Federal Reservations

Wall Street will be listening closely to Federal Reserve Chairman Ben Bernanke over the next two days for any signs of distancing himself from the central bank’s pledge to keep rates at ultra-low levels for up to three years.

Originally from MarketWatch

As I mentioned in the weekly schedule, the most anticipated event this coming week is Fed Chairman Bernanke's speech at Jackson Hole on Friday.

Here are some preliminary thoughts about the speech ...

• Last year Bernanke paved the way for QE2 with his Jackson Hole speech on August 27, 2010. Bernanke outlined three possible policy options for additional monetary accommodation: 1) additional purchases of longer-term securities (QE2), 2) change extended period language (the FOMC just did this), and 3) lower the rate of interest that the Fed pays banks on the reserves.

• It is likely that Bernanke will again outline policy options for further easing. It appears that Bernanke will once again discuss the possibility of additional purchases of longer-term securities (QE3), and some analysts have suggested that Bernanke will also discuss changing the composition of the balance sheet (keeping the size of the balance sheet stable, but changing the mix toward longer term securities). There will probably be some discussion of other options - like a higher inflation target - but just like last year, Bernanke will probably argue against these options.

• Bernanke will NOT commit to any option. Any further easing will be announced by the FOMC. However Bernanke might provide clues as he did last year. Here is what he said:

Under what conditions would the FOMC make further use of these or related policy tools? At this juncture, the Committee has not agreed on specific criteria or triggers for further action, but I can make two general observations.

First, the FOMC will strongly resist deviations from price stability in the downward direction. ...

Second, regardless of the risks of deflation, the FOMC will do all that it can to ensure continuation of the economic recovery. ...

He might change these comments a little this year.

• Economic outlook: Bernanke will probably make statements consistent with the recent FOMC statement:

"The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased."

Since the FOMC expects the unemployment rate to decline gradually, they probably expect trend growth (as opposed to the very slow growth that many analysts expect). That is consistent with comments from NY Fed President William Dudley this week:

Some of the weakness in economic activity in the first half of the year was due to temporary factors such as the hit to household income from higher food and energy prices, and supply chain disruptions following the tragic earthquake in Japan. These restraining forces have abated and thus, we should see stronger growth in the second half. But it is clear that not all of the weakness was due to these one-time factors—and in light of this, I have revised down my expectations for the pace of recovery going forward.

And from Cleveland Fed President Sandra Pianalto:

My latest forecast is for the economy to grow at a rate of about 2 percent this year, and about 3 percent in each of the next two years. Our economy has to grow at about a 2-1/2 percent clip just to absorb new labor force entrants and to keep the unemployment rate from rising.

That is still weak growth, but more optimistic than many analysts.

• My guess is Bernanke will outline some policy options, and probably focus on changing the composition of the balance sheet as the first choice. Additional asset purchases (QE3) will probably be discussed too.

Yesterday:
• Summary for Week ending August 19th (with plenty of graphs)
• Schedule for Week of Aug 21st

Originally from Calculated Risk

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

Concluding thoughts on the economy, Fed and more, with James Bullard, St. Louis Federal Reserve and the "Squawk Box" crew.

Originally from All News, Video and Posts related to TOPIC: Federal Reserve

1. The crucial objective factor promoting economic growth in a private property social order is per capita investment. 2. Americans save less than 5% of household income. 3. The Federal Reserve System runs the show economically; Congress doesn't.

Originally from The Market Oracle

Yesterday I attended the 6th Annual Goldman Sachs Emerging Markets conference in New York. My takeaway from the conference overall was that the risk-on sentiment that is driving massive inflows into EM funds is still very much present. Going forward, the conference participants generally see emerging markets as “different” from those ten years ago, and will no doubt remain resilient to the sovereign stress that is emanating from the developed world.

China. Goldman Sachs views the recent property boom as limited to that sector – the Chinese authorities are currently clamping down via administrative tightening measures – and that a broader “asset bubble” is not present. China was deleveraging going into the crisis, so its starting point was on a very different level than that of other “frothy” economies, like the US or UK.

On the outlook for China, Goldman sees 13% growth this year, followed by a remarkable 12.4% next. The inflation outlook, although tame, depends very much on Asia continuing as front-runner of the policy tightening cycle. On the currency front, outperformers will be those serving to fight inflation pressures, like the IDR (Indonesian rupiah) or the INR (Indian rupee). The CNY (Chinese yuan) is expected to appreciate modestly this year, possibly moving back to a currency basket target.

