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Marketplace of Ideas

Three economic events that were widely expected to be bombshells landed with a thud this week. Here’s what you need to know:

  • Scotland Referendum“Hawks squawk but Fed stays course.” That headline from Forbes is a fair assessment of this week’s FOMC meeting and forecast update. Some analysts expected a more hawkish tone to the Fed’s policy statement in light of the continued strengthening of the labor market data. In the end, Fed Chair Yellen stuck by her dovish tone and the FOMC majority stuck with her, though two members dissented, both leaning toward an earlier tightening of monetary conditions. Just when are rates finally going to go up? According to the Fed’s latest economic and policy projections, only one member thinks rates should be raised this year. For next year, the midpoint of the projections for the Fed’s key policy rate fall around 1.375%, which is not much of a change from 1.125% at the time of the last forecast round, in June. Some think that is too low, but markets are pricing in even less tightening than the Fed is signaling. That means rates on consumer and mortgage loans are staying low for now, but many people are already bracing for the inevitable rise.

  •  Scotland is not leaving the United Kingdom. Analysts warned that the economic impact of Scottish independence could have been brutal—for both Scotland and Britain—with unanswered questions raising unknowable risks: How would they divvy up their shared public debt? Would Scotland still use the pound sterling as its currency? Would the Bank of England still set monetary policy for an independent Scotland? With Scots rejecting independence in a 55-to-45% vote, those questions won’t have to be answered. Despite the wide margin of victory, polls leading up to Thursday’s referendum showed the outcome too close to call. But all the while, the market for online betting maintained pretty stable favorable odds for the “no” vote. Writing for The Upshot, Justin Wolfers says pollsters should learn from the markets: Ask people who they think will win, not who they’re voting for. In this case, having a better sense of the outcome might have prevented needless speculation about a run on banks and other market calamities.
  • Despite high expectations, the ECB’s latest effort to boost lending in the euro zone was a disappointment. Europe’s central bank won kudos recently for taking a more aggressive approach in its nearly seven-year battle to revive the economy and financial system. Part of that initiative was a program to give banks cash in exchange for certain non-mortgage consumer loans, which in theory would allow them to lend even more. But the results of the first such offering, announced on Thursday, showed limited interest among banks. What’s next? The ECB has other initiatives planned, such as purchases of asset-backed securities (ABS), but the details of that program are still unclear. In particular, the Germans do not want the ECB or the national governments to have to provide guarantees for ABS, which are riskier than government bonds. But even if such a scheme does come off, it would not be considered successful unless it caused banks to lend more. So the real question is, why aren’t banks in Europe lending? Some say geopolitical risks are to blame, with trouble in the Ukraine and the Middle-East adding uncertainty to the economic outlook. But there’s also a question of whether banks can lend. The ECB is about to release the results of its stress tests on 120 banks, which should reveal whether the European banking system is strong enough to help spur economic growth.

[Photo: Scott Heppell, Canadian Press]

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