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Fed, More Optimistic About Economy, Maintains Bond-Buying

June 19, 2013 by Leave a Comment

WASHINGTON — Federal Reserve policy makers, more confident about the economic recovery, on Wednesday maintained their current pace of monetary stimulus.

Fed officials also predicted in their latest economic forecast, released Wednesday, that the unemployment rate will decline more quickly than they had previously expected, sitting between 6.5 percent and 6.8 percent at the end of 2014. They had predicted in March that the rate would sit between 6.7 percent and 7 percent.

Officials predicted that the annual pace of inflation would rebound next year, rising closer to the 2 percent rate that the Fed considers healthy.

The improved outlook helps to explain why Fed officials have increasingly suggested that they may seek to reduce the pace of asset purchases in the coming months. The Fed has said that it will stop buying bonds well before it begins to raise interest rates. While the vast majority of the 19 Fed officials who participate in policy continue to expect a first rate increase in 2015, 13 said they expected the Fed to raise its benchmark short-term rate at least to 1 percent by the end of 2015, implying that increases would begin relatively early in the year. In March, only 10 officials forecast that rates would hit 1 percent by the end of 2015.

The Fed’s forecasts have consistently overestimated the strength of the economic recovery since the end of the recession. The central bank has suspended its stimulus efforts twice in recent years, only to find that it needed to do more. Officials have said that they are eager to avoid repeating those mistakes. But there is growing optimism inside the central bank that the Fed is finally doing enough.

The Fed is trying to encourage job creation through a very loose monetary policy, holding short-term interest rates near zero and by purchasing $85 billion a month in mortgage-backed securities and Treasury securities.

Economic conditions have improved modestly since the Fed began this latest round of asset purchases last September. The economy has added about 197,000 jobs a month, on average, and the unemployment rate has fallen slightly to 7.6 percent in May from 7.8 percent in September. The impact of federal spending cuts so far has been smaller than many forecasters, including the Fed, had expected.

But the economic damage of the recession remains largely unrepaired. Job growth is basically just keeping pace with population growth. The share of American adults with jobs has not increased in three years. At the same time, the Fed’s preferred measure of inflation has sagged to an annual pace 1.05 percent, the lowest level in more than 50 years, as the economy continues to operate below capacity.

Despite high unemployment and low inflation, the Fed has shown no sign of interest in expanding the pace of its stimulus campaign. Officials say that they are doing as much as they can. The debate instead has focused on how soon the Fed can afford to start buying fewer bonds.

Such a deceleration is not likely before September, at the earliest, but officials have sought to prepare investors for the change. In particular, the Fed wants to underscore that a smaller monthly volume of bond purchases still means that the Fed’s portfolio would be growing larger with each passing month. Indeed, the Fed argues that such a change would not amount to a tightening of monetary policy because the size of the portfolio is the source of the stimulus.

The Fed’s chairman, Ben S. Bernanke, also has been at pains to remind investors that a change in the pace of bond purchases does not indicate a change in the duration of the Fed’s plans to keep short-term rates near zero, which it has said it intends to do at least until the unemployment rate falls below 6.5 percent.

Investors, however, have responded skeptically. After all, the Fed needs to slow down first before it begins to retreat. Interest rates on 10-year Treasuries, a benchmark for the Fed’s efforts to reduce borrowing costs, rose to 2.20 percent on Tuesday from a low of 1.66 percent at the start of May.

“Fed officials have been trying to convince everyone that QE is a flexible instrument and that the onset of tapering does not convey information about the date of the first fed funds rate hike,” Vincent Reinhart, chief United States economist at Morgan Stanley, wrote Wednesday. “We believe such a conclusion is false.”

Moreover, some economists regard the volume of monthly purchases as more important than the total amount of the Fed’s holdings, meaning that a reduction in monthly purchases would indeed tend to tighten financial conditions.

The Fed also finds itself warring against psychology.

The Fed has established $85 billion as a baseline in the minds of investors. That might not matter if the benefits of the program were purely mechanical. But buying bonds is also a way for the Fed to signal its determination to keep interest rates low for years to come.

The program, in other words, is an effort to instill confidence in investors. And any reduction in the pace of purchases tends to undermine that message.

Article source: http://www.nytimes.com/2013/06/20/business/economy/fed-more-optimistic-about-economy-maintains-bond-buying.html?partner=rss&emc=rss

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E.C.B. Keeps Interest Rates Unchanged in Hopes for Recovery

June 6, 2013 by Leave a Comment

FRANKFURT — Defying some calls for bolder action, the European Central Bank left its benchmark interest rate unchanged on Thursday, even as it changed its economic forecast to a gloomier reading for the rest of the year.

