MacroScope

Housing neutral for Fed doves; Operation Twist running on empty

A slightly bigger than forecast 5.7 percent rise in sales of new homes in September reported by the National Association of Realtors on Wednesday lends credibility to September’s jump in housing starts, but appears neutral for Federal Reserve monetary policy discussions.

The jump in new home sales seems to have largely justified the 11 percent jump in September housing starts, says Decision Economics senior economist Pierre Ellis. The inventory of houses for sale at the end of September rose just 1.4 percent, from the end of August and the months’ supply fell to 4.5 months from 4.7 months, he added.

Thus, the increased production of houses seems not to have involved any “over-exuberant optimism” – and the impact if demand were suddenly to evaporate would be contained, he said. “Healthy skepticism seems to prevail in builderland,” Ellis observes.

The home sales jump should leave doves on the Federal Reserve’s policy-making committee feeling justified in their QE3 push since the doves see the third phase of unconventional easing “as a measure to sustain and further strengthen housing demand,” Ellis said. But the sales increase gives Fed doves no new evidence with which to argue QE3 should be stepped up immediately, he said.

Ellis said “odds do favor” a continuation of Operation Twist, a monetary easing tool that involves the Federal Reserve selling instruments that will mature in three years or less and using the proceeds of those sales to buy longer maturities. That program is currently set to end in December.

Deciphering the Fed: Guideposts for progress on jobs

The Federal Reserve’s open-ended bond-buying stimulus announced last month was coupled with a promise to continue purchasing assets “if the outlook for the labor market does not improve substantially.” Central bank officials are expected to continue discussing what parameters they will take into account to define such progress, but are not expected to come to any hard and fast decisions just yet.

In a research note entitled “What the Fed didn’t say: Payrolls at 160K,” Torsten Slok, economist at Deutsche Bank, offers a few guideposts:

In terms of what the Fed will be looking at, we reckon that employment growth will be first among equals – in particular nonfarm payrolls. We estimate that the FOMC’s economic and policy projections are consistent with payrolls averaging gains of around 160,000 per month through mid-2015, when they have told us they expect the exit process to begin to get under way. There is a range of uncertainty around this estimate. But if the numbers are coming in well below that rate for a number of months (100k or less), look for the Committee to extend the mid-2015 date and possibly step up its QE purchases, and expect just the opposite if they are coming in well above that rate (200k or more).

Could renewed U.S. economic strength turn the fiscal cliff into a fiscal ramp?

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The term ‘fiscal cliff’ has now safely transitioned from economic jargon to popular cliché. But how worried should Americans be about the growth-stunting mélange of expiring tax cuts and spending reductions set to begin kicking in at the start of next year?

Economists widely believe that if Congress fails to come to some sort of agreement on the budget, the U.S. economy would plunge into a deep recession. RBS economist Michelle Girard, however, thinks a recent pick up in U.S. economic activity could offset some of the cliff-related weakness.

While uncertainty over the fiscal cliff dominates most conversations, the relative strength of the underlying U.S. economy should not be forgotten. The expansion is today on firmer footing today than at any point in the past three to four years. No major economic imbalance exists. Moreover, headwinds that have hindered the pace of recovery are fading.

Banks keeping most of QE3 benefits for themselves

Federal Reserve officials have been worried that their policy of ultra-low interest rates may be having less of an effect than usual because of a “broken transmission channel.” In plain English, this means the money hasn’t really been flowing smoothly from liquidity-flooded banks to would-be borrowers.

Economists at TD Securities argue banks have passed on less than half of their lower funding rates as reflected in yields on mortgage-backed securities onto consumers.

During the current iteration of monetary policy easing, pass-though peaked at 66% during the third week following the QE3 announcement, when MBS yields rebounded from their post-QE3 lows and 30-year mortgage rates fell to a record-low 3.36%. However, since the QE3 announcement, our calculations suggest that banks have passed through an average of just 40% of their lower funding rates (i.e. lower MBS yields) in the form of lower mortgage rates.

Ambling through the archives: Don’t blame the deficit, 1983 edition

The battle over the amount and nature of government spending is the focus of the current U.S.presidential campaign and is unlikely to go away even after the November election is well in the rear view mirror.

In such a setting, a paper presented by economist Albert M. Wojnilower at the October 1983 Bald Peak Conference sponsored by the Federal Reserve Bank of Boston, sounds as timely today as it did then. Wojnilower, then chief economist at First Boston, prepared his “Don’t Blame the Deficit” talk as a commentary on “Implications of the Government Deficit for U.S. Capital Formation,” a paper by Benjamin M. Friedman, a professor of political economy at Harvard.

Here is the jist of Wojnilower’s argument, made almost three decades ago when the Ronald Reagan presidency was almost three years old: If the United States is under-investing, the “villain” is not the Federal budget deficit, he said.

