Tag Archives: fed

No central bank had considered any of these measures

Who would have thought that six years after the global financial crisis, most advanced economies would still be swimming in an alphabet soup – ZIRP, QE, CE, FG, NDR, and U-FX Int – of unconventional monetary policies? No central bank had considered any of these measures (zero interest rate policy, quantitative easing, credit easing, forward guidance, negative deposit rate, and unlimited foreign exchange intervention, respectively) before 2008. Today, they have become a staple of policymakers’ toolkits.

Indeed, just in the last year and a half, the European Central Bank adopted its own version of FG, then moved to ZIRP, and then embraced CE, before deciding to try NDR. In January, it fully adopted QE. Indeed, by now the Fed, the Bank of England, the Bank of Japan, the ECB, and a variety of smaller advanced economies’ central banks, such as the Swiss National Bank, have all relied on such unconventional policies.

One result of this global monetary-policy activism has been a rebellion among pseudo-economists and market hacks in recent years. This assortment of “Austrian” economists, radical monetarists, gold bugs, and Bitcoin fanatics has repeatedly warned that such a massive increase in global liquidity would lead to hyperinflation, the US dollar’s collapse, sky-high gold prices, and the eventual demise of fiat currencies at the hands of digital krypto-currency counterparts.

None of these dire predictions has been borne out by events. Inflation is low and falling in almost all advanced economies; indeed, all advanced-economy central banks are failing to achieve their mandate – explicit or implicit – of 2% inflation, and some are struggling to avoid deflation. Moreover, the value of the dollar has been soaring against the yen, euro, and most emerging-market currencies. Gold prices since the fall of 2013 have tumbled from $1,900 per ounce to around $1,200. And Bitcoin was the world’s worst-performing currency in 2014, its value falling by almost 60%.

To be sure, most of the doomsayers have barely any knowledge of basic economics. But that has not stopped their views from informing the public debate. So it is worth asking why their predictions have been so spectacularly wrong.

The root of their error lies in their confusion of cause and effect. The reason why central banks have increasingly embraced unconventional monetary policies is that the post-2008 recovery has been extremely anemic. Such policies have been needed to counter the deflationary pressures caused by the need for painful deleveraging in the wake of large buildups of public and private debt.

In most advanced economies, for example, there is still a very large output gap, with output and demand well below potential; thus, firms have limited pricing power. There is considerable slack in labor markets as well: Too many unemployed workers are chasing too few available jobs, while trade and globalization, together with labor-saving technological innovations, are increasingly squeezing workers’ jobs and incomes, placing a further drag on demand.

Moreover, there is still slack in real-estate markets where booms went bust (the United States, the United Kingdom, Spain, Ireland, Iceland, and Dubai). And bubbles in other markets (for example, China, Hong Kong, Singapore, Canada, Switzerland, France, Sweden, Norway, Australia, New Zealand) pose a new risk, as their collapse would drag down home prices.

Commodity markets, too, have become a source of disinflationary pressure. North America’s shale-energy revolution has weakened oil and gas prices, while China’s slowdown has undermined demand for a broad range of commodities, including iron ore, copper, and other industrial metals, all of which are in greater supply after years of high prices stimulated investments in new capacity.

China’s slowdown, coming after years of over-investment in real estate and infrastructure, is also causing a global glut of manufactured and industrial goods. With domestic demand in these sectors now contracting sharply, the excess capacity in China’s steel and cement sectors – to cite just two examples – is fueling further deflationary pressure in global industrial markets.

Rising income inequality, by redistributing income from those who spend more to those who save more, has exacerbated the demand shortfall. So has the asymmetric adjustment between over-saving creditor economies that face no market pressure to spend more, and over-spending debtor economies that do face market pressure and have been forced to save more.

Simply put, we live in a world in which there is too much supply and too little demand. The result is persistent disinflationary, if not deflationary, pressure, despite aggressive monetary easing.