The E.C.B. left its main rate at 0.5 percent, as expected. Despite ever more insistent calls from economists for more aggressive moves to stimulate lending in the euro zone, the E.C.B. may have decided it needed to assess the significance of a slight uptick in inflation as well as some evidence that consumers and business managers are becoming less pessimistic.

In a news conference after the announcement, Mario Draghi, the president of the E.C.B., cited “downside risks surrounding the economic outlook for the euro area.” Those, he said, include the possibility of weaker-than-expected domestic and global demand and slow or insufficient policy changes in euro zone countries.

He also said the central bank was lowering its 2013 economic forecast for the euro area, now expecting the region’s economy to shrink by 0.6 percent this year, worse than the 0.5 percent decline previously forecast. But the central bank expects growth in the euro zone of 1.1 percent next year — slightly higher than previous forecasts.

The E.C.B. had hinted in recent months the bank was considering additional unconventional measures to fix a credit crunch in southern Europe. That might even include the unprecedented step of obliging banks to pay to store their money at the central bank, rather than earning interest on it — resulting in a so-called negative deposit rate. The goal would be to force banks to put their money to work, by lending it. Mr. Draghi indicated that the central bank’s governing council, which met before he spoke, had considered that move but decided not to proceed with it.

Judging from recent speeches by E.C.B. policy makers, they are concentrating more on getting banks to deal with problem loans and other issues that may be interfering with their ability to lend.

Mr. Draghi called for euro zone policy makers to move forward with a uniform system for winding down failing banks in an orderly manner.

Marie Diron, an economist who advises the consulting firm Ernst Young, said that, while fixing weak banks was a worthy goal, it was unlikely to yield dividends for some time.

While “a cleanup of banks’ balance sheets is necessary to ensure sustained growth in the medium term, it would probably be negative for growth in the short term,” Ms. Diron wrote in an e-mail before the meeting Thursday. “It is not clear why the E.C.B. seem to have changed its focus since early May.”

Some recent economic indicators have kept alive hope that the euro zone is close to hitting bottom. Surveys have shown that businesses and consumers are a little less pessimistic than they were. And inflation has accelerated slightly, although it is still below the E.C.B. target of about 2 percent.

Many economists have urged the E.C.B. to be bolder, as unemployment remains a persistent problem, with joblessness in the euro zone at a record high of 12.2 percent. France on Thursday reported a 10.8 percent unemployment rate for the first quarter, also a record high

James Bullard, president of the Federal Reserve Bank of St. Louis, said in Frankfurt last month that the E.C.B. should consider so-called quantitative easing similar to that undertaken by the Fed — large bond purchases meant to drive down market interest rates.

It is very unusual for central bankers to put pressure on their peers so publicly. But Mr. Bullard warned that Europe was acting as a dead weight on the global economy.

“You have to be concerned,” he told an audience in Frankfurt. “The European Union as a whole is the biggest economy in the world.”

Article source: http://www.nytimes.com/2013/06/07/business/global/ecb-keeps-interest-rates-unchanged-in-hopes-for-recovery.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

High & Low Finance: Don’t Be Alarmed, It’s Just the Economy About to Accelerate

May 30, 2013 by Leave a Comment

The American markets are getting worried again. But this time the fear is refreshingly different.

The worry is that economic growth may be about to accelerate.

After five years of a disappointing economy, such a concern sounds too good to be true, and perhaps it is. But imagine what will happen if it is not. We’ve been complaining for years about how slow the recovery is. It would be great if it sped up appreciably.

But you might not know that if you listened to some of the commentary these days. Those who see a black cloud behind every silver lining can point to plenty of negatives in a good economy. Bond investors will lose money as the value of long-term bonds declines. That will mean that a lot of people are poorer. Banks own a lot of Treasuries, and some of them could suffer as the value of those bonds decline.

Perhaps rising interest rates will prompt a sell-off in the stock market. Perhaps they will choke off the recovery in the housing market.

The federal government will suffer a hit from having to pay higher interest rates as it borrows money. The Federal Reserve, which has bought a lot of long-term government bonds and mortgage securities, will lose money — perhaps a lot of it — as it sells those securities at lower prices than it paid. It might lose so much money that it stops funneling profits to the Treasury, further damaging the government’s fiscal position.

Added to those specifics is the feeling that we are about to enter unprecedented territory. Just as the Fed never before engaged in quantitative easing, it has never before unwound the positions. Who knows if it can handle the challenge?

