Posts Tagged ‘fomc’

No taper, no problem

18 September 2013

The Federal Open Market Committee concluded one of its most anticipated meetings in a long time with the expected decision to keep its federal funds rate target near zero (0 – 0.25%) and, less expectedly, not to “taper,” i.e., announce that it would gradually reduce its monthly purchases of mortgage-backed securities and longer-term Treasury bonds. Those purchases are otherwise known as “quantitative easing” (QE).

From various market surveys and betting sites, it appeared that about half the market was expecting a taper. Just why is hard to figure. Excessive asset purchases by the Fed can be inflationary, but excessive is in the eye of the beholder, and inflation has been under, not over, the Fed’s target of 2%. There is the argument that these new and unusual QE policies are damaging to investor confidence, but they’re not that new anymore, and the investors in the stock market seem remarkably undamaged — the S&P 500 has more than doubled since early 2009, i.e., since shortly after the first round of QE was implemented. Then there is the opposite argument that QE has created a “sugar high” in the stock market and maybe the housing market, too. This last argument has to be taken seriously, in view of how the 2000s housing bubble was stoked in part by the Fed’s easy-money policies circa 2004, when economic recovery was well underway.

But not too seriously. The S&P 500 is only about 15% higher now than it was mid-2007; adjusting for inflation, it’s hardly any higher at all (and the jury’s still out over whether stocks, as opposed to housing, were a bubble in 2007). Moreover, corporate profits are at record highs, so the fundamentals look rather good. Home prices are rising fast, but they’re still at 2004 levels, and monthly mortgage payments are cheaper than rents. A true speculative bubble is when people are obviously overpaying for assets, especially when they do so knowingly, with the plan of selling to a greater sucker later on. Is there evidence of that here?

The evidence about the general state of the economy is much stronger, and the evidence is that it’s still pretty weak. In particular, employment — the indicator that the Fed is supposed to focus on, along with inflation — is dismal. The employment-to-population ratio is still under 76%, or 4 points below where it was before the crisis. (The graph below, by the way, is of the “prime-age” population, 25-54 year-olds; if it included 16-24 year-olds, it would look even worse.)

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For more on unemployment and tape:

 

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Fed talk is anything but cheap

24 June 2013

After last Wednesday, I bet Ben Bernanke can relate to this observation by George Carlin about his Catholic upbringing:

If you woke up in the morning and said, “I’m going down to 42nd street and commit a mortal sin!” Save your car fare; you did it, man!

It’s the thought that counts! The Fed didn’t “do” anything last Tuesday and Wednesday at its Federal Open Market Committee meeting. Bernanke’s concluding comments about the continuing slump were not much more specific than “This too shall pass, someday,” combined with the obvious point that normal times will bring normal monetary policies. The main news was that he thought normal times would come sooner than many people expected. But that was enough. Evidently, the bond market was expecting the economy to be flat on its back for most of the next decade: 10-year Treasury bond rates had lately been in the range of 2.1-2.2%, whereas the recent historical norm is about 5%. After Bernanke’s remarks, the rate jumped by 30 basis points (0.30% point) to a Friday close of about 2.5%. It jumped further this morning to 2.6%.

Two observations:

(1) Just as in Carlin’s church, Bernanke doesn’t actually have to do anything to tank the long-term bond market. Just thinking about it aloud is enough.

(2) The long-term bond market is really not the economy’s friend. What tanked the bond market is the prospect of interest rates rising a bit sooner and faster than expected, on account of the Fed reacting to a stronger economy. So in a weird sense the spike in bond rates is good news: Bernanke said better times were coming, the markets believed him, and they acted accordingly. Not to say that their action was malicious, just that it was predictable: if you are expecting interest rates to rise in the future, you should buy bonds in the future, not now.

The ZIRP walk

12 December 2012

Today’s news from the Fed is that they will continue their zero interest rate policy (ZIRP) until the unemployment rate falls to 6.5%. To be precise, the Federal Open Market Committee (FOMC) announced that they believe the current 0 – 0.25% range for the federal funds rate “will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”

This replaces the Fed’s statement from six weeks ago, which was that they expected to continue the ZIRP “for a considerable time after the economic recovery strengthens” and said they thought the ZIRP would continue at least through mid-2015.

I think the new policy is better, first of all because it’s specific. Of course they’re going to raise rates when the economy’s better, but how do they define better? They just told us — 6.5% unemployment (it’s now 7.7%).

The new statement also is better because it’s a fairly clear policy rule, tied to an actual, observable number, as opposed to a prediction about when the ZIRP medicine will no longer be needed. Including a date like mid-2015 is problematic partly because predictions have a way of being wrong, but also because they have a way of creating bubbles. “Through mid-2015” was widely reported not as a prediction but as a fixed commitment by the Fed, which it wasn’t. If enough people in the financial community believe the Fed will keep rates low through mid-2015, there could be a problem. Because if they know that short-term interest rates will be low for the next three years, then they may be more likely to borrow massively in the short-term money market and invest it in longer-term risky assets while rolling over their short-term debts for the next three years. (Some people say we’re already in a stock-market bubble right now, thanks to today’s low interest rates.) Granted, “borrowing short and lending long” is what banks do, but usually it’s without the certainty of near-zero interest rates for the next three years. (more…)

Better than nothing

26 September 2011

. . . is how I’d describe this month’s major developments on the fiscal and monetary policy front, namely Pres. Obama’s new jobs proposal and the Fed’s decision to reallocate its Treasury bond portfolio so as to try to push long-term interest rates down.

