Federal Reservations

From the Fed: Minutes of the Federal Open Market Committee, January 24-25, 2012. Excerpts:

In light of the economic outlook, almost all members agreed to indicate that the Committee expects to maintain a highly accommodative stance for monetary policy and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014, longer than had been indicated in recent FOMC statements. In particular, several members said they anticipated that unemployment would still be well above their estimates of its longer-term normal rate, and inflation would be at or below the Committee's longer-run objective, in late 2014. It was noted that extending the horizon of the Committee's forward guidance would help provide more accommodative financial conditions by shifting downward investors' expectations regarding the future path of the target federal funds rate. Some members underscored the conditional nature of the Committee's forward guidance and noted that it would be subject to revision in response to significant changes in the economic outlook.

The Committee also stated that it is prepared to adjust the size and composition of its securities holdings as appropriate to promote a stronger economic recovery in a context of price stability. A few members observed that, in their judgment, current and prospective economic conditions--including elevated unemployment and inflation at or below the Committee's objective--could warrant the initiation of additional securities purchases before long. Other members indicated that such policy action could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run. In contrast, one member judged that maintaining the current degree of policy accommodation beyond the near term would likely be inappropriate; that member anticipated that a preemptive tightening of monetary policy would be necessary before the end of 2014 to keep inflation close to 2 percent.

Originally from Calculated Risk

From the Federal Reserve: The U.S. Housing Market: Current Conditions and Policy Considerations. Excerpt on converting REO to rental units:

At the same time that housing demand has weakened, the number of homes for sale is elevated relative to historical norms, due in large part to the swollen inventory of homes held by banks, guarantors, and servicers after completion of foreclosure proceedings. These properties are often called real estate owned, or REO, properties. While the total stock of REO properties is difficult to measure precisely, perhaps one-fourth of the 2 million vacant homes for sale in the second quarter of 2011 were REO properties. The combination of weak demand and elevated supply has put substantial downward pressure on house prices, and the continued flow of new REO properties--perhaps as high as 1 million properties per year in 2012 and 2013--will continue to weigh on house prices for some time. To the extent that REO holders discount properties in order to sell them quickly, the near-term pressure on home prices might be even greater.

In contrast to the market for owner-occupied houses, the market for rental housing across the nation has recently strengthened somewhat. Rents have turned up in the past year, and the national vacancy rate on multifamily rental properties has dropped noticeably from its peak in late 2009. These developments have been fairly widespread across metropolitan areas. The relative strength of the rental market reflects increased demand as families who are unable or unwilling to purchase homes are renting properties instead. Rental demand has also been supported by families who have lost their homes to foreclosure--the majority of whom move to rental housing, most commonly to single-family rentals.

The price signals in the owner-occupied and rental housing markets--that is, the decline in house prices and the rise in rents--suggest that it might be appropriate in some cases to redeploy foreclosed homes as rental properties. In addition, the forces behind the decline in the homeownership rate, such as tight credit conditions, are unlikely to unwind significantly in the immediate future, indicating a longer-term need for an expanded stock of rental housing.

Although small investors are currently buying and converting foreclosed properties to rental units on a limited scale, larger-scale conversions have not occurred for at least three interrelated reasons. First, it can be difficult for an investor to assemble enough geographically proximate properties to achieve efficiencies of scale with regard to the fixed costs of a rental program. Second, attracting investors to bulk sales opportunities--whether for rental or resale--has typically required REO holders to offer significantly larger price concessions relative to direct sales to owner occupants through conventional realtor-listing channels, in part because it can be difficult for investors to obtain financing for such sales. Third, the supervisory policy of GSE and banking organization regulators has generally encouraged sales of REO property as early as practicable. We discuss each of these issues in more detail later [in the white paper].

I suspect the FHFA will announce a bulk sale program of REO to investors within the next month or two.

Originally from Calculated Risk

The charts above show how the current economic expansion compares to the last two expansions (following the 1990-1991 and 2001 recessions) in terms of: a) employment (nonfarm payroll) recovery (top chart), and b) output (real GDP) recovery (bottom chart), from the Minneapolis Federal Reserve website (updated through May for employment).  Note that:

1. For employment (top chart), the job gains during the current expansion (red line) are actually quite a bit better 23 months into the … [visit site to read more] or compare Best Credit Cards and Balance Transfer Credit Cards

Originally from DailyMarkets.com

Effect on Total Economy-Wide Spending from a Cut in Government Spending Suppose that the federal government cuts its current spending on goods and services. Assuming nothing is done to tax rates, this means that the government's current borrowing will fall commensurately. (This represents a shift in the demand curve for credit, not a movement along it.) All else the same, the interest rates, with the exception of the one-day federal funds rate, which is targeted by the Federal Reserve, will decline as the demand for credit declines.

Originally from The Market Oracle

WASHINGTON (MarketWatch) -- In perhaps one of the sharpest critiques of Federal Reserve policy ever from a sitting policy member, Thomas Hoenig, the president of the Kansas City Federal Reserve Bank, said zero interest rates were "a dangerous gamble" in a period of moderate growth. In a speech in Lincoln, Nebraska, Hoenig warned that Fed Chairman Ben Bernanke and his allies were trying to use monetary policy as a "cure-all" for "every problem faced by the United States today." Keeping rates too low for too long will only lead to a repeat of the cycle of severe recession and unemployment in a few short years, he warned. Hoenig has dissented at every Fed policy meeting this year. He wants the Fed to commit to a slow and gradual increase in the target Federal funds rate. Hoenig argued that the economic news was not as bad as reported in the media and described by Wall Street experts. The markets want zero rates to continue because they are earning guaranteed returns on free money, he said. Hoenig dismissed fears of deflation.

