Inflation no obstacle to more Fed easing
Another reason the Federal Reserve may have additional room for monetary easing: Inflation expectations fell sharply in May, according to the latest Thomson Reuters/University of Michigan survey of consumer sentiment. Inflation expectations five years out dropped to 2.7 percent in May, the lowest since January. Fed officials often say expectations are a key leading indicator of actual price increases.
Daniel Silver, economist at JP Morgan:
This level of longer-term inflation expectations is towards the bottom of the range that has been reported in recent years – 2.7% has been hit on several occasions (most recently between October 2011 and January 2012) and 2.6% was only reached back in December 2008 and March 2009, early on in the crisis period. Most other inflation measures that the Fed watches (including core PCE inflation and the 5yr-5yr breakeven inflation rate) have signaled that inflation expectations are still anchored and underlying inflation pressure is modest.
The downshift comes in the wake of inflation figures for April that also pointed to a tame price environment. This is why Eric Green at TD Securities argues “U.S. inflation favors the doves.”:
In many ways the release today is emblematic of what we expect to see on the inflation front over the next six months. That is, steady disinflation on headline prices (driven by roll over and seasonal effects from energy prices) and stable core prices. Headline inflation will fall through core next month as energy prices alone virtually ensure a gain of no more than 0.1%, probably less. As headline inflation drifts to 2.0% y/y next month (from 2.3% y/y April) and 1.8% y/y by August, the inflation metric will work in favor of the more dovish contingent on the FOMC.
Still, deflation fears, a key underpinning of the Fed’s second round of quantitative easing, are not likely to make a comback, says Green:
That does not mean we are in a period of disinflation akin to the pre-QE2 period. Inflation will not be the cause célèbre of more accommodation, it will merely be removed as a potential obstacle among those favoring stronger growth, and truth be told, higher inflation.
Manifest currency? U.S. dollar’s global dominance not set in stone
Incumbency, it is often said, confers many advantages.
Sitting U.S. presidents certainly have reaped its benefits – in the past 80 years, only three have been unseated.
Most economists believe the same benefits apply to reserve currencies. Yes, the U.S. dollar may one day be supplanted as the leading international currency, the thinking goes, but that day is many decades away.
Then again, maybe not.
A new working paper from the National Bureau of Economic Research that looks more closely at the dollar’s own rise to the top in the 20th century suggests, among other things, that “the advantages of incumbency are not all they are cracked up to be.”
By looking at the currency denomination of foreign public debt issued by 33 countries from 1914 to 1946, the authors – University of California-Berkeley professor Barry Eichengreen and Livia Chitu and Arnaud Mehl of the European Central Bank – find that dollar-denominated bonds were nearly equal to those priced in sterling by the late 1920s. That’s about two decades earlier than the date assumed by previous scholars.
When stripping out Commonwealth countries that had strong commercial and political links with Britain, the dollar overtook sterling in 1929.
It seems unlikely any other nation of the world would want to have it’s currency and people abused as much as the dollar is, in our current status as reserve currency. Name one country that could withstand that kind of abuse, and survive, or benefit? None.
Asian Americans hit hardest by long-term unemployment
Asian Americans have the highest rate of long-term joblessness of any ethnicity in the United States, according to a report from the Economic Policy Institute, a liberal think tank in Washington.
Last year marked the second year in a row that Asian Americans had the largest share of unemployed workers who were unemployed long term (i.e., for six months or more). In 2011, 50.1 percent of the Asian American unemployed were unemployed long term, up from 48.7 percent in 2010. In both of these years, the Asian American share slightly exceeded the African American share.
Federal Reserve Chairman Ben Bernanke and other central bank officials have argued long-term unemployment is an enormous challenge, but have been reluctant to apply additional monetary stimulus to the problem. In March, Bernanke said:
Although most spells of unemployment are disruptive or costly, the persistently high rate of long-term unemployment we have seen over the past three years or so is especially concerning.
In QE3 waltz, Fed again steps toward easing
On again, off again. That’s been the story with prospects for another round of monetary stimulus from the Federal Reserve. Expectations for a third installment of quantitative easing, the much-debated QE3, had ebbed with improving economic data in the first quarter – but are now flowing anew.
Following a weak employment report for last month, the latest hint that more bond buys could be in the offing came from minutes of the central bank’s April meeting, which saw the Fed leave rates near zero and repeat that it would likely hold them there until at least late 2014. Policymakers appeared to be taking an increasingly dim view of economic prospects given an array of looming threats to growth, even if none are particularly new.
According to the minutes:
Participants identified several downside risks to the projected pace of economic expansion, including the fiscal and financial strains in the euro area and the possibility of an abrupt fiscal consolidation in the United States.
