It may not get as much attention as the monthly employment report or GDP figures, but the U.S. Federal Reserve Bank of Chicago’s gauge of the national economy has a good track record of distinguishing economic expansions from recessions. And it’s suggesting that the U.S. recovery may be wobbling.

Over at the econbrowser blog, economist James Hamilton points us to a recent research paper that examines how accurate the various economic indicators are at telling us when the economy is growing or contracting. The Chicago Fed’s national index was one of the best. And Monday’s report shows it faded in October.

Not only that, but its three-month moving average fell to -0.91 in October from -0.67 in September, declining for the first time in 2009. That drop was especially significant because the Chicago Fed says a move below -0.70 in the three-month moving average following a period of economic expansion indicates an increasing likelihood that a recession has begun.

Of course, the people who are tasked with determining when recessions begin and end haven’t called the latest one over yet. So is this report showing a speed bump on the way to a recovery or something more ominous?  

You know the American dollar is in trouble when… 
There is plenty of discussion about the fate of the U.S. greenback these days, what with multi-trillion dollar rescues still flowing through the financial system. But dollar bulls might feel just a little trepidation to see Jay Johnson, former head of the U.S. mint — the folks that print the stuff — become a spokesperson for gold. Johnson actually passed away last month, but he can still be seen on TV infomercials, singing gold’s praises.  

Gold this week rallied to a new record high above $1100 an ounce, even as the dollar sank to a 15-month low against a basket of major currencies. 

Dallas Fed President Richard Fisher said this week he was mindful of the possibility that the central bank’s pledge to keep interest rates at rock-bottom lows for an “extended period” might be fueling the carry trade. That’s when investors use a “cheap” low-yielding currency to fund trades on riskier assets with loftier returns.

He added that the dollar’s decline had not been disorderly so far, but that he would expect the FOMC (the Fed’s policy-setting committee) and other authorities to craft an appropriate remedy if that were to happen.

Inflation may not be at the forefront of worries about economy for now, but it’s certainly in the back of many investors’ minds. Not that anyone thinks price increases will be reinforced by the labor market, as per the old “wage-push” theory. A new report from the International Labor Organization showed that wage growth continued to decline around the world in 2008, falling to 1.4 percent last year from 4.3 percent in 2007. The UN group also suggested things have gotten worse this year.

The picture on wages is likely to get worse in 2009 – despite the beginning of a possible economic recovery.   Compared to the annual average of 2008, the real wages in the first quarter of 2009 fell in more than half of the 35 countries for which recent data is available.   The downward trend in wages raises some questions about the extent to which the consumption of workers and their families will be able to sustain aggregate demand for economic production once the effects of government rescue packages peter out.

This trend has not, however, succeeded in calming those spooked by unprecedented monetary and fiscal stimulus from governments and central banks around the world. Indeed, inflation-hedging is creating market niches all of its own. The Treasury, for instance, is expected to bring back 30-year Treasury Inflation Protected Securities, or TIPS, as part of its quarterly refunding announcement on Wednesday. Gorge Goncalves at Cantor Fitzgerald notes:

The Treasury could expand its TIPS offerings and or bring back the 30-Year TIPS to help finance the federal debt needs.  In the latest dealer questionnaire the Treasury asked about potential changes to the TIPS program including the replacement of the 20-year TIPS with a new 30-year TIPS security. 

Bond giant PIMCO, in the meantime, has introduced its own new anti-inflation fund, which it says is composed of a mix of TIPS and municipal bonds. John Cummings, who will manage the fund, offers some insight into the reasoning behind its creation.

With growing U.S. deficit projections and continued economic uncertainty, investors are facing the potential for higher taxes, elevated financial risks and the need to protect the purchasing power of their investments against inflation over time. 

BofA Merrill Lynch Global Research economist Ethan Harris thinks all the talk of a Federal Reserve rate hike is just that — talk. Harris, a former Federal Reserve Bank of New York economist, said much of the recent hawkish commentary has come from presidents of the regional Fed banks, and that may not be indicative of the thinking on the Fed’s board.

“The signals don’t  come from Reserve Bank Presidents or advisers,” Harris wrote in a note to clients. “They come from either the overall committee — in the form of the official statements — or from the core of the committee — that means (Chairman Ben) Bernanke, (Vice Chairman Donald) Kohn, and to a lesser extend, New York President (William) Dudley.”

The Fed starts its two-day policy-setting meeting on Tuesday, and Harris is certainly not alone in thinking they’ll stay the course, keeping benchmark interest rates near zero. In fact, BofA Merrill thinks it will be the European Central Bank that hikes before the Fed.

