Leaks from the OMC point to June end for asset-buying

ECB SIGNALS FURTHER INTEREST RATE RISES

Rumours were hardening into conviction across the Atlantic late last night that the Federal Open Market Committee (FOMC – America’s MPC) chaired by Ben Bernanke will not renew quantitative easing after the second quarter of 2011.

Sources suggest that Bernanke will aim to put a brave face on things by calling a special press conference in order to present some ‘good news’ data to support the decision. This will effectively enlarge upon his recent optimistic comments before Congress, when the Fed chairman spoke of “a self-sustaining recovery in consumer and business spending”, and claimed that “the risk of deflation has become negligible”. (MIT modelling has suggested for several months now that the real problem is inflation coupled with crippling debt).

As Ben Bernanke doesn’t ‘do’ press conferences, the importance of the one he’ll give cannot be underestimated; but before then, its content may be undermined by events. European Central Bank Governing Council members this morning ‘hinted officially’ that they will keep tightening monetary policy, raising rates further as inflation speeds up to its highest level since 2008. And there seems at last to be a unanimity among China-watchers that the Beijing regime has lost control of its raging inflation: yet more rate rises there now seem a certainty.

But despite the obvious trend, those Fed members against US interest rate rises remain in the majority. An analyst close to the situation asserted that “they daren’t put rates up – for more reasons than anyone cares to think about too hard”. The reference is to a continuing need to deflate foreign debt, avoid bad rate derivatives coming home to roost, and keep the currency cheap for exports.

We should, however, see this as a clear recognition by the Fed that the game’s up as regards any further pretence about QE at this level being able to stimulate the economy. The Slog remains unconvinced about whether the policy has done enough to clean the banks of toxicity – or that China will wear further Dollar devaluation as everyone else’s interest rates go up. What George Osborne and David Cameron think about it is anyone’s guess.

This is a dark corner from which the US cannot emerge unscathed. The last weapon available – Zirp – has a limited shelf-life unless Washington is prepared to countenance a near-worthless currency; Beijing certainly wouldn’t accept that. Then at last the reality of crippling debt has to be faced.