MacroScope

Guarded Bernanke still manages to toss a bone to Wall Street and Washington

Ben Bernanke has done it again. In his much-anticipated speech Friday, the Federal Reserve chairman managed to tell both investors and politicians what they wanted to hear – that “the stagnation of the labor market in particular is a grave concern” – all while saying next to nothing new about where U.S. monetary policy is actually headed. That the Fed, as Bernanke also noted, stands ready to ease policy more if needed was well known to anyone paying attention the last few months. We also know that the high jobless rate, at 8.3 percent in July, has long been Bernanke’s main headache in this tepid economic recovery.

Still, in Jackson Hole, Wyoming on Friday, it was like Bernanke tossed a bone to the hounds on Wall Street and in the Beltway without even getting up off his lawn chair.

For markets, hungry as they are for a third round of quantitative easing (QE3), the “grave concern” comment says the high unemployment rate and mostly disappointing job growth since March gives the Fed little if any choice but to act. U.S. stocks climbed and the dollar dropped after the speech, with traders and analysts citing the remark. “‘Grave’ concern with labor market is striking,” said David Ader, head of government bond strategy at CRT Capital Group.

For politicians, battling as they are in an election campaign where jobs are center stage, Bernanke is saying the Fed shares their deep concern about jobs. Democrats have struggled to lower the jobless rate from its crisis-era peak of 10 percent in 2009, and some like Sen. Charles Schumer have urged the Fed to take more policy action to help out, while Republicans say the millions of Americans still unemployed is reason enough to turn away from President Barack Obama. Said Steven Ricchiuto, chief economist at MSUSA, of Bernanke’s “grave concern” remark:

You have to say that in an election year. You’ve got the Republican convention that just took place, which was all about how bad the labor market is, and how kids can’t find jobs. If you’re the central banker and you might have to deal with these people in the future … are you going to say the labor market is okay?

Jackson Hole Join Discussion

Four reasons the Fed could buy mortgages

1. Since the second phase of Operation Twist just got underway, “it would be strange to announce outright purchases of Treasury securities.” 2. Fed officials have publicly noted that continued purchases of long-term Treasury securities “might compromise the functioning of the Treasury market — and undermine the intended effects of the policy.” 3. San Francisco Fed President John Williams “directly advocated” mortgage purchases and Fed Vice Chair Janet Yellen has said that “beyond the Twist extension, ‘it’s more likely that [the FOMC] would do things that would take a different form.’” 4. “Purchases of mortgage-backed securities may be considered less controversial than Treasury bond purchases amidst the charged political environment, just prior to the presidential election.”

The U.S. Federal Reserve will probably focus on buying mortgage bonds if it decides to launch a third round of quantitative easing or QE3 at its September meeting, says Columbia Management’s senior interest rate strategist Zach Pandl, until recently an economist at Goldman Sachs. Join Discussion

U.S. bond bulls ready to charge after payrolls report, survey says

(Corrects to show CRT is not a primary dealer)

Bond bulls are ready to charge after Friday’s July U.S. employment data, according to a survey by Ian Lyngen, senior government bond strategist at primary dealer CRT Capital Group.

Says Lyngen:

Despite the vacation season and the multitude of ‘out of office’ responses we got, participation in this month’s survey was above-average and consistent with a market that’s engaged for the big policy/data events of the summer. As for the results of the survey, in a word: BULLISH.

Lyngen argued the survey results were the most bullish since November 2010, a point that was followed by a selloff that brought 10-year yields from 2.55 percent to 3.75 percent over the following four months.

On the eve of the July payrolls report, the benchmark 10-year Treasury stands at 1.49 percent.

In a post-non-farm payrolls rally, we found 23 percent of respondents willing to chase a rally — much higher than the 10 percent average and the highest since April 2012. Very few participants were willing to sell strength: just 19 percent versus a 40 percent average, the lowest on record.  (The survey has been conducted since 2003)

Bond bulls are ready to charge after Friday's July U.S. employment data, according to a survey by Ian Lyngen, senior government bond strategist at primary dealer CRT Capital Group. Join Discussion

Interview: Richmond Fed’s Lacker on Libor, ‘soggy’ growth and the limits of monetary policy

There appears to have been a significant slowdown in the second quarter. In particular we saw the pace of job creation slowed to a pace of 75,000 per month in the second quarter down from 226,000 in the first quarter and there are also concerns about slowing growth globally, beyond Europe but also in the emerging world and China, which was highlighted in the minutes (to the June meeting) this week. So, where do you think we’re headed? Are we just going to remain in a soft kind of pace? Are there upside risks to growth? Are there downside risks to growth?

Growth has definitely softened. The data are unmistakably weaker in the second quarter than we had hoped they would be. I think everyone recognized the first quarter and the end of last year were a little bit stronger than we might be able to sustain in the middle of the year but it’s definitely come in softer than I’d expected.

