MacroScope

Hey, at least it beats the Mayan outlook

A panel of economic luminaries took the stage in Chicago this afternoon to join in a tradition repeated this time of the year in cities across the country, opining on the outlook for the coming year.

Raghuram Rajan, a finance professor at University of Chicago’s Booth School of Business, began with a joke involving 973 sheep and a dog, the butt of which was the intellectual capacity of economic forecasters. He went on to predict slow world growth ahead, highlighting the geopolitical risks from conflict in the Middle East and Asia, and the limits of fiscal and monetary policy to turn things around.

Carl Tannenbaum, Northern Trust’s chief economist, focused on the still-troubled housing market and risks posed by the failure of European political leaders to resolve their financial crisis (he observed that Americans frustrated by the deadlock in Washington over resolving the U.S. fiscal cliff have only to look across the Atlantic for comfort that things, certainly, could be worse).

Randall Kroszner, a Booth School economics professor who was a member of the Federal Reserve Board of Governors at the height of the financial crisis, forecast U.S. economic growth next year at 2 percent to 2.5 percent, better than this year but not fast enough to do much to bring down too-high unemployment.

Thankfully, not all was apocalypse and doom. “My outlook for the next year may be bleak, but it’s not as bleak as the Mayans,” quipped Kroszner, who then checked his watch to give the audience the exact time – 16 hours, 14 days, and 21 minutes – until the Mayan calendar predicts the end of the world.

Geithner’s gauntlet: Social Security is a “separate process” from fiscal cliff talks

Social Security should not be part of the current negotiations over the U.S. budget – that was the message from outgoing Treasury Secretary Timothy Geithner over the weekend. During a veritable tour of Sunday shows aimed at addressing negotiations surrounding the “fiscal cliff” of expiring tax cuts and spending reductions, Geithner told ABC News’ “This Week”:

What the president is willing to do is to work with Democrats and Republicans to strengthen Social Security for future generations so Americans can approach retirement with dignity and with the confidence they can retire with a modest guaranteed benefit.

But we think you have to do that in a separate process so that our seniors aren’t – don’t face the concern that we’re somehow going to find savings in Social Security benefits to help reduce the other deficit.

At the Fed, there’s a way to raise rates — but is there a will?

The Federal Reserve has kept its key federal funds rate at near-zero for four straight years, and it expects to keep it there for at least two more. But with each trip around the sun, outsiders wonder whether central bank policymakers will act without hesitation when the time finally comes to tighten monetary policy?

This week, the official with his hand on the Fed’s interest-rate lever, so to speak, asked that same question. Simon Potter, head of the Federal Reserve Bank of New York’s open market operations, was at NYU‘s Stern School of Business discussing the various ways the central bank can tighten policy: the federal funds rate; the interest rate on excess bank reserves; reverse repurchase agreements. Potter runs the unit that carries out Fed policy in the market, and sits in on most policy-setting meetings in Washington. Asked by a student about the inflationary or deflationary risks associated with tightening policy in the future, he had this to say:

The real heart of that question is a willingness one. I’m pretty confident we have the technical ability to raise rates. The hard part will be the willingness in some people’s minds. What I’ve seen among most people in financial markets is they’re pretty sure that the Fed will raise rates when it’s appropriate to do it… Definitely compared to 2009-2010, the type of hedge funds and people who took large bets thinking this would lead to high inflation have given up on that bet.

Could the private sector stage a stimulus plan?

Since the financial crisis, the federal government has implemented a fiscal stimulus plan and the Federal Reserve took to the road of monetary stimulus, actively seeking new routes to revive the U.S. economy.

The private sector, however, has been laggard in adding its muscle to the revival efforts. Private firms have added employees, but very cautiously, and wages are stagnant. Meanwhile, a huge amount of cash sits idle on corporate balance sheets.

“Capital expenditure plans are being retrenched,” notes Dan Heckman, senior fixed income strategist and senior portfolio manager at Minneapolis, Minnesota-based US Bank, with $80 billion in assets under management. “Most major corporations are sitting on tons of cash. They have no appetite for borrowing and credit line utilization is at all-time lows.”

The trouble with the Fed’s calendar guidance on rates

Sometimes, communication can be the art of what not to say. Federal Reserve Chairman Ben Bernanke took pains this week to make clear that the central bank’s indication that it will likely keep rates low until mid-2015 does not mean it expects growth to remain weak for that long.

