The Dollar continues to gain despite the supposed "Great Debaser" Federal Reserve Chairman Ben Bernanke bringing us multiple rounds of quantitative easing: Just sayin.... Continue reading

The early read on the Thomson Reuters/University of Michigan Consumer Sentiment index jumped to 83.7 in May, up from 76.4 in April. Just a quick reminder before we get too excited - sentiment has tended to be low relative to actual spending. May's sentiment bounce just returns us to trend: Better than collapsing confidence, but by itself not pointing to an imminent acceleration in consumer spending. Continue reading

Something of a busy data day. Not all of it pleasant, but I suspect that the Fed will attempt to see through that unpleasantness. Start with the surprise jump in initial unemployment claims: I don't think the jump is out of line with recent volatility, nor does it suggests that the general downtrend is broken. Next we have a disappointing read on housing starts, primarily due to a drop in the volatile multi-family sector: I would take comfort in the opposite move in building permits, which will show up as future starts: The regional manufacturing surveys continue to disappoint, with... Continue reading

After posting my review of Martin Feldstein's WSJ op-ed, I waded through Dallas Federal Reserve President Richard Fisher's latest speech and found this: The former outcome is that envisioned by the theoreticians that lead the Fed: According to this plot, by driving rates to historical lows along the entire length of the yield curve, investors will rebalance their portfolios and reach out to riskier assets, providing the financial wherewithal for businesses to increase capital expenditures and reengage workers, expand payrolls and regenerate consumption. Rising prices of bonds, stocks and other financial instruments will bolster consumer confidence. The CliffsNotes account of... Continue reading

I was reading Robin Harding's take on the possible nomination of Federal Reserve Vice Chair Janet Yellen for the top job at the Fed, and a chill went down my spine when he reminded me of this: Mr Bernanke’s own appointment in 2005 was a case in point. There were several candidates that year. According to people involved, then-President George W. Bush leaned towards Martin Feldstein, a former economic adviser to Ronald Reagan. But fate intervened: But Mr Feldstein was a director of the insurance company AIG, which restated five years of financial results that May after an accounting scandal.... Continue reading

As is well known, policymakers have been coalescing around a QE exit strategy for some time, since at least the March FOMC meeting. Two central issues with the exit are the timing and the communications. Officials do not want to undermine the recovery, knowing full-well that previous flirtations with exits have gone awry. At the same time, however, they fear the cost-benefit analysis may be turning against them. For some doves it is not the potential inflation cost, but the potential financial instability cost. Some policymakers want to begin tapering asset purchases at the next meeting, some are looking to... Continue reading

Is Abenomics about boosting exports or domestic demand? I tend to agree with Lars Christensen on this issue: There has been a lot of focus on the fact that USD/JPY has now broken above 100 and that the slide in the yen is going to have a positive impact on Japanese exports. In fact it seems like most commentators and economists think that the easing of monetary policy we have seen in Japan is about the exchange rate and the impact on Japanese “competitiveness”. I think this focus is completely wrong. While I strongly believe that the policies being undertaken... Continue reading

Thinking further about this from Friday's Jon Hilsenrath Wall Street Journal article: Stocks and bond markets have taken off since the Fed announced in September that it would ramp up the bond-buying program, and major indexes closed at another record Friday. An abrupt or surprising end to it could send stocks and bonds in the other direction, but a delayed end could allow markets to overheat. And some officials feel they've ended other programs too soon and don't want to repeat the mistake. Although past performance is no guarantee of future performance, it strikes me that previous instances of tighter... Continue reading

Gavyn Davies at the Financial Times questions the Federal Reserve's employment target: On the wider issue of general monetary policy, the behaviour of inflation and unemployment remain the key drivers, and here the Fed has a headache. Its forward guidance on unemployment is in danger of giving misleading signals about the need for tightening, and it probably needs to be changed. I agree. Davies cites research indicating that recession-driven underemployment makes the unemployment rate a poor measure of resource utilization. The policy implications: What does this imply for policy? It implies that the Fed will have a bias to keep... Continue reading

The divergence between PCE and CPI measures of inflation remains in the headlines. Pedro da Costa at Reuters sees a test of the Fed's credibility at hand: With the inflation rate about half of the Federal Reserve's 2.0 percent target, the central bank is facing a major test and some experts wonder whether it will eventually need to ramp up its already aggressive bond buying program. The challenge for policymakers is that they are clearly falling short of their dual mandate and that should open the door for additional asset purchases. But, but, but...I think that additional asset purchases is... Continue reading

This by Bloomberg's Josh Barro deserves to be highlighted: Yesterday, in an interview with Bloomberg Television, House Speaker John Boehner warned that the U.S. government must balance its budget. After all, he said: We have spent more than what we have brought into this government for 55 of the last 60 years. There’s no business in America that could survive like this. No household in America that could do this. And this government can’t do this. It’s hard to think of better evidence for the sustainability of budget deficits than the fact that we have run them for 55 of... Continue reading