To Millan Mulraine at TD Securities, the more negative tone suggested a modestly greater inclination to lean in the direction of easing. In particular, Mulraine singles out this sentence in the minutes:
Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.
Writes Mulraine:
Last week, the Brits reached the same conclusion I did a year ago: that we’ve reached the point of diminishing returns with QE. The pain from QE-motivated inflation is as damaging as the benefit from stocks rising (wealth effect?)
Hence: There should not be a QE3.
What happens when Operation Twist ends in June 2012? Will Ben launch QE3 during this year’s Jackson Hole conference? I sincerely hope not.
In this country, the central bank (The Federal Reserve) has a dual mandate (since 1978):
full employment
stable prices (read as low inflation)
That’s a short list. Conspicuously absent from that list is a mandate to:
-encourage speculation,
-drive the stock market higher,
-punish investors reliant upon income or that are otherwise unwilling to place a large portion of their life savings in the Vegas-like machine that is the US stock market,
- foment international unrest from a drop in value of the US dollar.
It is true that QE1 played a very significant role in stopping an economic collapse in 2009, and that it spurred another sugar-rush unsustainable stock market rally (is that what prosperity is?). But there was no free lunch. QE1 managed to reverse the deflationary forces taking hold of the economy, but it also significantly debased the value of the US dollar. This in turn meant the most significant export of the United States became inflation.
QE2 took over where QE1 left off:
-another risk-on unsustainable purely speculative stock market rally,
-high quality bonds lost value again (penalizing those that were defensive and conservative),
-interest rates rose on consumer loans and mortgages,
-food and fuel inflation spiked in the US and globally. In no small part, QE2 helped induce the “Arab Spring”.
Launching QE3 might provide yet another sugar-rush stock market rally (though probably smaller). But whatever the perceived gain might be, it would be counter-balanced by the detrimental effects of heightened food and fuel inflation, and higher interest rates courtesy of foreign buyers of US Treasury bonds balking at our printing press efforts. Surely the point of diminishing returns was reached with QE2.
Conventional monetary policy tools seem to have worked in rectifying previous recessions. A case could potentially be made to launch QE3 if it were obvious we were in a classic business cycle recession and that one more dose of monetary steroids might cure the ailment (not merely mask the symptoms). But it is clear we were not (2007-2009) and are not now in a business cycle recession. Rather, we have been and are in a much more challenging type of recession: a balance sheet recession. The best that can be hoped from monetary policy tools in a balance sheet recession is they act as an expensive snooze button. The systemic economic issues don’t go away. They merely wait to be addressed. But the cost of the most recent monetary policy tools (QE1 & QE2) are such that they’ve added to the systemic problem by increasing our public debt. It turns out you can’t solve a debt problem with more debt.
Let’s briefly look at what joint myopic monetary and fiscal policy intrusion has delivered over the past 12 years:
A recession in year 2000. 18 years of overspending and irresponsible myopic fiscal policy was beginning to take a toll. Arguably, we should have taken our medicine then. But no. Monetary and fiscal steroids were the prescription. The S&P500 lost 47% as demand collapsed. The Fed dropped short term rates to 1% in response. The US Congress & White House gave us unfunded tax cuts for a decade and introduced a massive new unfunded healthcare liability (medicare part D). The result was predictable: an artificial bubble in risk and leveraged assets (the stock market, the housing market). A colossal mis-allocation of resources and waste of several years. The problem was made larger and delayed for someone else to deal with (kick the can).
A recession recurred in 2008-2009 when the eventual housing and stock market bubble burst. The S&P500 lost 57%. This time it took 0% interest rates, QE1, QE2, $ Trillions in US bailouts and Keynesian fiscal policy stimulus (spending beyond our means), and a stream of sovereign bailouts in Europe that remains unresolved. The snooze button again.
Another US recession will likely begin in mid 2012 (June?). Early 2012 sees the S&P500 all the way back up to where it was 12 – 13 years ago. Worse, there is a very good chance stock markets will fall through the March 2009 lows. Why shouldn’t they ? Are the economic prospects that much better than they were 4 years ago?
There should not be a QE3 or any other monetary policy intrusion. Our three decade debt binge needs to be worked off. This position necessarily means the US and most world economies will head into the worst recession since the 1930s. But more monetary policy tricks will only add to the problem.
The last time we saw a balance sheet recession was the 1930s. We know what came next: WWII. Let us try to avoid the same mistakes. Ben, avoiding WWIII may not be part of the Fed’s mandate. But it should be.
Is U.S. economic patriotism hurting?
Any Americans believing that their country is being bought up by the Chinese might want to pay heed to a new report from the Vale Columbia Center on Sustainable International Investment. It says that China is a minimal player in terms of foreign direct investment in the United States and that Washington should in fact be doing a lot more to get it to gear up its buying.
