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  • 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 .

  • Stephen Roach: 'Odds of a hard landing in China and India remain low'

    We find it hard to talk about China without talking about India. Sometimes, for the sake of economic comparison, we pit the two against each other. Other times we pit the two, often along with South American kindred spirit Brazil, against the developed economies of the West. india and China seemed to zag while the rest of the world zigged during the global economic crisis, and were able to grow while the US, China, and Europe stagnated. But as 2011 ends, the two growing powerhouse economies are showing some vulnerability. At Project Syndicate , Stephen Roach warns us not to carried away by concerns that China and India will struggle in the coming year. He is a little worried about India's ability to avert crisis. As for China, Roach says not to expect a "hard landing," as China's policymakers have taken necessary action to ward off any major downfall: That is particularly evident in Chinese officials’ successful campaign against inflation. Administrative measures in the agricultural sector, aimed at alleviating supply bottlenecks for pork, cooking oil, fresh vegetables, and fertilizer, have pushed food-price inflation lower. This is the main reason why the headline consumer inflation rate receded from 6.5% in July 2011 to 4.2% in November. Meanwhile, the People’s Bank of China, which hiked benchmark one-year lending rates five times in the 12 months ending this October, to 6.5%, now has plenty of scope for monetary easing should economic conditions deteriorate. The same is true with mandatory reserves in the banking sector, where the government has already pruned 50 basis points off the record 21.5% required-reserve ratio. Relatively small fiscal deficits – only around 2% of GDP in 2010 – leave China with an added dimension of policy flexibility should circumstances dictate. India, however, "is more problematic," Roach notes: India is more problematic. As the only economy in Asia with a current-account deficit, its external funding problems can hardly be taken lightly. Like China, India’s economic-growth momentum is ebbing. But unlike China, the downshift is more pronounced – GDP growth fell through the 7% threshold in the third calendar-year quarter of 2011, and annual industrial output actually fell by 5.1% in October. But the real problem is that, in contrast to China, Indian authorities have far less policy leeway. For starters, the rupee is in near free-fall. That means that the Reserve Bank of India – which has hiked its benchmark policy rate 13 times since the start of 2010 to deal with a still-serious inflation problem – can ill afford to ease monetary policy. Moreover, an outsize consolidated government budget deficit of around 9% of GDP limits India’s fiscal-policy discretion. Read Why India is Riskier than China here .

  • Barry Bosworth on Fighting Stagnation in the US and Japan

    Japan went into a recession two decades ago and has been experiencing economic stagnation ever since. With low growth in the US, there may be lessons policymakers here can take from monetary and fiscal policy moves in Japan. Barry Bosworth , senior fellow for Economic Studies at Brookings , says both Japan and the US need to embrace significant, structural changes to their economies in order to spur real growth:

  • 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):

  • 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:

  • 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:

  • Romer and Lessons from 1937

    Christina Romer , chair of the President's Council of Economic Advisers, has a guest article in the latest Economist. Romer, who has been bullish on the Obama Administration's economic recovery plan, writes that we need to look back to 1937 to understand why, in her view, the stimulus spending is the right antidote for this recession. During FDR's first four years in office, the economy rebounded from the Depression in "rapid" fashion--"annual GDP growth averaged 9%." Unemployment dropped significantly in that period. But come 1937, unemployment surged (see chart at right from the Economist), as the country went into a deeper downturn. Romer: ...The fundamental cause of this second recession was an unfortunate, and largely inadvertent, switch to contractionary fiscal and monetary policy. One source of the growth in 1936 was that Congress had overridden Mr Roosevelt’s veto and passed a large bonus for veterans of the first world war. In 1937, this fiscal stimulus disappeared. In addition, social-security taxes were collected for the first time. These factors reduced the deficit by roughly 2.5% of GDP, exerting significant contractionary pressure. Also important was an accidental switch to contractionary monetary policy. In 1936 the Federal Reserve began to worry about its “exit strategy”. After several years of relatively loose monetary policy, American banks were holding large quantities of reserves in excess of their legislated requirements. Monetary policymakers feared these excess reserves would make it difficult to tighten if inflation developed or if “speculative excess” began again on Wall Street. In July 1936 the Fed’s board of governors stated that existing excess reserves could “create an injurious credit expansion” and that it had “decided to lock up” those excess reserves “as a measure of prevention”. The Fed then doubled reserve requirements in a series of steps. Unfortunately it turned out that banks, still nervous after the financial panics of the early 1930s, wanted to hold excess reserves as a cushion. When that excess was legislated away, they scrambled to replace it by reducing lending. According to a classic study of the Depression by Milton Friedman and Anna Schwartz, the resulting monetary contraction was a central cause of the 1937-38 recession. Red the full article here .