September 23, 2021

Fed Stands By Stimulus, and Says It’s Open to More

The Fed emphasized that it was ready to increase or decrease its efforts to spur growth and reduce unemployment as necessary, a more balanced position than it took earlier in the year, reflecting the reality that a strong winter has once again yielded to a disappointing spring.

It was the first time that the Fed had explicitly mentioned the possibility of doing more in a policy statement, although officials, including the Fed’s chairman, Ben S. Bernanke, have made the point repeatedly in public remarks.

Analysts disagreed about the central bank’s intent. Some saw it as a signal that the Fed’s next move could be an expansion of its stimulus.

Others, however, said the Fed was simply underscoring that it did not plan to reduce its asset purchases. It is buying $85 billion a month in Treasury and mortgage-backed securities.

“I don’t think there’s much chance of them stepping it up,” said Jim O’Sullivan, chief United States economist at High Frequency Economics in New York. “But this is certainly their way of saying there’s no bias toward scaling down.”

The Fed maintained a relatively sunny economic outlook in its statement, released after a two-day meeting of its policy-making committee. It said that the economy was expanding at a “moderate pace” and that the labor market had shown “some improvement.” It added, however, that federal spending cuts were “restraining economic growth,” an implicit critique of the rest of the government.

That language was stronger than the Fed had used in previous assessments of the economic impact of fiscal policy. Fed officials have repeatedly expressed frustration that fiscal policy is working at cross-purposes with their own monetary policy. The statement also noted that the pace of inflation had slackened, a potential sign of economic weakness. Bringing the annual rate of inflation closer to its target of 2 percent has been a primary goal of the Fed’s four-year-old stimulus campaign, but the statement expressed little concern about the recent deceleration to a pace of only about half that level.

Investors and the Fed have taken the view that inflation is likely to return to a more normal pace without additional effort.

“The committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline” to a level the Fed regards as acceptable, the statement said.

Michael Feroli, chief United States economist at JPMorgan Chase, said the stability of the Fed’s economic outlook suggested that policy, too, would remain stable.

“In effect, the Fed signaled that the pace of asset purchases would be data dependent in both directions, but that right now the data gives them little reason to change in either direction,” Mr. Feroli wrote Wednesday in a note to clients.

The statement won support from 11 of the Federal Open Market Committee’s 12 members. Esther George, the president of the Federal Reserve Bank of Kansas City, cast the dissenting vote, as she has at each meeting this year, citing concerns about potential “economic and financial imbalances” and the risk of excessive inflation.

The pace of economic growth appeared to slow in the weeks between the Fed’s previous meeting and the one this week. Inflation slackened in March to the slowest pace in two years, while employers added the fewest jobs in any month since last summer. And economists say that the pain of federal spending cuts is just beginning to tell.

Inflation was 1.1 percent during the 12 months ending in March, according to the most recent data from the Fed’s preferred inflation gauge, the Commerce Department’s index of personal consumption expenditures. That is well below the 2 percent annual pace that the Fed considers healthy.

The share of Americans with jobs has not increased since the recession.

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Fed Seen as Unlikely to Expand Asset Purchases

WASHINGTON — The Federal Reserve is making modest progress in its push to reduce the unemployment rate. But that’s 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.

The share of American adults with jobs has hovered around 58.5 percent for more than three years, roughly five percentage points below its prerecession peak. Job creation has merely kept pace with population growth. The unemployment rate, now 7.6 percent, has fallen mostly because people stopped looking for work.

There is little sign, however, that Fed officials are considering an expansion of their four-year-old stimulus campaign as the Fed’s policy-making committee prepares to convene Tuesday and Wednesday in Washington.

“We are seeing an impact from our policies,” Eric S. Rosengren, the Federal Reserve Bank of Boston president, said in a recent interview. But “I think we’re pushing the interest-sensitive sector about as far as we’re going to be able to push it at this time.”