The inability of unconventional monetary policies to prevent outright deflation partly reflects the fact that such policies seek to weaken the currency, thereby improving net exports and increasing inflation. This, however, is a zero-sum game that merely exports deflation and recession to other economies.

Perhaps more important has been a profound mismatch with fiscal policy. To be effective, monetary stimulus needs to be accompanied by temporary fiscal stimulus, which is now lacking in all major economies. Indeed, the eurozone, the UK, the US, and Japan are all pursuing varying degrees of fiscal austerity and consolidation.

Even the International Monetary Fund has correctly pointed out that part of the solution for a world with too much supply and too little demand needs to be public investment in infrastructure, which is lacking – or crumbling – in most advanced economies and emerging markets (with the exception of China). With long-term interest rates close to zero in most advanced economies (and in some cases even negative), the case for infrastructure spending is indeed compelling. But a variety of political constraints – particularly the fact that fiscally strapped economies slash capital spending before cutting public-sector wages, subsidies, and other current spending – are holding back the needed infrastructure boom.

All of this adds up to a recipe for continued slow growth, secular stagnation, disinflation, and even deflation. That is why, in the absence of appropriate fiscal policies to address insufficient aggregate demand, unconventional monetary policies will remain a central feature of the macroeconomic landscape.

Read more at http://www.project-syndicate.org/commentary/unconventional-monetary-policies-and-fiscal-stimulus-by-nouriel-roubini-2015-02

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5 THINGS TO WATCH AT THE DECEMBER FED MEETING

The Federal Reserve holds its last policy meeting of the year on Tuesday and Wednesday, resulting in plenty of material to be scoured for clues about when interest rates will start inching up. The central bank’s policy committee releases its statement and new economic projections at 2 p.m. Wednesday, followed by Chairwoman Janet Yellen’s press conference at 2:30 p.m. Here are five key things to keep an eye on.

A ‘CONSIDERABLE TIME’ TO SAY GOODBYE?

THE LABOR MARKET

OIL PRICE SPILLOVERS

INFLATION EXPECTATIONS, FINANCIAL STABILITY

OVERSEAS OUTLOOK

 

Full Text can be found here : http://blogs.wsj.com/briefly/2014/12/16/5-things-to-watch-at-the-december-fed-meeting/

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Why you should care about bonds even if everyone is talking about stocks

The US stock market gets all the attention, but the bond market is where the real fortunes are made. Chris Arnade, a former bond trader, describes the unsmiling, powerful markets that move companies and governments

On Wall Street, nearly everybody trades either stocks or bonds. Stock traders are the smiling guys with short hair, button-up blue Brooks Brother shirts, and dark navy pinstripe suits. Bond traders are the same guys, only without the smile.

Stocks do well when the world is doing well and bonds mostly do well when things are going badly. This makes bond traders widely disliked. It is not cool to smile when things are going badly for everyone else.

I traded bonds for 20 years. During that time, countless friends, relatives, friends of relatives, drunk strangers and strange drunks asked me: “What stock should I buy?”

Nobody asked me about bonds. Maybe I should have smiled more.

Stocks seem easy. They are a single price that tells a story on how a company is doing: Apple at $100? Great! Bank of America at $15? Not so hot.

Bonds don’t seem easy. They have a yield, they have price, they have maturity, and they have a coupon. There are government bonds, there are corporate bonds, there are bonds issued by cities. Bonds are individual contracts to pay back a debt. They have a lot of moving parts.

Stocks are how you make money and bonds are how you borrow money. Everybody likes making money, nobody likes borrowing money.

bonds
Specialist Henry Becker, left, directs trading at the post that handles AIG on the floor of the New York stock exchange. Stocks extended their decline and bond prices jumped a day after Wall Street’s steady collapse on the week of the crisis.

http://www.theguardian.com/business/2014/nov/03/bond-market-matters-talking-stocks

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A Checkpoint with this Week’s Expected End of QE

 

What’s New: With the curtain falling on the Fed’s QE. let’s take a look at what’s been happening of late for US Treasuries. The yields on the 10-, 20- and 30 year Treasuries have generally trended downward since the end of 2013.

