• Janet Yellen on Limited Strength of Recovery

    San Francisco Fed President Janet Yellen spoke in Phoenix yesterday, and she presented a relatively reserved view of the economy. it was her first speech since the economy entered its current recovery phase, and she defended and commended government action in fighting off economic meltdown. But she also warned that this recovery is going to be very slow. And she focused on two key factors--household spending and the woeful labor market: Consumers have surprised us in the past with their free-spending ways and it’s not out of the question that they will do so again. But I wouldn’t count on them leading a strong recovery. They face high and rising unemployment, stagnant wages, and heavy debt burdens. Their nest eggs have shrunk dramatically as house and stock prices have fallen, and their access to credit has been squeezed. It may be that we are witnessing the start of a new era for consumers following the harsh financial blows they have endured. 2 We often hear the word “deleveraging” used to describe the push by financial institutions to scale back debt and build equity. Households too have now begun to pay down debt and rebuild their savings. This phenomenon can be seen not only in the United States, but in most countries that experienced similar housing booms. The United States was hardly the only country where households borrowed heavily just before a severe housing bust set in. And those countries with greater increases in debt relative to income before the crisis experienced greater declines in consumption spending once the crisis began. In the United States, the personal saving rate, which had fallen to an incredibly low 1 percent in early 2008, has averaged 4 percent so far this year and may well rise higher. In the current environment, such belt-tightening makes great sense from the standpoint of individual households. In fact, some households may have no other option because their access to credit has been crimped. Over the long run, higher saving is surely a good thing for our economy because it provides capital that can be devoted to modern infrastructure, technology, and other productive investments that enhance our standard of living. All the same, the transition to a higher saving plane could be painful if it reduces the growth rate of consumer spending for an extended period. Weakness in the labor market is another factor that may keep the recovery sluggish for quite some time. Payroll employment has been plummeting for more than a year and a half, and, even though the pace of the decline has slowed, unemployment now stands at its highest level since 1983. In addition, many workers have seen their hours cut or are experiencing involuntary furloughs. To bolster earnings in the face of weak revenue growth, employers have been aggressive in cutting labor costs and jobs, and my business contacts say they will be reluctant to hire again until they see clear evidence of a sustained recovery. Weak demand for workers is also putting a lid on paychecks. Wages are barely rising. A well-known measure of overall employment costs rose by only 1¼ percent over the past year, the smallest increase in the history of the series. High unemployment, weak job growth, and paltry wage increases are a recipe for sluggish consumer spending growth and a tepid recovery. The U.S. experienced so-called jobless recoveries following the previous two recessions in 1991 and 2001, when job creation remained weak for several years following the business cycle trough. In both cases, output growth was less robust than in the typical recovery and, unfortunately, things seem to be shaping up similarly this time around. Since she gave the speech in Phoenix, Yellen's comments about the real estate market were both interesting and relevant to the local crowd. And she also addresses the Fed's monetary policy, past and present. Read the full speech here .

  • NY Fed Chair on the Root Causes of the Crisis and Potential Value of Contingent Capital