Fed officials backed away from talk of an early retreat from the current program of asset purchases — $85 billion a month in Treasury and mortgage-backed securities —after economic growth and inflation both rose more slowly than expected in the first quarter. The Fed’s preferred inflation gauge rose 1.2 percent, below its 2 percent target. But that is as far as the pendulum has swung.

The Fed’s chairman, Ben S. Bernanke, and his allies point to increased sales of homes and autos and the rising stock market as evidence that the asset purchases are working.“After reviewing the efficacy and costs of this program, I have concluded that the efficacy has been as high or higher than I expected at the onset of the program and the costs the same or lower,” William C. Dudley, president of the Federal Reserve Bank of New York, said in a recent speech.

But there are several reasons officials remain reluctant to do more. The benefits of additional asset purchases appear modest, at best. The consequences of buying more bonds are uncertain. And officials are frustrated that their monetary policy is being forced to play a role that most economists and Fed officials say could be more easily and effectively performed by fiscal policy.

Another reason the Fed is not embracing new measures is that it already has tied the duration of low interest rates to the unemployment rate. The Fed said in December that it intended to hold interest rates near zero at least as long as the unemployment rate remained above 6.5 percent, provided that inflation remained under control. The theory is that the economy will get as much stimulus as it needs.

“Communications from Fed leadership cast some doubt on the appetite of the key policy makers for increasing the monthly flow of purchases,” Michael Feroli, chief United States economist at JPMorgan Chase, wrote in an analysis of the coming meeting of the Federal Open Market Committee. “If the F.O.M.C. were to increase total purchases, they would prefer to do so by lengthening the time period over which they purchase $85 billion per month, rather than by increasing the monthly pace of those purchases.”

The Fed has good reasons for focusing on the unemployment rate. Historically, as people looking for jobs find work, people sitting at home start looking, so that total employment increases as the unemployment rate declines.

But recent research by two Fed economists suggests the current plan won’t work if the Fed begins to reduce its efforts when unemployment falls below 6.5 percent, because that’s not low enough to draw people into the job market.

The economists, Christopher J. Erceg and Andrew T. Levin, both on leave at the International Monetary Fund, calculated that the number of people who wanted jobs but were not looking now exceeded the number actively searching.

“It’s safe to ignore the participation rate during normal times,” Mr. Levin said earlier this month at a conference held by the Federal Reserve Bank of Boston, where the paper was presented. “Our message is that it may not be safe to ignore it now.”

They argued that the Fed should continue its stimulus campaign until those people were drawn back into the job market, and were able to find jobs — in other words, that the Fed should focus on employment rather than unemployment.

The implication is that the Fed should hold interest rates near zero even after the unemployment rate returns to a more normal level and even if inflation starts to rise.

Some Fed officials are skeptical of such arguments. James Bullard, president of the Federal Reserve Bank of St. Louis, warned in a presentation earlier this month that the Fed should not increase its efforts to reduce unemployment if the price is higher inflation.

“Such an approach may be highly counterproductive,” Mr. Bullard said, citing economic simulations that yielded better outcomes when the Fed maintained its focus on stabilizing the annual rate of inflation at about 2 percent.

Fed officials raise other doubts. Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said in a recent interview that economists understood the relationship between the unemployment rate and inflation, allowing for careful calibration of Fed policy. By contrast, he noted, it would be more difficult to set a target for labor force participation because of demographic changes, like the growing share of retirees.

Still, Mr. Kocherlakota said, the 6.5 percent unemployment threshold is too high. He wants to reduce it to 5.5 percent.

And other officials say that they, too, might favor additional accommodation if declines in the unemployment rate are not matched by a rising employment rate.

“We do not want to get to 6.5 percent just by having people pull out of the labor force,” Mr. Rosengren of the Boston Fed said. “We want to get to 6.5 because employment is expanding and we’re adding jobs faster than labor force growth.”

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Economix Blog: Hawks and Doves at the Fed

The economist Dean Baker recalls a story about Janet Yellen, the Federal Reserve vice chairwoman, that seems at odds with the story that opens my profile of Ms. Yellen in Thursday’s paper.

