MacroScope

Bullard weighs in on his colleague’s challenge to the ‘Bernanke doctrine’

Earlier this month, Fed Governor Jeremy Stein made waves that are still rippling with a speech on the risks of credit bubbles. The policymaker said that the U.S. central bank could use interest rates, as opposed to the more conventional tool of regulation, to cool overheating in junk bonds and other markets.

With worries growing that the Fed’s easy-money policies are inflating dangerous bubbles in financial markets, the speech could portend an earlier-than-expected reversal of quantitative easing or raising of ultra low rates. But don’t take my word for it. Here’s what St. Louis Fed President James Bullard had to say about Stein’s speech, when he visited New York University last week:

“My main takeaway from the speech … was that he pushed back against the Bernanke doctrine. The Bernanke doctrine has been that we’re going to use monetary policy to deal with normal macroeconomic concerns, and then we’ll use regulatory policies to try to contain financial excess. And Jeremy Stein’s speech said, in effect, I’m not sure we’re always going to be able to take care of financial excess with the regulatory policy. And in a key line he said, raising interest rates is a way to get into all the corners of the financial markets that you might not be able to see, or you might not be able to attack with the regulatory approach. So I thought this was interesting. And I would certainly think that everybody should take heed of this. This is an argument that, maybe you should think about using interest rates to fight financial excess a little more than we have in the last few years.”

Self-inflicted ‘sudden stop’? Brazil blocked by its own currency war trench

In times of currency wars, it’s best not to shoot yourself in the foot. By imposing several capital controls in the past years, Brazil might have tightened monetary policy right when the economy started to falter, Nomura’s strategist Tony Volpon wrote in a research note on Friday.

Brazil’s mediocre economic growth in the past two years has been a mystery, indeed. Some say it has been due to the global slowdown – which contrasts with steady growth elsewhere in Latin America. Many others blame Brazil’s several supply bottlenecks. But then, why don’t businesses see them as an investment opportunity?

The missing link, Volpon argues, has been the imposition of capital controls. Inflows dropped suddenly, reducing the supply of cheap foreign money available for banks and companies. So, even though the central bank cut local interest rates ten straight times to a record low of 7.25 percent, money supply growth has actually slowed since January 2012.

Hopefulness, not confidence, is spreading through the euro zone

Optimism in Germany is roaring and consumers across the euro zone are starting to become less gloomy. But the latest hard economic data are a reminder of the difference between confidence that things are going to get better, and the hope that they will.

For the moment, we only have the latter.

Friday’s German Ifo business climate survey topped even the highest expectations, as did the ZEW economic sentiment indicator on Tuesday. Euro zone consumer confidence improved this month too, and the mood in financial markets has been largely buoyant since the start of the year.

The hope is that will translate into a growing euro zone economy, but that isn’t happening yet.

Fed stimulus benefits still outweigh risks, Lockhart tells Reuters

The Federal Reserve is cognizant of the potential costs of its unconventional policies, but the economic benefits from asset purchases are still far greater than the potential costs, Atlanta Fed President Dennis Lockhart told Reuters in an interview from his offices.

What follows is an edited transcript of the interview.

The December meeting minutes seemed to signal a shift in sentiment at the central bank toward a greater focus on the policy’s costs. How concerned are you about the risks from QE? Has the cost/benefit tradeoff changed for you? What’s your sense of how long you’ll need to keep going?

I would not say at this point that, in any respect, the costs, which are largely longer-term and speculative, outweigh the benefits of maintaining a highly accommodative climate that is being contributed to by both large-scale asset purchases and our interest rate policy. Having said that, I think policymakers have to be aware that in a policy such as quantitative easing or large-scale asset purchases, continuing to build up the challenge of reversal of that policy, or the challenge of normalization, has to be on your mind. I don’t think we’ve gotten to the point where the costs outweigh the benefits. I’m a believer, although of course it’s very hard to isolate cause and effect in the real world, that our policy has benefited the economy and that the improving situation that we are now seeing is at least in part a result of monetary policy.

Still not thinking the very thinkable on Britain’s future

Mark these words. Not only is Britain going to avoid a triple-dip recession, but the economy won’t shrink again as far as the eye can see.

