MacroScope

Bernanke: The quickest way to raise rates is to keep them low

That’s not a typo in the headline. In a recent speech that took some mental gymnastics to absorb, Federal Reserve Chairman Bernanke countered critics of his low rates policy by arguing that a loose monetary policy is the best way to ensure rates can rise to more normal levels.

Why? Because interest rates will naturally move higher once stronger economic growth leads to higher rates of return on investment, Bernanke said. Here’s his argument:

One might argue that the right response to these risks is to tighten monetary policy, raising long-term interest rates with the aim of forestalling any undesirable buildup of risk. I hope my discussion this evening has convinced you that, at least in economic circumstances of the sort that prevail today, such an approach could be quite costly and might well be counterproductive from the standpoint of promoting financial stability. Long-term interest rates in the major industrial countries are low for good reason: Inflation is low and stable and, given expectations of weak growth, expected real short rates are low. Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading–ironically enough–to an even longer period of low long-term rates. Only a strong economy can deliver persistently high real returns to savers and investors, and the economies of the major industrial countries are still in the recovery phase.

Hey brother, can you spare a coupon?

Remember those green shoots? Ever since Fed Chairman Ben Bernanke uttered those words in response to the first signs of recovery from the Great Recession in 2009, many forecasters – including Fed officials – have consistently overestimated the economy’s strength.

Some economists believe 2013 could finally be a break-out year. With the fiscal cliff now in the rear-view mirror and the euro zone crisis apparently stabilized, some see the prospect that growth could actually exceed expectations for the first time in a long while.

Dennis Lockhart, president of the Atlanta Fed, said this week he sees a chance the economy might actually surpass his 2013 growth forecast range of 2-2.5 percent.

Bernanke’s Senate tone not that of Fed Chairman seeking third term

Federal Reserve Chairman Ben Bernanke may be keeping quiet about his future plans, but he sure doesn’t sound like someone planning to seek Senate support for a third term at the helm of the U.S. central bank.

In unapologetic and sometimes testy exchanges before the Senate Banking Committee on Tuesday, the Fed chief defended his record and dismissed one Senate critic in unusually blunt terms.

“None of the things you said are accurate,” Bernanke told Bob Corker, a Republican senator from Tennessee, who accused the Fed of deliberately starting a global currency war and of printing money to bail out big Wall Street banks.

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.”

A Stein in Bernanke’s shoe: Is there a bubble in corporate bonds?

Financial markets are again on edge about the direction of Fed policy following the surprisingly hawkish minutes of the January meeting released last week, even if most still expect the central bank to keep buying bonds at the current $85 billion monthly pace at least until the end of the year.

Federal Reserve Board Governor Jeremy Stein, an academic economist who joined the central bank last May, surprised Fed-watchers in his latest speech by focusing entirely on the risks of recent monetary stimulus and saying very little about its benefits. In particular, Stein, a corporate finance expert, raised the possibility that a bubble might be forming in the corporate bond markets, which has seen yields fall to record lows and issuance to record highs.

While the speech was riddled with caveats, Wall Street took it as an unusually stern warning about the potential side effects of quantitative easing from Fed’s inner-sanctum, the influential, presidentially-appointed Board of Governors in Washington. Stein argued:

As U.S. debates immigration, Fed’s Fisher tells his dad’s story

When Dallas Federal Reserve Bank President Richard Fisher and inveterate QE3 critic spoke Thursday evening at a black tie insurance industry event in booming Dallas, he left monetary policy out completely. As he often does with a speech directed at fellow Texans, he bragged on the Lone Star State, its job-generating prowess and its resilience since the Great Recession.

And then, in a tale he rarely tells publicly but that has particular resonance amid the rancorous national debate on immigration, he talked of another spectacular success: his dad. “This man is why, despite the current slow economic recovery we are experiencing outside of Texas, despite the fiscal tomfoolery of our national politicians, both Democrats and Republicans, despite the negativism and bad news that pervades the headlines, I have great faith in this country,” he said.

At age five, Fisher’s father was convicted of being a “neglected child” in Queensland, Australia, having been found sleeping under bridges and in doorways with his drunken father. He was sent to a reformatory, then to an orphanage, then to a series of foster families, one of which tied him up in the yard at night by the ankle and woke him “ in the predawn hours to deliver milk by horse drawn carriage.” His teeth rotted. He went to South Africa, drove buses, married, and sailed to the United States, “only to discover that his record and lack of documentation made him inadmissible.”

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.

The fallacy of Fed ‘profits’ (and ‘losses’)

Richard Fisher, the Dallas Fed’s colorfully hawkish president, enjoys touting the remittances that the central bank makes yearly to Treasury, earned, circularly enough, mostly on the returns of the Treasury bonds the Fed holds. Here’s Fisher in September 2010:

All the emergency liquidity facilities that the Federal Reserve instituted were closed down and did not cost the taxpayers of this great country a single dime. Indeed, last year, as we finished up this work, the Federal Reserve paid $47.4 billion in profits to the Treasury. Imagine that! A government agency that (a) created programs that actually worked as promised, (b) made money for the taxpayers in the process and (c) undid the programs – all in the space of about 28 months – once they had done their job.

The amount has only grown since then, as the Fed expanded its asset purchases in an effort to support a subpar economic recovery, totaling a record $88.9 billion for 2012.

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.

Don’t fear inflation boogeyman: BofA’s Harris

Worries about potential side-effects of unconventional monetary policy on financial markets are at least exaggerated, if not a near figment of the imagination.

This appears to be the conclusion of a comprehensively-argued research note by Bank of America Merrill Lynch global economist Ethan Harris.

The risk investors need to focus on is disinflation, not inflation; yet, remarkably, over the last several years critics of the Federal Reserve’s quantitative easing have “hijacked” the inflation debate, Harris says.