Posts Tagged ‘msnbc’

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’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?

Taking their chances on the wall of debt

29 July 2011

This morning’s surprise news is that, after last night’s fiasco in which House Speaker John Boehner could not round up enough votes for his own deficit reduction plan, 10-year Treasury bond prices are not only not down, they’re actually up, by a good bit. Interest rates on Treasuries, which move in the opposite direction as T-bond prices, are down 10 basis points to 2.84% (as of 11:14 a.m.). What gives?

Well, for one, the bond market may not have been expecting much from Boehner. The media had already been saying that he’s a much-weakened House Speaker, after watching his failure to rein in his Tea Party faithless. And any House Republican plan would likely be dead on arrival in the Senate anyway.

Another possibility is that as it becomes more likely that the government bumps up against the current debt ceiling on Aug. 2, that counterintuitively, T-bonds might actually be seen as safer, as Chris Isidore writes in CNNMoney. Why? Because the single biggest actor on the U.S. economic stage, the federal government, would be officially dysfunctional, even more so than it is now. Today through Aug. 1, at least, the government can meet all of its financial obligations. If Aug. 2 is indeed D-Day, then on Aug. 2 the government becomes a deadbeat, at least to somebody. And quite likely, it would not be T-bondholders. This assumes that (1) the government would still be allowed to issue more debt in order to pay off its maturing debt and (2) the Treasury would prioritize the interest on that maturing debt above its other obligations. As notes on NPR this morning, most commentators seem to agree that it is in the national interest to not stiff any of our bondholders, as an actual default would surely cause interest rates to skyrocket. If Aug. 2 is the beginning of Treasury triage time, then the government would more likely stiff someone else, like government employees (please please start with members of Congress!) and government claimants who lack political clout (i.e., not seniors or the military). This creates a lot of chaos, as people don’t know when they’ll be paid, which makes them less likely to spend or repay money and creates pressure on credit markets. In sum, the market reaction may just be the usual “flight to safety” that occurs when markets think conditions are about to get worse and also more chaotic. This would be consistent with the beating that stocks have been taking lately.

It may also be that the bond market is reacting to other news, like the dreadful GDP figures that just came out today. Real GDP in the second quarter grew just 1.3% (worse than the consensus forecast of 1.8%), and first quarter growth was revised drastically downward to 0.4% (from 1.9%). These numbers are “growth recession” territory (where the economy grows but not fast enough to generate enough jobs to keep unemployment from rising), consistent with the rise in unemployment (from 9.0% to 9.2%) over the last few months. As with the debt-ceiling brinkmanship, these new signs of economic weakness are a plausible reason to pull money out of stocks and put it into Treasury bonds.

But why Treasury bonds, you ask, and not another safe haven? The simple answer seems to be that there are woefully few alternatives. As Isidore puts it:

‘U.S. Treasuries are such a massive market — about $9.8 trillion — that they dwarf the markets of other so-called “safe havens” such as gold, top-rated corporate debt or the bonds of other countries with AAA ratings.’

So worldwide investors still like their chances on the wall of debt that is U.S. Treasuries.

P.S. Richard Thompson’s duet partner here is not Linda Thompson, but Christine Collister.

Bummer in the summer (updated)

22 June 2011

In today’s press conference Bernanke acknowledges the obvious: the economy is worse than we thought and likely to stay that way into 2012.  The Fed lowered its official economic growth forecasts and raised its unemployment rate forecasts for 2011-2012. After almost two years of slow but steady recovery and myriad positive straws that one could grasp, the last couple of months have brought mostly lousy news, notably the latest jobs report, which showed a gain of just 54,000 jobs last month, only about a quarter or a sixth as many as we’d need to get unemployment down to normal levels in five years or so.

It’s notable that the imminent end of the Fed’s quantitative easing, all $600 billion of which will be over by the end of the month, brings few calls for another round — everyone seems to agree that we’re in a liquidity trap, in which further monetary stimulus fails to stimulate, because interest rates are already practically 0%, banks are not eager to lend, and companies are not eager to invest in new capital.*

Our best hope, it seems to me, is an almost nihilistic one: the economy somehow recovers on its own, through black-box mechanisms that we still don’t really understand. Business confidence returns, hiring finally picks up, and the economy roars forth. This may be a vain hope, but the “animal spirits” of investors (and consumers) that Keynes wrote about in The General Theory are not really visible, despite the several monthly surveys of business sentiment that are out there.