To start with, look at the magic number. In 2010, the last year for which numbers are available, only 0.25 percent of FDI into the Untied States came from China. Switzerland, Britain, Japan, France, Germany, Luxembourg, the Netherlands, Canada were all far bigger. In the U.S. Department of Commerce’s report on the year, China, numbers were so small they were lumped into a category simply called ”others”.
This is not enough, the Vale Columbia report says. Given China’s burgeoning economic role across the globe, America can benefit from a lot:
First, FDI provides an influx of capital into the struggling economy, increasing employment at no cost to the taxpayer. Second, jobs in foreign affiliates are typically better remunerated than similar jobs in domestically owned companies. Third, keeping the US open to foreign investment demonstrates a global example for international openness. Finally, Chinese money refused by the U.S. could alternatively be directed to competitors or even the U.S.’s enemies.
(On the latter point, its worth reading our global economic correspondent Alan Wheatley’s story on China’s influence in Europe)
The Vale Columbia report acknowledges that Chinese FDI is controversial – primarily because a lot of Chinese companies are state-controlled and therefore raise fears that FDI may be more strategic that profit-seeking. There is also the concern about subsidies, piracy and economic espionage.
But the gains from opening the door to Chinese outweigh the risks, the report — entitled Economic Patriotism: Dealing with Chinese direct investment in the United States — says, recommending a series of steps such as dumping reciprocity clauses in FDI bilateral dealings.
“The US should corral as much of this investment as possible to revitalize the domestic economy and strengthen its image as an active supporter of an international investment openness.”
…or not.
China appears to fall into that grey area of desired market, yet geopolitical strategic opponent.
Just how close should we really be with them?
Jobs or inflation — Is the Fed distracted?
The Federal Reserve doesn’t get much love from Washington these days but it did receive a rare bit of political backing on Wednesday as Democrats defended its role in promoting full employment as well as stable prices.
The U.S. central bank has been the target of criticism from members of both political parties as a result of bank bailouts and hands-off rule-enforcement that let predatory and unsound lending practices go unchecked, among other shortfalls.
But discussing legislation narrowing the Fed’s mandate to a single-minded focus on price stability, Democrats questioned the need to drop the full employment side of the dual mandate.
“Is it a problem?” asked Minnesotan Keith Ellison. “To the degree that we have problems with monetary policy, is the dual mandate the cause?”
Ellison said that far from distracting the Fed, the lofty 8.1 percent unemployment rate should get greater attention. “This is a national disgrace,” he said.
Ron Paul, a presidential candidate who chairs a subcommittee on domestic monetary policy, held a hearing to discuss several pieces of legislation changing the Fed’s mandate. Two of these would limit the Fed’s focus to price stability.
With partisan divisions and other priorities, Congress is unlikely to make any changes to the Fed’s mandate this year. But the effort could gain momentum if Republicans control both houses of Congress after November.
The Feds don’t control credit unions, that’s why I moved my money. That and the fact that they actually pay you interest on your savings!
NYC Mayor Bloomberg: Highly-indebted U.S. could go the way of Europe
New York City Mayor Michael Bloomberg slammed the federal government for following the same fiscal path that has cost European governments so dearly, perhaps offering Democratic President Barack Obama and Republican challenger Mitt Romney hints about what policies he would like to see from them to win his endorsement as a moderate independent. Bloomberg’s seal of approval carries added weight because he is a billionaire businessman with close ties to Wall Street, a source of donations as well as a powerful force in the economy.
I think it is clear that we have a deficit problem that is going to hurt this country dramatically and unless we do something about it is a cloud on the horizon. It doesn’t mean America is going to go to zero… But I think if you take a look at Europe and other places and it shows you when you live above your means – It’s different than the city, the deficits we project are aspirational deficits, in the end we balance our budgets, the federal government does not.
The city by law must close any deficits. In contrast, the U.S. government can borrow to fund its operations – and at very low rates in recent years.
The mayor, now in his third and final term, was presenting an update to his $68.7 billion budget plan. One reason private employment in New York City has broken the 1969 record high is the city’s budget discipline, he said.
“We have to give people the clarity and confidence that we are going to face fiscal realities,” he said. The country’s failure to wrestle its deficit under control is curbing businesses from growing, he said. “Nationwide, there are some real questions in people’s minds and they are not willing to do that.”
New York City has regained about 180 percent of the private sector jobs lost during the Great Recession; the nation has only won back about 40 percent, he said. Private employment has climbed to 3.291 million, topping the decades-old high of 3.275 million. “We’re part of America; we want America to grow,” Bloomberg said.
Disappointing profits on Wall Street – the city’s economic motor – forced the mayor to slice his forecast for tax revenue by $352 million in the current budget and the new one that starts on July 1. The city is home to some of the world’s wealthiest individuals – including the billionaire mayor himself. Added Bloomberg:
Bloomberg doesn’t know we have a fiat currency. And the author of the article thinks we “borrow” money.
