ECB goes negative

Jun 5, 2014 22:06 UTC

Europe has reached the zero lower bound. After its June meeting today, the European Central Bank announced a number of policy changes (a “swarm”, according to Joseph Cotterill). Bloomberg’s Maxime Sbaihi helpfully chartified the ECB’s actions:


But will it work? ¯\_(ツ)_/¯

“The lesson today: Don’t underestimate Mario Draghi. Or the ECB, for that matter”, writes the WSJ’s Moneybeat team. The biggest move is probably the -0.1% deposit rate — meaning banks have to pay the ECB in order to park their money there overnight (here’s a more detailed explainer of negative rates). This is for two reasons, says Neil Irwin: first, if it’s expensive to keep money at the ECB, banks will hopefully do something else with it, like lend it out. Second, if it is expensive in general to keep money in Europe, the ECB hopes the price of the euro will fall in currency markets and inflation will rise — something Europe desperately needs.

Frances Coppola is not impressed with the ECB’s actions. “Banks lend if they choose to – if the balance of risk versus return works in their favour. If it doesn’t, no amount of reserves will make them lend. They will hoard money instead,” she writes. Tyler Cowensays he once liked the idea of negative rates, but has since changed his mind. “I think it will represent more of a tax on future lending than a spur to current lending”. Matt O’Brien isn’t that excited, either, though for a different reason: “As usual, the ECB might be doing too little, years too late. Charging banks to park cash at the ECB would have helped more back when banks actually had lots of cash parked at the ECB”.

Cullen Roche says this negative rate policy has been tried before, in Denmark in 2012, but it didn’t really work. Could things be different this time? Maybe. However, he says, “I don’t think this is a huge deal.  In fact, it’s probably more experimental than anything else”. The cut is really too small to make any impact anyway, say the Bloomberg View editors.

Paul Vigna notes that the euro originally fell against the dollar today, to just above 1.35 after opening at 1.36, but then started rising again, ending the day at 1.3661. “It’s a troubling sign that Mr. Draghi and the ECB didn’t go far enough, that he didn’t convince the market he’s making good on his 2012 pledge to do ‘whatever it takes’”, he says. —Shane Ferro

On to today’s links:

Correlation of the Day
Satellite images of nighttime city lights are an accurate indicator of economic growth -Richard Florida

Generation Debt
What Americans don’t know about student loan collections - New York Fed

Important Wine News
Wine fraud is on the rise, and physicists are being brought in to stop it - NPR

White Collar Punishment
Ignoring your coworkers is worse than bullying them - Pacific Standard

Good Questions
Why hasn’t economic growth led to less poverty? - Neil Irwin

Crime and/or Punishment
The US charges against BNP have nothing to do with financial stability - Felix Salmon

The scandal in God’s bank - Rachel Sanderson

MORNING BID – The Fed, on the minutes

May 21, 2014 12:55 UTC

Investors will get a look at the Federal Reserve’s thinking later on Wednesday in an otherwise quiet week when the Fed releases minutes from its April get-together. There may be a bit in the way of more up-to-date thinking in some of the scheduled Fed speeches, notably Bill Dudley of the New York Fed, along with Fed Chair Janet Yellen later in the week.

The minutes from February’s meeting were instructive – they clung to the Fed’s typical modus operandi in suggesting that economic difficulty early in the year was largely due to weather-related issues and pointed to improved outlooks in various areas, while still noting weakness in housing and consumer spending.

Whether the Fed alters that guidance in this go-around will be interesting to see. They tend to be overly optimistic on the economy and inflation, and slowly come in line with reality as conditions remain somewhere short of what they’re expecting.

With the Fed months away from ending its extraordinary stimulus program, you could get the impression it’s trying to run out the clock on QE before even turning to the greater manner of managing the federal funds rate and all the other attendant rates that the Fed will tweak using various tools it has brought into being in the last few weeks.

As Richard Leong noted in a recent Reuters article, the Fed is using a term deposit facility, reverse repos and the overnight interest on excess reserves to vacuum money out of the banking system.

