May 21, 2008
FOMC Minutes
The Fed posted their minutes from the last FOMC meeting today. Check out the charts at the back that show the shift in the forecasts of the participants on variables such as GDP and inflation going out to 2010. There has been a noticeable shift since January. However, it does appear that the last meeting will be the last rate cut for a while. The Wall Street Journal's Brian Blackstone has a good summary of the minutes.
See also Donald Kohn's speech from yesterday.
Posted by William Polley at 04:59 PM | Comments (0) | TrackBack
May 14, 2008
No more rate cuts for a while?
Janet Yellen is on the lecture circuit. (Reuters)
"The 1970s were a horrible period. If there's one thing that has to be very high priority, we don't want to go back to a period that is anything like that," she said, critiquing presentations on the economy at a symposium for college students in Tacoma, Washington.
She is, of course, talking about inflation (not bell-bottoms or disco).
"During the 1970s the Fed failed to keep inflation low in the face of supply shocks (which) became incorporated into inflation expectations," Yellen said.
She acknowledges, as I think most of us do, that this is not a simple problem with a simple answer. She's worried about the prospects of lower growth as well. But the fact that she, as one of the more dove-ish members of the committee, is talking about inflation risks is a sign that the tide may have turned.
Posted by William Polley at 09:02 PM | Comments (1) | TrackBack
April 30, 2008
GDP and the Fed
My class was right... including about who the dissenters would be. (Though they actually predicted more dissent, I cautioned them that two was probably the most you'd see in the vote.) Not that this was a particularly hard call. On the surprise meter, today's move by the Fed--from the amount and direction of the change to the dissenters to the apparent shift in stance going forward--barely registers. Indeed, what is there to say that hasn't been said already?
For the record, here is the statement from the Fed:
The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.
Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred no change in the target for the federal funds rate at this meeting.
In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Atlanta, and San Francisco.
There are two very obvious differences between this statement and the last (in addition to a few more subtle variations of the wording that are also consistent with the overall shift but probably not worth obsessing over). Those two obvious differences are that what was
Recent information indicates that the outlook for economic activity has weakened further.
is now...
Recent information indicates that economic activity remains weak.
The interpretation being that we may have "hit bottom," to put it rather bluntly. The other is that the sentence in the last statement...
However, downside risks to growth remain.
... is simply gone. Hard to be more obvious than that.
The inflation paragraph is interesting. There is some acknowledgment of the improvement in the core numbers. Also, the sentence in the last statement,
Still, uncertainty about the inflation outlook has increased.
Is now...
Still, uncertainty about the inflation outlook remains high.
As with the statement about economic activity, the implication is that while there hasn't been much improvement in the level, the first derivative looks better. It's almost as if an academic economist had a hand in crafting it.
Barring any new developments, expect no change in June.
Now, over to the GDP report. James Hamilton's post on the subject is my pick of the day for excellent analysis of the report. To tell you the truth, the GDP figure was pretty close to what most of us were expecting. Most expectations that I saw were in the positive-but-under-1-percent range. Also, it is important to remember that it is subject to revision, so I wouldn't make any big deal out of it beating expectations by a small fraction of a percent. It's what we expected, and it is not particularly good. The difference in economic activity over a 6 month period between growth of 3.5% and growth of 0.6% is a couple hundred billion dollars. Far from pocket change, that amount of lost economic activity in 6 months is roughly comparable to the current annual federal budget deficit.
But is it a recession? No. Not yet, anyway. And though some forecasts show an improvement in the 2nd half of 2008, we're not out of the woods yet. The increase in inventories and the accompanying decline in real final sales is particularly worrisome going into the 2nd quarter. The recovery from this slowdown (if not recession) will take some time.
Posted by William Polley at 02:13 PM | Comments (1) | TrackBack
April 29, 2008
Federal Reserve Simulation
In my intermediate macroeconomics course, the final project is a simulation of an FOMC meeting where members of the class play the roles of Fed officials. They did exceptionally well. The presentations and discussion were excellent.
My class voted 9 to 7 to cut by another quarter point. (The 7 wanting to hold rates steady)
As far as I can remember, my class has never been wrong, and also as far as I can remember, when the class predicts dissent, there usually, if not always, is (though never as much in the real vote).
It's an unscientific indicator, to be sure. But it is very rewarding to see the students take it so seriously and really learn about how the Fed works.
The real meeting, of course, is tomorrow. More on that later.
Posted by William Polley at 06:09 PM | Comments (0) | TrackBack
March 12, 2008
How much more can the Fed do?