    William C. Dudley , President and Chief Executive Officer of the New York Fed , spoke yesterday at the Institute of International Bankers. Dudley shared his views on how to strengthen the financial system. He started by outlining what he sees as the basic cause of the crisis: Regulators and market participants failed to fully appreciate the degree to which the various aspects of our financial system are interconnected, and to foresee what those tight linkages would mean for market function when even one reasonably large institution—let alone many—became distressed. We also did not fully appreciate the strength of the amplifying mechanisms that were built into our financial system; the consequence of which was to exacerbate the boom on the way up and worsen the bust on the way down. Contributing to these pro-cyclical dynamics were inadequate incentives for firms to curb their risk-taking and to more effectively manage the risks they did face. The inadequate level of transparency and disclosure, particularly in the market for structured products, were also important in making the financial system more fragile and vulnerable to crisis and in increasing the degree of uncertainty and contagion once the crisis was underway. Dudley went on to outline a whole set of measures that might be taken to avoid the systemic risk that was central to the crisis. Among the more interesting ideas he discussed was the notion of introducing contingent capital instruments. These would be "debt instruments in “good” states of the world, but would convert into common equity at pre-specified trigger levels in “bad” states of the world," Dudley told the audience. Consider the advantages that such an instrument would have had during this crisis. Rather than banks clumsily evaluating whether to cut dividends, raise common equity and/or conduct exchanges of common equity for preferred shares and market participants uncertain about the willingness and ability of firms to complete such transactions and successfully raise new capital, contingent capital would have been converted automatically into common equity when market triggers were hit. If these contingent capital buffers were large, which they could be because the cost of these instruments should not differ much from straight debt, then the worst aspects of the banking crisis might have been averted. If shareholders had faced the potential of automatic and substantial dilution, they may have demanded better risk management and disclosure during the boom. If common equity had been automatically bolstered during the early part of crisis, investors would have been much less concerned about the risk of insolvency. Counterparty risk concerns would have been much less significant—potentially short-circuiting one of the important amplifying mechanisms of the crisis. Such instruments could have reduced the likelihood of failure of large, systemically important institutions, reducing the significance of the “too big to fail” problem and its associated moral hazard problems. Read the full speech here . (Hat tip to Mark Thoma for linking to the speech at Economists View ).

  • Paul Volcker: Feds "Did what they had to do" In Facing Crisis

    Paul Volcker spoke with Charlie Rose last week, and the former Fed chair gave Ben Bernanke and Timothy Geithner generally good marks for its handling of the financial crisis so far. Here's an excerpt: To watch the full interview, in two parts, click here .

  • Federal Reserve Pushes New Rules to Protect Credit Card Users

    The Federal Reserve is proposing new rules to strengthen Truth in Lending regulation. And , according to the Fed, the new rules would: Protect consumers from unexpected increases in credit card interest rates by generally prohibiting increases in a rate during the first year after an account is opened and increases in a rate that applies to an existing credit card balance. Prohibit creditors from issuing a credit card to a consumer who is under the age of 21 unless the consumer has the ability to make the required payments or obtains the signature of a parent or other cosigner with the ability to do so. Require creditors to obtain a consumer's consent before charging fees for transactions that exceed the credit limit. Limit the high fees associated with subprime credit cards. Ban creditors from using the "two-cycle" billing method to impose interest charges. Prohibit creditors from allocating payments in ways that maximize interest charges. Read the Fed's release here .

  • Fed Chooses to Keep Interest Rates Low

    The Federal Open Market Committee met today and decided to keep the federal fund rates at 0 to 0.25 percent. So while the FOMC stated that it sees positive signs in the economic data, it is not ready to forgo monetary policy measures designed to push recovery, and it is not concerned about inflation at this point. From the press release: In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. Read the full release here .

  • Tim Duy: Fed Looking at 'Long Hard Road' of Recovery During FOMC Meeting This week

    The Federal Open Market Committee (FOMC) is set to meet Tuesday and Wednesday of this week. Tim Duy points out that Ben Bernanke and friends will be meeting with a far more positive "economic backdrop" than they have had for a long time. But for all the relatively good economic news there is, uncertainty remains. Duy believes that the FOMC should continue to anticipate slow recovery, and he points to limited consumer credit as a primary reason: Given the steady anecdotal buzz surrounding the deterioration of the commercial real estate market, it is difficult to expect a rapid reversal of these trends. In short, if you think credit markets are still under stress, as the Fed certainly does, and are worried about the availability of credit to support future spending, also among Fed concerns, then shifting rhetorically to signal a tighter policy stance irrational. Moreover, it would seem inconsistent with plans to continue expanding the balance sheet via purchases of mortgage backed securities and TALF assets. So, it seems Duy is telling us not to expect a drastic change in Fed policy until we see a major shift in consumer credit and unemployment. Read Even With Growth, A Long, Hard Road here .