What’s unclear is if the Fed can do what it intends to do, which is to draw down the massive $2.5 trillion in excess reserves without causing major market hiccups, freak-outs, panics or collapses.

So far (and it’s early – very early), the Fed’s done okay, but the real test has to come at some point down the road – to expect that we’ll be able to leave and “assume it all went to plan,” to cite Austin Powers’ Dr. Evil, is farcical.

The Swedish model

Apr 22, 2014 21:06 UTC

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Until about six months ago, Sweden was routinely trotted out as an example of a modeleconomy (not least by Sweden itself). But now it’s time to start talking about Swedish deflation. In March, the economy’s consumer prices were down was down 0.6% from the previous March, following a -0.2% CPI inflation rate in February. CPI inflation has been hovering around zero since November 2012.

The Swedish economy has been locked in an epic hawk/dove battle for more than three years. Between 2010 and 2011, the central bank increased interest rates to 2% from 0.25%. It quickly began lowering rates again in fall 2011, most recently cutting the rate to 0.75% from 1% (where it had been for a year) in December. The central bank wrote in its April report that it expects to keep rates unchanged for the next year, as “inflation has been weaker than expected for some time”.

The hawks, including the central bank’s governor, worried if the Riksbank did not raise rates in 2010, inflation would take off. Inflation has been low for some time, yet interest rates are still high relative to the negative rates former deputy governor Lars Svenssonhas called for (while still at the central bank, he was a force behind its innovativenegative interest rate policy back in 2009). The reason rates remain high, writesAmbrose Evans-Pritchard, is that the Riksbank “has been trying to ‘lean against the wind’ to curb house price rises and consumer credit, pioneering a new policy that gives weight to the dangers of asset bubbles”.

Alen Mattich reports that housing prices are up 70% from where they were in 2005, with rents up 30%. But the country is also dealing with a significant housing shortage, writes the WSJ. For all that Sweden is “a country with a small population but vast tracts of land”, as Mattich puts it, its population is booming due to immigration, and getting new housing built in the cities is a bureaucratic nightmare. According to the WSJ, Stockholm needs 17,000 new homes a year through 2030 to keep up with population growth. Between 2000 and 2012, the city only managed to average 7,250.

Svensson, who was so fed up with the Riksbank’s hawkishness he quit last April,writes that “the Swedish housing market seems robust and not fragile, in contrast to a bubble”. He has been warning of deflation from the bank’s tight monetary policy since 2010. Deflation dwarfs housing prices and household debt on the list of Swedish economic problems, he says. Paul Krugman agrees, calling Sweden “an object lesson in the power of sadomonetarism”. — Shane Ferro

On to today’s links:

Class, risk, and regulation at 18,000 feet - Jon Krakauer

New Normal
Get rich or die younger: the shrinking lifespans of poor US women - WSJ

Please Update Your Records
Wind turbines are “the smallest threat to birds worthy of mention” - Bloomberg

Primary Sources
“There’s no technological reason for you to have 10,000 dime­sized antenna”: the Aereo oral arguments - Supreme Court

EU Mess
“EU institutions have become instruments for creditors to impose their will on debtors” -Philippe Legrain

Citi renews its commitment to shareholder engagement by holding its annual meeting in St Louis with no webcast - Matt Zeitlin

Americans think owning a home is better for them than it is - Catherine Rampell
The rich like to invest in real estate and stocks; the poor prefer gold - Barry Ritholtz
The American middle class is no longer the world’s richest - David Leonhardt and Kevin Quealy

JPGoldman Stanley intact: Basel eases counterparty limits - Bloomberg

Real Talk
It’s not PowerPoint’s fault you are boring - Lisa Pollack

Fun with arbitrary numbers: the trouble with measuring the speed of tech adoption -Gizmodo

Bad Data
“The crimes reported there were real, but they actually happened somewhere else” -LAT

“Global megacities owe you nothing. Never forget that” - Conor Sen

Journalism 3.0
“Looking for Satoshi Nakamoto is how I procrastinate instead of playing 2048″ - Adrian Chen

MORNING BID – Hi Janet, Here’s a Selloff.

