March 7, 2021

Fed Closer to Easing Back Stimulus, but Still No Consensus on Timing

The minutes of the central bank’s Federal Open Market Committee meeting late last month, released Wednesday, showed hints that some committee members were more comfortable with easing back sooner rather than later on the Fed’s program of purchasing $85 billion a month in government bonds and mortgage-backed securities.

In June, the Fed’s chairman, Ben S. Bernanke, indicated the stimulus program could be scaled back later this year if economic data continued to be positive, but he left investors guessing as to whether that might begin as soon as September or be delayed until December or even later.

While “a few members emphasized the importance of being patient and evaluating additional information before deciding on any changes to the pace of asset purchases,” a few others “suggested that it might soon be time to slow somewhat the pace of purchases,” the summary of the July 30-31 meeting said.

Still, it was clear from the minutes that big doubts remained about the economy’s underlying strength, and any change in policy remained contingent on the economic data that will come out before their next meeting on Sept. 17-18.

Despite continued strength in housing and auto sales, a number of participants indicated “that they were somewhat less confident about a near-term pickup in economic growth than they had been in June.”

“Tapering is certainly on their minds, but they don’t want to lock themselves in,” said Dean Maki, chief United States economist at Barclays, in an interview prior to the release of the minutes.

He noted that to achieve the Fed’s annual forecast of growth for 2013, the economy would have to expand at 3.25 percent to 3.5 percent in the second half of 2013. Few observers expect that to happen, although the growth is expected to be better than the 1.4 percent rate of the first half of 2013.

Since Mr. Bernanke and the Federal Reserve first indicated that stimulus efforts might be eased, trading in both developed countries and in emerging markets has been volatile.

The asset purchases and ultralow interest rates made it to cheap to borrow in many countries, while also propping up stock markets around the world. That era is coming to an end but the minutes reveal that members are concerned about that the pace is properly telegraphed to investors.

In particular, the policy-makers emphasized that while the bond purchase would soon be scaled back, any uptick in interest rates was years away.

Another focus was how the economy and the housing sector, in particular, would handle rising interest rates, which moved up sharply in the wake of Mr. Bernanke’s comments following the June meeting.

“While recent mortgage rate increases might serve to restrain housing activity, several participants expressed confidence that the housing recovery would be resilient in the face of the higher rates,” the minutes said.

They cited factors such as pent-up housing demand, banks’ increased willingness to make mortgage loans, healthy consumer confidence and the fact that rates remain low by historical standards, even after the recent run-up.

Another topic of discussion was the impact of the sharp reductions in government spending mandated by Congress earlier this year, with committee members noting the cuts had caused slower growth in sales and equipment orders.

Overall, the concerns about the U.S. economy in the second-half were spurred by the increase in mortgage rates, higher oil prices, slower growth in key export markets abroad and the possibility the federal budget cuts will continue to crimp growth.

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Returning to Daytime TV, Vieira Will Host Talk Show

NBC’s syndication division did not say whether it had completed any deals with local television stations. But executives involved with the production of “The Meredith Vieira Show” expressed confidence that stations, including the 10 owned by NBC in big cities, would snap up the rights to the show in short order.

Daytime television, with its blend of information and entertainment, is terrain Ms. Vieira knows well: she was one of the original hosts of “The View,” the ABC talk show that Barbara Walters started in 1997. Nine years later, she signed off “The View” to succeed Katie Couric on “Today,” and helped keep that morning show on top of the ratings. Ms. Vieira left “Today” in 2011, exhausted by the early-morning hours and eager to spend more time with her family. She remained with NBC as a special correspondent. (The “Today” ratings winning streak ended 10 months later.)

By persuading her to return to daytime talk, NBC is betting that Ms. Vieira can help prop up the ratings for local stations at a time of increasing competition for the audience’s attention. Syndicated talk shows can be lucrative for their hosts and corporate backers. But they can also be immensely challenging, as Ms. Couric has demonstrated in her first year as the host of “Katie,” a product of the Disney/ABC Domestic Television division of the Walt Disney Company.

