MacroScope

What to expect from Bernanke testimony and Fed minutes this week

Financial markets this will be keenly focused on congressional testimony from Fed Chairman Ben Bernanke and minutes from the central bank’s April 30-May 1 meeting, particularly given a thin data calendar. The latter may be the more interesting one, since it will offer hints into how far Fed officials are leaning in a direction of curbing the pace of its bond-buying stimulus, potentially late this summer.

The economic backdrop has been just mixed enough to leave policymakers cautious about taking their foot off the gas. Still, if we get a few more months of strength in the labor market, Fed officials may just be able to say “substantial progress” has been made in the outlook for the labor market – their stated precondition for an end to asset buys.

Still, Harm Bandholz at Unicredit says markets should not confuse a debate about tapering bond buys with some immediate reversal of the Fed’s policy of ultra low rates.

Once the Fed talks about the exit (or unwinding/tapering asset purchases), the market is tempted to jump to the conclusion that this indicates an earlier exit. We disagree. The debate about an exit roadmap merely shows that the Fed is doing its necessary due diligence in time. It wants to make sure that it is prepared to do the right steps once the time has come. This debate does not, however, bring the exit a single day closer. In fact, the minutes are likely to show just the opposite, i.e. that at the previous meeting some Fed officials were talking about the possible need to increase the asset-purchase amount even further.

As for the testimony, don’t expect the chairman to make much news, says Roberto Perli at Cornerstone Macro:

Kocherlakota on Fed stimulus: Don’t stop ‘til you get enough

Ann Saphir contributed to this post

Minneapolis Federal Reserve President Narayana Kocherlakota has gone from being one of the U.S. central bank’s more hawkish characters to arguably its most dovish. In line with this transformation, Kocherlakota told a conference sponsored by the University of Chicago’s Booth School of Business that the Fed, despite its extensive bond-buying over the last few years, has not done enough to spur growth.

The FOMC has responded to this challenge by providing a historically unprecedented amount of monetary accommodation. But the outlook for prices and employment is that they will remain too low over the next two to three years relative to the FOMC’s objectives. Despite its actions, the FOMC has still not lowered the real interest rate sufficiently in light of the changes in asset demand and asset supply that I’ve described.

To get a sense of what he means, see the graphs below: U.S. inflation continues to undershoot the Fed’s 2 percent target, and is actually drifting lower, while unemployment, though down from crisis peaks, remains stubbornly high.

SF Fed’s Williams in the driver’s seat

In the barrage of Federal Reserve speakers making the rounds on Thursday, it is notable that San Francisco Fed President John Williams was the one that managed to move markets, allowing the dollar to recover losses. Why did his voice rise above the din? For one thing, he’s seen as a dovish-leaning centrist whose views closely resemble the Bernanke-Yellen core of the central bank.

Plus, he took the oft-abused economy-car analogy in a, er, new direction:

If we were in a car, you might say we’re motoring along, but well under the speed limit. The fact that we’re cruising at a moderate speed instead of still stuck in the ditch is due in part to the Federal Reserve’s unprecedented efforts to keep interest rates low. We may not be getting there as fast as we’d like, but we’re definitely moving in the right direction.

Small rays of hope brightened Canada’s economic outlook last week

 All data released last week point to a far better first quarter growth in Canada than previously expected, prompting economists to revise up their predictions.

In a Reuters poll conducted early last month, forecasters predicted that Canada’s economy expanded by just 1.6 percent on an annualised basis in the first three months of this year.

But that consensus could prove to be too low, with many now expecting growth to be close to 2 percent or even higher, likely a welcome sign for Stephen Poloz who was named Bank of Canada’s new governor last Thursday and will replace Mark Carney on June 3.

Scotland catches up with the UK economy – and maybe more?


Updated to show Scotland’s composite PMI has bettered the UK equivalent for seven straight months now, after Monday’s data.

For the first time in a long while, Scotland’s economic performance has caught up with the UK average– and there is at least some evidence to suggest it’s doing slightly better than the British baseline.