By pushing the expected period of low rates further into the future, we are not saying that we expect the economy to remain weak until mid-2015; rather, we expect – as we indicated in our September statement – that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.

The comments speak to a key problem with the notion of calendar-based forward guidance, first adopted by the Fed in August of 2011: each time officials push the date further into the future, they risk dampening financial market sentiment, thereby having the opposite effect to the stimulus it intended.

NY Fed’s Dudley: “Blunter approach may yet prove necessary” for too-big-to-fail banks

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It was kind of a big deal coming from the Federal Reserve Bank of New York’s influential president William Dudley. The former Goldman Sachs partner and chief economist has offered a fig leaf to those who say the problem of banks considered too-big-to-fail must be dealt with more aggressively. Some regional Fed presidents have advocated breaking up these institutions. But Dudley and other powerful figures at the central bank have maintained recent financial reforms have already laid the groundwork for resolving the issue.

At a gathering of financial executives in New York last week, Dudley said he prefers the existing approach of making it costlier for firms to become big in the first place. Still, he left open the possibility of tackling the mega-bank problem more directly:

Should society tolerate a financial system in which certain financial institutions are deemed to be too big to fail? And, if not, then what should we do about it?

How big will the Fed’s QE3 end up being?

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Polling data courtesy of Chris Reese

We’ll know it when we see it. That’s essentially been the Federal Reserve’s message since it launched an open-ended bond-buying stimulus plan that it says will remain in place for as long “the outlook for the labor market does not improve substantially.” Which begs the question: how much larger is the central bank’s $2.9 trillion balance sheet likely to get?

Minutes from the Federal Reserve’s October meeting point to solid support within the central bank for ongoing monetary easing via asset purchases well into 2013.

A number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program in order to achieve a substantial improvement in the labor market.

Fiscal cliff could help U.S. avoid road to Japan – but probably won’t

The “fiscal cliff” is widely seen as a massive threat looming over a fragile U.S. recovery. But with a little imagination, it is not difficult to see how the combination of expiring tax cuts and spending reductions actually presents an opportunity for tilting the budget backdrop in a pro-growth direction, even if political paralysis makes this scenario rather unlikely.

For Steve Blitz, chief economist at ITG in New York, the cliff presents a unique chance for the United States to avoid sinking deeper in the direction of Japan’s growth-challenged economy by shifting incentives away from consumption and towards investment:

If current negotiations end up simply turning the “cliff” into a 10-year slide an opportunity to help the economy regain a dynamic growth path and close the gap with pre-recession trend GDP would, in our view, be lost and raise the odds that, in the coming years, U.S. economic performance looks more like Japan’s. […]

Roaring auto sector could charge up U.S. growth

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Economists love motor analogies, and for good reason: they are very useful in illustrating the ebb and flow of economies. In coming months, maybe even years, the help from the auto sector could become a lot more literal, argues Paul Dales, senior U.S. economist at Capital Economics in London. In particular, he expects rising sales following years of depressed consumer spending on vehicles in the wake of the Great Recession could add as much as 0.25 percentage point to U.S. gross domestic product growth per year over the next four years. Here’s why:

The rise in new vehicles sales in September, to 14.9 million from 14.5 million in August, was significant as the number of new vehicles being purchased is now higher than the number being scrapped. This comes after four years in which the total number of vehicles in operation has been declining.

That fall was because when the recession hit and credit seized up, both households and businesses had little choice but to run their existing vehicles for longer. It is possible that 10 million fewer new vehicles have been sold than would have been the case if there was no recession.

Fed’s Lockhart explains what he means by “substantial improvement” on jobs

Federal Reserve officials have linked their open-ended stimulus program to substantial improvement in the labor market. So now, it’s up to Fed watchers to hone in on a definition of substantial, no small task in a world of multiple and often conflicting indicators on the job market.

In a speech to the Chattanooga Rotary Club on Thursday, Dennis Lockhart offered some insights into how he’s thinking about the process:

For policy purposes, I think it’s appropriate to be cautious about relying on a single indicator of labor market trends—for example, the unemployment rate—to determine whether the condition of “substantial improvement” has been met. The official national unemployment rate published by the Bureau of Labor Statistics is the most prominent statistic in the mind of the general public. As a policymaker, I want to have confidence that a decline of this headline number is reinforced by other indicators and evidence of broad labor market improvement in its many dimensions. The challenge my FOMC colleagues and I will face is communicating in simple and trackable terms what this phrase “substantial improvement” means while respecting the complex reality of many moving parts. […]