India will not take steps to cut petroleum imports from Iran

• India, the world’s fourth-largest oil consumer, will not take steps to cut petroleum imports from Iran despite U.S. and European sanctions against Tehran, finance minister Pranab Mukherjee said on Sunday during a visit to Chicago.
• The United States wants buyers in Asia, Iran’s biggest oil market, to cut imports to put further pressure on Tehran to rein in its nuclear ambitions. Washington suspects Iran of trying to make nuclear weapons, but Tehran says its nuclear program is for peaceful means.
• India, which imports 12 percent of its oil from the Islamic Republic, cannot do without Iranian oil, Mukherjee said.
• “It is not possible for India to take any decision to reduce the imports from Iran drastically, because among the countries which can provide the requirement of the emerging economies, Iran is an important country amongst them,” Mukherjee told reporters in Chicago at the end of a two-day visit aimed at wooing U.S. investment.
• New U.S. sanctions, authorized on December 31 and which penalize any financial institutions dealing with Iran’s central bank, could make it more difficult for India to pay Iran for oil imports.
• The European Union banned oil imports from Iran earlier this month.
• Mukherjee said he projects India to return to its path of high economic growth, despite an expected slowdown to a 7 percent pace this year from 8.5 percent last year. The Indian fiscal year ends in March.
• “This year, because of the European debt crisis and the slowing of developed economies, there has been a slowdown” in India’s growth, he said. “It will be possible to make it up in a year or two.”
• The Reserve Bank of India (RBI) last week held its policy rate steady and signaled its next move could be a rate cut, after signs that outsized price pressures may be ebbing.
• Inflation, as measured by wholesale prices, rose 7.47 percent in December, its slowest pace in two years, and Mukherjee said he expected further declines.
• “If this trend continues, I am optimistic (India will see inflation of) 6.5 percent to 7 percent by end of the year,” he said.
• But a possible move by the U.S Federal Reserve to ease monetary policy further could reverse that outlook, he said.
• Fed Chairman Ben Bernanke last week opened the door to a third round of quantitative easing, suggesting that a continued decline in inflation and ongoing economic weakness could justify new bond buying.
• The Fed’s last round of bond-buying drew loud criticism from emerging economies who said it sparked inflation and hurt their exports.
• Mukherjee repeated that criticism on Sunday, saying U.S. quantitative easing creates “inflationary impacts” in emerging economies and boosts uncertainty.

