MacroScope

Fed doves ‘will not be patient’

Ellen Freilich contributed to this post

The Fed did the twist. Will it shout as well? There has been some debate among economists about whether the U.S. central bank might launch a third round of outright bond buys or QE3 given that it just prolonged Operation Twist.

But a truly grim report on the U.S. manufacturing sector from the Institute for Supply Management, if coupled with further evidence of a deteriorating labor market, could certainly induce policymakers to press their foot to the monetary accelerator.

Not only did the index slip below 50 in June, pointing to a contraction for the first time in three years, but the reading of 49.7 was lower than the lowest forecast in a Reuters poll of economists. Moreover, the subcomponents showed the biggest drop in new orders since the aftermath of the Sept. 11 attacks in 2001.

According to Pierre Ellis, senior economist at Decision Economics:

Fed doves will not be patient in waiting for that issue to be resolved – seeing increasing chances of a demand contraction leading to employment weakness and further demand weakness.

The most alarmed are probably pushing for another easing move now, while others might still be calmed by a  strong-enough services-side employment result Friday. If it does not materialize, the normal hesitation in responding to limited numbers of bad data results will probably be overcome by the breadth of the weakness now evident, and by growing perceptions that the economy is much more vulnerable than normal to downside shocks.

Repo market big, but maybe not *that* big

Maybe the massive U.S. repo market isn’t as massive as we thought. That’s the conclusion of a study by researchers at the Federal Reserve Bank of New York that suggests transactions in the repurchase agreement (repo) market total about $5.48 trillion. The figure, though impressive, is a far cry from a previous and oft-cited $10 trillion estimate made in 2010 by two Yale professors, Gary Gorton and Andrew Metrick. The Fed researchers, acknowledging the “spotty data” that complicates such tasks, argue the previous $10-trillion estimate is based on repo activity in 2008 when the market was far larger, and is inflated by double-counting.

Repos are a key source of collateralized funding for dealers and others in financial markets, and represent a main pillar of the “shadow” banking system. The market was central to the downfalls of Lehman Brothers and Bear Stearns in the 2008 crisis, and now regulators from Fed Chairman Ben Bernanke on down are looking for a fix. Earlier this year, the New York Fed itself said it might restrict the types of collateral in so-called tri-party repos, after being dissatisfied with progress by an industry committee.

The study published by the New York Fed on Monday slices the complex market into five segments, mapping the flow of cash and securities among dealers, funds and other players. Because dealers represent about 90 percent of the tri-party market, the Fed study extrapolates that onto the broader repo market, to arrive at its estimates. Bottom lines: U.S. repo transactions total $3.04 trillion; U.S. reverse repo transactions total $2.45 trillion.

MIT’s Johnson takes anti-Dimon fight to Fed’s doorstep

Simon Johnson is on a mission. The MIT professor and former IMF economist is trying to push JP Morgan CEO Jamie Dimon to resign his seat on the board of the New York Fed, which regulates his bank. Alternatively, he would like to shame the Federal Reserve into rewriting its code of conduct so that CEOs of banks seen as too big to fail can no longer serve.

Asked about Dimon’s NY Fed seat during testimony this month, Bernanke argued that it was up to Congress to address any perceived conflicts of interest.

But Johnson says the Fed itself should be trying to counter the perception of internal conflicts. He told reporters in a conference call:

BoEasing

The Bank of England is finally catching a break. With Britain’s economy officially in recession, the BoE had been constrained from further monetary easing by a stubbornly high inflation rate. But as the global economy stumbles and Europe’s crisis rages unabated, UK price pressures may be giving way.

Barclays economist Chris Crowe argues:

We expect the MPC to announce an additional £50bn in QE at the July policy meeting.

CPI inflation fell to 2.8% y/y in May (Barclays 3.1%, consensus 3.0%) from 3.0% in April. Meanwhile, RPI inflation declined to 3.1% y/y (Barclays and consensus 3.3%), from 3.5%. With near-term inflationary pressures easing, the case for additional QE in response to faltering confidence is stronger.

Get ready for QE3 if things don’t get better soon

Ben Bernanke appears to be reluctantly gearing up for a third round of large-scale Federal Reserve bond buying, so-called QE3. Millan Mulraine of TD Securities captures just how likely further monetary easing is becoming following the Fed’s decision on Wednesday to expand Operation Twist.

The burden of proof may now be on the incoming data to prove that a third round of large-scale asset purchases may not be necessary.

