April 1, 2023

News Analysis: Indonesia Needs to Wean Itself From ‘Easy Money,’ Leader Says

The United States Federal Reserve’s decision on Wednesday to defer a reduction in economic stimulus offers Indonesia breathing space but does not remove the necessity for prompt action by policy makers here, said the vice president, Boediono, who goes by one name.

He called for the country to adjust its targets for inflation, the exchange rate and trade deficits, while also removing administrative obstacles to infrastructure programs and expanding online education.

“We have been addicted, so to speak, with an easy money environment for four years,” Mr. Boediono said. “We know that we have to make some adjustments, and maybe by next year, we have to really, fully adjust to a new normal, so to speak, where easy money is no longer” available.

Emerging markets around the world have seen an exodus of investment, falling currencies and tumbling stock markets since May. That was when the Fed began signaling that it was preparing to start cutting back its purchases of Treasury bonds and mortgage-backed securities — purchases that had helped keep long-term interest rates low to foster an economic recovery at home.

Indonesia and India were the two countries in Asia hit hardest as long-term interest rates rose through the summer in the United States and investors shifted money there. Both Asian countries’ financial markets staged a partial rebound on Thursday, however, after the Fed’s decision not to begin now the curtailing of asset purchases.

The Indonesian rupiah has fallen 13.7 percent since the start of May, making imported cars, cameras and many other goods more expensive, and threatening to feed inflation. The rupiah’s fall has also driven up the cost of government fuel subsidies.

The Indonesian central bank raised short-term interest rates by a quarter percent on Sept. 12, a move that temporarily halted the rupiah’s drop but could further slow economic growth.

While avoiding any specifics, Mr. Boediono appeared to hint that he did not expect recent market shifts to be reversed quickly. He said that Indonesia had to adjust “interest rates, even our exchange rate, to a new normal.”

Given a choice of reaccelerating economic growth or seeking greater stability in inflation, the value of the rupiah and the trade deficit, Mr. Boediono said that stability had become a higher goal in recent months.

But he called for a series of supply-side measures to address bottlenecks in the economy that could otherwise contribute to inflation. These measures included easier land acquisition and permits for infrastructure projects, as well as a new system of online education that would span Indonesia’s huge archipelago, which is as far across as from Seattle to Tampa, Florida, or from Paris to Tehran.

“Work hard on the supply side, then you can achieve a safe level of inflation without having to really tighten your monetary policy with the costs to growth and so on,” he said.

Many have long blamed corruption as another factor holding back economic growth in Indonesia, and the country has seen an accelerating tempo of corruption prosecutions in the past several years. Mr. Boediono said that it was impossible to know whether overall corruption had increased or declined, but said that the spate of legal cases showed that dishonest officials had more to fear.

Some of the most sought-after jobs in the Indonesian government used to be as project managers, because of the graft opportunities they provided. But Mr. Boediono said this was changing as corruption investigations were stepped up.

President Xi Jinping of China is scheduled to visit Jakarta this coming week. President Susilo Bambang Yudhoyono of Indonesia will hold discussions with him on some issues, including the South China Sea, Mr. Boediono said, declining to elaborate. China has been increasingly assertive in the past couple of years about claiming most of the sea as its own, to the annoyance of Indonesia’s allies in the Association of Southeast Asian Nations, particularly Vietnam, the Philippines and Malaysia.

Mr. Boediono said that he would be discussing with Mr. Xi the possibility of expanding the bilateral currency swap agreement between Indonesia and China, but he said that the amount of the expansion had not yet been decided. An expanded agreement would allow Indonesia to borrow more dollars from China if needed to buy rupiah in currency markets someday during another period of exchange rate volatility.

Mr. Boediono rarely grants interviews, and the one on Friday was the first time that he had discussed his country’s economic policies with an international media organization since the Fed began signaling in May that it planned to reduce its bond-buying program.

Mr. Boediono, 70, has been the central architect of Indonesia’s steady economic growth since the Asian financial crisis in 1997 and 1998. He negotiated the country’s International Monetary Fund bailout then and went on to serve as planning and development minister, finance minister, economics minister, governor of the central bank and, since 2009, as the vice president.

He was elected vice president in the summer of 2009 when Mr. Yudhoyono won a second term. Legislative elections are scheduled for next April and presidential elections for next July; Mr. Yudhoyono is not running for a third five-year term because of term limits.

As a technocrat with little if any political base, Mr. Boediono has not been expected to run for president. He said on Friday that he had no desire for public office after his term ends in October next year, and that he hoped to return to academia and focus on online education thereafter.

