Janet Yellen speaking at the Michel Camdessus Central Banking Lecture in Washington and then in discussions with Christine Lagarde afterwards, once again focused on the current position of the Federal Reserve in regard to its monetary policy. As one would expect, in an attempt to issue some words of caution, she commented that the lack of volatility and falling corporate bond spreads may be signs that investors could be increasing risk-taking, thereby exposing themselves to potential future loses. Overall, she did not believe there is a systemic threat from leveraged lending. One would be surprised if she were to suggest anything else. This week has seen a continued mixed bag of economic data from the US, as the Fed chair reiterated that despite the potential dangers from greater risk taking, the Fed was not likely to deviate from its current course.
The other point Janet Yellen made, and again it's one we have made in the past, is how the central banks, the IMF and other groups (for example the G7), are working closer together to help ensure financial stability around the world. In our view, if the financial crisis has done one thing it has ensured going forward that policy makers do work in a more coordinated manner. Hopefully, this has the effect of helping ensure the green shoots of recovery in the global economy continue, and although this closer coordination may not prevent the next crisis, whenever it comes, it may mean the world is a little more prepared for it and better able to react.
Thursday sees a host of data again on the US economy, a lot of it related to employment data. It is often said that markets tend to fall on good news and rise on bad news. No matter what the data comes out with tomorrow, the likelihood is that it will not change the Federal Reserve’s path in the near-term; this probably accounts partly for the continued lack of volatility in asset prices.