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  • CBO Budget and Economic Outlook: Fiscal Years 2012-2022

    The Congressional Budget Office has released its Budget and Economic Outlook for the next 10 years. For 2012, the CBO is projecting a deficit of $1.1 trillion. But over the next 10 years, the CBO projects that figure to drop to "under $200 billion and averaging 1.5 percent of GDP." This projection is based on current laws, including the scheduled expiration of some tax cuts: Much of the projected decline in the deficit occurs because, under current law, revenues are projected to shoot up by almost $800 billion, or more than 30 percent, between 2012 and 2014—from 16.3 percent of GDP in 2012 to 20.0 percent in 2014. That increase is mostly the result of of the recent or scheduled expirations of tax provisions, such as those initially enacted in 2001, 2003, and 2009 that lower income tax rates and those that limit the number of people subject to the alternative minimum tax (AMT). Under current law, CBO projects that revenues will continue to rise relative to GDP after 2014 largely because increases in taxpayers’ inflation-adjusted income will push more income into higher tax brackets and subject more of it to the AMT. Other important projections from the report are illustrated in the following slides from the CBO: Charts from CBO's January 2012 Budget and Economic Outlook View more presentations from Congressional Budget Office Read the full report here .

  • FOMC January Meeting: Majority of Participants Project Target Interest Rate Hike At Least Two Years Off

    It looks as though interest rates will remain low for the next two years. At their January meeting, members of the Federal Open Market Committee not only kept the target federal funds rate between 0 and 1/4 percent, they, as a group, projected the next rate increase would likely not come until 2014 at the earliest. They also set the inflation target at 2%. Here is a look at the Fed's projections for GDP and unemployment: At his press conference following the meeting, Ben Bernanke noted that the Fed needs to remain open to measures to "provide further stimulus" if the pace of recovery slows: Read the FOMC January statement here .

  • CPI Remains Steady

    The Consumer Price Index for All Urban Consumers remained flat for a second straight month in December. Once again a decrease in the energy index countered rises in the other indexes (the food index and the all items less food and energy index ). Over the last year, CPI rose 3.0% (seasonally adjusted). Here are some year-in-review details rom the Bureau of Labor Statistics release: The energy index increased 6.6 percent in 2011, a deceleration from the 2010 increase of 7.7 percent. The gasoline index, which rose 13.8 percent in 2010, increased 9.9 percent in 2011. In contrast, the household energy index accelerated in 2011, rising 1.8 percent after a 0.8 percent increase in 2010. The fuel oil index rose 18.0 percent and the electricity index increased 2.2 percent, although the index for natural gas declined for the third straight year, falling 3.7 percent. The index for food accelerated in 2011, rising 4.7 percent compared to a 1.5 percent increase in 2010. The index for food at home rose 6.0 percent in 2011 compared to 1.7 percent in 2010. All six major grocery store food group indexes rose in 2011, with increases ranging from 2.3 percent (fruits and vegetables) to 8.1 percent (dairy and related products). The index for food away from home rose 2.9 percent in 2011 after increasing 1.3 percent in 2010. The index for all items less food and energy also accelerated in 2011, increasing 2.2 percent after its historical low 2010 increase of 0.8 percent. This was the largest increase since 2007. Several indexes turned up in 2011. The apparel index rose 4.6 percent after a 1.1 percent decline the previous year. Similarly, the new vehicles index rose 3.2 percent in 2011 after a slight decline in 2010. The indexes for recreation and household furnishings and operations also rose in 2011 after declining in 2010. A number of other indexes rose more quickly in 2011 than in 2010. The shelter index accelerated notably, advancing 1.9 percent in 2011 after rising only 0.4 percent the previous year. The indexes for used cars and trucks, medical care, education, and personal care also rose more quickly in 2011 than in 2010. In contrast, the indexes for tobacco and airline fare posted smaller increases in 2011 than 2010. Here's a look at the CPI for All Urban Consumers over the last year: Read the full release here .

  • Chinn and Frieden on Conditional Inflation Targeting

    In the latest Foreign Policy , Menzie Chinn and Jeffry Frieden argue on behalf of conditional inflation targeting. A little inflation would be welcome, they say, in that it would "reduce the debt burden to more manageable levels." They write: Today our highest priority should be to stimulate investment, growth, and employment. Raising the expected inflation rate will lower real interest rates and spur investment and consumption. It will also make it difficult for the de facto dollar peggers, such as China, to sustain their policies. The resulting real depreciation of the dollar would stimulate production of U.S. exports and domestic goods that compete with imports, boosting American production. The United States would get faster growth, an accelerated process of deleveraging, a quicker recovery, and a firmer foundation upon which to address long-term fiscal problems. To back up his assertion that a little inflation is not a threat, Chinn adds this graph of implied inflation at the Econbrowser blog. Do you agree with Chinn that fear of inflation is "unwarranted"? Read A Call for Action: Conditional Inflation Targetting here .