analysing oil prices in 2012

• There is a remarkably wide spread of views among professional oil analysts concerning oil prices in 2012. While some factors, such as shale gas, could potentially push prices down, the situation in Iran for instance threaten to send the price of oil soaring. Still, despite the uncertainty, there appears to be a consensus-anticipated range among analysts. Or at least for now it seems.
• Oil prices had a low point or two in 2011, but finished the year with a fairly decent run, ending on the $100 mark despite fears of a potentially serious recession in Europe. In the ordinary course of events you would expect fears of a slowdown in global trade to cause the price of oil to slide, but the price of oil is determined by fears of bottlenecks in supply just as much, or probably quite a bit more, than by fears of a falling off in demand.
• As 2011 drew to a close the Strait of Hormuz, through which some one fifth of the world’s oil moves, had become a major factor in analysts’ calculations about future supply availability. Iran has the ability to control or shut down shipping through the Strait of Hormuz more or less at will. A few successful medium and long-range missile tests as part of an Iranian navel exercise in the area in late December gave point to this threat. The Strait, is the global economy’s Achilles heel and would be a limiting factor on any US moves to counter either Iran’s nuclear ambitions or its desire to extend its influence in Iraq and across the Middle East generally.
• If Iran is pushed hard by the US or the world community over its uranium enrichment program, we can expect it to retaliate by threatening to choke off the world’s oil supply.
• The proof of this was not long in coming. In the closing days of 2011, a senior Iranian official, the first vice president, Mohammad-Reza Rahimi, made the threat explicit, according to a story on 27 December, in the New York Times. The reason was the Obama Administration’s move to sign into law new legislation that will impose a raft of additional economic sanctions on Iran’s already stressed economy. Oil income provides around 50 percent of Iran’s annual revenues and the new measures are specifically targeting oil exports from Iran. As the NYT points out, this “carries the risk of confrontation, as well as economic disruption, given the unpredictability of the Iranian response.”
• Rahimi had warned that if Iranian oil exports are harmed, “then not one drop of oil will flow through the Strait of Hormuz”. For its part the US Administration says that it has contingency plans in place if the Strait is closed. However, it has not elaborated on those plans or said whether they include a military option. None of this bodes well for the global economy in early 2012.
• According to the NYT, the proposed sanctions will block any company doing business with the Iranian Central Bank from conducting any future financial transactions with the US. Since the Central Bank collects payment for most of the country’s oil exports, oil purchases have to go through the Iranian Central Bank. So the sanctions will force many of those buying oil from Iran to look elsewhere for their supplies. The move will not please a number of the US’s allies, despite some latitude being written into the legislation and it gives Obama some wiggle room to back off if the sanctions cause the price of oil to skyrocket.
• Analysts are generally taking this point on board. Robin Geffen, chief executive of Neptune Investment Management believes continued tension and geopolitical uncertainty in the Middle East will underpin a high oil price during 2012, as will “US economic data continuing to impress relative to rather depressed assumptions.”
• Geffen, who runs the Neptune Russia and Great Russia fund, believes that “continued firm oil prices will maintain a positive backdrop for the Russian economy.”
• However there is also a remarkably wide spread of views among professional oil analysts concerning the oil price in 2012.
• Analysts at Goldman Sachs are among the most bullish. They said they expect Brent Crude to average $120 per barrel in 2012, with West Texas Intermediate oil averaging $112.5.
• In forecasts compiled by Canada’s Financial Post, other investment banks were in line with Goldman Sachs – Barclays predicted that Brent would average $115, and WTI $105) in 2012. Other predictions included: Merrill Lynch (Brent: $108, WTI: $101), Deutsche Bank (Brent: $115, WTI: $105) and Standard Chartered (Brent: $107.5, WTI: $100.25).
• The more bearish analysts included those at Capital Economics (Brent: $88), Petromatrix (Brent: $88.75) and Bernstein (Brent: $90) expected Brent a slide in the price of oil in the coming 12 months.
• However a Bloomberg survey of 27 oil analysts predicted that WTI will average $100 per barrel in 2012. That is 25 cents up on the record high of $99.75 set in 2008. The US benchmark oil price averaged $95 per barrel in 2011.
• According to Financial Post, most analysts expect WTI-Brent spreads to narrow in 2012, as Enbridge reverses the Seaway pipeline to allow flows from the Cushing, Oklahoma, storage hub to the Gulf of Mexico coast.
• Signals remain very mixed.On the one hand there are signs of a better than expected uplift to the manufacturing sectors in the US and the UK, and some positive indicators from China and India, all of which suggests that demand for oil could be boosted by better than expected growth in 2012. That helps to keep the price of oil up as does the Iranian threat, which goes to supply issues.But several analysts, including Blackstone’s renowned economic forecaster Byron Wien take a more bearish view. Wien is chairman of the advisory services unit at Blackstone, the world’s largest asset management group. In his annual “10 Surprises” list, published annually since 1986 (and with a great track record on the accuracy of the predictions), Wein forecasts an average price of $85 for oil through 2012.
• The reason for the depressed price, he says, is the impact that the upsurge in US shale gas is going to have on oil imports to the US, which he expects to fall sharply, thus reducing demand in 2012 despite any growth in the US economy. The consensus anticipated range across all analysts? Somewhere between $85 and $120, with as much upside risk as you care to mention.

 