I wrote that in July 1996, Ms. Yellen was concerned that the Fed might drive inflation too low. Mr. Baker wrote Thursday that in September 1996, Ms. Yellen pressed for higher interest rates because she was concerned that inflation was too high.

The stories are both true and, taken together, do a nice job of illustrating the complexity of labeling Fed officials in general, and Ms. Yellen in particular.

The debate in July 1996 was about the Fed’s long-term goals.

The Fed’s chairman at the time, Alan Greenspan, maintained that the Fed should seek to eliminate price inflation. Asked by Ms. Yellen how he would define price stability, Mr. Greenspan responded, “I would say the number is zero, if properly measured.”

Ms. Yellen replied, “Improperly measured, I believe that heading toward 2 percent inflation would be a good idea, and that we should do so in a slow fashion, looking at what happens along the way.”

The entire transcript, which is very much worth reading, is available on the Fed’s Web site.

The debate in September 1996 was about that moment in time.

Inflation was still running at an annual pace of about 3 percent, and Ms. Yellen was concerned that the pace would rise.

The former Fed governor Laurence H. Meyer tells the story as follows. The full version is here.

“Before the September 1996 FOMC meeting, Janet and I went to see the Chairman to talk about the policy decision at that meeting and at following meetings. This was the only time I ever visited the Chairman (at my initiative) to talk about monetary policy, before or after a meeting. Janet and I were both worried about inflation, even though it was very well contained at the time. We told the Chairman that we loved him but could not remain at his side much longer if he continued, as he had been doing for some time, to push the next tightening action into the next meeting, and then not follow through. He listened, more or less patiently. I recall, though this may have not been the case, that he just smiled and didn’t say a word. After an awkward silence, we said our good-byes.”

Ms. Yellen, in other words, did not want inflation to fall below 2 percent, but she also did not want it to rise above 3 percent. She had a somewhat greater tolerance for inflation than Mr. Greenspan, but she was more concerned that inflation would rise, so she wanted to raise interest rates.

Mr. Greenspan, by contrast, had less tolerance for inflation, but also was less concerned that inflation would rise. So he held rates steady.

Ponder this for a moment: Which one was the hawk and which the dove?

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Stocks Step Ahead Despite Claims Data

Stocks ended higher on Thursday after the Bank of Japan announced aggressive policies to lift its economy, but weak jobs data in the United States capped gains.

The Bank of Japan’s surprising stimulus plan came with supportive comments from officials in Europe and at the Federal Reserve, suggesting that central bank actions will continue supporting the world’s economy to the benefit of stocks. Interest rates seemed to respond to the stimulus.

The Treasury’s benchmark 10-year note rose 15/32, to 102 4/32, and the yield fell to 1.77 percent from 1.82 percent late Wednesday.

The iShares MSCI Japan Index exchange-traded fund jumped 4 percent, to $10.89, while United States-listed shares of Toyota climbed 4.7 percent, to $105.63 and WisdomTree Japan, another exchange-traded fund, rose 7.5 percent, to $43.88.

The Fed’s stimulus, along with signs of improvement in the United States economy, have helped stocks rally since the start of the year. While the Standard Poor 500-stock index is up 9.4 percent since the start of the year and broke its nominal closing record last week, it has yet to surpass its intraday high of 1,576.09, and this week investors have mostly pulled back.

“The Fed officials certainly have been going out of their way to point out that they’re staying the course and sticking with their program, which has probably been reassuring for markets,” said Peter Jankovskis, co-chief investment officer at OakBrook Investments in Lisle, Ill.

An unexpected jump in weekly jobless claims to a four-month high raised questions about the labor market’s recovery a day ahead of the Labor Department’s widely watched monthly jobs report. A report on Wednesday showed that in March United States companies hired at the slowest rate in five months.