Our next best hope is another fiscal stimulus. It won’t be like the first one, which is about to run out and was too small anyway, not with a Republican majority in the House that believes spending = death and doesn’t even want to avert a financial crisis by raising the debt ceiling unless the Democrats agree to massive long-term spending cuts. But I could see the two parties agreeing on a big set of tax cuts, which is the usual form that a fiscal stimulus takes anyway (e.g., 1964, 1981, 2001).  That has a couple of disadvantages: (1) the “multiplier” effect of a tax cut on GDP is typically empirically estimated to be smaller than that of a spending increase of equal size, because not all of a tax cut gets spent; (2) tax cuts are hard to reverse, as everyone hates seeing their taxes go up, so they could make the long-term debt problem much worse. Still, it’s probably the only politically viable option for a fiscal stimulus.

* The last part of that statement (companies are not eager to invest in new capital) is less true than I had thought. As the Wall Street Journal article linked to below notes, a survey of banks indicated that small businesses were demanding more loans, at least in the first quarter of the year.

UPDATE: This Associated Press article from the next day’s newspapers adds some helpful detail. The headline from the Syracuse Post-Standard’s version of that article says it all: “Slow Economy a Puzzle: Fed chief flummoxed, says troubles could last a while.” My quick take:

(1) The economy has long been in a liquidity trap (Krugman’s definition, i.e., a slump in which monetary policy is no longer effective).

(2) Bernanke has long suspected this himself, but as Fed Chairman he feels obligated to try to stimulate the economy through monetary policy, via unusual, unprecedented channels “that just might work” like QE2.

(3) QE2 has failed to measurably stimulate the economy, because the economy was in a liquidity trap.

(4) Liquidity trap or not, it’s not easy for the Fed to just throw in the towel, so a QE3 might well happen. But I doubt the Street will get all that excited about it, considering what a dud QE2 seems to have been.

Just words

29 October 2009

This week’s news from the Commerce Department is that real GDP grew at a 3.5% annualized rate in the 3rd quarter of 2009, which is the best quarterly growth rate in two years.  And some economists, including the National Bureau of Economic Research’s (NBER’s) Jeffrey Frankel, are saying the recession probably ended sometime this summer.  Meanwhile, a poll of MSNBC readers finds that 82% think the recession is still raging, 9% think the economists are right, and 9% don’t know.  (Yes, online polls are unscientific, but earlier, professional surveys I’ve seen of the public also found them to be more pessimistic about the economy than the experts.)

Are the economists that obtuse, or is the public that dumb?  Even if one’s preferred is answer is “Both,” I think the split is due to two different definitions of “recession.”  The NBER and the economics profession define a recession as a general period of economic decline, whereas I bet most people define it as a weaker-than-usual economy.  I would argue for throwing the word out altogether when discussing the economy.

  • Use “contraction” to denote a period of actual decline, just as the 1929-33 collapse was called the Great Contraction.
  • Use “depression” to denote a period of economic weakness, just as 1929-early 1941 was the Great Depression.  I argued in March that we were in a depression, but if “depression” sounds too harsh because people associate it with the Great Depression, then say “slump.”

Right now, the different professional and public definitions of “recession” (just as with “money” and “investment”) just makes economists seem that much more out of touch.

Good news with a big grain of salt

18 June 2009

actual grain of salt

The Economist looks at the decline in jobless claims over the past four weeks and declares the U.S. recession to have “cleared the hump” (equivalent to “bottomed out,” from a “been down so long it looks like up to me” perspective).  But they predict a less-than-robust recovery:

‘It’s the return to the jobless recovery. And what that means for the population groups most affected—blue collar workers, those with less education, and so on—is that for years to come, work will be difficult to find and wages will lag. The recession will not end for everyone at the same time. Millions of workers will continue to struggle years after output numbers get out of the red.’

(h/t: Vanessa Cruz)

A commenter suggests that the decline in jobless claims may just mean that a lot of people’s unemployment insurance ran out, which, given the millions of long-term unemployed, is plausible.

Some stronger signs that recovery is on the horizon are in the just-released Index of Leading Economic Indicators, by the Conference Board.  The index looks at ten different economic data series (including unemployment claims) which tend to move in the same direction as the overall economy but a few months earlier.  Seven of those indicators were up in May; three were down.  Overall, the index grew 1.2%, its second monthly gain in a row and its largest gain since March 2004.