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…
Yellen’s nomination is unlikely to trigger a dramatic policy shift because the Federal Reserve acts as a committee and her more ‘dovish’ stance on stimulus is already part of that consensus. Investors should expect her main challenge to be clearer communication than recent Fed messaging, especially about the timing of the QE taper and interest rate guidance.
A taper — a reduction in the Fed’s monthly asset purchases (the article says about US$85 billion per month) — can create market volatility as investors adjust to less liquidity and the prospect of eventual tighter monetary policy. The Fed has signaled taper plans intermittently, which has confused markets; investors should watch Fed statements and meetings (the article notes an October 30 meeting and a potential leadership change in January) for clearer timing.
The Fed has said its key interest rate would effectively stay at zero until U.S. unemployment falls below 6.5% and inflation remains anchored below 2.5%. The article notes the Fed didn’t expect to act before 2015 under those conditions.
Sharemarkets have shown anxiety over the Washington debt-ceiling dispute, but debt markets have been pricing in a likely resolution and assuming the ceiling will be raised. If a default is avoided, the Fed might feel able to clarify QE plans, reducing one source of market uncertainty.
Newcrest announced several top-level changes: chairman Don Mercer is retiring at year end and will be succeeded by Peter Hay; CEO Greg Robinson is departing and Rio aluminium executive Sandeep Biswas will join as chief operating officer on January 1 and is expected to become CEO in the second half of next year. These moves are part of a governance response to the company’s recent problems.
The write-downs relate in part to the 2010 Lihir Gold acquisition — a nearly US$10 billion deal that didn’t perform as planned. Newcrest faced scrutiny for not adequately foreshadowing those write-downs and for vague analyst briefings before the announcements. For shareholders, write-downs can reduce reported earnings and raise governance and disclosure concerns; the company is undergoing reviews, including one by ASIC.
Biswas, joining from Rio as COO, is expected to tackle operational problems at Lihir. His appointment is meant to stabilise operations, but the article notes that the gold price is under pressure — so operational fixes at Lihir will be important but won’t fully insulate Newcrest from broader commodity price trends.
Gold’s price fell sharply earlier in the year (from about US$1,581/oz in April to just over US$1,203/oz at the end of June) and was around US$1,318/oz at the time of the article. Gold briefly attracted ‘flight-to-quality’ support amid U.S. political worries, but if a default is avoided and attention returns to U.S. recovery and tighter Fed policy, gold’s role as a safe-haven quasi-currency may be undermined and underlying downward pressure could persist.
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