Just under two months before the central bank’s yearly gathering at Jackson Hole – where Bernanke announced QE2 – the Chairman emphasized the path of the job market will be a key driver of any decision to further expand the central bank’s $2.8 trillion balance sheet. He told reporters at a press conference:

JP Morgan Houston janitor wants Jamie Dimon to walk in her shoes

Just as the proverbial shoemaker’s children can go without shoes so, apparently, can a cleaner of corporate office bathrooms not have time for a bathroom break. And with the lack of time to use one of the 24 bathrooms Adriana Vasquez must clean in a five-hour shift at the JP Morgan Chase Tower in Houston, Texas – 22 of them with multiple stalls – comes the absence of a living wage.

So on Tuesday, Vasquez had a question for JP Morgan Chief Jamie Dimon, whose bank is the prime tenant in the 60-story building where she cleans bathrooms five evenings a week.

“Why do you deny the people cleaning your buildings a living wage?” she asked Dimon after he testified about the bank’s multi-billion dollar trading loss in front of Congressional committees on financial institutions and consumer credit. Dimon said to call his office to arrange a meeting, according to the Service Employees International Union.

Hints of internal Fed divisions on Twitter?

Additional reporting by Ann Saphir. Updated with New York Fed and other details.

For a central bank that prides itself on transparency, the Federal Reserve remains cautious about adopting new ways of communicating its message. The Fed’s Washington-based board was a latecomer to Twitter. Its first tweet was dated March 14, well after its regional Fed counterparts.

Perhaps more tellingly, the @FederalReserve account follows most – but not all – regional Fed accounts. Of the 12 district banks, only the two most hawkish (and therefore likely to oppose the Fed’s unconventional monetary policy) are missing: Richmond and Kansas City. The third is New York, whose heavy influence on financial markets sometimes puts it at odds with the board. In fairness, the board does follow the Dallas and Philadelphia Feds. Its presidents, Richard Fisher and Charles Plosser, have also criticized Fed purchases of government and mortgage bonds, known as quantitative easing or QE.

Immigrant small business owners: bringing big bucks to Main Street

What would Main Street America look like without immigrants?

Picture vastly fewer restaurants (37% of the industry’s ownership is foreign-born), hotels and accommodation (43% foreign-born ownership), dry cleaning and laundry facilities (54% foreign-born), and nail salons (37%). It would be that much harder to go out for a treat (bakeries, 32% immigrant-owned), fill up the tank (gas stations, 53%), or grab a bottle of wine on the way to a dinner party (beer, wine and liquor stores, 42%).

As President Barack Obama announces a big shift in immigration policy that will offer greater leniency to individuals under 30 who came into the United States as undocumented children, a new report from the New York-based Fiscal Policy Institute highlights just how broad a role immigrants play in the world’s largest economy.

In his speech this week, President Barack Obama hinted at the new policy:

If we truly want to make this country a destination for talent and ingenuity from all over the world, we won’t deport hardworking, responsible young immigrants who have grown up here or received advanced degrees here. We’ll let them earn the chance to become American citizens so they can grow our economy and start new businesses right here instead of someplace else.

Euro zone survival is in the eye of the beholder

Despite all their years of experience and complex mathematical models, for economists the question of the euro zone’s survival really has them at the mercy of national bias… at least in terms of where their employer is based.

One of the key points from the latest Reuters poll was that a majority of economists from banks and research houses around the world – 37 out of 59 – expect the euro zone to survive in its current form for the next 12 months.

But behind that headline figure, the answers were skewed heavily by region.

Only 5 out of 24 economists from organisations based inside the euro zone thought it would fail to survive in its present 17-nation form over the next 12 months.

Central bankers vs. politicians: High-stakes chicken?

Are politicians playing chicken with central bankers? More to the point, if the U.S. Federal Reserve or the European Central Bank step up, yet again, to protect their economies from the global slowdown, will it take U.S., German, Spanish, Italian, Greek and other governments off the hook?

Such questions are swirling as Europe’s financial crisis boils and starts to bubble over into Asia and the Americas. Expectations are growing that the Fed will take more monetary policy action when it meets June 19-20. The messy possibility that Greece could exit the euro zone was not enough to prompt the ECB to cut interest rates last week – and that was before a deal over the weekend to bail out Spanish banks was dismissed by markets as just another kick of the can. Underlining the standoff between monetary and fiscal policymakers, ECB President Mario Draghi told European Parliament this on May 31:

Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no.