At the beginning of the year, it seemed as if Europe wouldn’t maybe weaken as much as we thought but lately the weakening from Europe has been coming online. In the U.S., I think we’re in a situation where we’re going to fluctuate from between the level where we are now to a level that’s more like we saw six or eight months ago. We’re going to have soggy patches, we’re going to have stronger spurts. If you look back over the last three years that’s the record you see. I don’t see a reason for that to change markedly.

There are some risks to that outlook. I do see downside risks of a more substantial global growth slowing than we’ve seen so far. I also see upside risks over the last twelve months. I think there’s enough potential for us getting past major sources of uncertainty. There’s a risk that resolving that uncertainty unleashes a stronger more positive outlook on the part of businesses and consumers that leads to stronger growth than we’ve seen so far.

And that would be some sort of resolution in Europe?

Reuters Fed correspondent Pedro da Costa was in Richmond on Friday for a sit-down interview with regional Fed president and lone FOMC dissenter Jeffrey Lacker. Join Discussion

Excuses, excuses: The problem with ‘structural’ explanations for U.S. unemployment

It’s an arcane economics debate with all-too-real implications for U.S. monetary policy: Is high unemployment primarily the result of “structural” factors like skills mismatches and difficulties relocating, or is it largely due to insufficient consumer demand in a weak economic recovery?

The answer to that question may help determine how much further the Federal Reserve is willing to push its unconventional measures to bring down the jobless rate, currently stuck at 8.2 percent. If unemployment is cyclical, economists say, it would be more likely to respond to looser monetary conditions.

Research from Berkeley professor Jesse Rothstein, published earlier this year and featured recently on the National Bureau of Economic Research’s website, represents one of the most thorough academic efforts to date to discredit the structuralist version of events.

Four years after the beginning of the Great Recession, the labor market remains historically weak. Many observers have concluded that “structural” impediments to recovery bear some of the blame. This paper reviews such structural explanations. I find that there is little evidence supporting these hypotheses, and that the bulk of the evidence is more consistent with  the hypothesis that continued poor performance is primarily attributable to shortfalls in the aggregate demand for labor.

Jeffrey Lacker, the Richmond Fed’s hawkish president, is a key proponent of the structural view, arguing this week that the U.S. unemployment rate is about as low as it can be right now without generating undue inflation pressures. In a May speech in Greensboro, North Carolina, Lacker made the case for why monetary policy was powerless to address the ailing jobs market despite the central bank’s dual mandate of maximum sustainable employment and low inflation.

In recent months, many of our business contacts have reported that although demand is beginning to increase, they are unable to respond as quickly as they would like due to an inability to find skilled workers. […]

The rise in long-term unemployment across a wide range of occupational and industry groups provides additional evidence that mismatch is an important factor restraining labor market performance.

Rothstein, however, begs to differ. He says the broad rise in unemployment in a wide array of industries points to a cyclical downturn, since a structural problem might be more confined to crisis-affected sectors like housing and construction.

Academic research suggests so-called structural problems -- skills mismatches, trouble relocating -- are not major factors in keeping U.S. unemployment high. Join Discussion

Fed doves ‘will not be patient’

Ellen Freilich contributed to this post

The Fed did the twist. Will it shout as well? There has been some debate among economists about whether the U.S. central bank might launch a third round of outright bond buys or QE3 given that it just prolonged Operation Twist.

But a truly grim report on the U.S. manufacturing sector from the Institute for Supply Management, if coupled with further evidence of a deteriorating labor market, could certainly induce policymakers to press their foot to the monetary accelerator.

Not only did the index slip below 50 in June, pointing to a contraction for the first time in three years, but the reading of 49.7 was lower than the lowest forecast in a Reuters poll of economists. Moreover, the subcomponents showed the biggest drop in new orders since the aftermath of the Sept. 11 attacks in 2001.

According to Pierre Ellis, senior economist at Decision Economics:

Fed doves will not be patient in waiting for that issue to be resolved – seeing increasing chances of a demand contraction leading to employment weakness and further demand weakness.

The most alarmed are probably pushing for another easing move now, while others might still be calmed by a  strong-enough services-side employment result Friday. If it does not materialize, the normal hesitation in responding to limited numbers of bad data results will probably be overcome by the breadth of the weakness now evident, and by growing perceptions that the economy is much more vulnerable than normal to downside shocks.

Tom Porcelli at RBC Capital Markets is even more categorical, saying QE3 could come as early as the Fed’s next meeting on July 31-Aug. 1:

Very weak manufacturing data for June has renewed speculation that the Fed will launch another round of bond buys or quantitative easing to stimulate growth. Join Discussion

BoEasing

The Bank of England is finally catching a break. With Britain’s economy officially in recession, the BoE had been constrained from further monetary easing by a stubbornly high inflation rate. But as the global economy stumbles and Europe’s crisis rages unabated, UK price pressures may be giving way.