In general, the Scottish economy has come second-best behind the poor UK average, at least since the full onslaught of the global financial crisis hit in September 2008 with the collapse of Lehman Brothers.

Not again, please! Brazil and India more vulnerable now to another crisis

After bad economic news from Germany, China and the United States over the past few weeks, here are two more. Brazil and India, two of the world’s largest emerging economies, are increasingly vulnerable to another crisis or to the eventual end of the ultra-loose monetary policies in developed economies after five years of a severe global slowdown.

Weak demand for Brazil’s exports and the voracious appetite of local consumers for imported goods widened the country’s current account deficit to 2.93 percent of GDP in the 12 months through March, the widest gap in nearly eleven years. In dollar terms, that amounts to $67 billion.

To help fund this gap, Brazil could at first loosen the currency controls adopted in the past few years and let more dollars in. But if the dollar flows change too swiftly, Brazil would find itself with three other options: curb spending by growing less, allow a decline in the foreign exchange rate at the risk of fueling inflation, or burn part of its international reserves – which are large, at $377 billion, but not infinite.

Baby it’s cold outside: monetary policy as outer wear

Discussions about central banking are often belabored by analogies to moving vehicles, which make some sense given that interest rate policy can act both as accelerator and brake on economic activity. Perhaps tired of being in the driver’s seat, Minnesota Fed President Narayana Kocherlakota decide to switch gears and talk about clothing instead.

In an attempt to illustrate that interest rates are low because of economic conditions, not the whim of policymakers, Kocherlakota compares monetary policy to a protective jacket that needs to be worn when the weather gets rough but can slowly be removed as the summer approaches.

Why have real interest rates fallen so much? At one level, the answer is obvious: monetary policy. The FOMC has announced its intention to keep the fed funds rate near zero at least until the unemployment rate falls below 6.5 percent. At the same time, the FOMC has bought over $3 trillion of longer-term assets issued or backed by the government. With inflationary expectations well anchored, these actions are designed to push downward on real interest rates and have been successful in doing so.

From one central banking era to another: beware the consequences

Paul Volcker’s inflation-fighting era as chairman of the Federal Reserve is quite the opposite of today’s U.S. central bank, which is battling to kick start growth and even stave off deflation with trillions in bond purchases. And it is polar opposite of where the Bank of Japan finds itself today, doubling down on easing to lift inflation expectations after two decades of Japanese stagnation. After all, Volcker ratcheted up interest rates in 1979 and the early 1980s to tame the inflation that had been choking the United States.

So it may come as no real surprise that, talking to students and faculty at New York University on Monday, he had a few concerns about where the world’s ultra accommodative central banks are headed.

“There are going to be big losses at central banks at someplace along the line,” he said. “You do all this support of buying longer term securities at very low interest rates; long term interest rates aren’t going to stay where they are forever; at some point losses are going to be taken.”

France’s downturn is more significant than you think

The huge downturn in French businesses was by far the most disappointing aspect of this week’s euro zone PMIs, which again painted a dismal picture of the euro zone economy.

Maybe it’s because grim euro zone PMIs come around with depressingly familiarity these days, but economists on the whole had surprisingly little say about this.

Still, the March survey delivered some major landmarks relating to France.

Most obviously, its services companies endured their worst month since February 2009, practically at the nadir of the Great Recession of 2008-09.

Goal line on jobs still a long way off: former Fed economist Stockton

The Great Recession set the U.S. labor market so far back that there is still a long way to go before policymakers can claim victory and point to a true return to healthy conditions, a top former Fed economist said. The U.S. economy remains around 3 million jobs short of its pre-recession levels, and that’s without accounting for population growth.

“The goal line is still a long ways off,” David Stockton, former head of economic research at theU.S.central bank’s powerful Washington-based board, told an event sponsored by the Peterson Institute for International Economics. He sees the American economy improving this year, but believes the recovery will continue to have its ups and downs.

A lot of people have been quite excited about some of the recent strength in the labor market. It’s encouraging but I don’t think we’ve yet seen any clear break out and I don’t think we’re going to for a while.  […]