Since its debut last September, “Katie” has not lived up to the expectations of Ms. Couric or the stations that paid a handsome license fee for it. While the show has been renewed through next summer, many syndication observers expect it to end at that point, either because Ms. Couric will choose to do something else — she has been unhappy at times with the fluffy nature of daytime TV — or because stations will choose to put on a different show.

If “Katie” ends in 2014, some stations (which license syndicated shows from a variety of companies, sometimes regardless of their own corporate affiliation) could pick “The Meredith Vieira Show” as a replacement — which would be an interesting wrinkle, given the intertwined history of the two women.

NBC, however, tried on Tuesday to manage expectations about “The Meredith Vieira Show,” having concluded that Ms. Couric and Disney excessively hyped “Katie” ahead of time.

The company will most likely seek out early afternoon time slots for the show, not the late afternoon slots that are typically highly rated and more highly sought. Also, the show could be televised in the late mornings by some local stations, putting it into direct competition with Ms. Vieira’s old show “The View.”

In a statement on Tuesday, Ms. Vieira said she wanted the show to embody what she called the “three H’s”: heat, heart and humor. “And speaking of the heart, I want to thank my husband, Richard, and kids, Ben, Gabe and Lily, for strongly encouraging me to take this incredible opportunity,” she said, and added, “or else they really just want to get me out of the house.”

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A Bold Dissenter at the Fed, Hoping His Doubts Are Wrong

But for the last several years, Mr. Lacker, president of the Federal Reserve Bank of Richmond, has warned repeatedly that the central bank’s extraordinary efforts to stimulate growth are ineffective and inappropriate and, worst of all, that the Fed is undermining its hard-won ability to control inflation.

Last year, Mr. Lacker cast the sole dissenting vote at each of the eight meetings of the Fed’s policy-making committee, only the third time in history a Fed official dissented so regularly.

“We’re at the limits of our understanding of how monetary policy affects the economy,” Mr. Lacker said in a recent interview in his office atop the bank’s skyscraper here. “Sometimes when you test the limits you find out where the limits are by breaking through and going too far.”

As the Fed enters the sixth year of its campaign to revitalize the economy, the debate between the Fed’s majority and Mr. Lacker — whose views are shared by others inside the central bank, as well as some outside observers — highlights the extent to which the Fed is operating in uncharted territory, making choices that have few precedents, unclear benefits and uncertain consequences.

The economy continues to muddle along, shadowed by the threat of another government breakdown, and the crisis of high unemployment is only slowly receding. But in trying to address those problems by suppressing interest rates, the Fed risks the unleashing of speculation and inflation.

It is basically a matter of disposition: is it better to risk doing too much, or not enough?

Mr. Lacker, 57, often uses the word “humility” in describing his views. He means that the Fed should recognize that its power to stimulate the economy is limited, both for technical reasons and because it should not encroach on the domain of elected officials by picking winners and losers.

As he sees it, the Fed’s current effort to reduce unemployment by purchasing mortgage-backed securities crossed both lines. He sees little evidence that it will help to create jobs. And he says that buying mortgage bonds is a form of fiscal policy, because it lowers interest rates for a particular kind of borrower.

But Mr. Lacker is at pains to emphasize that his disagreement with the other 11 members of the Federal Open Market Committee, who supported the purchases, is not about the need for help.

“It’s very unfair to think of me as not caring about the unemployed,” he said. “It just seems to me that there are real impediments, that just throwing money at the economy is unlikely to solve the problems that are keeping a 55-year-old furniture worker from finding a good competitive job.”

That sense of caution is deeply frustrating to proponents of the Fed’s recent efforts. The economists Christina D. Romer and David H. Romer wrote in a paper published last month that such pessimism about the power of monetary policy is “the most dangerous idea in Federal Reserve history.”

“The view that hubris can cause central bankers to do great harm clearly has an important element of truth,” wrote the Romers, both professors at the University of California, Berkeley. “But the hundred years of Federal Reserve history show that humility can also cause large harms.”