America is recovering from the debt bust faster than European countries

• Almost half a decade after the onset of the rich world’s credit bust, depressing evidence of its after-effects is visible in everything from feeble output figures to swollen jobless rolls. But for a truly grim picture, read a new report on deleveraging by the McKinsey Global Institute. It points out that in many rich countries the process of debt reduction hasn’t even started. America has begun to pare its debt burden, although the drop is small compared with the build-up in 2000-08. But many European countries are more, not less, in hock than they were in 2008. There the hangover could last another decade or more.
• These transatlantic differences stem from the trajectory of private debt. Government borrowing soared everywhere after 2008 as government deficits ballooned. But in America the swelling of the public balance-sheet has mirrored a shrinking of private ones. Every category of private debt—financial, corporate and household—has fallen as a share of GDP since 2008. The financial sector’s debt is now at its 2000 level. Corporate indebtedness, never very high, has shrunk. So, more importantly, has household debt. America’s ratio of household debt to income is down by 15 percentage points from its peak in 2008, after rising by over 30 percentage points in the eight preceding years. McKinsey reckons America’s households are between a third and halfway through their debt-reduction process. They think the household-debt hangover could end by mid-2013.
• In Europe private debt has fallen much less and in some cases even risen. In Britain the financial sector’s debts have grown since 2008. In Spain corporate debt, far higher as a share of GDP than in most rich countries, has barely budged. But the biggest difference is among households. Even countries which saw the biggest surges in household debt during the bubble era, such as Britain and Spain, have scarcely seen a dent since 2008. McKinsey’s analysts reckon it will take British households up to a decade to work off their debt burdens.
• It’s not that American households have been more frugal or disciplined. Household debt has fallen largely thanks to defaults, particularly on mortgages. America had a bigger housing bust; in some states non-recourse lending rules make default easier (people can walk away from home loans without fear of losing other assets). Some two-thirds of America’s $600 billion decline in household debt is due to defaults. With another $250 billion of mortgages in the process of foreclosure, further reduction is likely.
• Europe’s post-bubble economies, in contrast, have seen smaller drops in house prices, lower mortgage costs thanks to variable interest-rate mortgages, and gentler treatment from banks. The Bank of England suggests that around 12% of British mortgages receive some kind of forbearance. Fewer people are turfed out of their homes, but the millstone of debt weighs for longer.
• America’s private-sector debt reduction has also taken place against the backdrop of loose fiscal policy. Although state and local governments have been cutting back, the federal government has (at least until now) put off most fiscal tightening. In Europe, however, the sovereign-debt crisis means governments have been forced, or chosen, to undertake swingeing budget cuts long before the private sector’s deleveraging is done.
• That stands in stark contrast to most successful bouts of debt reduction. The McKinsey report pores over two episodes that it considers most relevant for today: the experiences of Sweden and Finland following their banking busts in the early 1990s. Debt reduction took place in two stages. In stage one, the private sector reduces its debts; the economy is weak and public debt soars. In stage two, growth recovers and the longer-term process of reducing government debt begins. In both these cases growth was buoyed by booming exports, a boon that seems unlikely this time. But it is telling that Sweden did not begin its budget-cutting until the economy had recovered; and that when Finland tried an early bout of austerity, this worsened its recession.
• The McKinsey analysts carefully avoid suggesting this means Europe’s austerity is misguided. Circumstances today are different, they argue: European governments began with higher debt and deficits, leaving them with less room for manoeuvre. But the message is clear: America is closer to Sweden’s successful template than Europe is. Debt reduction is very difficult without economic growth, and the scale of Europe’s austerity makes it hard to see where that growth will come from.
• That’s all the more true because Europe’s governments have been remarkably timid, compared with the Nordics, in exploiting another avenue to growth—structural reform. The report underscores just how dramatically Sweden and Finland overhauled their economies in the wake of their debt crises. Banks were nationalised and restructured; whole sectors, such as retailing, were deregulated. Thanks to a slew of efficiency-enhancing reforms, productivity soared and investment boomed.
• Nothing so bold has been attempted this time. America has not managed much in the way of growth-enhancing structural reforms and has a long to-do list, from improving worker training to reining in health-care costs. But it is in Europe where the potential gains from structural reforms are greatest and where the policy focus has nonetheless been overwhelmingly on austerity.
• That may change. With much of the euro zone in recession, structural reforms are getting higher billing. Spain’s new government began with an extra dollop of austerity; it now wants to accelerate the freeing of its rigid labour rules. Italy’s prime minister, Mario Monti, first raised taxes and cut spending; now he is about to take on the unions. Angela Merkel, the German chancellor, is saying that Europe’s leaders need to focus on growth. But a shift in the policy mix will not stop many European countries’ debt burdens from spiralling yet higher. Depressing, indeed.

