As the US economy stalls, the Fed’s timetable is getting pushed back
I will make this brief as I believe the links will do the talking for me. As I said yesterday, none of the economic data coming out of the US outside of housing seems to be surprising to the upside. That said, there is one bright spot here; the jobless claims numbers do look pretty good. And so we might get a surprisingly good jobs number tomorrow. Let’s see. Nevertheless, the pace of growth in the US continues to decline and that means that the Fed will remain accommodative for the near future. Read the links for a fuller picture.
“The surviving suspect in the Boston Marathon bombings told F.B.I. interrogators that he and his brother considered suicide attacks and striking on the Fourth of July as they plotted their deadly assault, according to two law enforcement officials.”
“But the point of this Outlook is that even IF… even IF QEs and near zero-bound yields are able to refloat global economies and generate a semblance of old normal real growth, they will do so utilizing historically tried and true “haircuts” that rather surreptitiously “trim” an asset holder’s money without them really knowing they had entered a barbershop. These haircuts are hidden forms of taxes that reduce an investor’s purchasing power as manipulated interest rates lag inflation. In the process, governments and their central banks theoretically reduce real debt levels as well as the excessive liabilities of levered corporations and households. But they represent a hidden wealth transfer that belies the vaunted phrase “good as money.””
“Opponents of capital punishment marked a milestone Thursday as Maryland became the first state south of the Mason-Dixon line to abolish the death penalty.”
“The ISM manufacturing index indicated expansion in April. The PMI was at 50.7% in April, down from 51.3% in March. The employment index was at 50.2%, down from 54.2%, and the new orders index was at 52.3%, up from 51.4% in March.”
“The Conservative government has passed over the Bank of Canada’s well-respected and heavily favoured second-in-command and reached outside the central bank to replace governor Mark Carney.
Finance Minister Jim Flaherty on Thursday announced the job would go to Stephen Poloz, an economist and head of the Export Development Canada, the Ottawa-based export credit agency.
Mr. Poloz, 57, had been rumoured to be a strong contender given his previous 14-year stretch at the Bank of Canada and broad global experience — including stints at the International Monetary Fund in Washington and the Economic Planning Agency in Tokyo.”
“During the presser following the March FOMC meeting, Ben Bernanke made two comments suggesting that its communications policy regarding asset purchases would shift in the direction of its policy for interest rates.”
“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.”
“Notably, the Fed intensified its language on fiscal policy, saying that belt tightening by the federal government “is restraining economic growth.” By contrast, in March the Fed statement noted that fiscal policy had “become somewhat more restrictive.”
Fed officials also voted to keep short-term interest rates near zero, where they have hovered since late 2008. Eleven out of 12 Fed officials concurred with the policy statement.
Federal Reserve Bank President Esther George dissented because she was concerned that the “continued high level of monetary accommodation increased the risks of future economic and financial imbalances” and could push long-term inflation expectations higher, according to the statement. Ms. George cited the same reasons for her dissents at the Fed’s previous two policy meetings this year.”
“The Federal Reserve said it would press forward with an $85 billion-a-month bond-buying program and hinted it might even dial it up if the job market or inflation figures fail to meet the Fed’s expectations.
The Wednesday pronouncement after a two-day policy meeting marked a shift in the U.S. central bank’s public tone.
In March, with U.S. labor markets apparently on the mend, central-bank officials started discussing how and when they might begin pulling back the bond programs.
But the Fed, in a statement released after Wednesday’s meeting, evinced no sign it is leaning toward pulling back. Instead, it struck a more neutral tone and emphasized it could “increase or reduce” the size of its monthly bond purchases, depending on inflation and job growth in the months ahead.
U.S. inflation has moved noticeably below the Fed’s 2% goal, part of a global slowdown. This has taken pressure off the Fed and other central banks to pull back from their efforts to boost growth by pumping new money into the world economy.”
“The number of Americans seeking initial jobless benefits, a proxy for layoffs, decreased by 18,000 to a seasonally adjusted 324,000 in the week ended April 27, the Labor Department said Thursday. That’s the lowest level for claims since January 2008, just after the last recession started.”
“Home prices are rising at the fastest rate in seven years, with some communities seeing double-digit gains, as buyers are returning to a market where the number of properties for sale is in short supply.
Prices increased 9.3% in February from a year earlier while mortgage-interest rates hovered near record lows, according to the Standard & Poor’s/Case-Shiller index that tracks home prices in 20 major metropolitan areas.
All 20 cities posted year-over-year gains for the second consecutive month, which hasn’t happened since 2005, before the crash.
In some of the hardest-hit markets, the gains have been particularly heady. Home prices rose 23% from one year ago in Phoenix and 18.9% in San Francisco. Nationally, the median home price in March stood at $184,300, well below the peak of $230,400 in 2006 but up from $154,600 in January 2012.
“Nobody that I’m aware of anticipated the kind of price growth that we’ve had,” said Budge Huskey, chief executive of Coldwell Banker Real Estate LLC.”
“It’s looking like an unsettling spring in Canadian housing, a market that has proven far more even-keeled and less scary for investors in recent years than in the United States.”
“Federal Open Markets Committee says ‘fiscal policy is restraining economic growth’ as sequestration bites”
“Two university classmates of suspected Boston marathon bomber Dzhokhar Tsarnaev were charged on Wednesday with destroying evidence after the attack, and a third was charged with lying to investigators.”
“With the news of three additional suspects in federal custody, questions remain about the motive for the Boston Marathon bombing and whether the attack involved conspirators beyond the Tsarnaev brothers. But an account from an acquaintance of the suspects—a student at the University of Massachusetts-Dartmouth who was once romantically involved with Dzhokhar Tsarnaev himself—helps shed light on the individuals now at the center of the investigation.”
