MacroScope

Recalculating: Central bank roadmaps leave markets lost

Central banks in Europe have followed in the Federal Reserve’s footsteps by adopting “forward guidance” in a break with traditionBut, as in the Fed’s case, the increased transparency seems to have only made investors more confused.

The latest instance came as something of an embarrassment for Mark Carney, the Bank of England’s new superstar chief from Canada and a former Goldman Sachs banker. The BoE shifted away from past practice saying it planned to keep interest rates at a record low until unemployment falls to 7 percent or below, which it said could take three years.

Yet the forward guidance announcement went down with a whimper. Indeed, investors brought forward expectations for when rates would rise – the opposite of what the central bank was hoping for – although the move faded later in the day.

According to a money market trader:

The focus on… unemployment level in the UK at 7 percent, something which we have never really looked at before, has given us the possibility of just more volatility going forward. So rather than having a calming effect, the forward guidance from the UK and (BoE governor Mark) Carney has actually had the reverse effect, it’s created some uncertainty and volatility…

It’s just that the target set on the unemployment rate is quite close to where we currently are… had he set a slightly lower target then the market probably would have been a bit more comfortable with some forward guidance in that respect.

Obama’s second chance to reshape the Fed

Lost in the bizarre Yellen vs. Summers tug-of-war into which the debate over the next Federal Reserve Chairman has devolved, is the notion that President Barack Obama is getting a second shot at revamping the U.S. central bank.

The perk of a two-term president, Obama will get to appoint another three, potentially four officials to the Fed’s influential seven-member board of governors in Washington. This may buy the president some political wiggle room when it comes to his pick for Fed chair, since he might be able to placate Republicans with one or two “concession” appointments. Every Fed governor gets a permanent voting seat on the policy-setting Federal Open Market Committee.

Elizabeth Duke, the last George W. Bush appointee, is already on her way out. So is Sarah Bloom Raskin, who after a relatively short stint at the board is moving to the Treasury, to be Jack Lew’s Deputy Secretary. Then there’s the awkward suspicion that, if Obama passes up Fed Vice Chair Janet Yellen, by far the favorite for the top spot, she will also step down after a long career in the Federal Reserve system, including many years as head of the San Francisco Fed.

Forward!

The Bank of England will give the government its blueprint for “forward guidance” when it publishes its quarterly inflation report, a big moment in British policymaking.

Canadian Mark Carney, in his second month at the helm, was heralded in advance as the man to kick start a languishing economy but with green shoots sprouting all over the place that may not be needed. Nonetheless, if companies and households can be convinced interest rates will stay at record lows for a prolonged period, that could boost investment and spending and help solidify a recovery that now looks to be in train.

After the U.S. Federal Reserve indicated that it may soon start to phase out its bond purchases – two of its policymakers again pointed to September yesterday – the Bank of England made a first stab at forward guidance last month, saying a rise in UK market rates was misguided. Now it will be more precise.

St. Louis blues: Fed’s Bullard gets a sentence

Ellen Freilich contributed to this post

Talk about getting a word in edgewise. St. Louis Federal Reserve Bank President James Bullard got almost a full sentence in the central bank’s prized policy statement.

Some background: Bullard dissented at the Fed’s June meeting, arguing that, “to maintain credibility, the Committee must defend its inflation target when inflation is below target as well as when it is above target.” The latest inflation figures show the Fed’s preferred measure at 0.8 percent, less than half the central bank’s target.

Fast-forward to yesterday’s policy statement, which included the following new language:

U.S. GDP revisions, inflation slippage tighten Fed’s policy bind

Richard Leong contributed to this post

John Kenneth Galbraith apparently joked that economic forecasting was invented to make astrology look respectable. You were warned here first that it would be especially so in the case of the first snapshot (advanced reading) of U.S. second quarter gross domestic product from the U.S. Bureau of Economic Analysis.