The Dow Jones industrial average was up 55.76 points, or 0.38 percent, at 14,606.11. The S. P. 500 index gained 6.29 points, or 0.40 percent, to 1,559.98. The Nasdaq composite index was up 6.38 points, or 0.20 percent, at 3,224.98.

Among the latest comments from Fed officials, Dennis P. Lockhart, president of the Atlanta Fed, suggested the program to stimulate the economy would continue for at least a few more months. Charles Evans, head of the Chicago Fed, said rates could stay at rock bottom until the unemployment rate fell to 5.5 percent. The rate was 7.7 percent in February.

The European Central Bank president, Mario Draghi, opened the door to an interest rate cut as soon as next month.

The retailer Best Buy rose 16.1 percent, to $25.13, after saying it would offer a 30 percent discount on Apple iPad 3 tablets in the United States.

Shares of Facebook rose 3.1 percent, to $27.07, after the company introduced applications that let users display versions of their Facebook newsfeed and messages on the home screen of a wide range of devices based on Google’s Android system.

Analysts said Facebook’s move could divert users from Google’s services. Its shares fell 1.4 percent, to $795.07.

The report about jobless claims was the latest bit of disappointing economic news. Claims jumped to 385,000 in the latest week, confounding expectations that claims would drop by 7,000, to 350,000.

Friday’s labor report was expected to show 200,000 jobs were created last month, according to a Reuters survey. The unemployment rate was expected to remain at 7.7 percent.

Earnings forecasts have declined heading into first-quarter reports, which are set to begin next week with Alcoa. S. P. 500 earnings are expected to rise just 1.6 percent from a year ago, according to Thomson Reuters data, down from a Jan. 1 growth forecast of 4.3 percent.

If a majority of results beats expectations, as has been the trend, “There’s a good chance we could see the markets resume their upward trend,” said Mr. Jankovskis.

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Economix Blog: On Federal Reserve Policy, No More, No Less

A speech on Tuesday by Eric Rosengren, president of the Federal Reserve Bank of Boston, underscores that debate within the central bank once again is shifting from whether to do more to when to do less.

This should not suggest that the Fed is on the verge of doing less. It seems clear that a strong majority of the Fed’s policy-making committee supports the current round of stimulus, announced in September and December. The Fed’s chairman, Ben S. Bernanke, said on Monday that the persistence of high unemployment “motivates and justifies” those steps, which he called “extraordinarily important.”

But an account of the committee’s most recent meeting in December, released earlier this month, showed participants already debating whether the Fed should end the bond purchases as early as this summer.

Mr. Rosengren, who holds one of the four rotating seats on the committee this year, pushed back against calls for an early end. The Fed is buying $85 billion a month in Treasuries and mortgage bonds to drive down borrowing costs, which it hopes will encourage spending and foster job creation. Mr. Rosengren said the campaign was working and that it should continue for some time.

“I consider it imperative that monetary policy continue to actively support the economy at present — since we continue to have an unacceptably high unemployment rate while, at the same time, inflation is undershooting the Federal Reserve’s 2 percent target,” Mr. Rosengren said.

But Mr. Rosengren – who has been one of the strongest advocates for the Fed to act more aggressively to reduce unemployment — did not argue that the Fed should expand its efforts, even though he and other Fed officials expect that unemployment will remain higher than they would like, and that inflation will remain lower.

After the speech, in an interview with Bloomberg News, Mr. Rosengren made clear that the Fed could do more – he just doesn’t think it should, at least not for now.

Another strong supporter of the asset purchases, Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, did call Tuesday for additional action to reduce unemployment, but his views are less significant because he does not hold a vote on the policy-making committee this year.

“Monetary policy is currently not accommodative enough,” Mr. Kocherlakota said, noting that inflation is projected to remain below the 2 percent annual pace the Fed regards as most healthy, so the central bank is failing both in its obligation to reduce unemployment and to control inflation.

Mr. Kocherlakota said the Fed should announce its intention to keep short-term interest rates near zero until the unemployment rate falls below 5.5 percent, rather than the 6.5 percent threshold the central bank adopted in December.