  • Boston Globe's 12 for 2012: 6 Reasons for Optimism, 6 for Pessimism

    The first work week of 2012 is now underway. As we look ahead to the year ahead, the state of the economy is first on foremost on our minds. Boston Globe Correspondent Jay Fitzgerald offers up no predictions, but rather a point-counterpoint list of reasons to be optimistic, and reasons to be pessimistic, about the economy in 2012. The six reasons to be optimistic: Momentum --that is, 2011 ended with some; Jobs --improving data on that front; Corporate profits --slowed down in 2011, so maybe companies will need to hire in order to get the growth engine humming; Inflation --"remains in check"; Exports --the weak dollar is helping sales of US exports; and Technology --high-tech/scientific sectors remain strong. Before you get too excited, here are the reasons Fitzgerald sites for pessimism: Europe --the old continent starts off 2012 with a lot of uncertainty; The job market --improving, yes, but not quickly enough. Housing --a big problem far from solved; Politics --with an election this year, it is hard to imagine policymakers in Washington coming together on any bold fixes; Energy --oil is back near $100/barrel; and Banks --American banks are better off than their European counterparts, but that is not saying much. What is Fitzgerald's list missing? And do you see the factors on one list beating out those on the other? Read Will 2012 be the year for economic optimists? here .

  • Sargent and Sims Nobel Prize Lectures

    As part of the Nobel Prize festivities, award recipients Thomas Sargent and Christopher Sims gave their Nobel Prize lectures last week in Stockholm. Sargent's lecture was titled United States then, Europe now . Sims spoke on Statistical Modeling of Monetary Policy and its Effects . You can watch the lecture here. Thank you to the Institute for New Economic Thinking for the video (the lectures start 10 minutes in):

  • India's GDP Rose 'Only' 6.9% in Third Quarter

    Bloomberg 's Kartik Goyal reports that India's economy grew 6.9% in the third quarter of 2011. While that number looks great from the US, it is the lowest level of growth since the second quarter of 2009. Inflation and exposure to Europe's economic woes are leading causes for the lower expansion rate, but India is certainly not alone feeling the effects of global slowdown. Goyal writes: While India’s growth is still the fastest after China among major economies, expansion in BRIC nations is starting to falter as demand from Europe wanes. China’s economy grew 9.1 percent in the third quarter from a year earlier, the least since 2009. Manufacturing in India grew 2.7 percent in the three months through September from a year earlier, slower than the 7.2 percent gain in the previous quarter, today’s report showed. Mining fell 2.9 percent, farm output rose 3.2 percent and construction grew 4.3 percent. Investment by companies and the government declined 0.6 percent in the three months ended Sept. 30 from a year earlier after a 7.9 percent gain in the previous three months, according to the report. “The slippage in investment that we are seeing doesn’t jeopardize the medium-to-long term story at all,” Kaushik Basu, chief economic adviser in India’s finance ministry, told reporters in New Delhi today. He expects India’s economy to expand about 7.5 percent in the year ending March 31. Read India’s Economy Expands Least Since 2009 as Fastest BRIC Inflation Bites here .

  • Low Expectations and No Monetary Policy Changes from the FOMC November Meeting

    The Federal Open Market Committee has wrapped up its two day November meeting, and it appears there are no significant changes to monetary policy coming in the near future. The Fed will keep the federal funds target rate at 0 to 1/4 percent, as the committee anticipates recovery will continue at a slow pace. From the release: The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. Here's a look at the Fed's current projections for GDP and jobs: Read the full release here , and watch Fed Chair Ben Bernanke's press conference from the FOMC meeting below:

  • WSJ Forecasting Survey: Another Decade of Stagnant Income

    The first decade of the twenty-first century brought declining incomes for American workers. And it doesn't look like we'll see a rebound any time soon. Economists surveyed for the Wall Street Journal 's forecasting survey predict that the US median income, adjusted for inflation, will not reach 2000 levels again until at least 2021. Phil Izzo reports on the findings in this WSJ video:

  • Sims and Sargent Awarded 2011 Nobel Economic Prize

    The 2011 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel will go, jointly, to Thomas J. Sargent and Christopher A. Sims "for their empirical research on cause and effect in the macroeconomy." This seems a timely award for two men who have done a great deal of work on the relationship between public policy moves and economic growth. As central banks consider tools at their disposal to manage inflation or deflation, or elected officials argue over tax policy and spending, the work of Sargent and Sims provides needed analysis of potential impact. From the Nobel press release: Thomas Sargent has shown how structural macroeconometrics can be used to analyze permanent changes in economic policy. This method can be applied to study macroeconomic relationships when households and firms adjust their expectations concurrently with economic developments. Sargent has examined, for instance, the post-World War II era, when many countries initially tended to implement a high-inflation policy, but eventually introduced systematic changes in economic policy and reverted to a lower inflation rate. Christopher Sims has developed a method based on so-called vector autoregression to analyze how the economy is affected by temporary changes in economic policy and other factors. Sims and other researchers have applied this method to examine, for instance, the effects of an increase in the interest rate set by a central bank. It usually takes one or two years for the inflation rate to decrease, whereas economic growth declines gradually already in the short run and does not revert to its normal development until after a couple of years. Sims and Sargent are much, much better know within central bank staffs than by the general public. We're on the lookout for some of their public speeches. So far we have two that provide glimpses into their work. First, here's Sargent speaking last year at Wake Forest University Business School about where the line between monetary and fiscal policy has been drawn throughout US history. (Starting at 06:00, Sargent addresses the debate, going back 235 years of whether there should be a central bank in the US): Thomas Sargent: Drawing Lines in U.S. Monetary and Fiscal History from WFU Schools of Business on Vimeo . And here is Sims speaking at an Institute for New Economic Thinking event last year, in which he discusses interest rate policy at central banks and the effectiveness of modeling tools in aiding central bank decision-making:

  • 'Extreme' Policy Moves of 2011

    Calling the Fed's latest maneuvering, dubbed operation twist , extreme policy might seem a little, well, extreme. But that is exactly what the folks at Central Bank News have done in adding it to the list of the most extreme policy moves of 2011. Here's the list: 1. Belarus Financial Crisis 2. The Twist 3. Swiss Franc Floor 4. ECB SMP and the Confidence Crisis 5. Bank of Japan Earthquake Response 6. Vietnamese Hyperinflation 7. Brazilian Rate Reversal 8. Kiwi Earthquake Insurance 9. Joint Liquidity Operations 10. 'Chindia' Tightening For details of each of the policy moves listed above, read Top 10 Most Extreme Monetary Policy Moves of 2011 here .

  • The IMF Growth Tracker Showing Moderating Growth Across Global Economy

    The IMF's World Economic Outlook shows a worrying global economic slowdown, led by Europe and the US. Among the many causes cited for slowing economic activity is the lack of demand in the private sector. The IMF's researchers suggest that they expected a quicker "handover from public to private demand." The tsunami and earthquake damage in Japan also bears some of the blame, as do disruption in oil supplies in North Africa this year. A lasting, and troubling factor is the lack of confidence on the part of consumers and businesses in developed economies of the West. The ripple effects of the dip in confidence are being felt around the globe. Note the impact on growth, as shown in the IMF's Growth Tracker : From the report: Worryingly, various consumer and business confidence indicators in advanced economies have retreated sharply, rather than strengthened as might have been expected in the presence of mostly temporary shocks that are unwinding. Accordingly, the IMF’s Growth Tracker (Figure 1.4, top panel) points to low growth over the near term. WEO projections assume that policymakers keep their commitments and the financial turmoil does not run beyond their control, allowing confidence to return as conditions stabilize. The return to stronger activity in advanced economies will then be delayed rather than derailed by the turmoil. Read the World Economic Outlook, and watch video of the IMF staff discussing their findings, here .

  • Paul Volcker on 'A Little Inflation'

    In a New York Times op-ed, Paul Volcker expresses some concern that members of the Federal Reserv's Open Market Committee are starting to find the prospects of "a little inflation" tempting. The thinking that concerns Volcker is that 4 or 5% inflation might have a stimulating effect for the economy. Not so, says Volcker: My point is not that we are on the edge today of serious inflation, which is unlikely if the Fed remains vigilant. Rather, the danger is that if, in desperation, we turn to deliberately seeking inflation to solve real problems — our economic imbalances, sluggish productivity, and excessive leverage — we would soon find that a little inflation doesn’t work. Then the instinct will be to do a little more — a seemingly temporary and “reasonable” 4 percent becomes 5, and then 6 and so on. What we know, or should know, from the past is that once inflation becomes anticipated and ingrained — as it eventually would — then the stimulating effects are lost. Once an independent central bank does not simply tolerate a low level of inflation as consistent with “stability,” but invokes inflation as a policy, it becomes very difficult to eliminate. It is precisely the common experience with this inflation dynamic that has led central banks around the world to place prime importance on price stability. They do so not at the expense of a strong productive economy. They do it because experience confirms that price stability — and the expectation of that stability — is a key element in keeping interest rates low and sustaining a strong, expanding, fully employed economy. Read A Little Inflation Can Be a Dangerous Thing here .

