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Everybody knows U.S. unemployment, currently at 7.6%, is still too high – especially the millions of Americans struggling to find work. Less widely acknowledged is a recent dip in inflation that puts it well below the Federal Reserve’s 2 percent target. Indeed, at 0.7 percent in April, the Fed’s preferred inflation measure was less than half of the central bank’s explicitly stated goal. So why are Fed officials, gathered in Washington for their latest policy decision today, discussing a pullback in stimulus rather than an increase in it?
According to some economists, it’s because policymakers believe the recent decline in inflation will be transitory and that the rate will gradually move back up toward target as growth picks up during the rest of this year and in 2014. Yesterday’s report on consumer prices corroborated that prospect for some analysts.
Paul Ashworth, chief US economist at Capital Economics, wrote:
The low level of headline inflation largely reflects the drop back in commodity prices over the past 12 months, with even the low core rate partly explained by the indirect impact of those lower commodity prices. Under those circumstances, we wouldn't expect the Fed to put too much weight on inflation being below its target. Once commodity prices level out, the downward pressure on consumer goods prices will begin to ease. In other words, this won't prevent the Fed from beginning to reduce its monthly asset purchases, probably beginning in September.
Eric Green at TD Securities said:
Inflation pressures remain very subdued, but downside momentum is fading. Y/y change in core prices was unchanged at 1.7% y/y, and while this may drift down to 1.6% y/y next month that should be the low in advance of an upward drift toward 2.0% by year end. The six-month average in core prices continues to shift incrementally higher and at 1.8% puts more distance with the trough of 1.4% in December. In effect, prices are low, but the move is to the upside. It is the turn in inflation momentum rather than the level of inflation that matters on the great tapering debate. May brought more evidence that the turn is in.
The monthly payrolls report from the U.S. Labor Department will always be the big kahuna of economic releases. Other, less prominent indicators of the American job market nonetheless can offer additional insight into the employment backdrop.
Take the clumsily-acronymed JOLTS report, which stands for Job Openings and Labor Turnover Survey. It shows the ratio between job openings and job seekers, as well as the rate of new hires. The latter, unfortunately, is not particularly comforting.
For a central bank that likes to tout the importance of clear communication, the Federal Reserve sure knows how to be obtuse when it wants to. Take Bernanke’s testimony before the Joint Economic Committee of Congress last month. His prepared remarks were reliably dovish, emphasizing weakness in the labor market and offering no hint of an imminent end to the current stimulus program, which involves the monthly purchase of $85 billion in assets.
It was during the question and answer session that the real fireworks came. Asked about the prospect for curtailing such bond buys, Bernanke said:
As the Federal Reserve meets this week, unemployment is still too high and inflation remains, well, too low. That makes some investors wonder why policymakers are talking about curtailing their asset-buying stimulus plan. True, job growth has averaged a solid 172,000 net new positions per month over the last year, going at least some way to meeting the Fed’s criteria of substantial improvement for halting bond purchases.
So, either policymakers see brighter skies ahead or they want to get out of QE3 for other reasons they may rather not air too publicly: worries about efficacy or possible financial market bubbles.
By Una Galani
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
Iranians have voted for an end to the conservative status quo. The surprise victory of Hassan Rohani, the sole moderate candidate, in the presidential race has shown the level of public discontent with the Islamic Republic’s hardliners, whose voices silenced others in the last few years. The high turnout also returns legitimacy to the electoral process after the rigged vote of 2009. Iran’s complex power structure means that radical shifts at home or abroad are unlikely. But the mood in Tehran has shifted.
The first portion of Federal Reserve Governor Sarah Bloom Raskin’s remarks to the Roosevelt Institute earlier this month were pretty standard central bank fodder. Raskin, on the dovish side of Fed monetary leanings, said U.S. unemployment was still too high, and far more progress was needed in bringing a somnolent job market back to life.
But the second half of her comments offered an unusually personal look at one Fed official’s dismay with the country’s economic situation. Stumbling into a job fair near her house, Raskin was stunned by the generally low quality of positions available. In her own words:
from Hugo Dixon:
Tayyip Erdogan seems to like the concept of “choking” things. At the weekend, Turkey’s prime minister sent riot police into an Istanbul park with tear gas and water cannons to clear out the protestors. A week earlier, he had threatened to “choke” an alleged “high-interest-rate lobby” of speculators who wanted to push interest rates up and suffocate the economy.
Erdogan’s harsh actions against protestors and harsh words against investors could backfire economically. The country depends on foreign investors to fund its big current account deficit. If they turn tail in response to the mounting unrest, interest rates will indeed have to rise.
from Expert Zone:
(Any opinions expressed here are those of the author and not of Thomson Reuters)
Monsoon rains are early and heavier then normal, raising the hopes of green shoots in the next few months. Macro numbers were showing signs of bottoming out but the rupee slide has thrown calculations awry. A feeble request by the finance minister urging people to shun gold won’t do much good in a country enamoured by gold.
from Photographers Blog:
By Eric Gaillard
One evening while returning home I came upon a scene that I had never imagined in a country as rich as France - people rummaging through supermarket trash bins looking for food.
In spite of the difficulties I would encounter, I decided to go ahead and meet these people head-on. That day I saw an elderly man waiting on a public bench. Quickly I understood that he was waiting for the trash container from a nearby neighborhood supermarket. I approached him, with my camera on my shoulder, and started a conversation, which stopped abruptly with a curt, "Leave me alone, don’t take my photo".
Is Federal Reserve Chairman Ben Bernanke avoiding the word “taper” in order to temper expectations that the U.S. central bank will ratchet down its massive bond buying program? This is one view that’s been widely bandied about in recent days.
But then why is it that the Fed officials who are most eager to "taper" have pretty much stopped using the word, too?