The U.S. productivity farce
Economists don’t agree on much but they do tend to converge on one idea – productivity improvements are the key to long-term prosperity. Except that who benefits from productivity increases matters as much as the efficiency gains themselves, according to two reports from the liberal Economic Policy Institute in Washington.
The first finds that rising income inequality in the United States means that the benefits of better productivity are accruing mainly to the very wealthy. The EPI offers this startling nugget of data as basic food for thought: U.S. productivity grew 80.4 percent from 1973 to 2011, while average hourly compensation rose just 39.2 percent in the same period, and median compensation, which excludes outliers, gained a paltry 10.7 percent.
Writes Lawrence Mishel, EPI president and author of the reports:
Productivity growth, which is the growth of the output of goods and services per hour worked, provides the basis for the growth of living standards. However, the experience of the vast majority of workers in recent decades has been that productivity growth actually provides only the potential for rising living standards: Recent history, especially since 2000, has shown that wages and compensation for the typical worker and income growth for the typical family have lagged tremendously behind the nation’s fast productivity growth.
John Tasini, a labor activist who made an unsuccessful bid for the U.S. Senate in 2006, puts the disparity in perspective by calculating what the minimum wage would be if its rise had kept up with productivity growth, as it did before the mid-1970s.
The minimum wage today, if it reflected productivity gains over the last 30 years, should be between $19-$20 an hour. Raising the minimum wage, then, to $8.50 an hour seems like a big deal – except when you understand that it hides the vast robbery that has taken place of the past 30 years and it certainly will not make it possible for people to live with dignity and respect.
As a grocery store cashier for Stop and Shop, I make a little over minimum wage. My salary is $8.30 an hour and for the amount of work that I do, I feel that I am underpaid. It is back braking work where you are on your feet for hours per shift. You are constantly asked to do more than your job requires. If you work a six hour shift, you ONLY get a 15 minute break. There have been times where I have worked over 7 hours and have ONLY gotten a 15 minute break. Our store does over a million in sales per week and I would love it if they were to up our salaries.
Mary MacElveen
Dancing on the edge of a (fiscal) cliff
With hundreds of billions worth of stimulus measures set to expire on Jan. 1, investors are all too aware that the United States is hurtling toward what economists are calling “a fiscal cliff.” It’s just that most seem to think Congress will execute one of its typical last-minute, hairpin turns to avoid plunging the economy over the edge.
As Russ Koesterich, global chief investment strategist at iShares told Reuters recently, “people are worried but they feel some sort of fix will get done.” Certainly the equity and bond markets back him up: the S&P 500 is up a healthy 12.7 percent this year while benchmark 10-year Treasury yields remain pinned beneath 2 percent.
Ethan Harris at Bank of America-Merrill Lynch isn’t so sure. After all, we’re talking about the same group of politicians who nearly forced the United States to default last year and earned it a credit downgrade from S&P in the process. This time, Republicans and Democrats will have just seven weeks to stitch up a deal, and they’ll have to do it while the wounds inflicted by a brutally negative a presidential election campaign are still fresh.
At stake are about $240 billion in income, capital gains, dividend and estate tax cuts – the Bush tax cuts – that are scheduled to expire on Jan. 1, along with Obama’s $90 billion payroll tax cut. Also set to start next year will be the first round of a 10-year diet of automatic spending cuts totaling $1.2 trillion. These were triggered when a Congressional committee failed last year to agree on a long-term deficit reduction plan.
Harris is warning clients to prepare for the worst:
Absent new legislation, fiscal policy will tighten by more than 4 percent of GDP. Even if just half of the threatened tightening occurs, it would be a major shock to growth.
Financial markets may not even have to wait until 2013 to feel the sting. As Harris puts it:
Put your rate hike where your mouth is
Jonathan Spicer and Van Tsui contributed to this post.
This week, for the second time ever, the U.S. Federal Reserve published policymakers’ forecasts for when the central bank should start raising rates. The chart suggested a split Fed, with three policymakers expecting a rate rise this year, three next year, seven in 2014 and four in 2015. That’s useful information, as far as it goes.
But as much as the Fed has embraced transparency in recent years, it stopped short of saying which policymaker backs a rate hike in which year – a key bit of data for grasping where the voters on Fed Chairman Ben Bernanke’s policy-setting committee stand, and how their positions shift over time.
Below is the bar graph that the Fed published Wednesday, with Reuters’ best estimates of who fell where. We stand ready be convinced otherwise by readers offering evidence or insight that supports a different view. Send us an email, gives us a call, write a comment or shout us out on Twitter.
You can find more information about the policy leanings of each top Fed official in our handy interactive hawks-doves chart.