I'm in the middle of a few things that are keeping me from blogging an extended analysis of the Fed's recent actions. But I did come across something today that will interest my readers. The WSJ Real Time Economics Blog opens a post with this:
Back in 2003, when the Federal Reserve cut interest rates to 1%, the world worried that the Fed was running out of ammunition and would soon have to turn to unconventional tools.
Now, in 2008, it’s worth asking if the Fed could run out of unconventional ammunition. Tuesday’s offer to lend $200 billion of its Treasury holdings to primary dealers in return for mortgage-backed securities both guaranteed by the government-sponsored enterprises (Fannie Mae and Freddie Mac) and not (private-label MBS) means it will have eventually sold or pledged half of its Treasurys, limiting how many more of these tricks it can pull off.
My first thought when I heard about this innovative move the Fed was that it would take the pressure off for a few days--maybe a week or two. And what then?
Posted by William Polley at 06:02 PM | Comments (2) | TrackBack
March 05, 2008
Beige Book.... now available as a PDF
Here's a link to the new PDF version of the Beige Book. Here's the old html version.
The Wall Street Journal headline is "Beige Book Hints at Stagflation Amid Slow Growth, Prices Pressures"
I'm heading out the door, but I know what I'll be reading tonight.
Posted by William Polley at 02:35 PM | Comments (2) | TrackBack
February 19, 2008
He never actually says "liquidity trap"
But Martin Feldstein does say this in Wednesday's Wall St. Journal:
The dysfunctional character of the credit markets means that a Fed policy of reducing interest rates cannot be as effective in stimulating the economy as it has been in the past. Monetary policy may simply lack traction in the current credit environment.
As they say, read the whole thing.
Posted by William Polley at 10:28 PM | Comments (0) | TrackBack
February 15, 2008
Consumer confidence tumbles
Ouch.
Feb. 15 (Bloomberg) -- Confidence among U.S. consumers fell more than expected this month, reaching a 16-year low, as the labor market cooled and expectations about inflation rose.
The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 69.6, the lowest since February 1992, from 78.4 in January.
UPDATE: FRED has not updated their series to reflect today's data, so I have drawn in where the new data point will be. The series has been noisy in the current (I'm still using present tense) expansion. The reader is left to draw his or her own conclusions.
Posted by William Polley at 10:50 AM | Comments (2) | TrackBack
February 13, 2008
Robert Reich on what this economy really needs
Believe it or not, this sort of dovetails with my previous post. Here's Robert Reich in the NY Times:
We're sliding into recession, or worse, and Washington is turning to the normal remedies for economic downturns. But the normal remedies are not likely to work this time, because this isn’t a normal downturn.
...
The only lasting remedy, other than for Americans to accept a lower standard of living and for businesses to adjust to a smaller economy, is to give middle- and lower-income Americans more buying power — and not just temporarily.
...
The only way to keep the economy going over the long run is to increase the wages of the bottom two-thirds of Americans. The answer is not to protect jobs through trade protection. That would only drive up the prices of everything purchased from abroad. Most routine jobs are being automated anyway.
A larger earned-income tax credit, financed by a higher marginal income tax on top earners, is required. The tax credit functions like a reverse income tax. Enlarging it would mean giving workers at the bottom a bigger wage supplement, as well as phasing it out at a higher wage. The current supplement for a worker with two children who earns up to $16,000 a year is about $5,000. That amount declines as earnings increase and is eliminated at about $38,000. It should be increased to, say, $8,000 at the low end and phased out at an income of $46,000.
Median household income is about $48,000. What would be the ramifications of making almost half of all households receive the earned income tax credit? The EITC is a great program, and probably could be expanded in the sense of giving a larger amount to the lower income earners. It's the closest thing we have to Milton Friedman's negative income tax. It is a potentially powerful anti-poverty program.
But I'm less sanguine about making the EITC a middle class entitlement, which is exactly what would happen if we were to follow Reich's advice. I'm not sure a middle class entitlement is what Friedman had in mind.
Reich is right about one thing though.
Over the longer term, inequality can be reversed only through better schools for children in lower- and moderate-income communities. This will require, at the least, good preschools, fewer students per classroom and better pay for teachers in such schools, in order to attract the teaching talent these students need.
Except that he forgets to mention that it also requires a change in the way we fund schools at the state and local level. The federal government is impotent to do anything about that, and that's probably a good thing. Though it is tempting to think that the federal government could swoop in with a grand fix, I fear that they would make things worse. Our recent record on federal government intervention in K-12 education is not exactly stellar.