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U.S. and 14 Lenders Said to Be Near Deal of Foreclosure Claims

A $10 billion settlement to resolve claims of foreclosure abuses by 14 major lenders was expected to be announced as early as Monday, several people with knowledge of the discussions said on Sunday.

The settlement would come after weeks of negotiations between federal regulators and the banks, and covers abuses like flawed paperwork and botched loan modifications, said these people, who spoke on condition of anonymity because the deal had not been made public.

An estimated $3.75 billion of the $10 billion would be distributed in cash relief to Americans who went through foreclosure in 2009 and 2010, these people said. An additional $6 billion would be directed toward homeowners in danger of losing their homes after falling behind on their monthly payments.

All 14 banks, including JPMorgan Chase, Bank of America and Citigroup, were expected to sign on.

The agreement would come almost a year after a sweeping deal in February between state attorneys general and five large mortgage lenders.

The settlement almost fell apart over the weekend. Some officials at the Federal Reserve threatened to scuttle the deal unless the banks agreed to pay an additional $300 million for their role in the 2008 financial crisis, which upended the housing market and led to millions of foreclosures.

The Fed officials argued for additional aid for homeowners ensnared in a flawed foreclosure process, according to several people briefed on the negotiations who spoke on condition of anonymity. The $300 million demand was to come on top of the $10 billion payout, but was met with resistance from the banks, especially because it was raised late in the day on Friday, according to these people.

The Federal Reserve officials backed down, allowing the $10 billion pact to move forward ahead of bank earnings releases this month, these people said.

During the last week, officials from the Federal Reserve met with community groups and consumer advocates to gather comments about a settlement. It was those talks that induced the Fed to forgo the request for additional money, according to three people familiar with the matter. The thinking, these people said, was that broad relief was better than a lengthy review process that had not yielded much relief.

Representatives from the Federal Reserve and the Office of the Comptroller of the Currency, which led banking regulators in the negotiations, declined to provide further details on the settlement.

Still, some housing advocates said the settlement did not go far enough in providing relief. Bruce Marks, chief executive of the Neighborhood Assistance Corporation of America, expressed cautious optimism about the deal, but added that the “devil is in the details.”

It is still unclear how the monetary relief will be distributed among homeowners, but one immediate result of the settlement is the end of a troubled review of millions of loan files.

As part of a consent order in April 2011, the comptroller’s office and the Federal Reserve established the Independent Foreclosure Review, which mandated that banks hire independent consultants to audit loan files and look for illegal fees, bungled loan modifications and instances where borrowers lost their homes even though they were current on their payments. Only 323,000 homeowners submitted claims for their files to be reviewed.

Within the comptroller’s office, senior officials raised concerns that the reviews had grown bloated and inefficient, especially after each loan took more than 20 hours to review, up from original estimates of eight hours a file.

The mounting costs of the reviews, up to $250 an hour, began to worry the banking regulators, according to several of the people with knowledge of the matter. So far, the foreclosure review program has cost the banks an estimated $1.5 billion, according to these people.

Banking regulators grew concerned that the reviews were not producing meaningful instances of banks wrongfully seizing the homes of borrowers who were current on their payments, according to these people.

Told last week of the plans to stop the foreclosure reviews, some consumer advocates expressed concern that the full extent of the damage to homeowners would never be known. Some of the advocates have questioned whether the banks were getting off too easily because they selected and paid the consultants charged with examining their loans.

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Fed Set to Introduce Communications Policies This Week

While the changes could make it easier for the Fed to move ahead with another round of asset purchases later this year, by helping to explain why the economy needs additional stimulus, officials have indicated that any such plans remain on the back burner, and may stay there so long as the economy continues to recover.

Indeed, the Fed is able to focus on communication in part because it is no longer devoting all of its energies to crisis management. These are improvements that the Fed’s chairman, Ben S. Bernanke, has waited five years to make, reflecting his vision for how the Fed should operate in periods of calm, too.

