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The world’s major central banks tightened monetary policy in 1999, albeit moderately, but enough to generally erase the easier policies implemented in 1998. The rationale for the tightenings were the faster, stronger than expected improvements in the major economies, but significantly without any strong inflationary pressures. Thus, the central bank actions were largely preemptive and designed to slow the economies and, in turn, check inflation before it took hold. The concern was especially evident in the U.S., but at yearend 1999 the jury was still out as to whether the Federal Reserve, and other major central banks, were being overly cautious. What has yet to be determined is whether the emergence of high-tech economies and attending improvements in worker productivity can absorb tight labor markets without triggering either cost-push and/or demand-pull inflation. From a historical economic stance it shouldn’t happen. However, it does appear that subtle changes are taking root in the global economies which may yet give central banks more flexibility towards monetary policy. As the new century unfolds, the role of the central bank is likely to prove a major issue. A century ago there were only 18 central banks, 16 of them in Europe. Now there are 172 central banks with more and more of them claiming some degree of independence from their national governments. The European Central Bank (E.C.B.) represents eleven nations with a new degree of independence since no one government appoints all its members. The claim for such independence rests largely on the success of tight monetary policies in quelling inflation in the 1980’s. In early November 1999, the E.C.B. raised the benchmark refinancing rate to 3.0 percent from 2.5, the bank’s first increase in its then short history. The move was not unexpected and was in response to a better than expected economic setting for Western Europe. Earlier in the year, the E.C.B. had lowered rates to 2 1/2 percent in an effort to prevent an economic downturn and possible deflationary pressures. Whether the rate decrease buoyed Europe’s economies in midyear is uncertain, but it did help the equity markets and the wealth created, on paper and/or realized, obviously had an impact on consumer spending. Still, the European Union benchmark rate of 3 percent in late 1999 was still under the U.S. and U.K., by at least 2 percent, but well above Japan’s 1/2 percent. In September, Britain’s central bank raised the short term securities repurchase rate 25 basis points to 5.25 percent, the first increase in more than a year and breaking a series of seven moderate rate cuts. The Bank’s action was unexpected since U.K. inflation was below its target of 2.5 percent, but the economy’s growth was accelerating and traders apparently surmised that the 1/4 point increase would have little dampening impact, the implication of which suggested additional increases would soon come and in November another 25 basis point increase lifted the repurchase rate to 5.50 percent. However, the economic situation in the U.K. in late 1999 was still considerably better than across much of Continental Europe. Growth in France was good with the G.D.P. growing at more than 2.5 percent. Growth was seen as torrid in Ireland and Holland. In Germany, which accounts for about one-third of the Euro zone’s economic output, growth was modest at best. Germany’s G.D.P. in 1999 was put at +1.5 percent and was forecast at +2.5 percent in 2000. The U.S. economy continues to dominate the world and its robust growth in 1999, annualized at over 5 percent, prompted the federal reserve to raise short-term rates three times, effectively erasing the three rate cuts in 1998. The Fed’s rational for the increases was that the economy was too strong for its own good. Unemployment was at a thirty year low and skilled workers were lacking in a number of industries. However, the flip side of the economic equation was that productivity per worker was the best in years which effectively restrained labor costs. Thus, inflation, either producer or consumer, which the Fed fears as the most damaging economic variable, showed little sign of surfacing in 1999. Still, the strong equity markets buoyed consumer spending, and if the scenario carries into 2000 additional rate hikes are apt to be seen by midyear. A major restraint on any aggressive Fed tightening may be the fear higher rates would have on strengthening the U.S. dollar, but the Fed has always stressed that its primary concern is containing inflation, not the dollar’s value. In Japan, short-term interest rates stayed within an eyelash of zero during 1999. The nation’s monetary policy was viewed my many as dangerously passive. Until 1998, the Bank of Japan basically took its orders on monetary policy from the Ministry of Finance, but now it is independent and perhaps overly protective of its new responsibility, as evidenced in 1999 when the bank refused to print more yen, as requested by the Finance Ministry, to help bring down the yen’s soaring value against the U.S. dollar. Although Japan slowly pulled itself out of its economic malaise during 1999, the change has been largely due to fiscal policy rather than monetary. In early 1999, global deflation and rising unemployment were the primary economic fears, by yearend those fears had largely dissipated. The question for the year 2000 is how strongly the central banks will react to strengthening economies and inflation fears, real or perceived. The odds appear to favor some further credit tightening, especially in the U.S., if the wealth generating equity markets continue to move higher.

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Futures Markets

A number of actively traded interest rate futures markets are traded worldwide. The London International Financial Futures Exchange (LIFFE) trades contracts on 3-month Sterling prices and British long Gilts. LIFFE also offers futures on Euroswiss and Italian government bonds. The all-electronic Eurex exchange in Frankfurt trades a variety of Swiss and German government bonds as well as Euribors. Canadian Bankers Acceptances are traded on the Montreal Exchange (ME). 3-year Australian Commonwealth T-bonds are traded on the Sydney Futures Exchange. Notional bond and PIBOR futures are traded on the Paris MATIF. Euroyen futures and Japanese yen government bonds are traded in Tokyo. Libor and eurodollars are traded on Chicago’s Mercantile Exchange, with the latter also on the Mid-America Exchange. A Brady Bond Index futures is traded on the CBOT.

Excerpted from the CRB Commodity Yearbook.