rupee hit a two-month high on Tuesday

• The rupee hit a two-month high on Tuesday, propelled by dollar inflows, and as strong China growth data and better-than-expected German business sentiment improved appetite for riskier assets globally.
• The rupee rose 1.24 percent to end at 50.73/74 to the dollar, close to its intraday high of 50.70 — a level last seen on November 17.
• “Risk sentiment definitely improved and the dollar got sold for most part of the day,” said Naveen Raghuvanshi, associate vice president of foreign exchange trading at Development Credit Bank.
• He expects the rupee to rise up to 50.50 to the dollar in coming sessions and does not expect the central bank to buy dollars at current levels.
• The government’s decision to raise import duty on gold and silver earlier in the day helped the rupee rise as the move could help lower India’s yawning trade deficit, traders said.
• India is the biggest consumer of bullion and the dollar-quoted yellow metal along with crude oil forms a major chunk of the country’s massive import bill which is typically higher than the exports.
• According to data from the central bank on December 30, India’s trade gap widened to $43.9 billion in the September quarter from $37 billion a year ago, while the current account deficit stood at $16.9 billion.
• Intermittent dollar demand from domestic oil companies, the biggest buyers of the greenback checked rupee gains, traders said.
• The euro rose for the first time in three trading sessions on Tuesday and Indian shares rallied 1.7 percent to their highest close in almost six weeks.
• One-month offshore non-deliverable forward contracts were quoted at 51.09, indicating some weakness in the short term in the onshore spot rate.
• In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all ended around 50.93 on total volume of $7.11 billion.

India’s exports grew at a faster annual pace in December

•  India’s exports grew at a faster annual pace in December than in the preceding month but the overall picture is still not rosy, Trade Secretary Rahul Khullar said on Monday.
• December exports rose an estimated 6.7 percent from a year earlier to $25 billion, while imports were $37.8 billion, leaving a trade deficit of $12.8 billion, Khullar told reporters.
• “It is not rosy… I am not saying that exports from India will not grow, but in a better time, when things were more buoyant, they would grow faster,” he said.
• The next fiscal year, starting on April 1, may be difficult for exports, he added. “If you get anything between 20-22 percent (growth) I would be more than happy in 2012-13.”
• Indian exporters enjoyed record growth last fiscal year, but have struggled in recent months in the face of economic turbulence in the euro zone, India’s biggest trade partner.
• Exports between April-December rose 25.8 percent to $217.6 billion, Khullar said.
• The trade deficit is expected to be $155 billion to $160 billion for the full fiscal year ending March, while exports are expected to be close to $300 billion, he said.