Benchmark revisions to U.S. gross domestic product made for a bit of a mayhem for forecasters, who were way off the mark in predicting just 1 percent annualized growth when in fact the rate came it at 1.7 percent. Morgan Stanley had predicted a gain of just 0.2 percent.

Hours after the GDP release, Federal Reserve officials sent a more dovish signal than markets had expected, offering no hint that a reduction in the size of its bond-buying stimulus might be imminent. In particular, they flagged the risk to the recovery from higher mortgage rates as well as the potential for low inflation to pose deflationary risks.

Event risk

If you’re hankering after “event risk”, look no further. Europe can offer top central bank meetings, front line economic data, a debt auction and more political risk than you can shake a stick at today.

This could be almost a perfect storm of a day after the Federal Reserve said its bond-buying would continue unabated for now and gave no new firm steer as to when it might begin rowing back, although its choice of adjective to describe the pace of growth – modest rather than the previous moderate – could be a hint that it is in less hurry to taper.

Now, it’s the European Central Bank’s turn. Given its forecast for recovery in the second half of the year has some evidence behind it, an interest rate cut is unlikely. Instead, for the second month running, Mario Draghi may have to focus primarily on the backwash from the Fed.

Uncertain about the effects of uncertainty on jobs

Job number one at the Federal Reserve these days is to bring down high U.S. unemployment without sparking inflation. Job number two, it sometimes seems, is explaining just how unemployment got so high in the first place.

Two recent papers published by the San Francisco Fed offer what look like opposite takes on the topic.

“(S)tates in which businesses cited poor sales also registered disproportionately sharp drops in jobs and household spending,” wrote Princeton University professor Atif Mian and University of Chicago Booth School of Business professor Amir Sufi in a February Economic Letter.

Fed on guard over low U.S. savings rate

As Federal Reserve Chairman Ben Bernanke delivered what may have been his last testimony on monetary policy before Congress, most of the world’s attention was focused on what hints he might give about the timing of an eventual reduction in the pace of asset purchases.

Tucked in the actual semi-annual monetary policy report Bernanke delivered to lawmakers on Capitol Hill was a little-noticed reference to growing worries about the potential for an extended period of low savings, associated in part with long-stagnant wages, to thwart long-run economic progress.

Total U.S. net national saving – that is, the saving of U.S. households, businesses, and governments, net of depreciation charges – remains extremely low by historical standards.

U.S. housing outlook still promising despite rise in rates: Citigroup economist

U.S. housing sector fundamentals remain favorable despite the recent rise in interest rates and the sharp drop in housing starts in June, says Citigroup economist Peter D’Antonio.

Housing starts fell 9.9 percent to a ten-month low of 836,000 units in June.

But the decline was almost all in the volatile multi-family sector, D’Antonio notes. Single-family starts remained in a range just below 600,000, while multi-family fell 26 percent to 245,000.

Multi-family starts have been an important growth sector in housing in the past year, but month-to-month changes in multi-family starts – noted for their volatility – are meaningless. Multi-family housing starts rose 21 percent in March, fell 32 percent in April, rose 28 percent in May, then fell 26 percent in June.

Curse of the front-runner a bad omen for Fed contender Yellen?

The buzz on who will replace Ben Bernanke as Federal Reserve chairman has grown this year and amplified recently with talk of Lawrence Summers as a real possibility. There is also lingering speculation over Timothy Geithner, another previous U.S. Treasury Secretary, and former Fed Vice Chair Roger Ferguson among others as possible successors. Bernanke has provided no hint he wants to stay for a third term.

But above the din the central bank’s current vice chair, Janet Yellen, has remained the front-runner. Her deep experience and implicit policy continuity has crowned her the heir apparent until proven otherwise. A Reuters poll of economists showed Yellen was seen as far and away the most likely candidate.

Yet this is a familiar plot that has played out in other Western countries over the past year – with a shock climactic twist. New Zealand, Britain and Canada have all pulled the rug out from under the presumed front-runner and named a surprise new head of their respective central banks. And perhaps most worryingly for Yellen, in each case the overlooked candidate was the bank’s No. 2 official.