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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 .

  • Fed Investments Net Nearly $77 Billion in 2011

    The Federal Reserve had another good investment year, making $76.9 billion in profits off of treasury bonds and mortgage-backed securities and the like. But the Wall Street Journal 's Jon Hilsenrath says not to get too excited. While the Fed was able to turn over that tidy profit to the US Treasury this year, there is still quite a bit of risk in its portfolio.

  • 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 .

  • Stiglitz's 'Alternative Theory of the Depression'

    In a thought-provoking piece for the January issue of Vanity Fair , Joseph Stiglitz urges us to consider an important element of the Great Depression that has not received as much attention in the media as monetary policy, a troubled banking system, or political battling. Stiglitz points us to the shift away from agriculture in the late 1920s through the early 1930s as cause of the Depression. If we are to look more closely at that piece of history, then we may be able to extract important lessons for today, as we see so many Americans going through revolutionary changes in their work and in their workplaces. Citing resebarch that he has been doing with Bruce Greenwald , Stiglitz writes: The parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology. (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs. The millions of jobless former factory workers once employed in cities such as Youngstown and Birmingham and Gary and Detroit are the modern-day equivalent of the Depression’s doomed farmers. The consequences for consumer spending, and for the fundamental health of the economy—not to mention the appalling human cost—are obvious, though we were able to ignore them for a while. For a time, the bubbles in the housing and lending markets concealed the problem by creating artificial demand, which in turn created jobs in the financial sector and in construction and elsewhere. The bubble even made workers forget that their incomes were declining. They savored the possibility of wealth beyond their dreams, as the value of their houses soared and the value of their pensions, invested in the stock market, seemed to be doing likewise. But the jobs were temporary, fueled on vapor. Mainstream macro-economists argue that the true bogeyman in a downturn is not falling wages but rigid wages—if only wages were more flexible (that is, lower), downturns would correct themselves! But this wasn’t true during the Depression, and it isn’t true now. On the contrary, lower wages and incomes would simply reduce demand, weakening the economy further. Of four major service sectors—finance, real estate, health, and education—the first two were bloated before the current crisis set in. The other two, health and education, have traditionally received heavy government support. But government austerity at every level—that is, the slashing of budgets in the face of recession—has hit education especially hard, just as it has decimated the government sector as a whole. Nearly 700,000 state- and local-government jobs have disappeared during the past four years, mirroring what happened in the Depression. As in 1937, deficit hawks today call for balanced budgets and more and more cutbacks. Instead of pushing forward a structural transition that is inevitable—instead of investing in the right kinds of human capital, technology, and infrastructure, which will eventually pull us where we need to be—the government is holding back. Current strategies can have only one outcome: they will ensure that the Long Slump will be longer and deeper than it ever needed to be. Read The Book of Jobs 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):

  • ECB to Lower Interest Rates to 1%

    In a press conference earlier today, European Central Bank President Mario Draghi announced that the ECB has cut interest rates to an historically low 1%. He also made it clear that the ECB would not go on a bond buying spree. Dow Jones 's Andrea Hotter and Paul Hannon discuss the key takeaways from the announcement. You can watch a full webcast of Draghi's press conference here .

  • Marketplace Whiteboard: Why the EU Wants Dollars

    Last week the Federal Reserve and the European Central Bank announced a plan in which they, along with other key central banks, will coordinate efforts to fight the global credit crunch . In short, the Fed will make it easier for the ECB to get dollars. Why do they want dollars, when they have their own currency? Paddy Hirsch takes to the Marketplace Whiteboard to explain: Why does the EU want U.S. dollars? from Marketplace on Vimeo .

  • SF Fed: Impact of News on Interest Rates

    In a new Economic Letter , Michael Bauer , an economist for the Federal Reserve Bank of San Francisco , takes a look at the impact of news on bond markets. Surprising data has an immediate impact on short-term interest rates, but what about long-term rates? Bauer argues for examining the "entire term structure of interest rates." Monetary policy actions, such as changes in the federal funds target, releases of Federal Open Market Committee (FOMC) statements, or speeches by committee participants, often contain new information relevant to financial markets. Importantly, while the Fed has direct control only over the federal funds rate, it can also affect interest rates at other maturities by changing expectations of future monetary policy. How does monetary policy affect the term structure? In what way does it affect longer-term interest rates, which are crucial in determining lending costs and mortgage rates, and strongly influence economic behavior? Looking at the entire term structure of forward rates reveals how much news about monetary policy changes perceptions of economic fundamentals and affects rates at different horizons. Specifically, changes in the term structure show whether policy actions directly affect distant forward rates or whether the effects die after medium horizons. An important difference exists between macroeconomic news and monetary policy news. We can quantify economic surprises, but we do not have a measure that satisfactorily captures all aspects of policy surprises. The language of FOMC statements and speeches cannot easily be quantified. To capture the surprise component, researchers have focused on how policy actions affect financial markets (see Kuttner 2001). Thus, to assess the effects of policy actions, I employ the same model-based methodology I used with employment and inflation news, examining changes across the entire term structure of interest rates as policy surprises were made public. Figure 3 shows the effects on forward rates of three Fed moves in 2007 to lower the federal funds target: a half percentage point cut on September 18, a quarter percentage point cut on October 31, and another quarter percentage point cut on December 11. These three easing actions had very different effects on the term structure. In September, the size of the cut surprised market participants. Short-term rates fell, but longer forward rates actually increased, which may have reflected an upward revision in expectations about economic growth. In October, forward rates at short and medium horizons increased on the day of the meeting, probably because markets had expected a larger federal funds rate move or a change in the language of the Fed’s policy statement. Thus, monetary policy was viewed as tighter than previously anticipated. Markets had anticipated the Fed’s December cut, so the short end of the term structure did not move much. But medium and longer-term forward rates fell significantly. Changing statement language apparently led market participants to expect much easier monetary policy over the medium and long horizons. Read What Moves the Interest Rate Term Structure? 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:

  • The Economist: Multimedia Explainer on Currency Wars

    The Economist provides another helpful primer on currency battles across the globe. The trick: keeping your currency low enough to make exports more affordable. Not an easy thing to do as dominant global currencies like the dollars remain down:

  • Mark Thoma Sees SIgns of Coming Fed Action

    In his Money Watch column, Mark Thoma looks at the below graph and sees signs that the Fed will pursue further quantitative easing measures: Thoma writes: The Fed is very sensitive to and very fearful of deflation, and the fall in inflation expectations evident in the graph was one of the reasons the Fed decided to implement QE1. And as you can see from the graph, this (along with the other steps the Fed took at that time) turned the expectations around, at least for awhile. However, just before the dotted vertical line on the graph, expectations began falling again. What is the vertical line? It shows the point in time when QE2 was announced by Ben Bernanke (August 27 of 2010 at Jackson Hole, Wyoming), and once again inflation expectations turned around. However, notice that recently the trend has turned downward again and if this continues the Fed is likely to intervene once again. What do you see in the graph? Do monetary policy measures need to be taken? What are the lessons from QE1 and QE2? Read The Fed Is Laying the Groundwork for Further Easing here .

  • Lieberthal: China and US Must Work Together to Resolve Currency Matters

    The US Senate sent a message last week, voting to enact measures against China for that country's currency "manipulation." It is unlikely that the House will go along with the Senate, so what we have is more gamesmanship than actual policy . But it does bring the issue of China's currency policies back to the fore. Kenneth Lieberthal , director of the John L. Thornton China Center at Brookings , argues that both the US and China need to resolve the problem of currency manipulation, as both economies depend on a strong relationship in order to grow:

  • 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 .
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