MacroScope

Raskin’s warning: ‘Shouldn’t pretend’ Fed capital rules are a panacea

Post corrected to show Brooksley Born is a former head of the Commodity Futures Trading Commission (CFTC) not a former Fed board governor.

Underlying the Federal Reserve recent announcement on new capital rules was a general sense of “mission accomplished.” The U.S. central bank, also a key financial regulator, has finally implemented requirements that it says could help prevent a repeat of the 2008 banking meltdown by forcing Wall Street firms to rely less heavily on debt, thereby making them less vulnerable during times of stress.

As Fed Chairman Ben Bernanke put it in his opening remarks:

Today’s meeting marks an important step in the board’s efforts to enhance the resilience of the U.S. banking system and to promote broader financial stability.

The final rule that we’re considering today puts in place a comprehensive, regulatory capital framework that the board has been developing for some time in consultation with our domestic and international colleagues in central banks and regulatory agencies. Critically, this framework requires our banking organizations to hold more and higher quality capital, capital that will act as a financial cushion to absorb future losses while reducing the incentives for firms to take excessive risks.

Strong capital requirements are essential if we hope to have safe and sound banks that can weather economic and financial stress while continuing to meet the credit needs of our economy.

Fear the Septaper

Credit to Barclays economists for coining the term ‘Septaper’

A solid U.S. employment report for June appears to have cemented market expectations that the Fed will begin to reduce the pace of its bond-buying stimulus in September.  Average employment growth for the last six months is now officially above 200,000 per month.

Never mind that, even at this rate, it would take another 11 months for the job market to reach its pre-recession levels – and that’s not counting the population growth since then.

John Brady, managing director at R.J. O’Brian & Associates in Chicago, nails the market’s sentiment:

U.S. minimum wage hike would offer short-term economic stimulus: Chicago Fed

President Barack Obama proposed a hike in the U.S. minimum wage during his State of the Union Address in February. Since then, we haven’t really heard very much about the proposal. That’s too bad for a U.S. economy that could still use a bit of a boost, according to new research.

A paper from the Chicago Fed finds that, while there might be little impact on long-term growth prospects from a higher minimum wage, the measure could add as much as 0.3 percentage point to gross domestic product in the short-run. That’s not insignificant for an economy that expanded at a soft annualized rate of just 1.1 percent over the last two quarters.

This is how the authors summarize their findings:

A federal minimum wage hike would boost the real income and spending of minimum wage households. The impact could be sufficient to offset increasing  consumer prices and declining real spending by most non-minimum-wage households and, therefore, lead to an increase in aggregate household spending. The authors calculate that a $1.75 hike in the hourly federal minimum wage could increase the level of real gross domestic product (GDP) by up to 0.3 percentage points in the near term, but with virtually no effect in the long term.

Broken (record) jobless data: Euro zone unemployment stuck at all-time high

Surprise! Euro zone unemployment was stuck at record high of 12.2 percent in May, with the number of jobless quickly climbing towards 20 million. Still, as accustomed to grim job market headlines from Europe as the world has become, it is worth perusing through the Eurostat release for some of the nuances in the figures.

For one thing, as Matthew Phillips notes, Spain’s unemployment crisis is now officially more dire than Greece’s – and that’s saying something.

Also, the figures remind us just how disparate conditions are across different parts of the currency union. While Spanish and Greek unemployment is hovering just below 27 percent, the jobless rate in Austria, the region’s lowest, is 4.7 percent.

Full blown damage control?

Call it the great wagon circling.

Central bankers are talking tough in the face of the wild gyrations in financial markets. But it’s becoming increasingly clear they are sweating – and drawing up contingency plans to assuage the panic that’s taken hold since Chairman Ben Bernanke last week sketched out the Fed’s plan for winding down its QE3 bond-buying program. U.S. policymakers in particular must have predicted investors would react strongly. But now that longer-term borrowing costs have spiked to near a two-year high, they look to be entering full-blown damage control.

Here’s Richard Fisher, head of the Dallas Fed, speaking to reporters in London on Monday:

I’m not surprised by market volatility – markets are manic depressive mechanisms… Collectively we will be tested. We need to expect a market reaction… Even if we reach a situation this year where we dial back (stimulus), we will still be running an accommodative policy.