“The Federal Reserve will need to carefully navigate through the completion of quantitative easing,” the Organization for Economic Cooperation and Development said this week in its generally gloomy semiannual global economic forecast. “A premature exit could jeopardize the fragile recovery, but waiting too long could result in a disorderly exit from the program with sizable financial losses.”

Of course, we’ve all known that — someday — the Fed would have to start reducing its positions. But on Wall Street, someday can seem a very long way off. “This was supposed to be next year’s trade,” a hedge fund manager told me this week.

What made it seem like this year’s trade was the sudden backup in the bond market that began early in May and accelerated late in the month after the Fed’s chairman, Ben S. Bernanke, mused that the Fed might be able to start to backing off the easing program later this year. The yield on 10-year Treasuries, below 1.7 percent early this month, rose above 2.1 percent on Tuesday.

That may not sound like a lot, but to owners of such bonds, it is a problem. If they bought at the latest auction of 10-year Treasuries, on May 8, the value of their securities fell enough in three weeks to offset more than a year of income.

That latest drop came on the heels of some surprisingly good economic news, as well an upbeat forecast. Last week, the Federal Reserve Bank of New York said it expected the unemployment rate, now 7.5 percent, to fall to 6.5 percent by late next year. That is earlier than the Fed had expected when it said 6.5 percent was the level at which it might choose to back away from quantitative easing,

Then this week the Standard Poor’s Case-Shiller home price index was reported to have leapt 10.9 percent over the year through March. That was the largest gain since 2006, when the housing bubble was in full expansion. And on the same day that was reported, the Conference Board said consumer confidence was at a five-year high.

There are reasons to restrain enthusiasm about both figures, though. Home prices hit their lows for the cycle in March 2012, so this is a bounce off the bottom. And while consumer confidence is up, it is still well below the levels that seemed acceptable before the financial crisis. During the decade before the economy began to crater in 2008, there were only two months — in 2003 — when the index was as low as it is now. And not all statistics are surprising on the upside; first-quarter gross domestic product was revised a bit lower in the latest estimate, released Thursday.

Article source: http://www.nytimes.com/2013/05/31/business/economy/dont-be-alarmed-its-just-the-economy-about-to-speed-up.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

High & Low Finance: Don’t Be Alarmed, It’s Just the Economy About to Speed Up

May 30, 2013 by Leave a Comment

The American markets are getting worried again. But this time the fear is refreshingly different.

The worry is that economic growth may be about to accelerate.

After five years of a disappointing economy, such a concern sounds too good to be true, and perhaps it is. But imagine what will happen if it is not. We’ve been complaining for years about how slow the recovery is. It would be great if it sped up appreciably.

But you might not know that if you listened to some of the commentary these days. Those who see a black cloud behind every silver lining can point to plenty of negatives in a good economy. Bond investors will lose money as the value of long-term bonds declines. That will mean that a lot of people are poorer. Banks own a lot of Treasuries, and some of them could suffer as the value of those bonds decline.

Perhaps rising interest rates will prompt a sell-off in the stock market. Perhaps they will choke off the recovery in housing.

The federal government will suffer a hit from having to pay higher interest rates as it borrows money. The Federal Reserve, which has bought a lot of long-term government bonds and mortgage securities, will lose money — perhaps a lot of it — as it sells those securities at lower prices than it paid. It might lose so much money that it stops funneling profits to the Treasury, further damaging the government’s fiscal position.

Added to those specifics is the feeling that we are about to enter uncharted territory. Just as the Fed never before engaged in quantitative easing, it has never before unwound the positions. Who knows if it can handle the challenge?

“The Federal Reserve will need to carefully navigate through the completion of quantitative easing,” the Organization for Economic Cooperation and Development said this week in its generally gloomy semiannual global economic forecast. “A premature exit could jeopardize the fragile recovery, but waiting too long could result in a disorderly exit from the program with sizable financial losses.”

Of course, we’ve all known that — someday — the Fed would have to start reducing its positions. But on Wall Street, someday can seem a very long way off. “This was supposed to be next year’s trade,” a hedge fund manager told me this week.

What made it seem like this year’s trade was the sudden backup in the bond market that began early in May and accelerated late in the month after the Fed’s chairman, Ben S. Bernanke, mused that the Fed might be able to start to backing off the easing program later this year. The yield on 10-year Treasuries, below 1.7 percent early this month, rose above 2.1 percent on Tuesday.

That may not sound like a lot, but to owners of such bonds, it is a problem. If they bought at the latest auction of 10-year Treasuries, on May 8, the value of their securities fell enough in three weeks to offset more than a year of income.