  • Bernanke: 'Recession is very likely over'

    Add Fed Chair Ben Bernanke's voice to the growing chorus that the recession appears to be over and a long slow recovery is beginning. Bernanke spoke at the Brookings Insititution yesterday about the events of the last year, and during his speech he noted that he was well aware that forecasters were announcing the end of the recession. Here is a key excerpt from the speech. But the general view of most forecasters is that that pace of growth in 2010 will be moderate, less than you might expect given the depth of the recession, because of ongoing headwinds, including still ongoing financial and credit problems, you know, deleveraging by households, the needs for adjustments in the economy, sectoral adjustments in the economy, the need for a fiscal exit at some point, many, many factors that will likely, at least based on current information, make the 2010 recovery moderate, and in particular, not much faster than sort of the underlying potential growth rate of the economy. And the arithmetic is that unless the economy grows, you know, significantly faster than its longer term growth rate, it’ll be relatively slow in creating jobs over and above those needed to employ people coming into the labor force, and therefore, the unemployment rate would tend to come down quite slowly. So that’s a risk, that’s a possibility. Of course, there is on both sides of that forecast; we could have a stronger recovery, we could have a weaker recovery, but if we do, in fact, see moderate growth, but not growth much more than the underlying potential growth rate, then, unfortunately, unemployment will be slow to come down. It will come down, but it may take some time. Obviously, that’s a very serious concern, and that’s one reason why, even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time as many people will still find that their job security and their employment status is not what they wish it was, and so that’s a challenge for us and all policy-makers going forward. You can read a full transcript of the speech, and watch the full session by clicking here .

  • First Reactions to Bernanke Reappointment

    President Obama announced this morning that he is going to nominate Ben Bernanke for reappointment as Chair of the Federal Reserve . And we already have many reactions in the Econoblogosphere. Greg Mankiw gives congrats to the President, and condolences to Bernanke . Brad DeLong agrees with Greg Mankiw (not an isolated incident, but rare nonetheless). And while DeLong is "surprised" Bernanke is being reappointed, he thinks the Fed Chair "is one of the best in the world for this job." David Kotok of The Big Picture writes that "markets will like the removal of uncertainty," but Bernanke has to recognize that the Fed can't go it alone and "needs to find a path for coordinated action when the time to remove the stimulus is at hand." And Phil Izzo compiles quotes from supportive economists at the Wall Street Journal's Real Time Economics blog. Read their comments here .

  • WSJ August Forecast: Most Economists Surveyed Say the Recession Has Ended

    The Wall Street Journal 's August forecasting survey shows most of the participating economists feel the economy stabilizing: After months of uncertainty, economists are finally seeing a break in the clouds. Forecasts were revised upward for every period, with 27 economists saying the recession had ended and 11 seeing a trough this month or next. Gross domestic product in the third quarter is now expected to show 2.4% growth at a seasonally adjusted annual rate amid signs of life in the manufacturing sector, partly spurred by inventory adjustments and strong demand for the "cash for clunkers" car-rebate program. Here's what the Journal's GDP forecasting trend looks like: This month the Journal asked economists to weigh in on Ben Bernanke. The Fed Chair has 6 months left in his current term, and the economists surveyed give him a 71% chance of being reappointed. Wall Street Journal news editor Phil Izzo discusses econiomists' views on Bernanke and the survey with Kelly Evans : Click here for full coverage of the survey, and here for the Journal's always useful interactive survey charts and graphs.

  • Bernanke Town Meeting

    Federal Chair Ben Bernanke held a town meeting at the Kansas City Federal Reserve Bank on Sunday, and he explained the Fed's actions prior to the recession, and in reaction to the economic meltdown last year. Jim Lehrer moderated, and The Newshour with Jim Lehrer has now made video of the meeting available. Here's the first segment (of three) in which Bernanke defends the Fed's actions and answers questions from the audience: You can view segments two and three by clicking here .

  • GEC Timelines from the NY Fed

    With Ben Bernanke 's semi-annual testimony on Capitol Hill last week, and his town meeting in Kansas City yesterday (segments of the event will be aired this week, starting tonight, on Newshour with Jim Lehrer ), the Fed Reserve chair is getting a lot of attention. But it is good to remember that the Federal Reserve district banks have been making valuable, informational resources available to the public. For example, the New York Fed has put together timelines of the global economoc crisis. Here's a sample. Click here to look at the timelines--a domestic timline dating back to June 2007, and an international timeline that follows G-7 responses to the crisis since September 2008.