Too big to exist? Fed’s regulation czar backs limits on bank size

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Regional Federal Reserve Bank presidents who oppose quantitative easing have made little way in convincing the central bank’s dovish core. Apparently, not so on the cause célèbre of policymakers like Richard Fisher at the Dallas Fed, who have called for too big to fail banks to be broken up.

In a speech this week, Fed board governor and regulation czar Daniel Tarullo stopped short of calling for outright break-ups. But he did take the unprecedented step of backing size limitations on banks that would be linked to overall U.S. economic output.

In his own words:

In these circumstances, however, with the potentially important consequences of such an upper bound and of the need to balance different interests and social goals, it would be most appropriate for Congress to legislate on the subject. If it chooses to do so, there would be merit in its adopting a simpler policy instrument, rather than relying on indirect, incomplete policy measures such as administrative calculation of potentially complex financial stability footprints.

Why rise in part-time employment does not explain U.S. jobless rate decline

The September unemployment rate was the lowest since December 2008 after surprisingly large back-to-back declines, sending economists back to the drawing board after big forecast misses. Some pointed to the large increase in involuntary part-time employment – erroneously so, according to an analysis from Ray Stone, economist and managing director at Stone & McCarthy.

The jobless rate fell to 7.8 percent last month from 8.1 percent in August.

After a quick, superficial look at the September household data, several commentators embraced the thesis that it was due to a 582,000 increase in Part-Time Employment for Economic Reasons. These are people who prefer full-time employment, but sadly had to settle for a part-time job. These 582,000 part-timers accounted for much of the overall 873,000 increase in September civilian employment.

This Part-Time for Economic Reasons statistic “was a Greenspan favorite, and certainly over longer periods of time such is a measure of labor distress,” Stone said. “But, the month-to-month wiggles in this series usually turn out to be noise. In September this metric rose to 8.613 million.”

Fed speak galore

The pace of Federal Reserve speeches intensifies next week, with Vice Chair Janet Yellen kicking off the calendar on Tuesday with a speech on financial stability. Yellen will be speaking in Tokyo at an IMF meeting panel. The cacophony picks up on Wednesday, with remarks from Minneapolis Fed president and recent dovish convert Narayana Kocherlakota, the board’s regulation-czar Dan Tarullo and the ever hawkish Richard Fisher from Dallas. On Thursday, Yellen will directly address monetary policy in another speech, while board governors Jeremy Stein and Sarah Raskin offer a rare peak into their macroeconomic views. Philadelphia Fed President Charles Plosser and Jim Bullard of the St.Louis Fed, both of whom have opposed QE3, are also on tap. Jeff Lacker, the lone dissenter on this year’s FOMC, will close the week on Friday.

Sustainable full employment is within reach: Green Party U.S. presidential candidate Stein

As Americans get ready or tonight’s presidential debate, there’s one candidate they won’t be seeing on television and may not even have heard of: Jill Stein, a Harvard-trained doctor and Green Party candidate. Stein is promising a Green New Deal that she says could create more than 20 million jobs, 16 million through a government-sponsored program for full employment and millions more due to the increase in demand that would come from the new investments. She wants to expand Medicare coverage for all Americans and sharply reduce military spending, and says her policies would reduce the deficit by boosting tax revenues. She spoke to Reuters recently by telephone. What follows is an abbreviated transcript of the interview.

The Green Party does not appear to have realistic chance to win a major election at the moment. What is the goal of your candidacy?

An election is a wonderful time when people get involved and have a much broader conversation than usual. My hope is that we can drive some really critical solutions that already have majority support from the American public, that we can actually drive them into a political system that has been terribly hijacked and disconnected from the interests of everyday people.

Why the Fed shouldn’t raise rates to discipline Congress

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Federal Reserve Chairman Ben Bernanke has been trying for some time to fend off critics of his bond-buying policies who argue the central bank is making it easier for the federal government to run deficits. In remarks to the Economic Club of Indiana on Monday, he seems to have found a useful way to help illustrate his point.

It follows logically that those who say the Fed is abetting profligate governments might want to see higher interest rates that would discourage excess federal borrowing. Bernanke pursues this line of thinking to its natural conclusions – and is very uncomfortable with the results:

I sometimes hear the complaint that the Federal Reserve is enabling bad fiscal policy by keeping interest rates very low and thereby making it cheaper for the federal government to borrow. I find this argument unpersuasive. The responsibility for fiscal policy lies squarely with the Administration and the Congress. At the Federal Reserve, we implement policy to promote maximum employment and price stability, as the law under which we operate requires. Using monetary policy to try to influence the political debate on the budget would be highly inappropriate.