That latest drop came on the heels of some surprisingly good economic news, as well an upbeat forecast. Last week, the Federal Reserve Bank of New York said it expected the unemployment rate, now 7.5 percent, to fall to 6.5 percent by late next year. That is earlier than the Fed had expected when it said 6.5 percent was the level at which it might choose to back away from quantitative easing,

Then this week the Standard Poor’s Case-Shiller home price index was reported to have leapt 10.9 percent over the year through March. That was the largest gain since 2006, when the housing bubble was in full expansion. And on the same day that was reported, the Conference Board said consumer confidence was at a five-year high.

There are reasons to restrain enthusiasm about both figures, though. Home prices hit their lows for the cycle in March 2012, so this is a bounce off the bottom. And while consumer confidence is up, it is still well below the levels that seemed acceptable before the financial crisis. During the decade before the economy began to crater in 2008, there were only two months — in 2003 — when the index was as low as it is now. And not all statistics are surprising on the upside; first-quarter gross domestic product was revised a bit lower in the latest estimate, released Thursday.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/05/31/business/economy/dont-be-alarmed-its-just-the-economy-about-to-speed-up.html?partner=rss&emc=rss

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News Analysis: Britain’s Economic Malaise Brought Ratings Downgrade

February 25, 2013 by Leave a Comment

Prime Minister David Cameron and his increasingly jittery coalition government have made deficit and debt reduction a defining priority. In December, his powerful chancellor of the Exchequer, George Osborne, warned that an austerity program that had already resulted in the elimination of tens of thousands public-sector jobs would have to be extended for a year longer than planned, to 2018. But that same austerity program has contributed to long-term economic malaise.

On Friday Moody’s became the first ratings agency to strip Britain of its prized triple-A investment grade, reducing the country to Aa1. In its report, Moody’s said one of the core factors behind its decision was the very slow pace of the British recovery.

Mr. Osborne said afterward that Moody’s decision was “disappointing news,” but he promised not to let the downgrade deflect the government from its deficit-cutting strategy.

The challenge Mr. Cameron and Mr. Osborne face in turning around the economy and changing Britain’s status as a fiscal and trade laggard was underscored by two statistics released Friday in a widely anticipated European Commission economic forecast for the European Union.

The first is that despite presiding over one of the longest and highest-profile European austerity campaigns, the British government will end this year with a primary deficit — the purest measure of how much more a government spends than it receives in taxes — of 4.3 percent of gross domestic product. That is by far the highest such figure in Europe and second only to debt-ridden Japan among the world’s developed economies.

The second is that even though the pound has lost up to a third of its value against major currencies since the onset of the financial crisis, Britain this year will be the only developed economy in the world that will register a current account deficit that will be higher, at 3.1 percent of G.D.P., than it was in 2009.

The current account balance is the broadest measure of a country’s ability to sell its goods abroad. The larger the deficit, the more a country must borrow. All things being equal, a less costly currency should make it more attractive for foreigners to purchase a country’s goods or invest in its assets. Export powers like Germany and China run large current account surpluses.

Mr. Cameron has touted the benefits of having a flexible currency, free of the constraints of the euro — and Britain may even hold a referendum on its continued membership in the European Union. But even euro zone countries like Spain, Greece and Portugal, which three years ago had gaping account deficits that drove them to the brink of collapse, have made dramatic improvements in this regard. The European Commission even sees Spain moving to a current account surplus this year.

Britain’s persistent and worsening trade gap illustrates a troubling inability to increase exports even though the government has made this a policy priority. In his first address to Parliament, the incoming governor of the Bank of England, Mark J. Carney, pointed out that since 2000, Britain’s share of global exports had decreased about 50 percent — the steepest decline among the world’s 20 biggest economies.

One explanation for the disappointing British record in narrowing its deficit and becoming more competitive is a surprising decline in productivity since the start of the crisis.

Since their economies tanked, countries like Spain, Portugal and Ireland have become more competitive by laying off workers. That should set the stage for a more robust return to growth once the recession ends.

In Britain, however, the opposite has been true: Despite stagnant economic growth, the British unemployment rate has remained relatively low, at just under 8 percent. In other words, Britain needs more workers to produce the same product — which, in addition to keeping the economy from growing strongly, pushes up labor costs, making exports more expensive to foreign buyers.

Article source: http://www.nytimes.com/2013/02/25/business/global/britains-economic-malaise-brought-ratings-downgrade.html?partner=rss&emc=rss

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