  • Bernanke and the Fed's Independence

    Ben Bernanke delivered his Semiannual Monetary Policy Report to the Congress yesterday before the House Financial Services Committee , and he expressed a relatively upbeat view of the economy . He also defended the need for the Federal Reserve to hold onto independence in the face of proposals to give the General Accounting Office more auditing powers, saying "a perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability." Here is his opening statement, from Bloomberg : Bernanke will continue his testimony later today. Mark Thoma 's concern with the Fed these days has less to do with its independence as a whole, and more, it seems, with the independence of the district banks as currently structured: As it stands, the Board of Governors in Washington has considerable influence over who is appointed to key positions such as the President of the district banks, and those Presidents represent five of the twelve votes at the meetings where monetary policy is set. More independence of the district bank Presidents and other district bank personnel from the Board of Governors would be a healthy change (there is also a question of whether geographic representation through district banks is the best way to capture the public interest, but I'll leave that aside for now). Read Fed Independence here .

  • Grading Bernanke

    Ben Bernanke has half a year left on his term as chair of the Federal Reserve , and at this point it is not certain whether he will be asked to serve another. Bernanke has said that he expects the economy to pick up later this year , and perhaps his future as chair depends on whether he is right or not. David Wessel , economics editor of the Wall Street Journal , assesses Bernanke's tenure in this short video, and says Bernanke "did a great job in saving us from something that could have been a catastrophe."

  • Alan Blinder: 'Why Inflation Isn't the Danger'

    There's quite a bit of inlfation chatter going around these last few days. Some are concerned that the behavior of central banks around the world in applying varying degrees of quantitative easing policies will bring about inflation . Domestically, the question of inflation seems to center on whether or not the Federal Reserve has the capacity to fight inflationary threats that might come down the road. Columbia University economist , and former Fed governor, Frederic Mishkin , writes in today's Wall Street Journal that " the Fed is boxed in ." Alan Blinder says there are plenty of choices for things to worry about, but inflation shouldn't be at the top of the list. Blinder, professor of economics and public affairs at Princeton, former Vice Chairman of the Fed, and author , put forward three reasons he is not concerned with the Fed's capacity in the New York Times: The possibilities for error are two-sided. Yes, the Fed might err by withdrawing bank reserves too slowly, thereby leading to higher inflation. But it also might err by withdrawing reserves too quickly, thereby stunting the recovery and leading to deflation. I fail to see why advocates of price stability should worry about one sort of error but not the other. The Fed is well aware of the exit problem. It is planning for it, is competent enough to carry out its responsibilities and has committed itself to an inflation target of just under 2 percent. Of course, none of that assures us that the Fed will hit the bull’s-eye. It might miss and produce, say, inflation of 3 percent or 4 percent at the end of the crisis — but not 8 or 10 percent. The Fed will start the exit process when the economy is still below full employment and inflation is below target. So some modest rise in inflation will be welcome. The Fed won’t have to clamp down hard. Read Why Inflation Isn't the Danger here .

  • The White House's New Plan for Financial Regulation

    The White House is set to announce a new financial regulation plan today. A draft of the plan is available here , and as Stephen Labaton writes in the New York Times , if the final edition is in line with this draft, the Fed and the FDIC will soon have expanded regulatory powers : The plan the president will formally announce on Wednesday would give the Federal Reserve greater supervisory authority over large financial institutions whose problems pose potential risks to the economic system. It would separately expand the reach of the Federal Deposit Insurance Corporation to seize and break up troubled financial institutions. And it would create a council of regulators, led by the Treasury secretary, to fill in regulatory gaps. In doing so, the plan seeks to give Washington the tools to police the shadow system of finance that has grown up outside the government’s purview, and to make it easier for regulators to head off problems at large, troubled institutions or take control of them if they fail. Labaton also points out that the plan has many contributors: many "government officials, financial experts, lawmakers, industry executives and lobbyists" weighed in on the proposed plan. The Times's John Harwood asked President Obama yesterday whether he chose to put forward a plan that has a greater chance of political support rather than one that might be more comprehensive: The President also sat down with the Wall Street Journal yesterday to discuss financial regulation, and he again stressed that his desire is for the federal government to have a "light touch" when it comes to regulation. Here is a transcript of that interview .
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