The centerpiece of the new policies is a plan to publish the predictions of senior Fed officials about the level at which they intend to set short-term interest rates over the next three years — including when they expect to end their three-year-old commitment to keep rates near zero. The Fed also will describe the expectations of those officials for the management of the central bank’s vast investment portfolio.

The first forecast will be published after a two-day meeting, starting on Tuesday, of the Federal Open Market Committee, which sets policy for the central bank. The committee also is considering the publication of a statement describing the Fed’s goals for the pace of inflation and level of unemployment, which it has never formalized.

“Our moves toward greater openness in recent years have made our policies more effective and helped the public understand the Fed’s actions better,” John C. Williams, president of the Federal Reserve Bank of San Francisco, said in a recent speech.

Any bolder steps, he said, “will depend on how economic conditions develop.”

This is not the first time the Fed has tried to get past crisis management. And after several false starts in which it overestimated the strength of the recovery, officials have been careful to insist that they still stand ready to do more if necessary.

The economy, after all, is merely muddling along. While economists calculate that fourth-quarter growth was relatively strong, most forecasters expect a much slower pace of growth in the new year. The Fed’s own forecast, which will be updated Wednesday, anticipates growth of up to 2.9 percent. Most other guesses are lower.

Unemployment also remains a deep and prevalent affliction. Almost 24 million Americans could not find full-time work in December; the unemployment rate has ticked downward in part because many people have stopped looking for work.

Senior Fed officials have also sought to focus attention in recent months on the depressed condition of the housing market, arguing that other parts of the government can and should do more to help homeowners and revive sales. Some Fed officials have advocated that the Fed buy large quantities of mortgage-backed securities, which could further reduce interest rates on mortgage loans.

But several Fed officials have said in recent speeches that they are hesitant to support new efforts to improve growth, because they think monetary policy has exhausted most of its power, and because they are worried about inflation.

“Steady even if unspectacular growth accompanied by inflation in the neighborhood of 2 percent justifies some reluctance to change, in either direction, the F.O.M.C.’s accommodative policy,” Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, said in a speech this month.

Mr. Lockhart added a standard caveat for Fed officials, that the persistence of high unemployment required the Fed to keep thinking about doing more.

“Now is not a time to lock into a rigid position,” he said.

But Fed officials have made clear that high unemployment is an insufficient cause for additional action, at least as long as inflation remains near 2 percent.

Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, said in a recent speech that the economy would not create enough jobs to return unemployment to normal levels for “perhaps even four or five years.”

“Sooner, of course, would be better for everyone,” she said. “But I want to be on a path toward full employment that
doesn’t create an inflation problem down the road.”

The communications changes that the Fed plans to announce Wednesday mark the furthest advance in a 20-year-old campaign to increase the transparency of its decision-making as a means to increase the impact of its policies. As recently as the early 1990s, the Fed still did not regularly announce the decisions reached at its policy meetings. Now it plans to start publishing predictions about the outcomes of future meetings to guide investor expectations.

The Fed disclosed its plans this month when it released a description of the committee’s most recent meeting, in December. On Friday it followed up by releasing the templates that will be used to publish the predictions.

The predictions themselves could have a mild effect on markets. The Fed said this summer that it would maintain short-term rates near zero through middle of 2013, at least. Mr. Bernanke has since underscored the words “at least,” and analysts expect the forecast will show that most members of the committee intend to hold rates near zero into 2014.

Pushing back that timetable will tend to reduce interest rates, but the impact is likely to be minor, as asset prices already reflect an expectation that rates will not rise before 2014.

“In policy terms, this is a historic change,” Paul Ashworth, chief North American economist at Capital Economics, wrote in a note to clients. “In practical terms, however, the change isn’t going to have any major impact.”

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Economy Grew Modestly Last Month, Fed Report Says

The economy “expanded at a modest to moderate pace” from late November through the end of December on increased holiday retail sales, demand for services and oil-and-gas extraction, the Fed said in its beige book business survey. At the same time, most industries saw “limited permanent hiring,” and the housing market remained “sluggish.”

