MacroScope

All four Federal Reserve policymakers who dissented on U.S. central bank policy this year will lose their votes next year. That could make the New Year full of love, but not necessary free from dissent, Dallas Fed President Richard Fisher joked on Friday.

Fisher, like Minneapolis Fed President Narayana Kocherlakota and Philadelphia Fed President Charles Plosser, lobbied and lost against Fed easing earlier this year; all three dissented twice. Chicago Fed President Charles Evans dissented twice from the other side of the aisle, arguing for further easing at the most recent two meetings against the majority’s decision to stand pat.

None will have votes next year. Not, of course, because they voiced their opposition to the majority, but simply because votes rotate among regional Fed presidents according to a set schedule, and it just so happened that all four regional Fed presidents with votes this year used those votes to dissent.

“We still love each other — in fact we’ll love each other more because we are not going to be voters next year – we’ll have to hug each other and have solidarity,” Fisher told reporters after a speech in Austin on Friday. But Fisher for his part vowed that even without a vote he will “not be quiet,” and said that whether colleagues will cast dissents will depend on what proposals are put on the table.

Fisher also suggested that he may balk at new efforts – now under consideration at the Fed – to boost transparency at the nearly 100-year-old central bank.

Banks took more than $50 billion from the European Central Bank on Wednesday in the first offering since it, the Federal Reserve and other major central banks slashed the cost of borrowing dollars in response to a worsening euro zone crisis. The high volume of emergency borrowing was seen as a sign that some of the region’s banks are having  problems obtaining dollar funding.

This means that, as our friend Mike Derby aptly predicted, the Fed’s balance sheet, currently around $2.8 trillion, will show a big increase when its weekly custody holdings figures are released on Thursday.

If one believes, as the Fed does, that the extent of unconventional monetary stimulus depends on the stock of assets the central bank holds rather than the “flow” of its interventions in Treasury and mortgage bond markets, then this amounts to a defacto monetary easing – about 1/12 of the Fed’s $600 billion QE2 bond-buying program.

The U.S. home price drop is adding a further drag on local budgets by shrinking the property tax base, according to a new study from the Federal Reserve Bank of Cleveland.

That sets the current episode apart from other recessions, where rapid housing rebounds alleviated some of the budget pressures naturally associated with periods of contraction. The report’s authors, economists Thomas Fitzpatrick and Mary Zenker, explain:

During and after earlier recessions, home prices remained flat or increased. Stable home prices provide stable tax revenue, which is used to fund many critical city services, such as the local police force, fire department, public education, and infrastructure projects. The fall in property values that began in the recent recession — and that continues in many markets today — may be amplifying the budget crises across the country because of the decline in property taxes it is causing.

Surging Republican presidential candidate Newt Gingrich told TheStreet in an interview on Tuesday he would commit the Federal Reserve to ensuring that the dollar would not lose value.

I would return having the Fed having an obligation to have hard money, meaning if you save a dollar this year, it should be worth a dollar 20 years from now.

Since the value of the dollar depends on many variables and is relative to other currencies around the world, it would be interesting to learn how he thinks the Fed would accomplish that.

Since the 2008 failures of Bear Stearns, Lehman Brothers and American Insurance Group, the U.S. Federal Reserve has reached deep into unconventional territory for ways to coax the economy out of its deepest slide since the Great Depression, slashing interest rates to a shade above nothing and buying trillions of dollars of long-term securities.

Now it appears the U.S. central bank is diving for new ideas in its own dumpster – or recycling bin, as the case may be. As Fed officials vet a range of communications options that could provide more certainty to markets about the Fed’s policy intentions, they are warming to the idea of providing forecasts for short-term interest rates.

Doing so, some central bankers believe, would give markets a clearer idea of the Fed’s intentions, and could head off a recovery-choking jump in rates if investors start betting on tighter monetary policy before the Fed believes such tightening is warranted.

Should central bankers be more like Miles Davis — experimental, improvisational, and out in front — or a Dixieland band — traditional, predictable, and in the background?