Barclays economist Chris Crowe argues:

We expect the MPC to announce an additional £50bn in QE at the July policy meeting.

CPI inflation fell to 2.8% y/y in May (Barclays 3.1%, consensus 3.0%) from 3.0% in April. Meanwhile, RPI inflation declined to 3.1% y/y (Barclays and consensus 3.3%), from 3.5%. With near-term inflationary pressures easing, the case for additional QE in response to faltering confidence is stronger.

The sense that further stimulus is forthcoming follows a decision last week to offer 100 billion pounds in cheap long-term funding to banks and minutes from the BoE’s last policy meeting showing a very close 5-4 vote against more quantitative easing. Significantly, Governor Mervyn King voted in favor.

The pullback in inflation may just be enough to tilt the balance.

The Bank of England looks set to ease monetary policy further now that inflation is coming down. Join Discussion

Get ready for QE3 if things don’t get better soon

Ben Bernanke appears to be reluctantly gearing up for a third round of large-scale Federal Reserve bond buying, so-called QE3. Millan Mulraine of TD Securities captures just how likely further monetary easing is becoming following the Fed’s decision on Wednesday to expand Operation Twist.

The burden of proof may now be on the incoming data to prove that a third round of large-scale asset purchases may not be necessary.

Just under two months before the central bank’s yearly gathering at Jackson Hole – where Bernanke announced QE2 – the Chairman emphasized the path of the job market will be a key driver of any decision to further expand the central bank’s $2.8 trillion balance sheet. He told reporters at a press conference:

If we don’t see continued improvement in the labor market, we will be prepared to take additional steps if appropriate.

That suggests another crummy jobs report for June could push policymakers over the edge, potentially even as early as its July 31-August 1 meeting.

The Fed may be gearing up for another round of monetary stimulus. Join Discussion

Hints of internal Fed divisions on Twitter?

Additional reporting by Ann Saphir. Updated with New York Fed and other details.

For a central bank that prides itself on transparency, the Federal Reserve remains cautious about adopting new ways of communicating its message. The Fed’s Washington-based board was a latecomer to Twitter. Its first tweet was dated March 14, well after its regional Fed counterparts.

Perhaps more tellingly, the @FederalReserve account follows most – but not all – regional Fed accounts. Of the 12 district banks, only the two most hawkish (and therefore likely to oppose the Fed’s unconventional monetary policy) are missing: Richmond and Kansas City. The third is New York, whose heavy influence on financial markets sometimes puts it at odds with the board. In fairness, the board does follow the Dallas and Philadelphia Feds. Its presidents, Richard Fisher and Charles Plosser, have also criticized Fed purchases of government and mortgage bonds, known as quantitative easing or QE.

The feeling is mutual, it seems. Richmond and Kansas City do not follow the board either. New York, however, does.

Are we reading too much into this? Probably. It is just a little bit curious? We think so.

 

The Federal Reserve board follows most regional Fed banks on Twitter -- but not two of the most hawkish. Join Discussion

Central bankers vs. politicians: High-stakes chicken?

Are politicians playing chicken with central bankers? More to the point, if the U.S. Federal Reserve or the European Central Bank step up, yet again, to protect their economies from the global slowdown, will it take U.S., German, Spanish, Italian, Greek and other governments off the hook?

Such questions are swirling as Europe’s financial crisis boils and starts to bubble over into Asia and the Americas. Expectations are growing that the Fed will take more monetary policy action when it meets June 19-20. The messy possibility that Greece could exit the euro zone was not enough to prompt the ECB to cut interest rates last week – and that was before a deal over the weekend to bail out Spanish banks was dismissed by markets as just another kick of the can. Underlining the standoff between monetary and fiscal policymakers, ECB President Mario Draghi told European Parliament this on May 31:

Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no.

European central bankers “feel in some ways that the more they do, the more it takes pressure off the fiscal authorities,” said Lewis Alexander, U.S. chief economist at Nomura Securities. “So they’ve been reluctant to be more aggressive.”

The Fed, for its part, has one worried eye on the European crisis and the other on the U.S. “fiscal cliff” of big tax rises and spending cuts scheduled to kick in at the end of this year. Policymakers at the U.S. central bank rarely pass up a chance to publicly chastise Congress for putting off action on the cliff, which could slash U.S. GDP growth by an estimated 3 percentage points if left unaddressed. Meaning, of course, the United States would join much of Europe in another recession.

Chairman Ben Bernanke has said the Fed stands ready to protect the fragile U.S. recovery, but gave few clues that was imminent at a Congressional hearing in Washington last week.

I do want to say, and I’ve said this before, that monetary policy is not a panacea. It would be much better to have a broad-based policy addressing a whole variety of issues… I’d be much more comfortable in fact if Congress would take some of this burden from us and address those issues.

Politicians and central banks are engaged in a game of chicken. Who will blink first? Join Discussion