The report may reinforce the views of a majority of Fed officials, who see an economy that is expanding without being strong enough to reduce joblessness as quickly as they would prefer. The unemployment rate dropped to 8.5 percent in December from 9.4 percent a year earlier. Fed officials are urging lawmakers to try more housing-aid programs.

“The reports on balance suggest ongoing improvement in economic conditions in recent months,” the Fed said in the report, which comes out two weeks before each meeting on monetary policy. “The combination of limited permanent hiring in most sectors and numerous active job seekers has continued to keep a lid on general wage increases.”

The beige book report reflects a “slightly better tone, slightly better data,” said Joseph LaVorgna, chief United States economist at Deutsche Bank Securities in New York. Even so, “the financial market has taken recent Fed commentary as generally dovish and as a signal that the Fed is perhaps exploring more easing measures.”

The last beige book, released Nov. 30, said the economy expanded at a “slow to moderate” pace in 11 of 12 districts, led by gains in manufacturing and consumer spending. St. Louis was the only region to report a decline in economic activity.

The Federal Open Market Committee will meet Jan. 24-25 in Washington as officials debate whether to try new actions to lower borrowing costs. Fed policy makers will for the first time publish projections for the benchmark federal funds rate and will also update their forecasts for economic growth, unemployment and inflation.

The beige book said that “upward wage pressures were modest over all” for workers across the country. The Labor Department said Jan. 6 that 200,000 jobs were added to payrolls in December, the most since September. The jobless rate declined for a fourth consecutive month to the lowest since February 2009.

Even so, the New York Fed president, William C. Dudley, said last week that the “outlook for unemployment is unacceptably high” and that it was appropriate for the Fed to consider steps to ease monetary policy.

The residential real estate market “largely held steady at very low levels” except for increasing construction of multifamily homes, the beige book said. The rental market tightened in some areas, the report said.

The Fed said in the report that inflation and pressures to raise prices were limited at the end of last year. Several district banks reported that “upward price pressures from rising commodity and input prices have eased substantially,” the Fed said.

Lending edged up on higher demand from businesses, with the New York and Cleveland regions reporting increased loans in commercial mortgages, the Fed said.

Consumer lending “was largely flat compared with the prior reporting period,” the central bank said.

A separate Fed report Jan. 9 showed that consumer borrowing in the United States rose in November by the most in 10 years. Credit increased by $20.4 billion, the biggest jump since November 2001, to $2.48 trillion.

Most regions said that holiday retail sales “were up noticeably over last year’s season,” and that consumer spending and confidence had improved, the Fed said.

Commercial and industrial loans from banks have increased to $1.34 trillion as of Dec. 28, the highest since October 2009, from $1.21 trillion a year earlier. They peaked at $1.62 trillion in October 2008.

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Economix Blog: What to Look For in Friday’s Jobs Report



Dollars to doughnuts.

The Labor Department will release its monthly jobs report on Friday morning, and economists are expecting that once again the news will be mediocre.

American companies probably added a net total of about 90,000 jobs in October, after a gain of 103,000 in September, forecasters say. (Remember, though, that the September numbers were helped by the rehiring of Verizon workers who were on strike during August.)

While job growth is, of course, better than job losses, a gain in the neighborhood of 100,000 is nothing worth celebrating. That would be just about enough to keep up with population growth, so it would not actually reduce the backlog of unemployed workers.

As a result, economists expect the unemployment rate to stay flat at 9.1 percent. If they’re right, that would mean that the unemployment rate has not fallen below 9 percent in seven months.

The outlook for the coming year is not much better: On Wednesday, the Federal Reserve’s forecast for economic growth next year was revised downward. Fed officials expect an average unemployment rate of 8.5 to 8.7 percent in 2012.

Those figures also do not seem to have factored in whatever mayhem could result from the European debt crisis.

