MacroScope

Fed doves becoming an endangered species

 

It’s official: Instead of policy doves on the U.S. central bank’s Federal Open Market Committee, there are now only “non-hawks.” A research note from Thomas Lam at OSK-DMG used the term in referring to recent remarks from once more dovish officials like Charles Evans of the Chicago Fed and San Francisco Fed President John Williams.

The implied message from the latest Fed comments (or reticence), namely from the non-hawks, is that policymakers are clearly assessing a broader spectrum of considerations – beyond data-dependence – when mulling over the prospect of tapering in September.

Lam neglected to mention the silence from arguably the most dovish Fed member of all, Boston’s Eric Rosengren. He and Evans were at the forefront of calling for continuous and aggressive stimulus in the form of asset purchases. But recently, the Fed as a committee has shifted away from its emphasis on balance sheet expansion toward forward guidance –  thus far with mixed success.

During a briefing with reporters in Greenville, South Carolina last week, I asked Evans about why he appeared to have given up on asset buys, despite still sub-target inflation, high unemployment and anemic growth. In part, he emphasized his own optimistic forecast that growth will bounce back to around 3 percent next year. He added:

I’ve been among the most enthusiastic advocates for as aggressive monetary policy as we can. I think we’ve put in place a lot of aggressive policies. I do take the point that this was intended to be a temporary program and it’s been going on for over a year and we’re looking at likely another many months of this – mid-2014 I think in terms of being in the vicinity of 7 percent (unemployment).

Euro chat resumes

After the summer lull, euro zone and EU finance ministers meet in Lithuania. The “informal Ecofin” can often be quite a big deal but with German elections only nine days away, it’s hard to see that being the case this time.

During the election campaign German Finance Minister Wolfgang Schaeuble let slip that Greece would need more outside help which would not include a haircut on Greek bonds held by euro zone governments and the ECB.

Since then, European Central Bank policymaker Luc Coene has said Athens might need two bouts of further assistance and Estonia’s prime minister told us yesterday the popular bailout fatigue he flagged as a danger last year had now faded and he was open to aiding Greece with a third bailout and helping other troubled euro zone nations too.

Has dawn broken over Britain’s economy?

Bank of England Governor Mark Carney said on Thursday he was wary of another “false dawn” for Britain’s economy, but economists polled by Reuters are generally more optimistic.

The poll, published on Wednesday and taken ahead of an unexpected fall in unemployment, said the economy would expand a relatively healthy 0.7 percent in the current three month period and then by 0.5 percent per quarter through to early 2015.

And that comes after better than expected 0.7 percent growth in the second quarter.

from The Great Debate:

China’s commitment to growth will drive the global economy

From outside China, the Bo Xilai trial looks like the Chinese news event of the year, one of the preoccupations of Western media, along with corporate corruption and the clampdown on American and European companies. Yet these issues are no more than sideshows to the most important economic event of recent times, the unveiling and ratification of a major program for reforms for the next decade, which will occur at the Chinese government’s third plenum in November. The reforms promise to bring another great leap forward in China's dramatic ascent.

Chinese officials will reveal how long China will need to make the transition from an investment-led, middle-income country to an innovative, consumer-driven, high-income one -- and thus when it will become the world's largest economy. Can China circumvent what we know as "the middle-income trap" that has for decades denied high-income status for Latin America and Asian countries like Malaysia and Thailand?

The challenges that China's new leadership faces in pushing for rising levels of innovation, entrepreneurship and skills will be the main discussion points this week at the New Champions summit in Dalian, China, organized by the World Economic Forum under the leadership of executive chairman Klaus Schwab. The summit recognizes the important truth that China’s degree of success will determine global growth: it will determine whether the twenty-first century will be the Asian century, and whether by mid-century Asia -- which not long ago represented just 10 percent of the world economy -- will represent half or just a third.

Italian market test

Italy will auction three different bonds, aiming to raise 7.5 billion euros against a volatile domestic backdrop.

A sale of one-year bills on Wednesday saw yields rise, this after the Treasury asked parliament to raise the ceiling on this year’s net debt issuance to 98 billion euros from 80 billion, given the struggle to rein in public finances and a government commitment to pay outstanding bills to firms, which at least could give the economy a boost.

Parliamentarians have a bigger fish to fry in the form of Silvio Berlusconi. A cross-party Senate committee that must decide on whether to bar him from political life drew back from the brink on Tuesday but has caused growing tension between the coalition parties with some of Berlusconi’s allies threatening to pull the shaky government down.