Bloomberg has a story with an ominous opening paragraph: Bank of Japan Governor Haruhiko Kuroda’s stimulus policies are backfiring in the housing market, where mortgage rates are rising even as the central bank floods the financial system with cash. Lions, tigers, and bears, oh my! The next paragraph: Fixed 35-year home-loan costs rose to 1.81 percent this month, the first increase since February and up from an all-time low of 1.8 percent in April, according to data compiled by the Japan Housing Finance Agency. Federal Reserve Chairman Ben S. Bernanke’s monetary easing almost halved 30-year U.S. mortgage rates since 2008... Continue reading

This tweet from Andy Harless caught my eye: HIres-to-openings ratio looking uglier & uglier bls.gov/news.release/j… Looks like rising structural unemployment — Andy Harless (@AndyHarless) May 7, 2013 The chart: The ratio of hires to openings fell to the low of the last cycle. Now compare the ratio to the unemployment rate: Unemployment appears to be too high relative to the hires/openings ratio (caution is warranted, however, as the JOLTS data only extends back to 2001). One would normally associate such a low ratio with low unemployment as the number of hires would be relatively low because of the lack of... Continue reading

Calculated Risk comments on this morning's JOLTS report: Not much changes month-to-month in this report - and the data is noisy month-to-month, but the general trend suggests a gradually improving labor market. This observation extends far beyond just the JOLTS report to virtually the entire set of labor market data. While we often get caught up in the month-to-month gyrations of various employment reports, the underlying trend of those data have been remarkable consistent: General, consistent improvement is evident across an array of indicators. The pace of that improvement, however, consistently falls short of what is necessary to rapidly alleviate... Continue reading

Seems like just yesterday Japanese policymakers were looking to push the Nikkie to 13,000. It even seemed like a overreaching at the time. Here is Matthew Boesler at Business Insider: The 13,000 index target implies around 17 percent upside in February and March. The pace may sound ambitious, but then again, Japan is one of the hottest momentum trades in the world right now. Today the Nikkei pushed past 14,000: Note too that the 10-year Japanese government bond holds well below 1 percent - fears that aggressive policy would cause rates to skyrocket are once again proved unfounded. So far,... Continue reading

L. Randall Wray (ht FTAlphaville) thinks the Paul Krugman has made the leap to MMT by acknowledging the ability of the central bank to control interest rates. Wray sees that Krugman was faced with an intellectual roadblock to MMT: The sticking point has been “crowding out”—the idea that once we get beyond the liquidity trap and return to a more “normal” ISLM world, government deficits will push up interest rates. And that will then reduce private investment, which tends to lower economic growth. Higher interest rates plus lower growth means the government’s deficit and debt ratios grow beyond “sustainable” levels.... Continue reading

Running to meeting in a few minutes, but have some quick thoughts on the employment numbers: Don't Get Fooled Again. San Franscisco Fed President John WIlliams discounted the last employment report, and he was right to do so. The underlying economy continues to grind along at a slow and steady pace; it doesn't pay to get pulled into becoming overly optimistic or pessimistic about what the latest numbers. The twelve month moving average is remarkably steady: Summer Tapering Back On The Table. The recent data flow suggested that plans to begin tapering QE this summer with a year-end target for... Continue reading

The FOMC concluded their two-day meeting by holding policy constant, as expected. The assessment of the economy was largely unchanged. From March: Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year. Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that... Continue reading

I find Binyamin Applelbaum's Fed preview to be rather depressing and distressing. Applelbaum begins with a solid insight - reducing the unemployment rate is not the same as maximizing employment: The Federal Reserve is making modest progress in its push to reduce the unemployment rate. But that is not the jobs goal Congress actually established for the Fed. The central bank is supposed to be maximizing employment. And on that front, it is not making progress. Applelbaum points to the employment to population ratio as evidence that the Fed is falling short of the mandate. But are Fed officials ready... Continue reading

The minutes of the last FOMC meeting, concluded on March 20, included this passage: In light of the current review of benefits and costs, one member judged that the pace of purchases should ideally be slowed immediately. A few members felt that the risks and costs of purchases, along with the improved outlook since last fall, would likely make a reduction in the pace of purchases appropriate around midyear, with purchases ending later this year. Several others thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the... Continue reading

I think it is difficult to ignore the role of asset prices in the dynamics of the past two business cycles: If the objective of monetary policy is a combination of low inflation and unemployment, I think it is difficult to argue that the Federal Reserve pursued an overly loose policy stance in the periods of the internet and housing bubbles. Indeed, it is arguable that asset price bubbles were integral in fostering low unemployment. With this in mind, consider this conclusion from Minneapolis Federal Reserve President Narayana Kocherlakota, speaking at the 22nd Annual Hyman P. Minsky conference: In this... Continue reading