The fate of Greece has been up in the air for about a year and a half now, and this week talks over the conditions of a deal to ease the Greek debt burden have been particularly contentious. Economists worry that a possible Greek default could set off a domino effect that takes down Italy and other indebted countries, potentially causing another global financial crisis. And as you may recall, earlier upheaval — the tsunami in Japan, the Arab Spring, severe winter storms, the debt ceiling debacle in Washington — caused previous economic forecasts to look far too optimistic.

Besides the headline numbers in Friday’s report,  pay attention to:

  • The share of working-age people who are actively participating in the labor force, either by working or looking for work. This share has been alarmingly low in recent months, indicating that many workers are sitting on the sidelines because they find the job market so discouraging.
  • The average duration of unemployment. The average length of time workers have spent fruitlessly looking for work has reached record high after record high, climbing to 40.5 weeks in September. And that number would not even include people who have been out of work for longer but gave up their job search.
  • The length of the work week. Before employers take the plunge and hire more workers, they often work their existing employees longer. But average weekly hours for private employees have been mostly flat at about 34.3 so far this year. We’ll see if hours picked up in October.

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Economix Blog: Giving the Fed a Good Grade

It’s been a rough week for the Federal Reserve, as its latest plan to stimulate growth was greeted by the sound of falling stock prices.

But here’s a bit of good news for the Fed: A new study by the Federal Reserve Bank of Cleveland finds that the central bank’s previous effort to push growth, announced in August, has had a positive impact.

The Fed announced after the August meeting of its policy-making committee that it intended to hold short-term interest rates near zero until the middle of 2013. The statement was its latest effort to reduce the cost of borrowing, in this case by giving lenders the confidence that money would remain cheap for another two years.

“The Committee was attempting to alter the expectations of market participants,” the Cleveland Fed said in its report. “It worked. Since the announcement, forecasts for a variety of interest rates have fallen, at least in part due to the lower expectations for future interest rates.”

Source: Federal Reserve Board, via Federal Reserve Bank of Cleveland

Central banks generally avoid specific statements about long-term plans, to preserve flexibility and to avoid the need for apologies. But the Fed’s August statement culminated a gradual move in the direction of talking about the future. Beginning in 2009, the Fed said that it would maintain rates near zero for “an extended period,” language it repeated until August. Earlier this year, the Fed’s chairman, Ben S. Bernanke, defined an “extended period” as meaning at least two meetings of the policy-making committee.

Fed officials decided to go even further after concluding that the risk of backtracking was low because there was little prospect the economy would recover sufficiently in the next two years to put significant upward pressure on wages and prices.

The decision was controversial. Three of the 10 committee members dissented, the largest bloc of dissent in almost two decades. They expressed concern that the majority was underestimating the danger of inflation, overestimating the benefits of low interest rates — and that the announcement might persuade some consumers and business to wait before borrowing, in the confidence that rates would remain low and the hope that the economy would improve.

The Cleveland Fed study does not resolve those concerns, but it does point to clear evidence that the announcement has succeeded in reducing interest rates.

Specifically, by convincing investors that short-term rates would remain low, the Fed succeeded in lowering rates on longer-term debt — which are based in large part on expectations about the level of short-term rates throughout the longer period. Rates on the benchmark 10-year Treasury note, for example, declined by about 0.20 percentage points.

Moreover, the study found that the announcement also reduced market expectations about future interest rates for mortgage borrowers and corporations, suggesting that the Fed may succeed in reducing the cost of borrowing across a wide swath of the economy.

Markets now anticipate, for example, that corporations with good credit will be able to borrow at 4.80 percent at the end of 2012, down from an expectation of 5.60 percent before the Fed’s announcement.

Source: Blue Chip Financial Forecasts, via Federal Reserve Bank of Cleveland

Of course, one great caveat looms over all of the Fed’s efforts: Reducing the cost of borrowing does not make loans any easier to get. Federal regulators reported Thursday that mortgage loan originations fell by 12 percent last year, despite the historically low level of interest rates.

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