UK unemployment — the monthly monetary policy guide

Of the week’s economic data, today’s UK unemployment stands out since the Bank of England has pegged any move up in interest rates to a fall in the unemployment rate from 7.8 percent to below 7.0. The rate is forecast to have held at 7.8 percent in July.

Bank of England Governor Mark Carney has struggled to convince markets of his contention that interest rates are unlikely to rise for three years because the jobless rate will fall only very slowly. Interest rate futures – short sterling – spiked higher after last week’s policy meeting which offered no change of direction and no statement.

There are some key imponderables:
1. To what extent UK firms have kept workers on but worked them less (its certainly true that the jobless rate rose less than expected during Britain’s recession), leaving plenty of scope to ramp up as growth returns without hiring large numbers of new staff.
2. The economy is still three percent smaller than it was in 2008 but no one is quite sure how much activity has been permanently lost during the financial crisis so the size of the output gap is uncertain and therefore so is the level of output at which price pressures start to build.
3. Most importantly, with the Federal Reserve poised to act, can a country like Britain possibly divorce itself from the world’s economic superpower as it sets the global terms of monetary policy?

Trust me, I’m with Google

Hal Varian, Google’s chief economist, is unsurprisingly an advocate of data extraction and analysis on a mass scale – you’d almost have to be, as data-cruncher-in-chief of a company whose search engine was tapped a billion times just since this morning.

At the annual meeting of the National Association for Business Economics in San Francisco, Varian talked at length about how people can use software to make life better, describing one Google application that he said can retrieve information from your private calendar, check the traffic on the route to your next appointment, and notify you that you’d better leave shortly or risk being late. “I have to say, for some people, this completely freaks them out,” he quipped, but later added that for most kinds of information, the benefits of sharing information with your computer outweigh the costs.

Still, some people are uncomfortable with the extent to which their privacy is at risk in an online world, particularly after new revelations about the U.S. National Security Agency’s ability to keep electronic tabs on Internet users. Asked about legislative responses to the leaks from former NSA contractor Edward Snowden, Varian had this to say:

New film takes a whack at warped Fed policies in the land of never-ending bubbles

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“Money for Nothing: Inside the Federal Reserve” is a slick, thoughtful and alternately infuriating-and-funny documentary that premiered in New York’s Florence Gould Hall last night. It gives the U.S. central bank a pretty thorough lashing, especially Alan Greenspan. The former Fed Chairman is strung up like a piñata and smacked around as the culmination of long-misguided U.S. monetary policy that, crisis after crisis, lacks the creativity and courage to remove the proverbial punch bowl when the time is right.

The film, by writer and director Jim Bruce, is narrated by Liev Schreiber but almost doesn’t need him given the series of interviews that drive an account of the Fed over the 100 years of its existence. Paul Volcker, Alice Rivlin, Charles Plosser, Jeffrey Lacker, Allan Meltzer, Raghuram Rajan, Alan Blinder and Jim Grant are among those who weigh in. Oh and Janet Yellen, but not Lawrence Summers.

The midtown Manhattan audience of economists and investors hooted and howled at decade-old footage of Greenspan telling a congressional committee that bank regulators have no clue how derivatives work so should simply let Wall Street police itself in the years to come; Timothy Geithner is seated just off the Maestro’s right shoulder, and the film shines a wry spotlight on the man who would run the New York Fed as Wall Street collapsed into crisis a few years later.

Norway shifts tack

Norway’s centre-right swept to power last night, ousting a centre-left government that couldn’t capitalize on a solidly performing economy which escaped the world financial crisis largely unscathed (uncanny echoes of Australia’s weekend election here). The popular feeling seems to have been that a decade of strong growth was wasted and is now slowing.

Erna Solberg, Norway’s second woman premier, will have to govern with the anti-immigration, anti-tax Progress party which could be problematic. But they seem at one on the need for lower taxes at least.

Solberg also wants to revamp the $750 billion oil fund, the world’s biggest sovereign wealth fund. Changes could include breaking it up and requiring it to start investing in Norway, forbidden until now.

Italy’s High Noon

Silvio Berlusconi’s political future – upon which both Italian and euro zone stability rest to varying degrees – is up for debate when a Senate committee meets on Monday to begin discussions that could end with formal procedures to expel him from the Senate. Talks could last for days.

Members of Berlusconi’s centre-right PDL have threatened to walk out of Prime Minister Enrico Letta’s coalition government if a final vote – due in the Senate in October or maybe November – bars him from political life, following the upholding of his conviction for tax fraud.

One of Berlusconi’s key allies says he has already prepared a video message that could announce a decision to bring down the coalition government.