“The bottom line is that faced with roughly the same economic backdrop — very low core inflation, moderate headline inflation and a large but slowly closing output gap — we expect the ECB to be more hawkish than the Fed,” they wrote. “We expect a replay of the summer of 2008, when the ECB hiked in response to high headline inflation, but Bernanke held back the Fed for fear of fragile financial conditions. Of course, thankfully, a replay of the fall of 2008 is unlikely.”

U.S. Representative Barney Frank forgot one minor little detail in Thursday’s hearing on overhauling the financial regulatory system — the witness, Federal Reserve Chairman Ben Bernanke.

After Frank and other members of Congress delivered opening statements, Frank launched into a spirited rebuttal of one member’s comments, but was soon interrupted by the committee’s top-ranking Republican, Spencer Bachus.

Bachus: Mr. Chairman, uh, your time has expired. Now if you want to give an additional….

Frank: Excuse me, I’m in my five questions, I’m in my five minutes.

Bachus: How about the opening statement of Chairman Bernanke?

Frank: Oh, I forgot about that. I apologize.

After Bernanke read his statement, Frank offered another apology — and docked himself 30 seconds of speaking time.

Congratulations, Ben Bernanke. It looks like a second term as Federal Reserve chairman is in your future. But considering the tasks before him, is this a blessing or a curse?

Greg Mankiw, the Harvard University economics professor and former adviser to President George W. Bush, summed it up nicely on his blog:

“I extend my congratulations to the President for a fine decision and my condolences to Ben for having the spend the next four years overworked and underpaid.”

So what do you think? Best job in the world? Or worst?

Two days after arriving in Martha's Vineyard, President Barack Obama is taking a break from his vacation to make some news: he will announce that he is nominating Ben Bernanke to a second term as chairman of the Federal Reserve.

Investors have given Bernanke, whose current term expires on Jan. 31, 2010, high marks and had widely expected his reappointment.

But the announcement is being made earlier than expected and comes not just during Obama's family vacation but also on the day that the White House Office of Management and Budget and the non-partisan Congressional Budget Office both release their midyear budget updates.

The reports are expected to show the government will spend a record $1.6 trillion more than it collects this year and nearly double its outstanding debt over the next 10 years.

The grim fiscal picture could provide fodder for opponents of Obama's costly plan to overhaul the healthcare system.

So why is Obama interrupting his vacation to announce Bernanke's renomination? Does he hope to inject a sense of continuity and stability by erasing doubt over who might lead the Fed?

For more Reuters political news, click here.

Photo credit: REUTERS/Jason Reed (Obama and friend Eric Whitaker wave as they golf on Martha's Vineyard)

Professor Charles Goodhart of the London School of Economics explains the difference between inflation targeting and price level targeting in the lobby of Jackson Lake Lodge after taking part in an animated discussion of whether central banks should target price levels rather than inflation.

A paper University of California, Santa Cruz economist Carl Walsh presented at the Federal Reserve’s annual mountain retreat suggested that one lesson from the recent financial crisis is that central banks would benefit from the greater flexibility that price level targeting might give them.

A former Fed governor,  Frederic Mishkin, said that while in theory price level targeting may sound attractive, in actual practice it is more difficult to use effectively. One difficulty he cited was in explaining to consumers how it works. 

 Juergen Stark of the inflation-targeting European Central Bank, said that inflation targeting was working well for the ECB, and that changing tactics in a crisis would be inappropriate.

 Bernanke’s tone may have been slightly more optimistic today — but the first thing policy-makers from around the world see as they enter the conference room for the Fed’s annual Jackson Hole symposium is a large stuffed bear.

Bernanke told the conference on Friday morning that the prospects for return to global growth appear “good” in the near-term — his clearest signal yet that he thinks the global recovery is at hand.

The ECB’s Trichet, on the other hand, expressed uneasiness at what he saw as premature talk of a return to normal from a financial crisis.

After two years of battling a financial crisis and a deep recession, Federal Reserve officials were able to poke fun at themselves at their annual retreat in Jackson Hole, Wyoming.

Many more people than there are places for want to attend the conference, which draws a number of central banking stars and takes place in a beautiful and remote national park. Kansas City Fed President Thomas Hoening, who hosts the event, said at the opening dinner on Thursday it’s been suggested to him that he open it to more participants.

“But then we’d be too big to feed,” he deadpanned. 

Fed Chairman Ben Bernanke promised at the event two years ago that the central bank would not protect investors from bad decisions, only to later throw emergency lifelines to firms whose collapse might cause widespread damage, making them “too big to fail.”

Bernanke, who has taken heat for underestimating the contagion that defaulting subprime mortgages would cause, picked up the theme.

He was glad, he told the dinner audience, that an evening of star-gazing led by local astronomers is on the schedule after a day of papers and discussions on Friday.

“But,” he asked Hoenig with a plaintive shrug, “Couldn’t you have invited some astrologers? I mean, could it have hurt?”