The latest Freddie Mac Weekly Primary Mortgage Market Survey last Thursday puts the 30-year fixed at 3.92%, well off its 4.53% 2014 peak during the first week of January and its lowest rate since June 2013.

 

Here is a snapshot of the 10-year yield and 30-year fixed-rate mortgage since 2008.

A log-scale snapshot of the 10-year yield offers a more accurate view of the relative change over time. Here is a long look since 1965, starting well before the 1973 Oil Embargo that triggered the era of “stagflation” (economic stagnation with inflation). I’ve drawn a trendline connecting the interim highs following those stagflationary years. The red line starts with the 1987 closing high on the Friday before the notorious Black Monday market crash. The S&P 500 fell 5.16% that Friday and 20.47% on Black Monday.

Here is a long look back, courtesy of a FRED graph, of the Freddie Mac weekly survey on the 30-year fixed mortgage, which began in May of 1976.

A Perspective on Yields Since 2007

 http://www.advisorperspectives.com/dshort/updates/Treasury-Yield-Snapshot.php

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THINGS TO WATCH IN FRIDAY’S JOBS REPORT

The Labor Department’s initial estimate of August job growth on Friday is expected to show another solid month of hiring. Economists surveyed by The Wall Street Journal forecast the economy added 225,000 jobs, which is roughly in between the 12-month average of 214,000 and the 3-month average of 245,000. The unemployment rate is expected to drop to 6.1% after ticking up to 6.2% in July. Beyond those headline figures, here are five things to watch on Friday.

Read the 5 things to watch here :  http://blogs.wsj.com/briefly/2014/09/04/5-things-to-watch-in-fridays-jobs-report-2/

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The Fed Is Not As Powerful As We Think

This past week marked the annual gathering of bankers, financial officials, and other economic experts hosted by the Kansas City Federal Reserve Bank in Jackson Hole, Wyoming. On Friday, Fed Chair Janet Yellen and European Central Bank head Mario Draghi both spoke; in a slow week for the markets, these speeches received the bulk of the econ media’s attention, and Yellen’s remarks were heralded for days as the week’s major financial event.

Zachary KarabellZACHARY KARABELL

Zachary Karabell is an author, money manager, and commentator. His most recent book is The Leading Indicators: A Short History of the Numbers That Rule Our World.

This emphasis on the utterances of the Fed chair is only one aspect of a deification of the Fed and whoever heads it. The elevation of the Fed chair to current heights is not benign. It fosters an unhealthy dependency and excuses policymakers and market participants from making their own judgments, as well as their own mistakes.

More problematic, however, was the topic of Yellen’s speech: the labor market. Don’t get me wrong. The labor market is a crucial economic topic. But the notion that the Fed should be responsible for the labor market is both new and flawed. The so-called “dual mandate” of the Fed is to focus on price stability and on employment. But the idea that the Fed can do much to affect employment is, at the very least, questionable.

The pronouncements of the chair of the Federal Reserve now occupy a special place in the financial ecosystem. The Fed chair regularly appears before Congress to give an assessment of the economy, and these appearances receive considerably more attention in media and financial circles than equivalent briefings by the Treasury secretary, let alone the chairpersons of the National Economic Council or the Council of Economic Advisers.