It also makes an interesting contrast with Mr. Lacker’s personality. His favorite escape is driving a Porsche Boxster racecar; a model sits on a shelf at his office. He jokes that the track is the only place that people don’t ask him about interest rates — although, he adds, they do care about fuel prices.

And at the Fed, an institution that likes consensus, dissenting also requires a certain amount of boldness. Mr. Lacker has now said no at 13 of the 24 regular policy meetings he has attended as a voting member, one-third of all dissents since Ben S. Bernanke became the Fed’s chairman in 2006. He voted in 2006, 2009 and 2012 as part of the regular rotation of reserve bank presidents.

Even some who sympathize with his concerns doubt the efficacy of such public stands.

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Bernanke Offers No Plan for New Stimulus

In remarks that went well beyond his previous calls for Congress and the White House to address the nation’s long-term fiscal challenges, Mr. Bernanke suggested the process itself was broken.

“The country would be well served by a better process for making fiscal decisions,” he said.

Mr. Bernanke said he was “optimistic” about the long-run prospects for the American economy, and he gave little indication the Fed was mulling any increase in its economic aid programs, although he said the issue would be revisited in September.

But Mr. Bernanke, the nation’s most prominent economist, warned that the government had emerged as perhaps the greatest threat to renewed growth.

“The quality of economic policy-making in the United States will heavily influence the nation’s long-term prospects,” Mr. Bernanke said in the much-anticipated speech at a policy conference held each August at a resort in Grand Teton National Park.

The turn toward stronger language was welcomed by some observers of partisan battles in Washington that have pitted Republicans demanding spending cuts to reduce the federal debt against Democrats arguing for cuts and increased revenue.

A deal reached earlier this month to raise the maximum amount the government can borrow, in exchange for spending cuts of at least $2.1 trillion, would not reduce the debt to a level most economists regard as sustainable, and the chaotic political brinksmanship led Standard Poor’s to remove long-term Treasury securities from its list of risk-free investments.

Maya MacGuineas, president of the non-partisan Committee for a Responsible Federal Budget, described Mr. Bernanke’s remarks as “an emergency intervention.”

“It was great to hear him weigh in so strongly,” said Ms. MacGuineas. “He’s saying what needs to be said, and hopefully people will listen because of the messenger.”

Mr. Bernanke’s speech comes on the heels of the Fed’s announcement earlier this month that it intends to hold short-term interest rates near zero until at least the middle of 2013, a reflection of its view that growth will not be fast enough during that period to drive up wages and prices.

Many investors had viewed that announcement as merely the opening of a new round of efforts by the Fed to bolster an economy that once again is struggling to grow. The government said Friday that it now estimated the economy expanded at an annual pace of just 1 percent in the second quarter, down from its initial estimate of a 1.3 percent annual pace.

Friday’s speech was eagerly anticipated because Mr. Bernanke and his predecessors have made a habit of coming to this conference, hosted by the Federal Reserve Bank of Kansas City, to clarify their views on the economy and monetary policy.

Last year, Mr. Bernanke used his remarks here to provide the first substantial indication that the Fed intended to renew its economic aid campaign. The central bank went on to buy $600 billion in Treasury securities between November and June, increasing its total portfolio of Treasuries and mortgage securities to more than $2.5 trillion.

This year, Mr. Bernanke noted that the nation faces significant challenges, including huge amount of unemployment and an unsustainable federal debt. But the speech marked a return to the Fed’s position earlier this year that it has largely exhausted the power of monetary policy and that the rest of government must do more through fiscal policy.

“Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” Mr. Bernanke said.

While offering his standard disclaimer that the Fed would take any steps necessary to help the economy, he notably omitted any description of possible measures. He did say, however, that a scheduled meeting of the Fed’s policy-making committee in late September would be extended to two days from one day “to allow a fuller discussion.”

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High & Low Finance: The Inevitability of a Greek Default

“It would have a tremendous cost, with no benefit,” the minister, George Papaconstantinou, said in an interview on Greek television. “Greece would be out of markets for 10, 15 years.”