S&P downgrades France, eight others

• Standard & Poor’s downgraded the credit ratings of nine euro zone countries, stripping France and Austria of their coveted triple-A status but not EU paymaster Germany, in a Black Friday 13th for the troubled single currency area.
• “Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone,” the U.S.-based ratings agency said in a statement.
• In a potentially more ominous setback, negotiations on a debt swap by private creditors seen as crucial to avert a Greek default that would rock Europe and the world economy broke up without agreement in Athens, although officials said more talks are likely next week.
• If Greece cannot persuade banks and insurers to accept voluntary losses on their bond holdings, a second international rescue package for the euro zone’s most heavily indebted state will unravel, raising the prospect of bankruptcy in late March, when it has to redeem 14.4 billion euros in maturing debt.
• S&P cut the ratings of Italy, Spain, Portugal and Cyprus by two notches and the standings of France, Austria, Malta, Slovakia and Slovenia by one notch each.
• The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushes Portugal into junk status.
• It put 14 euro zone states on negative outlook for a possible further downgrade, including France, Austria, and still triple-A rated Finland, the Netherlands and Luxembourg.
• Germany was the only country to emerge totally unscathed with its triple-A rating and a stable outlook.
• French Finance Minister Francois Baroin, speaking after an emergency meeting with President Nicolas Sarkozy, played down the impact of Europe’s second biggest economy being downgraded to AA+ for the first time since 1975.
• “This is not a catastrophe. It’s an excellent rating. But it’s not good news,” Baroin told France 2 television, saying the government would not respond with further austerity measures.
• The euro fell by more than a cent to $1.2650 on the news. European stocks, which had been up on the day, turned negative but reaction to the widely anticipated news was moderate. Safe-haven German 10-year bond futures rose to a new record high while the risk premium investors charge on French, Spanish, Italian and Belgian debt widened. 
• Euro zone finance ministers responded jointly by saying in a statement they had taken “far-reaching measures” in response to the sovereign debt crisis and were accelerating reforms towards stronger economic union.
• Greek negotiators who have repeatedly voiced confidence in a deal in which private creditors would accept writedowns of 50 percent of the face value of their bond holdings said they were now less hopeful, warning of “catastrophic consequences” for Greece and Europe if they failed.
• “Yesterday we were cautious and confident. Today we are less optimistic,” a source close to the Greek task force in charge of the negotiations said.
• The Institute for International Finance, negotiating on behalf of banks, said: “Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach.
• The two sides are divided principally over the interest rate Greece will end up paying, which determines how much of a hit banks take. While both appear to be engaged in brinkmanship, there are also doubts about the take-up rate of any voluntary deal, since some hedge funds have bought up Greek debt and want to be paid out in full or trigger default insurance.
• The double blow of the S&P news and the stalling of the Greek debt talks came after a brighter start to the year with Spain and Italy beginning their marathon debt rollover at lower borrowing costs this week.
• The European Central Bank’s move last month to flood banks with cheap three-year liquidity helped ease a worsening credit crunch and provided funds which governments hope some will use to buy sovereign bonds.
• S&P said the euro zone faced stresses including tightening credit conditions, rising risk premiums for a growing number of sovereigns, simultaneous deleveraging by governments and households and weakening economic growth prospects.
• It also cited political obstacles to a solution to the crisis due to “an open and prolonged dispute among European policymakers over the proper approach to address challenges”.
• Austerity and budget discipline alone were not sufficient to fight the debt crisis and risked becoming self-defeating, the ratings agency said.
• German Finance Minister Wolfgang Schaeuble played down the news, saying: “In the past months, we’ve come to agree that the ratings agencies’ judgments should not be overvalued.”
• France and Austria were at risk because of their banks’ exposure to the debt of peripheral euro zone countries and Hungary respectively, as well as the weakening economic outlook for Europe. Italy and Spain face historically high borrowing costs.
• The cut in France’s rating is a serious setback for the centre-right Sarkozy’s chances of re-election in May and could weaken the euro zone’s rescue fund, reducing its ability to help countries in difficulty.
• France is the second largest guarantor of the European Financial Stability Facility, which has a AAA rating. Preserving that status would require members to increase their guarantees, which could prove politically unpopular.
• In their statement, the euro zone finance ministers said they would do all they could to ensure the rescue fund keeps its top rating.
• After vowing for months to do everything to preserve Paris’ top-notch standing, Sarkozy appeared to prepare voters last month for the loss of the prized status before the election.
• His political opponents pounced on the S&P decision as a verdict on the failure of his policies.
• “This is in reality a double downgrade. It is a downgrade of our sovereign rating that will affect the country’s reputation, with heavy consequences, and it is also a downgrade compared to our main neighbour, Germany, with which we had equal status up to now,” centrist candidate Francois Bayrou said.
• Socialist party leader Martine Aubry said: “Mr Sarkozy will be remembered as the president who downgraded France.”
• It is not clear how far the downgrade will increase France’s borrowing costs, since markets have already anticipated the prospect by raising the French risk premium over German Bunds.
• “One notch is priced in but not more. The Franco-German spread can widen. It is about 130 basis points for the 10-year bond. The maximum level reached was 180 to 190 basis points and it can go back to this level,” said Alessandro Giansanti, senior rates strategist at ING in Amsterdam.

Standard & Poor’s is set to downgrade the credit ratings of several euro zone countries

•  Standard & Poor’s is set to downgrade the credit ratings of several euro zone countries later on Friday, but not those of Germany and the Netherlands, a senior euro zone government source said.
• Another source confirmed “several” countries would be hit.
• French TV, citing a government source, said France’s credit rating would be downgraded and another source said Slovakia, the euro zone’s second poorest country currently rated A+ by S&P, would suffer the same fate.
• “Remain alert tonight when U.S. markets close,” said another euro zone source.
• In December, S&P placed the ratings of 15 euro zone countries on credit watch negative – including those of top-rated Germany and France, the region’s two biggest economies – and said “systemic stresses” were building up as credit conditions tighten in the 17-nation bloc.
• Since then, the European Central Bank has flooded the banking system with cheap three-year money to avert a credit crunch.
• At the time, the U.S.-based ratings agency said it could also downgrade the euro zone’s current bailout fund, the EFSF.
• “The consequence (if France is downgraded) is that the EFSF cannot keep its triple-A rating,” said Commerzbank chief economist Joerg Kraemer.
• “That may irritate markets in the short term but wouldn’t be a big problem in a world where the U.S. and Japan also don’t have a triple-A rating anymore. Triple-A is a dying species,” he said.
• S&P has said that if a downgrade did materialize, countries such as Germany, Austria, Belgium, Finland, the Netherlands and Luxembourg would likely see ratings cuts of only one notch.
• The other nine countries – most notably triple A-rated France – could suffer downgrades of up to two notches.
• S&P declined to comment on Friday on the Reuters report of an impending wave of downgrades, which hit stocks, the euro and boosted demand for safe-haven U.S. government debt.
• European shares extended falls to stand more than one percent lower on the day.
• A downgrade could automatically require some investment funds to sell bonds of affected states, making those countries’ borrowing costs rise still further.
• “It’s been priced in for several weeks, but the market had been lulled into complacency over the holidays, and the new year began with a bounce in risk appetite, thanks partly to a good Spanish auction,” said Samarjit Shankar, Director Of Global Fx Strategy at BNY Mellon in Boston.
• “But the Italian auction brought us back to earth and now we face the spectre of further downgrades.”
• Italy’s three-year debt costs fell below 5 percent on Friday but its first bond sale of the year failed to match the success of a Spanish auction the previous day, reflecting the heavy refinancing load Rome faces over the next three months.