Mar 20, 2014 14:06 UTC

Welcome Madame Chair, here’s a market selloff for you.

Fed Chair Janet Yellen made some news that she didn’t expect yesterday. She perhaps thought she was offering some clarity when she answered the question from Reuters’ Ann Saphir as to when the Fed might start raising interest rates. That’s not how it worked, although at least in this case she didn’t mouth off to Maria Bartiromo the way Ben Bernanke did eight years ago.

What we didn’t see in her answer on the distance between the end of QE3 and the first rate hikes of “six months” (or something like that), is whether we will start to see any kind of reaction from the primary dealers surveyed by Reuters yesterday.

Most still see the Fed not raising rates until late in 2015 although there were a couple of notable changes. Barclays moved up its expectations for the rate increases to the second quarter of 2015. There were still, however, four dealers that do not see rate hikes coming until 2016. This may, on some level, put the Fed behind the curve as interest-rates adjust, though it was notable to see several Fed members in the Fed’s projections believe rates should be at 1 percent by the end of 2015. (It wasn’t much of an adjustment, but somehow, the way it looked on the dot matrix chart the cool kids were talking about was enough to get the bond market in a lather. The stock market, of course, didn’t react until someone (Yellen) told it what to do.)

What is undetermined now, however, is what the Federal Reserve will be looking at when it decides whether to raise rates or not. The market has gotten awfully used to the idea of a threshold on the unemployment rate that made things easy. Without that, it reverts to looking at a number of indicators, although the Fed chair yesterday did say that she thought the unemployment rate was one of the best indicators.

It is perhaps to the markets’ credit that many commentators remarked on the Fed’s use of several indicators as worrisome. In years past, there was great praise for Alan Greenspan just because he used to discuss looking at various pieces of data in his bathtub or whatnot. Now the market finds such alchemy to be less comforting. That may at least be a sign of maturity. Or, perhaps, the Fed has through years of communication efforts changed the markets’ belief that the Fed chair should be this omniscient presence in the market. If so, that bodes well for what is usually an awkward transition between Fed chairs. This may make that much easier, regardless of what Yellen said.

Slacktivist monetary policy

Mar 12, 2014 22:01 UTC

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How much slack is there in the labor market? That is, how close is the American labor market to full employment? The answer to that question is important, says Evan Soltas, because estimating whether the economy is near its potential affects what, if anything, policymakers actually do to help the economy. No one is quite sure, but Paul Krugman argues against the emerging consensus that says “even though we still have huge unemployment, we’re actually running out of employable workers”.

Soltas divides the two economic camps into the slackers and the quitters. The slackers, including Fed chair Janet Yellen, as well as Krugman, think the economy still has a long way to go before it’s back at its full potential, therefore the Fed should continue to help it along. The quitters think there’s very little slack in the labor market, especially for the short-term unemployed, and therefore the Fed should think about raising interest rates to stem coming inflation.

In the quitters camp is the New York Fed’s Henry Linder, Richard Peach, and Robert Rich, who in a recent paper found evidence that “the long-duration unemployed exert less influence on wages than the short-duration unemployed”. Soltas sees this as “a sign that the job market is working for some even as it fails others”. When wages are going up as they are now (albeit slowlyaround 2%), that implies the advantage in the labor market is shifting toward workers, and therefore there’s not much slack.

However, Krugman points out that wages normally rise during bad weather — like this winter — because low-wage workers are more often unable to work than their white-collar counterparts. Jared Bernstein looks at both quit rates in yesterday’s JOLTS report and short-term unemployment rates and thinks the economy still isn’t at its potential. Dean Baker says much the same thing. If you go back a decade or more, says Bernstein, neither metric is back to normal. “I don’t think an objective person would look at the end of the lines in the figure and conclude: ‘our work is done here, folks’”, he writes. – Shane Ferro

On to today’s links:

Modern Problems
Silicon Valley’s youth problem: engineers, money, and being over-the-hill at 35 – NYT Mag