To financial markets, and to many other observers, it is more than thinkable. It is very close to a sure thing. When, how, and how messy it will be are open to question.

It was just a year ago this weekend that Europe bailed out Greece, amid much self-congratulatory talk. Olli Rehn, the European commissioner for monetary policy, said the move was “particularly crucial for countries under speculative attacks in recent weeks,” a reference to Spain and Portugal.

Markets — described by Anders Borg, Sweden’s finance minister, as “wolf packs” — returned to their lairs on the Monday after the bailout. The yield on three-year Greek government bonds plunged to 7.7 percent from 17.5 percent, as the price of such bonds soared 28 percent in a single day.

And how have things gone since then? Just fine in Germany, where growth is accelerating and unemployment is lower than at any time since German unification. The European Central Bank is even raising interest rates to curb inflation there. It’s going more or less acceptably in France and Italy, each of which recorded G.D.P. growth of 1.5 percent in 2010, well below Germany’s 4.0 percent. But it’s not going well at all in the country that supposedly was rescued. Greece’s economy shrank 6.6 percent, far more than the 1.9 percent decline in 2009.

The market wolves are howling again. The yield on Greek three-year bonds is more than 23 percent, not that anyone thinks that yield will really be received. The yields on similar Portuguese and Irish bonds have also soared into double digits. Investors are a little more skittish about Spanish and Italian bonds than they had been, but there is no sense of impending disaster.

Longer-term rates on Portuguese debt did slide a little this week after a tentative agreement on a bailout, but they remain at levels that show widespread doubts about the country’s ability to pay.

The trading patterns of Greek bonds indicate that traders expect a restructuring, and they think it will be messy.

That yields are as low as they are — if you can call 23 percent low — is a reflection of the fact that the bailout has been going on below the surface. The European Central Bank has been lending money to Greek banks, accepting Greek bonds as collateral on loans to other banks, and even buying bonds.

Keeping up the fiction that all will somehow be well if we just wait has its own disadvantages.

“Delays in restructurings are costly,” Alessandro Leipold, the chief economist of the Lisbon Council, a Brussels-based research group, and a former official of the International Monetary Fund, wrote in a paper this week. He warned that the longer the inevitable was delayed, the more potential economic production would be lost and the greater the amount of good money that would be thrown after bad in the form of ever larger bailouts. Ultimately, he said, the result would be larger losses for bondholders.

“The real problem is capital shortfalls in European banks,” said Whitney Debevoise, a partner in Arnold Porter and a former executive director of the World Bank, who has been involved as a lawyer for countries and creditors in several restructurings. Until the banks have more capital, forcing them to admit to losses would be problematic, to put it mildly.

Stalling has worked before. In the early 1980s, major American banks could not afford to admit that they had lost huge sums in the Latin American debt crisis. “There was,” Mr. Debevoise said in an interview, “a five-year period of temporizing while Citibank and other banks rebuilt capital.” Finally, there was a debt restructuring and the banks admitted to their losses.

Currently, some European banks would probably be hard pressed to take losses, a group that may include some of the German landesbanks, which are generally owned by state governments and are badly in need of new capital.

The European Central Bank itself would hate to report losses, which is one reason that the first Greek restructuring, when it comes, may avoid forcing bondholders to accept “haircuts,” or reductions in principal. Instead, cutting interest rates and postponing maturities could allow the central bank to pretend it had not lost money. Eventually, however, haircuts seem inevitable.

Although there have been plenty of defaults and restructurings by national governments in recent decades — a partial list includes Argentina, Brazil, Uruguay, Russia, Ukraine, Pakistan and Ecuador — there is no agreement on the way to arrange a restructuring. Nearly a decade ago, the I.M.F. tried to put together what it called a “sovereign debt restructuring mechanism,” a sort of international bankruptcy law. The effort collapsed.

As a result, restructurings can be messy. Some bondholders can try to hold out on approving a plan, hoping they will be paid more than those who agree. Lawsuits will be filed.

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