Originally from MarketWatch

by Mike Kimel

Cross posted at the Presimetrics Blog.

A Look at the Current Recession, A Signpost for the Start of Recessions & Some Thoughts on the Likelihood of a Double Dip

These days there’s a lot of talk about whether the recession is going to double dip. And frankly, there’s a lotta yadda yadda, some bad news, and some not-so-bad news. You’ve heard it all before, you don’t need to hear it again from me, and frankly, I’d like to take a different approach. Before launching in, links to all data sources will be provided at the bottom of the post.
Let’s get started with a look at the pace of recoveries from recessions and how the current one compares to others. The graph below shows the percentage change in real GDP per capita each quarter from the end of a recession. Every recession since 1947, the first year for which quarterly data is available, is depicted.

Figure 1

The graph makes a few things apparent. First, it is clear that the double dip or no double dip, the current recovery is pretty feeble. Second, the most recent recoveries have all been pretty feeble.

Things look even worse when one looks at recoveries from deep recessions:

Figure 2



Part of this feebleness is no doubt due to the government’s policies. As I’ve noted before, the data shows that when tax rates were cut during or right after a recession, recoveries were slower and shorter. And both GW and Obama were happily cutting taxes of one sort or another during the latest recession. And of course, the government spending they threw on as a stimulus was in large part ill-conceived, going to benefit primarily some of the parties most responsible for the meltdown, buying toxic assets at inflated prices, and trying to prop up housing prices that should have been allowed to fall.

But what’s there is there. The question du jour is double dips – is the economy going to fall into another recession so quickly after coming out of the previous one, as occurred in 1981, or repeated times in the 1920s?

To answer that question, we need to know what causes recessions. While the academic literature has some complex explanations which depend on all sorts of odd assumptions, I think the answer is simple. The following graph shows the 12 month percentage change in real M1 per capita in the month that a recession begins. M1 is simply the narrowest of the Fed’s measures of the money supply (cash, money in checking accounts, and traveler’s checks), and I’ve adjusted it for inflation and population. Note that the Fed from 1947 to 1958, the Fed doesn’t report M1, but it does report “money stock” which is sufficiently similar to use in its place.

Figure 3

Notice that every recession except one, the one that began in July of ’53, began after the Fed reduced the real M1 per capita by at least 2%. That’s enough to suggest that the change in real money supply per person may well matter; no certainty, but it’s a suggestion.

Assuming for the moment that real M1 per capita does matter, notice that the twelve month change in that variable through June of this year is about 2.8%, which doesn’t make it look an awful lot like a recession about to begin, even if (to repeat the points of Figures 1 and 2) the recovery is crummy.

But the graph also suggests that the theory needs something in order to be complete – it needs to be improved in order to explain July of ’53. What happened then? The big event at about that time was the wind-down from the Korean War. Another way to look at it… real government spending was about to start dropping a lot. Additionally, the very next month, the 12 month change in real M1 per capita went negative, and it stayed negative through the duration of the recession.

Call a drop in real M1 per capita a necessary but not sufficient condition for a recession, at least so far. Now, it is quite possible, pace Rogoff & Reinhart that this time it will be different. I would imagine that the way the Fed has put money into the economy lately, essentially giving freebies to badly run financial institutions, is not quite as useful as its usual M.O. In that case, it might take more than just being on the positive side of the real M1 per capita ledger to make a difference. And check out where that variable is going, anyhow:

Figure 4

It’s down quite a bit… but still it is positive. Can that number go negative in a hurry? Ayup. But the last bit of information we’ve had doesn’t seem to show that.

So what’s the conclusion? I’ve never had much of a problem going out on a limb. Back in March of 2008 I had my first few posts discussing the recession we were in, at a time when the consensus was that we weren’t in one. And check out the comments when I claimed, back in December of ’08 real GDP per that the recession would be over in the first half of the year. (Yes, I know, the post went up in January. And yes, I know the NBER hasn’t called the end of the recession yet but real GDP bottomed out in the second quarter of ’09.) This time, I’m not as comfortable; given where and how the Fed has been putting Money I just don’t see increases in the real money supply as being quite as effective as normal. The money is going to fill in a big hole the financial industry created in its collective balance sheet, and isn’t necessarily leading to a lot of additional spending. Furthermore, with all the talk of austerity, it wouldn’t be surprising if the Federal Government starts cutting back on spending.

So I’m just not sure. But as often as not, when things are bad enough for everyone to see a problem, they’re not as bad as most people think. Given that the weight of the evidence seems almost equally balanced on both sides, this little thing tips it slightly for me: unless and until the Fed starts removing money from the system, I don’t think we’re going into a second dip. But given the Federal Government’s current policies, I don’t expect much more than mediocre growth for the next few quarters either.



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Data Sources

FRED, the Federal Reserve Database, was the source for most of the data used to compute real M1 per capita: population from 1952 to the present , M1 from 1958 on and M1 from 1958 on.

Quarterly data on real GDP per capita and population. Note – the quarterly population figures were used to extrapolate monthly population for 1947 to 1952.

Finally, money stock figures were substituted in for M1 from 1947 to 1957. Those were copied by hand from this document at the Federal Reserve of St. Louis’ FRASER archives

Mike Kimel

Originally from Angry Bear