Tax Arcana
Big US companies are holding nearly $2 trillion overseas to avoid US taxes (up nearly 12% last year) – Bloomberg

Unsurprisingly, women still do the majority of the unpaid work – Shane Ferro
The CEA’s report on the importance womens’ contributions to the economy – The White House

BoE governor: currency manipulation charges are more serious than Liebor – Telegraph

Ackman’s revenge: The FTC announces its investigating Herbalife – Dan McCrum
When hedge funds lobby – Felix

Piketty: The US has seen an “unprecedented rise of top managerial compensation” – NYT
How finance gutted American manufacturing – Boston Review

The problem with restaurant letter grades: health inspectors don’t know anything about cooking – Open City

Inside the barista class – The Awl
Related: When a journalist is forced to take a retail job – Joseph Williams

Journalism startups aren’t a revolution if they’re filled with white men – Emily Bell

Primary Sources
The economics of the underground commercial sex economy – Urban Institute

The Fed
The Fed’s 7 degrees of communication – Jon Hilsenrath

Primary Sources
The average Wall St bonus was up 15% last year to $164,000, the highest since ’08 – NY State Comptroller

Interesting Failures
“Error is the engine of language change” – The Guardian

Profiles in Capital
A good profile of Stanley Fischer, including a sick Larry Summers burn – Binyamin Appelbaum

Study Says
The myth of the myth of the myth of the hot hand – Andrew Gelman

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Morning Bid — The Minutiae of the Minutes

Jan 8, 2014 13:52 UTC

December’s last salvo before going into holiday mode was the surprise Federal Reserve decision to trim its monthly $85 billion in bond buying to a more modest (but still enormous) $75 billion, that helped balloon its balance sheet to north of $4 trillion.

Suffice to say, on some levels, there was a bit of a disconnect here: The Fed’s inflation outlook showed inflation not getting back to its 2 percent target for a long time (like, forever; several years out, it was seen as just sneaking its way over 2 percent, never mind what Charles Plosser of Philly says).

With the Fed’s minutes due out later Wednesday, there are a number of unanswered questions about the Fed’s decision as Ben Bernanke exits and Janet Yellen (confirmed on a 56-26 vote, with “OMG IT’S COLD” coming in third place with 18 votes) enters the scene:

There’s been no guidance on this so far. Ben Bernanke, in his final press conference as the Fed head, said he could envision a steady reduction in $10 billion increments at each meeting, which would drop the monthly buying to nothing by the end of 2014. Richard Fisher, Dallas Fed head and now a voting member for 2014, said he would be comfortable with a more accelerated rate of purchases. And dovish John Williams of San Francisco said yesterday he’d expect to see the end of buying by year-end.

So it will be interesting to see any commentary on this – whether a faster pace was considered or not. (There will probably be some boilerplate on the Fed saying it could ‘reduce at a faster pace’ or ‘resume additional purchases’ or something. Just as a warning.)

But the October minutes provide some clues, as the Fed said some participants “mentioned that it might be preferable to adopt an even simpler plan and announce a total size of remaining purchases or a timetable for winding down the program. A calendar-based step-down would run counter to the data-dependent, state-contingent nature of the current asset purchase program, but it would be easier to communicate.”

Recent inventory figures, construction data and durable goods orders point to better-than-expected figures for the fourth quarter, and a first quarter where the economy gains momentum. The baseline projection for GDP growth in the fourth quarter has been for around 2.5 percent, but it could be higher thanks to a boost in exports.

The Fed sees 2014 GDP growth of 2.8 to 3.2 percent, which may end up being optimistic, while they see inflation as not much of a threat.
Yellen, in the past, has been more explicit about the idea of living with additional inflation, if needed, to help reduce unemployment, so there’s that. Again, that central tendency only ticks up to 2 percent in 2015 and 2016, and that’s the just the upper end of the Fed’s forecasts.