The Fed’s decision is simpler, so I’ll start with that one. Last Wednesday the Federal Open Market Committee kept its fed funds rate target unchanged at 0-0.25% and announced that it would sell most of its short-term T-bill portfolio and replace it with longer-term T-notes and T-bonds. This is quite a bit less than the “QE3” (quantitative easing, round 3) that many in the market were hoping for, as it does not involve a net increase in the Fed’s Treasury holdings, and the stock markets took a tumble that afternoon. The media quickly dubbed the Fed’s move “Operation Twist,” after a similar action in 1961. Nobody expects this move to have more than a marginal impact, not when mortgage and other long-term interest rates are already at historic lows, but it’s hard to argue against a positive marginal impact, purchased at so little cost. A Wall Street Journal editorial notes that the 1960s Operation Twist lowered long-term interest rates by about 0.20 percentage points, and “Some experts said that was enough to make the program effective; others deemed it a failure.” It seems to me that any reduction in unemployment from this move, however small, is welcome news at a time of 14 million unemployed.

The President’s new jobs bill is a more complicated animal. (Note that they’ve dropped the term “stimulus package,” apparently out of belated recognition that “jobs bill” is simpler and sounds more appealing and also because the $787 billion stimulus of 2009 is unpopular. I’ve been over this one before: leading estimates are that it saved a few million jobs, which is good, but it was supposed to save all of them, and that obviously didn’t happen. Thus it is unpopular.) The main complication is that it has no chance whatsoever of passing, given knee-jerk opposition to all things Obama in the Republican-controlled House and the Republican-filibuster-strength minority in the Senate. This despite the fact that, as Obama said, that virtually everything in it has been supported by Democrats and Republicans alike. (To be fair, not much in it has been supported by Republicans recently, i.e., since Obama became president.)

Specifics: The American Jobs Act (its official name) has a price tag of $447 billion, most of which apparently would be spent during the next 12 months, so roughly the same yearly amount as the 2009 stimulus. More than half of that is a $240 billion cut in payroll taxes, including a reduction in the payroll tax paid by workers, a cut in the employer share for small businesses, and a tax holiday for new employees. The next biggest item is $140 billion for infrastructure and local aid, notably transportation, retaining and rehiring teachers and first responders, and modernizing public schools. The last area is $62 billion for unemployment insurance extensions, tax credits for hiring the long-term unemployed, and subsidized employment for low-income individuals.

All of this seems reasonable, maybe too reasonable. In a less toxic political environment, this proposal would pass, but just like the 2009 stimulus, it would be way too small to fill America’s jobs deficit. The payroll tax has already been cut to 4.2% (down from about 6.2%), and the jobs bill would cut it to 3.1%, or about $11 on every $1000 of income.  Small potatoes. And while poorer workers would surely spend their payroll tax cut, upper-middle class and upper-class workers would probably save much of theirs. The current payroll tax cut is set to expire at the end of this year, and Republicans aren’t crazy about it (they prefer permanent tax cuts aimed at “job creators” in the top tax brackets) but don’t want to be cast by Democrats as favoring tax increases for the little guy, so a further extension of the 4.2% payroll tax rate seems likely.

The payroll tax holiday and ($4000) tax credit for hiring the unemployed should also be expected to have a positive but marginal impact on employment. The number one question in any prospective employer’s mind is “Can I sell the extra output that this person would produce?” Tax holidays and tax credits make a Yes more likely, but only if the product demand is strong enough to almost warrant hiring the person in the first place. Still, we economists live at the margin, and as with the Fed’s Operation Twist, anything that creates jobs at minimal cost is a positive thing.

And now on to costs. This is the main area where I have a problem with the president’s proposal. Obama says the program is fully funded, when really that’s the last thing we should be worrying about during a depression.The more you offset the new spending and tax cuts with spending cuts and tax increases elsewhere, the less stimulus you have. Obama said the program will be paid for by additional spending cuts in the future, closing corporate tax loopholes, and reinstating the “millionaire’s tax” on personal income. (Note: We last had a $1 million tax bracket in 1940, in nominal terms. Adjusting for inflation, we last had a $1 million tax bracket in 1973.) If the spending cuts are sufficiently far off in the future, like when the unemployment rate is back below 6%, they should do little macroeconomic damage. Ditto the closing of tax loopholes — which probably have little to do with hiring anyway — and the millionaire’s tax. As far as I can tell, those tax increases — and some others that I would support, like taxing hedge fund managers’ salaries as ordinary labor income instead of at the lower capital gains rate — would take effect immediately. While I don’t buy the Republican rhetoric about every rich person being a Job Creator, I still don’t think raising taxes in a depression is a good idea. It can wait.

The Fed predicts two more lean years

9 August 2011

From today’s Federal Open Market Committee announcement:

‘The Committee 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 mid-2013.’

Ouch. This was apparently supposed to be a mild monetary stimulus — the fed funds rate target is being held at 0-0.25% for two full years instead of just for a vague “extended duration” — but it’s also one more dismal forecast, from an authoritative source.

Good article here by MSNBC.com’s John W. Schoen, who lays out some of the Fed’s alternative options and seems underwhelmed by them. For example, the much-discussed “QE3” option of buying long-term T-bonds in an effort to force long-term bond rates down further has two big disadvantages: (1) Low long-term bond rates don’t seem to have sparked much investment or consumption so far, so it’s doubtful that lowering them further will make much difference; (2) Lowering them even further will reduce the already much-reduced incomes of retirees and others living on interest.

What’s a central bank to do?