Clarity needed from new Fed chief
The Fed is a battleship that is steered by committee, and vice-chairman Yellen's so-called doveish support for Fed stimulus in the wake of the global crisis is part of the committee consensus.
If she is confirmed and takes over in January, one of her challenges will be to talk more clearly than Bernanke has been doing in recent months.
The Fed and other central banks including the Bank of England have been strengthening their post-global crisis monetary policy medicine by issuing statements that project policy into the medium-long term.
Since December last year, the Fed has been saying that its key interest rate will stay at zero per cent effectively until US unemployment is below 6.5 per cent (it peaked at 10 per cent in October 2009 and is 7.3 per cent now), with inflation anchored below 2.5 per cent. It does not expect to act before 2015.
It has also been pumping $US85 billion of liquidity into the market every month with its quantitative easing program, but its plans on that front have been less clearly communicated.
The Fed began signalling in April that the first reduction in the size of the buying program was approaching, and Bernanke said in June that the taper could begin by year-end, and eliminate QE by the middle of next year.
Bernanke and other Fed officials have consistently stressed that the taper depends on the economy's ability to handle it - but the Fed allowed the markets to believe it would begin the process at its mid-September meeting, and then did nothing. The economic data was still a bit mixed and the brawl in Washington that was brewing was a factor, Bernanke said after the meeting, but the markets were confused.
Sharemarket anxiety about Washington's debt ceiling brawl is not being mirrored in the debt markets. They are assuming that the ceiling will be raised, and a debt default avoided. If that happens, the Fed could say more about QE. It next meets on October 30.
If the taper timetable is still up in the air in January when Yellen takes over, however, investors will be looking for her to quickly end the uncertainty.
Newcrest's sweep
There have been enough problems at Newcrest to justify the changes at the top the gold miner has announced.
Departing chairman Don Mercer was chairman in 2010 when Newcrest paid almost $10 billion for Lihir Gold. It was a very big capital deployment, and did not work as planned.
Departing chief executive Greg Robinson has been a Newcrest director since November 2006. He became CEO in July 2011, after the Lihir acquisition, but was finance director when the deal occurred.
Both were in their current roles in June, when Newcrest announced big write-downs and came under scrutiny on two levels - for not foreshadowing the write-downs adequately, but also for conducting non-specific briefings with analysts shortly before the write-downs were announced.
Mercer says he flagged his intention to retire with Newcrest's board last year. Peter Hay joined the board in August this year as part of the succession planning, and will take the chairman's gavel when Mercer retires at the end of this year.
Rio aluminium executive Sandeep Biswas will join Newcrest as chief operating officer on January 1, and Newcrest says it expects him to replace Robinson as chief executive in the second half of next year.
Hay will steer the group's medium-term governance response to the problems that have emerged. The review of Newcrest's disclosure that ASIC is conducting is grist for the mill.
He is new to the board, but is highly regarded, and has a heavyweight non-executive portfolio including a directorship of ANZ. He has also been chairman of the Australian advisory board of Newcrest's corporate adviser, Lazard, but has stood down from that position as part of his elevation at Newcrest.
One of Sandeep Biswas' key jobs will be to sort out operational problems at Lihir, but the gold price is under pressure.
It has attracted some "flight to quality" support this month on fears that the political brawl in Washington could lead to a US debt default.
If a default is avoided as most expect, however, the focus will again be on the US economic recovery and tightening monetary policy: gold's post-global crisis role as a safe-haven quasi "currency" is undermined in that environment.
It fell from $US1581 an ounce on April 10 this year to just over $US1203 an ounce at the end of June as the Fed discussed the QE taper, is at $US1318 an ounce now and not reacting appreciably to the Washington drama - a sign that underlying pressure remains.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
If confirmed, Janet Yellen is unlikely to produce a dramatic policy shift because the Fed is run by committee and her dovish support for stimulus is already part of the consensus. Her bigger early challenge will be clearer communication to end uncertainty. The Fed continues to signal a near-zero key interest rate until US unemployment falls below 6.5% and inflation stays under about 2.5%, and it has been buying about US$85 billion a month as part of quantitative easing.
The QE taper is a reduction in the Fed’s monthly asset purchases ($85bn a month). The Fed began signalling a taper in April and Ben Bernanke said in June the taper could begin by year-end and eliminate QE by mid-next year. Markets were confused because the Fed hinted at starting the process at its mid-September meeting but then held off, citing mixed economic data and US political uncertainty.
Forward guidance (telling markets rates will stay low until unemployment and inflation targets are met) keeps borrowing costs down, supports asset prices and influences bond yields. The Fed has said it won’t act before 2015 and will keep the key rate near zero until unemployment is below 6.5% and inflation remains anchored below about 2.5%, so investors should watch US unemployment, inflation and Fed meeting dates (the article notes the Fed next meets on October 30).
The article notes sharemarkets were anxious about the debt ceiling brawl, but debt markets were assuming the ceiling would be raised and a default avoided. If default is avoided (as most expect), the Fed could feel freer to clarify QE plans. If the worst happened, it could create flight-to-quality moves in markets, but the piece highlights that most markets expect a resolution.
Newcrest faced problems after paying almost US$10 billion for Lihir Gold in 2010; the acquisition didn’t go as planned and Newcrest announced large write-downs in June. The company was criticised for not adequately foreshadowing the write-downs and for holding non-specific analyst briefings beforehand. As a result, the chairman Don Mercer and CEO Greg Robinson are departing, Peter Hay will become chairman and a senior operational executive, Sandeep Biswas, will join to address operational issues — all moves aimed at strengthening governance and fixing Lihir.
Sandeep Biswas is a Rio aluminium executive who will join Newcrest as chief operating officer on January 1 and is expected to become CEO in the second half of next year. One of his main tasks will be to sort out operational problems at the Lihir mine.
Gold attracted flight-to-quality support when US political tensions raised default fears, but if a default is avoided the focus returns to US recovery and tightening monetary policy, which can weaken gold’s safe-haven role. The article notes gold fell from US$1,581/oz on April 10 to just over US$1,203/oz at the end of June as taper talk intensified; at the time of the article it was around US$1,318/oz.
ASIC is conducting a review of Newcrest’s disclosure practices, which adds regulatory scrutiny to the company’s governance response. Peter Hay’s elevation to chairman is intended to steer the group’s medium-term governance fixes. For shareholders, this means closer oversight and the potential for further corporate-governance-driven changes or clarifications.
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