MacroScope

Obama’s second chance to reshape the Fed

Lost in the bizarre Yellen vs. Summers tug-of-war into which the debate over the next Federal Reserve Chairman has devolved, is the notion that President Barack Obama is getting a second shot at revamping the U.S. central bank.

The perk of a two-term president, Obama will get to appoint another three, potentially four officials to the Fed’s influential seven-member board of governors in Washington. This may buy the president some political wiggle room when it comes to his pick for Fed chair, since he might be able to placate Republicans with one or two “concession” appointments. Every Fed governor gets a permanent voting seat on the policy-setting Federal Open Market Committee.

Elizabeth Duke, the last George W. Bush appointee, is already on her way out. So is Sarah Bloom Raskin, who after a relatively short stint at the board is moving to the Treasury, to be Jack Lew’s Deputy Secretary. Then there’s the awkward suspicion that, if Obama passes up Fed Vice Chair Janet Yellen, by far the favorite for the top spot, she will also step down after a long career in the Federal Reserve system, including many years as head of the San Francisco Fed.

To boot, Jerome Powell’s term as governor ends at the end of January 2014, at the same time as Bernanke’s.

While such a large number of openings could make for a turbulent ride at a time when the Fed is expected to be starting a pullback of its bond-buying stimulus plan, it also confers a great deal of discretion on the president. In the recent past, political leanings have not made an enormous difference to monetary policy, though perhaps a bit more on regulatory matters. But in the future, they could. No wonder the president wants to sleep on the issue for a couple more months.

A Marshall Plan for Greece

The spectacular failure of “expansionary austerity” policies has set Greece on a path worse than the Great Depression, according to a study from the Levy Economics Institute of Bard College.

Using their newly-constructed macroeconomic model for Greece, the Levy scholars recommend a recovery strategy similar to the Marshall Plan to increase public consumption and investment.

“A Marshall-type recovery plan directed at public consumption and investment is realistic and has worked in the past,” the authors of the report said.

Uncertain about the effects of uncertainty on jobs

Job number one at the Federal Reserve these days is to bring down high U.S. unemployment without sparking inflation. Job number two, it sometimes seems, is explaining just how unemployment got so high in the first place.

Two recent papers published by the San Francisco Fed offer what look like opposite takes on the topic.

“(S)tates in which businesses cited poor sales also registered disproportionately sharp drops in jobs and household spending,” wrote Princeton University professor Atif Mian and University of Chicago Booth School of Business professor Amir Sufi in a February Economic Letter.

Full blown damage control?

Call it the great wagon circling.

Central bankers are talking tough in the face of the wild gyrations in financial markets. But it’s becoming increasingly clear they are sweating – and drawing up contingency plans to assuage the panic that’s taken hold since Chairman Ben Bernanke last week sketched out the Fed’s plan for winding down its QE3 bond-buying program. U.S. policymakers in particular must have predicted investors would react strongly. But now that longer-term borrowing costs have spiked to near a two-year high, they look to be entering full-blown damage control.

Here’s Richard Fisher, head of the Dallas Fed, speaking to reporters in London on Monday:

I’m not surprised by market volatility – markets are manic depressive mechanisms… Collectively we will be tested. We need to expect a market reaction… Even if we reach a situation this year where we dial back (stimulus), we will still be running an accommodative policy.

What’s a Fed to do? Taper talk persists despite missed jobs, inflation targets

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.

“I don’t think the data dependent emphasis is the only ball the Fed is focusing on when mulling over the pace and extent of asset purchases,” says Thomas Lam, chief economist at OSK-DSG.

MacroScope presents: ask the economist

MacroScope is pleased to announce the launch of ‘Ask the Economist,’ which will give our readers an opportunity to directly ask questions of top experts in the field. We are honored that Michael Bryan, senior economist at the Federal Reserve Bank of Atlanta, has agreed to be our first guest. In his role, Bryan is responsible for organizing the Atlanta Fed’s monetary policy process. He was previously a vice president of research at the Cleveland Fed.