Jan Hatzius presented his outlook on the US economy – he sees the Fed hiking rates in 2011, as monetary policy accommodates the massive labor underutilization. I could not disagree with this assessment.

Rebecca: I would add that I see a positive probability attached to further Fed QE measures, as the fiscal stimulus inevitably drags the economy – without further stimulus growth will turn negative and drag GDP. In lieu of a heroic surge in private sector demand, which is currently driven almost solely by the upswing on a massive inventory cycle, the Fed will have no choice but to continue to “pushing on a string”. The fiscal impetus is driving this recovery.

Actually I was truly shocked that the merits of the fiscal stimulus was not mentioned more directly in his outlook. He spent 7 slides comparing this recession to previous post-war recessions and not once did fiscal policy come up - just Fed policy. Several slides after that, we finally get a chart illustrating the contribution to GDP coming from government spending. And then, I knew it was coming, a chart about the US public debt to GDP. It's just a scare tactic, I assure you, and should not be taken seriously. As long as the US issues debt in its own currency, and that currency is not fully convertible, the US government does not face solvency risk!

Unlike Greece....

Erik Nielsen proffered his outlook for the Eurozone. Currently, Goldman Sachs is more bullish on Eurozone growth than is the consensus. Their baseline case is that Greece’s liquidity crisis is mitigated through IMF/EU support, and that the solvency issues are repaired in a timely manner through restructuring and austerity measures. Overall, the economic impact remains mostly contained in Greece.

Of course, the risk in the interim, is that the EU/IMF is too slow in approving the aid package, and a mass run on the banks ripples throughout the Eurozone (currently there is no deposit-insurance mechanism across the members of the “zone”). I queried Marshall regarding the banking sector in the Eurozone:

Rebecca: "In the "zone", is there an FDIC-style insurance mechanism in place to shore up the banking system across the member countries?"

Marshall: "No. The deposit guarantee is handled on a national scale, which is why Ireland is basically insolvent. The deposit liabilities of its banking system are about 600% of GDP. Ireland can "write the cheque" to cover this, so it's doomed. "

Rebecca: "Great, thx! This is not good..."

Marshall: "No, it's a disaster. In many respects, Ireland's problems are even worse than Greece. It truly is insolvent. Greece has problems because of self-imposed constraints, nothing more."


Rebecca again: I still don’t see it: how “internal devaluation”, i.e., falling prices and massive wage cuts, is to drive export growth for all debtor across the Eurozone. It’s a fallacy of composition: if every country in the Eurozone deflated in order to improve competitiveness, then demand on the aggregate falls. Therefore, the Eurozone sees less rather than more export income generation.

The average country in the Eurozone earns over 60% of its export income via inter-European Union trade. Likewise, and this is why Nielsen’s base case is no contagion: the GIIPS countries (Greece, Italy, Ireland, Portugal, and Spain) account for 35% of GDP in Q4 2009. Contagion is assured if the GIIPS jointly face a liquidity crisis.

Ahmet Akarli is very positive on the outlook for Turkey. He is likewise bullish on Russia, which is consistent with the Goldman Sachs outlook for oil: $90/barrel in 2010 and $110/barrel in 2011. Finally, Hungary appears to be the apple of the investment banking eye. Hungary’s austerity measures have been very effective, and the economy gained momentum on improved competitiveness.

Rebecca: I should note that my feeling about Hungary’s bullish export outlook is consistent with that of the Eurozone overall: the forint is pegged to the Euro (within a band, that is), so its true competitive advantage can only be sustained by persistent productivity gains and wage declines.

Paulo Leme covered Latin America. For Brazil, their outlook on the BRL and its economy more generally is consistent with my own: hot! Week after week, the inflation numbers are “higher than expected”, the current account balance “surprises to the downside”, and domestic demand is outpacing GDP by leaps and bounds.

That's all for now.

Rebecca Wilder

Originally from Angry Bear

The US Congress decided to re-appoint Ben Bernanke as Fed Chairman of the US Federal Reserve. This decision is completely and utterly insane. Please understand, I do not use the word “insane” for humorous purposes, but as a factual observation. For there is truly no other way to look at Congress’ decision.

Originally from The Market Oracle