thing based on U.S. conditions. The ECB does its thing based on Eurozone conditions, Bank of Japan does its own thing.”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT
“Sure. Thanks, Jack. Yeah, obviously the ECB is on everyone's mind. It's the number two central bank in the world in the global monetary system and certainly worth watching. Three-quarter point interest rate rise that we got yesterday was, I would say, as expected. It would have been surprising if they had done otherwise. The ECB has three main policy rates and they move them most of the time. They move them in sync. That's what they did yesterday plus 0.75 points. The ECB continues to see high inflation in the Eurozone, higher even than in the United States. And their playbook tells them that when interest is inflation is high, that interest rates have to rise. So that's what we're seeing, no huge surprise there. In terms of the balance sheet, the main story is”
2022-10-28 · Forward Guidance · The European Central Bank Goes On The Offensive | Daniel Neilson (LIVE) · IDENTIFIED FROM THE TRANSCRIPT