Goldman sees 2012 upside in oil, gold, copper

• Goldman Sachs said it expected upside in prices of oil, gold and copper this year, citing greater supply risks and stronger fundamentals.
• “We view gold and copper as providing the best value opportunities relative to our view of fundamentals in 2012,” the investment bank said on Friday, citing remaining risks of substantial supply shortfalls.
• Goldman said it continued to expect a rise in oil demand in excess of production capacity gain, despite the slowdown in global economic growth.
• “In our view, it is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supply,” it said.
• The bank said it expected gold prices to continue to rise through 2012, reaching $1,940 per ounce in 12 months, due to the current low level of U.S. real interest rates.
• “We expect US real interest rates to remain lower for longer, given our U.S. economics team’s expectation for U.S. economic growth to remain slow through 2012,” Goldman added.
• Goldman kept its 12-month return forecast for the S&P GSCI Enhanced Commodity Index of 15 percent, and its overweight allocation to commodities remained unchanged.
• In another note, investment bank Barclays Capital BARCBC.UL said more sanctions against Iran could push oil prices well into the $130-140 per barrel range.
• “While the focus of the oil market is the potential closure of the Strait of Hormuz, sanctions can actually have a knock-on impact on underlying balances,” it said.

Morgan Stanley has downgraded Reliance Industries to ‘underweight’ from ‘equalweight’

• Morgan Stanley has downgraded Reliance Industries to ‘underweight’ from ‘equalweight’, saying it expects the energy major’s gross refining margins, exploration and production volumes to fall.
• The bank cut its price target for the company to 650 rupees from 921 rupees.
• “We highlight that two of three Reliance’s core divisions — refining and petrochemicals — face near-term headwinds,” it said in a note.
• “We are downgrading our industry view (on oil and gas) to cautious from attractive,” it said.
• Morgan Stanley also downgraded oil marketing companies Hindustan Petroleum Corp, Bharat Petroleum Corp and Essar Oil to ‘underweight’ from ‘equalweight’.

For central bankers in the rich world, unconventional is the new conventional

• There was a time when the Federal Reserve wouldn’t say whether it had changed interest rates. Soon it will say where it thinks rates will be years from now. Beginning with its policy meeting on January 24th-25th, Fed officials will disclose when they expect to start raising their short-term interest-rate target, which is at near-zero now, and what they expect its path to be over the coming years. Behind such radical transparency is a grim fact: at the start of a fourth successive year of extraordinarily low short-term rates and a still-moribund economy, the Fed is desperate for new ways to stimulate demand.

• It is not alone. Of the rich world’s four major central banks, Britain’s and Japan’s already have their policy rates stuck near zero and the fourth, the European Central Bank (ECB), is likely to get there this year. Meanwhile, the balance-sheets of all four institutions have ballooned as they expand the volume and range of assets and loans they hold.

• Central banks have never been comfortable with unconventional monetary policies such as verbal interest-rate commitments and quantitative easing (QE), the purchase of assets by printing money. Alan Blinder, a Princeton economist and former Fed official, has likened them to a family that lets its crazy aunt out of the closet only on special occasions. QE is “best kept in the locker marked ‘For Emergency Use Only’”, is how Charlie Bean, the Bank of England’s deputy governor, put it in 2010.