If that sounds ridiculously optimistic, don’t tell the more than 30 economists polled by Reuters last week, none of whom predict even a single quarter of economic decline from here on.

Even the Bank of England, not exactly famous these days for its accuracy in economic forecasting, has said for a long time that a quarter or two of contraction here and there is to be expected. That was underlined by Wednesday’s unexpected news some policymakers voted for more bond purchases this month.

Show and tell: Fed’s balance sheet not as big as you thought

Size matters, and Federal Reserve’s balance sheet is not as big as shrill critics of QE3 would lead you to believe.

True, $3 trillion is serious money. It represents a tripling in the size of the Fed’s balance sheet since 2008, before the U.S. central bank unleashed the first round of its aggressive campaign of so-called quantitative easing. It is now on round three, and has committed to keep buying bonds until it spies a substantial improvement in the outlook for the labor market.

But as a percentage of GDP (gross domestic product), the Fed’s balance sheet is still smaller  than those of the Bank of Japan, European Central Bank, and Bank of England, notching under 20 percent of GDP compared with over 30 percent of GDP for both the BOJ and ECB.

QE3 debate kicks into high gear: Get ready for an assembly line of Fed speeches

Is it full steam ahead for the Fed’s QE3 or is the U.S. central bank having second thoughts? Next week’s veritable assembly line of speeches from Fed officials could help answer that question. Vice Chair and possible Bernanke successor Janet Yellen kicks off the week with remarks to an AFL-CIO conference. She is followed by numerous regional Fed presidents, the bulk of them with hawkish tendencies: Esther George, Jeffrey Lacker, Charles Plosser and Dennis Lockhart on Tuesday, St. Louis’ James Bullard on Wednesday and Thursday, and finally, Cleveland Fed President Sandra Pianalto Friday. Oh, and the Fed’s regulatory point person, board governor Daniel Tarullo, testifies before the Senate Banking Committee on Thursday. The topic is a now-perennial one: “Wall Street Reform.”

 

Fading productivity could hurt U.S. job growth

RBC economist Tom Porcelli is such a curmudgeon these days. Still, given that he was one of the few economists that accurately predicted the possibility of a negative reading on fourth quarter GDP, maybe it’s not a bad idea to listen to what he has to say.

This week, he expressed concern about a rapid decline in U.S. productivity – and that was before data showing U.S. nonfarm productivity fell in the fourth quarter by the most in nearly two years.

Productivity declined at a 2 percent annual rate, the sharpest drop since the first quarter of 2011 and a larger fall than the 1.3 percent forecast in a Reuters poll.

Brazil: Something’s got to give

How about living in a fast-growing economy with tame inflation, record-low interest rates, stable exchange rate and shrinking public debt. Sounds like paradise, doesn’t it? But Brazil may be starting to realize that this is also impossible.

Inflation hit the highest monthly reading in nearly eight years in January, rising 0.86 percent from December. It also came close to the top-end of the official target, accelerating to a rise of 6.15 percent in the 12 months through January.

That conflicts with key pillars of Brazil’s want-it-all economic policy. The central bank cut interest rates ten straight times through October 2012 to a record-low of 7.25 percent, saying Brazil no longer needed one of the world’s highest borrowing costs. The government also forced a currency depreciation of around 20 percent last year, aiming at boosting exports and stopping a flurry of cheap imports.

New drama casts American Dream in a cold light

The American Dream distorted almost beyond recognition by mass foreclosures, women working on straight commission, men not working at all, and an alleged “higher power” who wants you to be rich beyond your wildest dreams, is the subject of the Women’s Project Theater’s production of “Bethany,” a new play by the young playwright Laura Marks.

The central character, Crystal, (played by America Ferrera, star of the “Ugly Betty” television series) is trying to regain custody of her daughter, Bethany, who has been placed in foster care because foreclosure has left her mother homeless.

Crystal is a victim of the American Dream, portrayed in this work as little more than an elaborate con game where honest, frantic people run like rats on a wheel – with firmer, secure ground hopelessly out of reach.