Posted by William Polley at 12:58 AM | Comments (1) | TrackBack
February 12, 2008
More divergent views on whether we are in or near a recession
Yesterday, I pointed to comments by William Poole. There were also similar remarks from Janet Yellen and Charles Plosser. Both remain concerned about inflation, with Plosser appearing to be more skeptical of the anticipated moderation of inflation coming this year. (Hat tip to Greg Mankiw for the links.)
In contrast, the Philly Fed is concerned. So are many economists on Wall St.
But then we have this interesting piece from King Banaian (SCSU Scholars). He quotes from this article in his local paper. The article raises the following question in my mind: Are American households really worried about a traditional recession or are they concerned about changing relative prices causing them to adjust their expenditures? Before you dismiss the question, take a look... this could be any newspaper in any city.
Cindy Haupert's life has changed since the economy took a dive.
Haupert, 36, once lived comfortably with her husband and two children in St. Cloud. She was a stay-at-home mom, working every other weekend. Her husband is an attorney. They made ends meet.
But gas prices would rise. Costs for homemade dinners and lunches would increase. And in September, when it was time for her son to go to kindergarten, she wanted him to go all-day, every day, so he could be ready for first grade. But that meant a $184 hit to the family checkbook each month. That doesn't even count lunch money.
"Now it's like we're living paycheck to paycheck. I can definitely see a change," she said.
Prices rising faster than wages Lifestyle changes. There's nothing so far about a real recession in the classical sense. As King points out, she didn't have to pay for all-day kindergarten. The writers says this all happened since the economy "took a dive"? Did their income fall? That question is not addressed.
But the writer understands that cost of living increases is just inflation by another name...
The consumer price index for Midwestern states, including Minnesota, increased 3.8 percent from December 2006 to December 2007. That reflects the increased cost of living.
So what's a person to do?
Haupert feels it. She now works an additional four days a week at Office Depot as a cashier while her fifth-grader and kindergartner are in school.
Wait... what? She's increasing her hours worked? Isn't that contrary to what happens in a traditional recession? Sure, we shouldn't generalize from one person's experience. But this is what the newspaper is giving us, and I don't think this is the only story of its kind in the media. Is the new face of "recession" someone who has to work harder to maintain their standard of living with higher gas prices, etc.?
She tries to make up for extra costs. She clips coupons and budgets meticulously. She's allowed herself and her husband $90 per week for gas and $125 per week for groceries.
She takes advantage of mail-in rebates and uses gas coupons. She rides the bus when she can and doesn't take frivolous drives.
When she and her husband bought a new TV to accommodate the high-definition requirement for 2009, they shopped around. They checked prices to see where they could get the best deal.
When they settled on one with a better warranty, they got an extra 10 percent off for comparing prices.
Again I ask, is shopping around to get an extra 10% off an HDTV a sign of a weak economy or a smart consumer facing different relative prices?
(By the way, if they have cable or satellite, they don't need a new TV in 2009, at least not right away.)
I don't mean to diminish the cases where people have lost their jobs due to slack demand in construction or manufacturing, etc. There are certainly people who are feeling the effects of the slowing economy. And while those people may be larger in number today than, say, a year ago, they still represent a fairly small slice of the population.
Yet, so many people surveyed by the major media have a profoundly dismal view of the economy--even if they are not unemployed or particularly at great risk of becoming unemployed. And I am seeing more and more anecdotal stories like this one where what people are really concerned about boils down to the increasing cost of living (inflation) and the choices that one has to make to cope with the increased cost. Gas prices are higher. Real incomes have not increased as rapidly. Thus, one will need to cut back on gas or cut back on something else. If that means shopping around for the best deal on an HDTV or getting one that is a couple inches smaller, then that's just the way it is.
We are now experiencing somewhat slower and more uneven growth of real income than at other times in our history. The current inflation we are experiencing is also uneven in the sense that some prices are rising faster than others. Some prices (like HDTVs) are even falling. And that does create some distortions. But there's little that the Fed can do to reverse the long trend of slower wage growth. That is largely a structural problem that transcends the current recession or non-recession. There's little that the Fed or congress can do to address changes in relative prices which are the real source of dissatisfaction with the economy for so many people.
So at the end of the day, I'm not sure what to make of this. Is this just a bad article and a bad interview subject for the point the writer was trying to make? Or is this indicative of the reasons behind the dissatisfaction with the economy for a significant number of people? If the former, then this post is a cautionary tale for journalists and we can perhaps leave it at that. But if the latter, then we really need to have a talk about the difference between a real recession and other economic events that can also cause households some distress such as changing relative prices that are not necessarily recessionary.
Posted by William Polley at 03:01 PM | Comments (3) | TrackBack