• The unconventional, however, is now conventional. In a presentation to this year’s annual meeting of the American Economic Association, Mr Blinder will argue that the circumstances—low inflation and low nominal interest rates, persistent excess capacity, and fiscal policy paralysed by large debts—that have forced central banks to operate through unconventional policy will be a recurring feature of the economic landscape. “We can’t stuff the crazy aunt back in the closet,” he says.

•  In Japan, interest rates have been near zero almost continuously since 1999. Since then the Bank of Japan has bought government and corporate bonds, commercial paper, exchange-traded funds and real-estate investment trusts. Last year it offered targeted loans to spur long-term investment and rebuild areas damaged by the earthquake and tsunami. Such measures have prevented a deeper recession but not deflation or stagnant employment.

• That outcome is not yet likely in Western countries. But 2012 will nonetheless require more unconventional policy. The Fed’s decision to include interest rates in its quarterly projections of key economic indicators, announced this week, emulates central banks in New Zealand, Norway and Sweden. But whereas this trio sought transparency for its own sake, the Fed’s main motivation is practical. It has been saying since August that it would hold rates near zero at least until mid-2013. Its new projections should persuade investors to expect no tightening before 2014, thereby nudging down long-term rates.

• Whether the stimulative impact will be sufficient is another matter. In November Fed officials thought the economy would grow between 2.5% and 2.9% in 2012. The private sector projects growth of just 2%. The Fed may yet be proven right, given the upbeat tone of recent data. But if it is not, it will probably launch another round of QE, on top of its two previous rounds and “Operation Twist,” under which it swapped short-term for long-term bonds.

• A similar sort of dynamic is at work in Britain, where the Bank of England’s most recent forecast was for growth of 1.2% in 2012. As in America, private-sector forecasts are gloomier as recession in Europe and austerity at home bite. The bank is likely soon to resume QE.

• Most eyes are on the ECB. It has bought government bonds reluctantly and lent to banks enthusiastically, and portrayed both actions as ways of restoring liquidity to the financial system so that monetary policy can work, not as monetary policy itself. Yet now that it is lending huge sums to euro-zone banks for up to three years, this distinction is becoming meaningless. The idea is for banks to use this money to buy peripheral government debt; to lend more to households and business; or to reduce the amount of debt that they must refinance. In all instances that would raise the price and lower the yields on government or private debt, which is how QE is supposed to work. Asked recently if the ECB was conducting QE, Mario Draghi, the bank’s president, sidestepped the question: “Each jurisdiction has not only its own rules, but also its own vocabulary.”

• The ECB could yet explicitly embrace QE if it saw inflation falling short of its goal of just below 2%. Elga Bartsch of Morgan Stanley thinks that could happen this year. The ECB already expects inflation of only 1.5% in 2013 and that number could drop as the bank brings its growth projections into line with the gloomier private consensus. Ms Bartsch thinks the ECB will cut its policy rate to 0.5% from 1% now in the first half of the year, about as low as it can go for technical reasons. Asset purchases would be the next logical step.

• The question is: which assets? Mr Blinder notes QE can work by narrowing the spread between long-term and short-term rates or between private and government rates. The first is best conducted by purchasing government debt, the second by purchasing private debt. The Bank of England has stuck firmly to the first route, leaving it to the Treasury to extend credit to the private sector. The Fed has done a bit of both by purchasing federally-backed mortgage bonds as well as Treasuries, but avoided purchases of private assets because of legal and political constraints.

• The ECB is in the opposite position to the Fed: circumscribed in its ability to fund governments but at liberty to buy private debt. Although expanded purchases of peripheral government bonds would be more effective, Ms Bartsch therefore reckons the bank is likely first to conduct QE through expanded purchases of private debt such as bank and corporate bonds (assuming its three-year loans to banks prove ineffective at expanding credit). It could also purchase bonds of all euro-zone governments, in the process relieving pressure on struggling peripheral sovereigns.

• Whatever central bankers do, they cannot repair problems best fixed by politicians, such as America’s incoherent fiscal policy or Europe’s fractured institutions. Asked about the ECB’s aggressive new lending to banks, Masaaki Shirakawa, the governor of the Bank of Japan, said it could “buy time”. But he warned it could backfire if politicians fritter away whatever time the central bank has bought. Unfortunately, that risk is never low.