The process is simple. We give you a heads up on our upcoming featured economist. You tweet us your question using the hashtag #asktheeconomist, or via direct message if you prefer. We select a handful of the most interesting queries this week, ship them over to our economist du jour. She or he will then answer each one in writing and we will post their response as a blogpost. And of course, you’ll be cited for asking the pithy question.

We look forward to your questions and thank you in advance for participating.

Let the games begin.

From one Fed dove to another: I see your logic

Narayana Kocherlakota, the head of the Federal Reserve Bank of Minneapolis, has made a habit of turning economists’ heads. In September, the policymaker formerly known as a “hawk” surprised people the world over when he suddenly called on the U.S. central bank to keep interest rates ultra low for years to come. This week, Kocherlakota arguably went a step further into “dovish” territory, saying the Fed needs to ease policy even more. He wants the Fed to pledge to keep rates at rock bottom until the U.S. unemployment rate falls to at least 5.5 percent, from 7.8 percent currently – despite the fact that, just last month, the central bank decided to target 6.5 percent unemployment as its new rates threshold.

Kocherlakota’s bold policy stance is probably even more dovish – ie.  more willing to unleash whatever policies are needed to get Americans back to work – than even those of Chicago Fed President Charles Evans and Boston Fed President Eric Rosengren, until now considered the stanchest doves of the central bank”s 19 policymakers.

So in an interview on Tuesday, Reuters asked Rosengren what he thought of Kocherlakota’s plan. Here’s what he had to say:

Big government kept a “contained depression” from being a Great one: Levy

David Levy says he is bullish on the U.S. economy long term. But for now, the country is effectively stuck in a “contained depression,” the chairman of the Jerome Levy Forecasting Center told Reuters during a recent visit to our Washington bureau.

Still, things could have been much worse, says the third generation economist. For Levy, the interventions of a large and proactive federal government prevented a repeat of the 1930s.

In this corrective process, the reason we haven’t had a collapse in profits as we had in the Great Depression is we have – what nobody seems to like very much – a big government that’s stabilizing it by just simply running these deficits and being a much more active lender of last resort.

Subconscience of a liberal: Krugman’s curious support of sweatshops

Who hasn’t heard of Paul Krugman these days? The Nobel-winning Princeton economist and New York Times columnist has emerged as a key voice in American liberalism, and is berated by the right for his support of heavy fiscal stimulus, higher inflation and a strong social safety net.

Which makes the views espoused in a 1997 missive entitled “In Praise of Cheap Labor” rather surprising. In the article, the economist attacks opponents of globalization for their soft-hearted distaste for inhumane labor conditions in developing countries.

Such moral outrage is common among the opponents of globalization – of the transfer of technology and capital from high-wage to low-wage countries and the resulting growth of labor-intensive Third World exports. These critics take it as a given that anyone with a good word for this process is naive or corrupt and, in either case, a de facto agent of global capital in its oppression of workers here and abroad.

At the Fed, there’s a way to raise rates — but is there a will?

The Federal Reserve has kept its key federal funds rate at near-zero for four straight years, and it expects to keep it there for at least two more. But with each trip around the sun, outsiders wonder whether central bank policymakers will act without hesitation when the time finally comes to tighten monetary policy?

This week, the official with his hand on the Fed’s interest-rate lever, so to speak, asked that same question. Simon Potter, head of the Federal Reserve Bank of New York’s open market operations, was at NYU‘s Stern School of Business discussing the various ways the central bank can tighten policy: the federal funds rate; the interest rate on excess bank reserves; reverse repurchase agreements. Potter runs the unit that carries out Fed policy in the market, and sits in on most policy-setting meetings in Washington. Asked by a student about the inflationary or deflationary risks associated with tightening policy in the future, he had this to say:

The real heart of that question is a willingness one. I’m pretty confident we have the technical ability to raise rates. The hard part will be the willingness in some people’s minds. What I’ve seen among most people in financial markets is they’re pretty sure that the Fed will raise rates when it’s appropriate to do it… Definitely compared to 2009-2010, the type of hedge funds and people who took large bets thinking this would lead to high inflation have given up on that bet.