October’s minutes sounded a note of caution when it came to regular people, saying that “consumer sentiment remained unusually low, posing a downside risk to the forecast, and uncertainty surrounding prospective fiscal deliberations could weigh further on consumer confidence.“

Said fiscal shenanigans have receded for the time being (give it a day or so), which has removed a layer of uncertainty, though it’s debatable that consumers make decisions based on what’s happening in Washington to begin with. But a weak September payrolls figure and a few limp sentiment surveys put the Fed in a mind to be more concerned, and later economic figures don’t show a similar kind of worry.

Summers goes negative

Ben Walsh
Nov 18, 2013 23:15 UTC

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In a new speech at the IMF Economic Forum, Larry Summers said the US may be in a near-permanent slump — an assertion Peter Coy calls “deeply pessimistic”. What the US faces, Summers warns, is secular stagnation. The problem: nominal interest rates can’t go any lower, because they’re already near the zero lower bound, but the economy may need real interest rates of negative two or three percent to get back to full employment. Here’s Summers:

We may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back, below their potential.

Paul Krugman is annoyed, because he agrees with Summers, and “Larry’s formulation is much clearer and more forceful, and altogether better, than anything I’ve done”. The US economy, repeats Krugman, still needs good old-fashioned Keynesian policy like burying gold in coal mines or faking an alien attack.

The most radical part of Summers’ speech, Krugman says, is his assertion that we may need very negative real interest rates (that is, interest rates after accounting for inflation) to kickstart growth. When real interest rates go negative, monetary policy becomes less effective, says Krugman. Summers adds that rates can stay low, but QE can’t go on indefinitely, even if the economic conditions that make it necessary continue forever. If that’s true, says Krugman, “we may be an economy that needs bubbles just to achieve something near full employment”.

Ryan Avent thinks there’s far too much over-thinking going on. Inflation is far too low across the globe, and particularly in Europe, so central bankers should raise their inflation goals and “try to increase expectations of inflation”. The Fed is at least studying the possibility of increasing its inflation target above 2% to juice growth.

Tyler Cowen disagrees, saying that negative real interest rates would neither help the economy nor help return the economy to full employment.

James Pethokoukis thinks Summers is too dismissive of things like quantitative easing, or shifting to targeting nominal GDP growth rather than inflation. And, contrary to Summers’ fears of stagnation, he says the US may be in better shape than we think: current productivity metrics may not capture the full economic benefits of the IT revolution. — Ben Walsh

On to today’s links:

The Volcker Rule is now nearly 1,000 pages, still not yet a rule – DealBook

The real heroes of the world economy: Countries like Austria, Canada, Lesotho and the Philippines – Dani Rodrik

Unintended Consequences
How the digital revolution is making it increasingly hard to measure the “real” economy – James Surowiecki

Must Read
“The Pentagon is largely incapable of keeping track of its vast stores of weapons, ammunition and other supplies” – Reuters

Modern Problems
Your job, quite possibly, adds no real value to the economy – Noah Smith

Banks are piling into auto loans, and extending loans of up to 8 years – Sober Look

EU Mess
The flaw in the UK recovery story – Joe Weisenthal

Some reasons not to be bearish – Macro Man

Financial Arcana
Do stocks really trade in fractions of a penny? Sort of – Ben Walsh

The “cost of employee turnover due to various forms of workplace discrimination is about $64B per year” – Senator Klobuchar
Your semi-regular reminder that Europe’s youth unemployment situation is dismal – NYT

“A kind of Kickstarter for political assassinations” – Forbes
The DOJ and SEC to tell Congress that Bitcoin is a legitimate financial instrument – Bloomberg

Keeping Score
A reminder of who was wrong about QE – Barry Ritholtz

People have always left the NYT and they always will – Jack Shafer

People take jobs that pay a lot of money – Ryan Chittum

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Government spending pulls real economy loan activity, which creates a multiplier effect through loan demand by creating qualified borrowers. QE is pushing on a rope. The Fed’s QE has been trying its best to push that rope, because of the congressional budget cutting. Dear lord. What could be more obvious than that.

Why doesn’t Larry do something useful, like speak up against that cretin, Grover Norquist? Speaking up about what is really wrong, instead of wringing his hands over the limpness of the Fed’s QE rope might be useful.

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