“In the sparse office he now occupies in the Seagram Building in Midtown Manhattan, Robert E. Diamond Jr., the former C.E.O. of Barclays, paced in circles and tried to explain how he had gone from being one of the highest-ranking and highest-paid bankers in Britain to a guy who takes the subway to this office in exile and waits in line for his coffee at a cart on Park Avenue. “
“Ford, General Motors, Chrysler and Nissan all reported double-digit sales growth, despite the continuing shaky economic picture.
Chrysler sales were up by 11%, Ford’s numbers grew by 18% and GM sales were 23% higher.”
“The final HSBC Purchasing Managers’ Index (PMI) dropped to 50.4 in April from March’s 51.6 and was largely in line with a flash reading last week of 50.5. Fifty divides expansion from contraction on a monthly basis.
China’s official PMI on Wednesday painted a similar picture, falling to 50.6 in April from an 11-month high of 50.9 in March as new export orders fell.”
“Fears the global economic recovery is losing momentum have intensified after manufacturing in the US and China slowed last month.”
“Apple will avoid a potential tax bill of up to $9bn by using the proceeds from its $17bn blockbuster bond issue to pay shareholders rather than bringing back cash from abroad.
The technology group would have paid as much as 35 per cent in tax to bring that amount of cash back into the US, according to lawyers and accountants.”
“The urge to taper off quantitative easing has lessened since the last meeting. That pushes the beginning of the end back to the later back of the year. The door is open to additional stimulus as well, but I suspect that it would have to be driven by the employment side of the mandate. Clear evidence of a deflationary threat is likely necessary to drive action on the other side of the mandate; such a threat seems unlikely in an expanding economy.”
“Hedge fund firm Centaurus Capital is returning external investors all of their money after clashes with them over where the best money-making opportunities lay, a source familiar with the firm said.
The partners of the London-based firm will now only trade using their own cash after investors challenged a decision to focus on so-called “event-driven” strategies such as bets on company takeovers, the source said.”
“A country that spends and spends and spends and does not tax sufficiently will eventually run into debt-generated trouble. Its nominal interest rates will rise as bondholders fear inflation. Its business leaders will hunker down and try to move their wealth out of the corporations they run for fear of high future taxes on business. Real interest rates will rise because of policy uncertainty, and make many investments that are truly socially productive unprofitable. When inflation takes hold, the web of the division of labor will shrink from a global web he’d together by thin monetary ties to a very small web solidified by social bonds of trust and obligation–and a small division of labor means low productivity. All of this is bound to happen. Eventually. If a government spends and spends and spends but does not tax sufficiently.
But can this happen as long as interest rates remain low? As long as stock prices remain buoyant? As long as inflation remains subdued. My faction of economists–including Larry Summers, Laura Tyson, Paul Krugman, and many many others–believe that it will not.”
“New research suggests that an influential study showing that high debt levels can hurt economic growth overstated the risk, and thus the importance of speedy debt reduction during a recession. But how influential was the study, anyhow?
For an indicator, read the following passage from a book on US debt by Republican Senator Tom Coburn. This is a scene that takes place on April 5, 2011, when forty senators met the authors of the study, Harvard economists Kenneth Rogoff and Carmen Reinhart, for a briefing. It was just months before disagreements over America’s fiscal path lead to a confrontation over the country’s borrowing limit and a near-default.”
“no one should be arguing to stabilise debt, much less bring it down, until growth is more solidly entrenched – if there remains a choice, that is. Faced with, at best, haphazard access to international capital markets and high borrowing costs, periphery countries in Europe face more limited alternatives.
Nevertheless, given current debt levels, enhanced stimulus should only be taken selectively and with due caution. A higher borrowing trajectory is warranted, given weak demand and low interest rates, where governments can identify high-return infrastructure projects. Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower. We have argued this consistently since the outset of the crisis.
Ultra-Keynesians would go further and abandon any pretence of concern about longer-term debt reduction. This position has been in the rhetorical ascendancy in recent months, with new signs of weaker growth. It throws caution to the wind on debt and, to quote Star Trek, pushes governments to “go where no man has gone before”. The basic rationale is that low interest rates make borrowing a free lunch.
Unfortunately, ultra-Keynesians are too dismissive of the risk of a rise in real interest rates. “
“he minutes of the meeting revealed that some board members warned of possible side-effects, such as lower returns for private investors in the government bond market, as well as a rise in speculation that the BoJ was simply funding the state’s vast deficit.
There were concerns, too, that the bank’s “financial soundness” could be threatened by ramped-up purchases of bonds and risky assets such as exchange traded funds and real estate investment trusts, with one member proposing that the BoJ consider “an arrangement” with the government to cover potential losses.”
“So where’s this stuff about the scale of government coming from? Well, in practice it turns out that many conservatives are unwilling to concede that Keynesian macro has any validity to it, or that you can sometimes run the printing presses without unleashing runaway inflation, because they fear that any such admission would open the doors to much wider government intervention. But that’s exactly my point! They’re letting their views about how the world works be dictated by their vision of the kind of society they want; they’re politicizing their economic analysis. And that’s why they keep getting everything wrong.
And I guess that Crook becomes part of the “they” I’m talking about, because he too seems unable to distinguish between how things are and political value judgments.
Do I do the same thing? Well, I try not to – which is one reason I’ve been leery of linking my concerns about inequality to my macro advocacy.”
“Futures were little changed in New York after slumping 2.6 percent yesterday, the most in more than two weeks. U.S. crude supplies increased 6.7 million barrels last week to 395.2 million barrels, the most in weekly data started in 1982, figures from the Energy Information Administration show. According to monthly data, they were last at this level in 1931. Inventories were forecast to climb 1.1 million barrels, a Bloomberg News survey showed.”