In his own words: Fed’s Bullard explains dovish dissent

The following is a statement from the St. Louis Fed following the decision by its president, James Bullard, to dissent from the U.S. central bank’s decision to signal a looming reduction in its bond-buying stimulus program:

Federal Reserve Bank of St. Louis President James Bullard dissented with the Federal Open Market Committee decision announced on June 19, 2013.  In his view, the Committee should have more strongly signaled its willingness to defend its inflation target of 2 percent in light of recent low inflation readings.  Inflation in the U.S. has surprised on the downside during 2013.  Measured as the percent change from one year earlier, the personal consumption expenditures (PCE) headline inflation rate is running below 1 percent, and the PCE core inflation rate is close to 1 percent.  President Bullard believes that to maintain credibility, the Committee must defend its inflation target when inflation is below target as well as when it is above target.

President Bullard also felt that the Committee’s decision to authorize the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed.  The Committee was, through the Summary of Economic Projections process, marking down its assessment of both real GDP growth and inflation for 2013, and yet simultaneously announcing that less accommodative policy may be in store.  President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.

The new reality

The Federal Reserve has spoken and the message seems pretty clear – unless the U.S. economy takes a turn for the worse the pace of money creation will be slowed before the year is out and it will be stopped by mid-2014.

That’s a fairly tight time frame, although interest rates won’t rise for some time after that, and it doesn’t take a crystal ball to see a further bout of market volatility is likely, centred again on emerging markets which could suffer big portfolio investment outflows as U.S. bond yields climb.

The markets certainly don’t seem confused, just alarmed. The German Bund future has plummeted by nearly a point and a half to its lowest point since February, mirroring the spike in U.S. Treasury yields. European stocks shed 1.5 percent at the start.

Why low inflation may not prevent the Fed from reducing QE

Everybody knows U.S. unemployment, currently at 7.6%, is still too high – especially the millions of Americans struggling to find work. Less widely acknowledged is a recent dip in inflation that puts it well below the Federal Reserve’s 2 percent target. Indeed, at 0.7 percent in April, the Fed’s preferred inflation measure was less than half of the central bank’s explicitly stated goal. So why are Fed officials, gathered in Washington for their latest policy decision today, discussing a pullback in stimulus rather than an increase in it?

According to some economists, it’s because policymakers believe the recent decline in inflation will be transitory and that the rate will gradually move back up toward target as growth picks up during the rest of this year and in 2014. Yesterday’s report on consumer prices corroborated that prospect for some analysts.

Paul Ashworth, chief US economist at Capital Economics, wrote:

The low level of headline inflation largely reflects the drop back in commodity prices over the past 12 months, with even the low core rate partly explained by the indirect impact of those lower commodity prices. Under those circumstances, we wouldn’t expect the Fed to put too much weight on inflation being below its target. Once commodity prices level out, the downward pressure on consumer goods prices will begin to ease. In other words, this won’t prevent the Fed from beginning to reduce its monthly asset purchases, probably beginning in September.

U.S. job market still in need of a jolt

The monthly payrolls report from the U.S. Labor Department will always be the big kahuna of economic releases.  Other, less prominent indicators of the American job market nonetheless can offer additional insight into the employment backdrop.

Take the clumsily-acronymed JOLTS report, which stands for Job Openings and Labor Turnover Survey. It shows the ratio between job openings and job seekers, as well as the rate of new hires. The latter, unfortunately, is not particularly comforting.

The number of job openings at the end of April was 3.8 million, down slightly from the prior month’s 3.9 million.

The chairman’s challenge: Bernanke says ‘taper,’ markets hear ‘tighten’

For a central bank that likes to tout the importance of clear communication, the Federal Reserve sure knows how to be obtuse when it wants to. Take Bernanke’s testimony before the Joint Economic Committee of Congress last month. His prepared remarks were reliably dovish, emphasizing weakness in the labor market and offering no hint of an imminent end to the current stimulus program, which involves the monthly purchase of $85 billion in assets.

It was during the question and answer session that the real fireworks came. Asked about the prospect for curtailing such bond buys, Bernanke said:

If we see continued improvement and we have confidence that that’s going to be sustained then we could in the next few meetings … take a step down in our pace of purchases. If we do that it would not mean that we are automatically aiming towards a complete wind down. Rather we would be looking beyond that to see how the economy evolves and we could either raise or lower our pace of purchases going forward.