That question was the theme of a discussion at the Council on Foreign Relations in New York yesterday morning that featured Arminio Fraga, a former governor of the Central Bank of Brazil; Kevin Warsh, a former governor of the Federal Reserve Board; and Adam Posen, an American economist who currently sits on Bank of England’s Monetary Policy Committee (and who coined the Davis/Dixieland dichotomy). Within the panel, which was entitled “Central Banking in an Age of Improvisation,” there was discord about how activist monetary policy should be when interest rates are already at the zero bound and when the economy was not undergoing a financial crisis.

For Posen, the big fear is that in fifty years the current period will be remembered as a “major deflationary mistake.” In a series of op-eds and speeches this year, Posen has consistently called for more stimulative monetary policy, urging central banks to undertake unconventional maneuvers like purchasing long-term government bonds or even backing new public institutions that would lend directly to small- and medium-sized enterprises or securitize illiquid SME loans. He is not wide-eyed enough to believe that further easing will be a panacea, but does maintain that “irresponsible monetary tightening will make your problems insoluble.”

The St. Louis Fed had a public forum this week to talk about their research into the ailing U.S. jobs market. Not a feel-good scenario.

The bottom line was something the regional Fed bank’s research director Christopher Waller told Reuters in a recent interview: the last three recessions have brought jobless recoveries and this one is no exception. No one can clearly explain why, except that employers are less likely to hire back workers they’ve fired than in the past, and that with so much of the recent downturn due to the collapse of housing, it’s evident that unemployed construction workers can’t easily find new work in, say, nursing or IT.

At this week’s gathering, Waller and his staff fleshed out their research with a number of interesting take-aways. In no particular order:

Minutes of the Federal Reserve’s November meeting were notable for showing lengthy discussion — about the way the Fed could talk more clearly. The Fed took no action on either monetary policy or its communications strategy.

Call it the Fed’s sour spot. The recovery, while weak, is showing just enough sign of life to make the need for more monetary accommodation questionable. But by the Fed’s own admission, the job market won’t reach full employment until beyond 2014. In those circumstances, and with fiscal channels blocked, many will continue to look to Fed as the only possible source of stimulus.

Add to that clear signs of policy fatigue. Fed options are clearer communications or more bond buying. With mortgage rates already very low and house prices still falling, it’s clear monetary policy is struggling to translate into stronger growth. As Dallas Fed President Richard Fisher tells audiences after laying out grim scenarios: Have a nice day.

It may be hard to convince consumers with stagnant wages that their purchasing power is improving. But according to Labor Department, inflation is certainly on the decline. U.S. consumer prices fell unexpectedly in October, a drop that gives the Federal Reserve more room to consider additional monetary easing if the economy continues to stutter into next year.

Compared to a year earlier, consumer prices rose 3.5 percent following September’s 3.9 percent increase. Core prices rose 2.1 percent in the 12 months through October, up from 2.0 percent in September. But looked at over shorter horizons, the pullback in the rate of consumer price growth is even more pronounced.

Research from Credit Suisse economists puts it in perspective:

The 0.4 percentage point easing in the year-on-year headline inflation rate was the first (drop) all year and the biggest since June 2010. Short run trends were as follows: 2.4 percent 3-month annualized from 4.8 percent last month; 2.1 percent 6-month annualized from 3.1 percent last month.

The Federal Reserve, which on Wednesday sharply downgraded its outlook for U.S. economic growth and employment, appears to be seriously considering another round of monetary easing. In what would represent a policy U-turn, any third round of quantitative easing or QE3 appears increasingly likely to be heavily tilted toward purchases of mortgage-backed securities.

The idea was recently floated rather surprisingly by Fed Governor Daniel Tarullo, who normally focuses on regulatory issues. Some analysts had speculated Tarullo might not have broad support, but Fed Chairman Ben Bernanke’s comments on the matter during his post-meeting press conference on Wednesday suggested otherwise:

The housing sector is a very important sector. Problems in that sector are a big reason why our economy’s not recovering more quickly. I do think that purchases of mortgage-backed securities is a viable option. Certainly, something we would consider if the condition were appropriate. So the answer is yes, we will certainly look into that.