 

http://www.slate.com/articles/business/the_edgy_optimist/2014/08/janet_yellen_jackson_hole_speech_let_s_stop_deifying_the_fed.html

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Reminder :: Quantitative easing alone will not do the trick

Very low inflation poses a mounting threat to the economic stability of the eurozone. The rate of consumer price inflation has been below 1 per cent since October, and hence far below the European Central Bank’s (ECB) target of just below 2 per cent. This highlights the degree of weakness in the eurozone economy – and reinforces it – notwithstanding the optimism generated by a return to modest growth. And it further increases doubts over debt sustainability across the currency union: without a healthy dose of inflation, it is much harder for households, firms and governments to reduce their debt burdens.  To make things worse, in the most indebted countries, such as Greece, Portugal, Spain and Italy, inflation is even lower than the eurozone average. In response, many observers argue that the ECB should employ unconventional tools like quantitative easing (QE) to boost inflation. The problem is that QE alone is unlikely to be effective without a significant change in the ECB’s approach to monetary policy. The ECB needs to manage people’s expectations about the future path of demand, income and inflation more forcefully if it is to generate a proper economic recovery across the Eurozone. 

 

See more at: http://www.cer.org.uk/insights/quantitative-easing-alone-will-not-do-trick#sthash.00rBSkSf.dpuf

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Jackson Hole Guide: Investors Seek Yellen Job-Market View

Here’s what to look for from the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole,Wyoming, which runs Aug. 21-23.

— Yellen’s keynote: The highlight will be Fed Chair Janet Yellen’s speech Aug. 22 on labor markets at 10 a.m. New York time. She’ll probably reiterate the Fed’s view that there is plenty of room for improvement in the labor market, according to Dean Maki, chief U.S. economist at Barclays Plc in New York.

— In July, the Federal Open Market Committee changed the language of its policy statement to highlight “significant underutilization of labor resources” as a justification for continued easy-money policies, even though the unemployment rate has fallen faster than Fed officials had forecast. The Fed chief will probably “point to measures like the elevated number of workers that are employed part time for economic reasons as evidence” of continued slack, Maki said.

— Yellen “would like to move away from this being a market-moving policy speech and get it back to being more of an academic exercise,” said Michelle Girard, chief U.S. economist at RBS Securities Inc. in Stamford,Connecticut. “I don’t think that she will use this as a tool to signal anything in terms of the Fed’s thinking, or certainly any meaningful change in the Fed’s thinking.”

— Wage focus: Tepid growth in wages is one area Yellen could choose to explore in more detail if she wants to advance the conversation, said Ethan Harris, co-head of global economics research at Bank of America Corp. in New York.

Stagnant Wages

— Average hourly earnings rose 2 percent in July from the year before, matching the mean increase over the past five years and down from 3.1 percent in the year ended December 2007, Labor Department data showed in the latest employment report. Separately, the employment cost index, a measure of labor cost changes, advanced 2 percent in June from the previous year.

— “A more careful look at wages would be a good place for her to plow some new ground,” Harris said. “They are way too weak, no sign of improvement, and if you’re going to defend why the Fed is going so slowly here, that’s your exhibit A: slow wage growth.”

— Conference participants will be mostly academics and central bankers; economists from major Wall Street banks weren’t invited this year.

— Draghi’s outlook: European Central Bank President Mario Draghi will follow Yellen with the keynote luncheon address. Investors will be seeking further insights into how weak his 18-nation economy is and whether he’s more likely to deploy Fed-style quantitative easing that the ECB has resisted.

Europe Stalls

— The euro area unexpectedly stalled in the second quarter as its three biggest economies failed to grow, adding to the region’s deflation risks. Draghi already committed this month to intensifying the unprecedented stimulus he unveiled in June if the outlook deteriorates.

— Draghi’s challenge may be compounded if Yellen remains focused on boosting the U.S. labor market, according to Alberto Gallo, head of macro credit research at Royal Bank of Scotland Group Plc in London. That’s because her bias toward continued stimulus will keep the dollar weak against the euro.

— Draghi “has tried to push down the euro and has so far won little ground against the dollar,” Gallo said. “The ECB is under even more pressure to do more.”

— Structural woes: Panel discussions on labor-market research presented at the conference may reveal “a growing awareness that underutilized labor resources may be a more permanent fixture,” rather than a cyclical shift, said Eric Green, global head of foreign exchange and rates at TD Securities USA LLC in New York.