  • Bernanke on the Outlook for Growth and Inflation

    Federal Reserve Chairman Ben Bernanke also took to the podium yesterday, albeit with a much, much smaller audience. He gave his outlook on the US Economy in Minneapolis, but he there was little in his speech to suggest any significant change in monetary policy. He did address increased gas and food prices in the context of inflation concerns: Prices of many commodities, notably oil, increased sharply earlier this year. Higher gasoline and food prices translated directly into increased inflation for consumers, and in some cases producers of other goods and services were able to pass through their higher costs to their customers as well. In addition, the global supply disruptions associated with the disaster in Japan put upward pressure on motor vehicle prices. As a result of these influences, inflation picked up significantly; over the first half of this year, the price index for personal consumption expenditures rose at an annual rate of about 3-1/2 percent, compared with an average of less than 1-1/2 percent over the preceding two years. However, inflation is expected to moderate in the coming quarters as these transitory influences wane. In particular, the prices of oil and many other commodities have either leveled off or have come down from their highs. Meanwhile, the step-up in automobile production should reduce pressure on car prices. Importantly, we see little indication that the higher rate of inflation experienced so far this year has become ingrained in the economy. Longer-term inflation expectations have remained stable according to the indicators we monitor, such as the measure of households' longer-term expectations from the Thompson Reuters/University of Michigan survey, the 10-year inflation projections of professional forecasters, and the five-year-forward measure of inflation compensation derived from yields of inflation-protected Treasury securities. In addition to the stability of longer-term inflation expectations, the substantial amount of resource slack that exists in U.S. labor and product markets should continue to have a moderating influence on inflationary pressures. Notably, because of ongoing weakness in labor demand over the course of the recovery, nominal wage increases have been roughly offset by productivity gains, leaving the level of unit labor costs close to where it had stood at the onset of the recession. Given the large share of labor costs in the production costs of most firms, subdued unit labor costs should be an important restraining influence on inflation. Read Bernanke's speech here .

  • FOMC Meeting Minutes

    The Fed has released the minutes from the June Federal Open Market Committee meeting, and it is an interesting read. Okay, maybe interesting isn't the right word. Perhaps illuminating. In short, members of the committee hold to their views that the slow but steady recovery will continue, though they are looking at it as more slow now than they thought it would be a few months ago. And they largely hold to their policies of the moment--though there is clearly some disagreement over monetary policy moving forward: Most participants expected that much of the rise in headline inflation this year would prove transitory and that inflation over the medium term would be subdued as long as commodity prices did not continue to rise rapidly and longer-term inflation expectations remained stable. Nevertheless, a number of participants judged the risks to the outlook for inflation as tilted to the upside. Moreover, a few participants saw a continuation of the current stance of monetary policy as posing some upside risk to inflation expectations and actual inflation over time. However, other participants observed that measures of longer-term inflation compensation derived from financial instruments had remained stable of late, and that survey-based measures of longer-term inflation expectations also had not changed appreciably, on net, in recent months. These participants noted that labor costs were rising only slowly, and that persistent slack in labor and product markets would likely limit upward pressures on prices in coming quarters. Participants agreed that it would be important to pay close attention to the evolution of both inflation and inflation expectations. A few participants noted that the adoption by the Committee of an explicit numerical inflation objective could help keep longer-term inflation expectations well anchored. Another participant, however, expressed concern that the adoption of such an objective could, in effect, alter the relative importance of the two components of the Committee's dual mandate. Participants also discussed the medium-term outlook for monetary policy. Some participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation. Others, however, saw the recent configuration of slower growth and higher inflation as suggesting that there might be less slack in labor and product markets than had been thought. Several participants observed that the necessity of reallocating labor across sectors as the recovery proceeds, as well as the loss of skills caused by high levels of long-term unemployment and permanent separations, may have temporarily reduced the economy's level of potential output. In that case, the withdrawal of monetary accommodation may need to begin sooner than currently anticipated in financial markets. A few participants expressed uncertainty about the efficacy of monetary policy in current circumstances but disagreed on the implications for future policy. Read through the full minutes here .
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