‘Hawkish’ Tone

More here : http://www.bloomberg.com/news/2014-08-20/jackson-hole-guide-investors-seek-yellen-job-market-view.html

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FOMC not so important this month

The Federal Open Market Committee releases minutes from its last meeting on Wednesday afternoon, but Wall Street is already downplaying the event as a sideshow in comparison to an annual symposium on monetary policy in Jackson Hole, Wyoming, two days later.

“The FOMC minutes are telling us about what happened three weeks ago, and Jackson Hole, given its precedent for signaling meaningful policy shifts, has taken on this very elevated status; it gets that extra attention even if it is just an academic conference,” said Jeff Greenberg, senior economist at J.P. Morgan Private Bank.

While investors will parse Wednesday’s minutes for clues as to when the Fed will start hiking interest rates, “the real look ahead for any hints as to monetary policy is Jackson Hole,” said Art Hogan, chief market strategist at Wunderlich Securities.

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Secular stagnation :: Is there something seriously wrong with the economy?

Is there something seriously wrong with the economy?

It’s a scary prospect, and a concern that’s gotten louder and louder over the past year. In economic circles, it goes by the alliterative name of “secular stagnation.” And it’s a phrase that Fed watchers are likely to hear more and more in the months ahead.

Recent comments by the vice chairman of the Federal Reserve, Stanley Fischer, indicate questions within the central bank about whether the slow growth that has followed the recent recession could reflect, or at least could potentially morph into, longer-term issues within the economy. And while Fischer avoided the phrase “secular stagnation” in his Monday speech, Minneapolis Fed President Narayana Kocherlakota is planning to host a November symposium that directly addresses the issue of secular stagnation by name, CNBC has learned.

“I think there’s a lot of concern about how long this will last, and I think that’s certainly high on the agenda right now. At least people are entertaining that possibility now that it could drag on for longer,” said Brown University associate professor of economics Gauti Eggertsson, who authored (along with fellow Brown economist Neil Mehrotra) the landmark paper “A Model of Secular Stagnation,” which provides an in-depth explanation of how a long period of low growth could come about.

The theory of secular stagnation was first developed by Alvin Hansen, who wondered in the midst of the Great Depression whether diminishing investment opportunities in a maturing economy would stunt economic growth and permanently prevent full employment—at least in the absence of robust government intervention, which soon came in the form of the second world war.

These theories have found a new life in the aftermath of the so-called Great Recession, as the U.S. is experiencing (albeit to a much less dramatic degree) slow growth over a relatively long time period.

In November 2013, noted economist Larry Summers (who was considered, alongside current Chair Janet Yellen, a leading candidate to head the Fed) began to invoke the same phrase in arguing that the interest rate that the economy requires has fallen below zero.

The problem is that it is very difficult for nominal interest rates to fall below zero due to a constraint known as the zero lower bound. The upshot? Even with the Fed keeping short-term rates just above zero, market interest rates cannot possibly create adequate demand for loans, and thus the economy stagnates.

Without embracing the secular stagnation thesis, in Sweden on Monday, second highest-ranking Fed official Fischer gestured toward those concerns.

Noting slow growth in “labor supply, capital investment and productivity,” Fischer warned that “This may well reflect factors related to or predating the recession that are also holding down growth” and noted: “How much of this weakness on the supply side will turn out to be structural—perhaps contributing to a secular slowdown—and how much is temporary but longer than usual lasting remains a crucial and open question.”

“There was a level of concern on that point that I don’t think we generally hear,” said Nicholas Colas, chief market strategist at ConvergEx, referring to Fischer’s speech.

The stagnation debate will also be addressed by a new eBook entitled “Secular Decline,” which is due to be published on Aug. 18, and hosts contributions from Paul Krugman and Nomura’s Richard Koo, in addition to Summers, Eggertsson and Mehotra, and others.

http://www.cnbc.com/id/101914044

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