He has a doctorate in business economics from the Wharton School at the University of Pennsylvania and has been on the economics faculty at Gadjah Mada University in Indonesia since 1973.

As governor of the central bank during the global financial crisis, he pivoted from a fight against inflation in the summer of 2008 to a rapid program of economic stimulus by December of that year in a successful bid to prevent the economy from falling into recession then.

Article source: http://www.nytimes.com/2013/09/21/business/global/indonesia-needs-to-wean-itself-from-easy-money-leader-says.html?partner=rss&emc=rss

Off the Charts: Dire Warnings About Fed Strategy Did Not Come to Pass

While the first such program had started at the height of the credit crisis in 2008, the new program came when the economy was growing, and it was subjected to immediate and withering criticism, particularly from conservatives fearful it would set off inflation and unimpressed by the Fed’s belief that action was needed to spur job growth.

A group of 43 economists, including former aides to Republican presidents and presidential candidates, published an open letter to the Fed’s chairman, Ben Bernanke, saying the program should be “reconsidered and discontinued.” The planned bond purchases “risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment,” the economists wrote.

The Fed did not back down, and Republican efforts to pass legislation removing the Fed’s mandate to seek full employment were not successful. The next year, the Fed moved on to what became known as QE3, also known as Operation Twist, an effort to bring down long-term interest rates by purchasing longer-term Treasuries. That move was criticized by Republican leaders even before it was announced. “We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy,” the Congressional leadership said in a letter sent to Mr. Bernanke while the Fed was meeting.

Now, the Fed is again under attack, as officials discuss the possibility of slowing the pace of bond purchases later this year, and of possibly ending the program as early as 2014. That talk has caused interest rates to rise and led to warnings of large losses for bond investors, amid complaints that it is still too early to proclaim that the recovery has gathered strength.

Losses for bond holders are sure to happen at some point, assuming interest rates return to more normal levels, and this week’s downward revision of first-quarter economic growth may provide a warning that the Fed’s growth expectations, which are more robust than those of many economists, may be too rosy. Navigating an end to quantitative easing, whenever that becomes necessary, may yet prove to be tricky.

But as the accompanying charts indicate, the Fed’s critics of 2010 and 2011 have not proved to be prescient. Far from bringing disaster, QE2 appears to have helped the economy.

It is remarkable how close many markets are now to where they were when the Fed announced the new program on Nov. 3, 2010. The recent rise in 10-year Treasury bond rates has left the yield just a little lower than it was as the program began. The price of gold spiked to record highs in 2011, but is now down about 10 percent from its pre-QE2 level.

In 2010, there were complaints from developing countries that the Fed was trying to drive down the value of the dollar, something Fed officials denied even while conceding the program could temporarily have that effect. Now the dollar index — based on the value of the American currency against six major foreign currencies — has recovered all the lost ground.

Inflation has been quiet, and perhaps more important from a central bank perspective, inflationary expectations remain subdued. Such expectations can be inferred by comparing yields of inflation-protected Treasury securities to ordinary Treasuries of the same maturity. The chart shows what the markets expect inflation will be in five years.

For a time last year, the markets were expecting deflation — a far cry from the runaway inflation that was feared by Fed critics in 2010. Now, the expectation is for inflation of a little over 1 percent — or less than the expectation when the QE2 program was begun.

The decline in unemployment since the Fed began QE2 has been steady but hardly inspiring, and there are still fewer people working than there were before the credit crisis began in 2008. But consumer confidence has been rising recently and the stock market, despite some recent Fed-induced jitters, remains more than 30 percent above its level when the program began.

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

Article source: http://www.nytimes.com/2013/06/29/business/economy/dire-warnings-about-fed-strategy-did-not-come-to-pass.html?partner=rss&emc=rss

Off the Charts: S.&P. Has More Than Doubled Under Obama

Through Friday, more than 52 months after he took office, the index was up 105 percent during his term in office, for a compound annual gain of 18 percent.

There is, of course, more than a little good fortune in that statistic. Mr. Obama took office on Jan. 20, 2009, in the middle of a credit crisis that had caused prices to plunge and would cause them to keep falling for a few more weeks. It helps to start from a very low level. It also helps to have a central bank that drove short-term interest rates to zero, a step that both increased corporate profits and made bonds less attractive investments.

In fact, the United States stock market fell from record high levels this week, and world markets quavered, in part because of comments made by the Federal Reserve chairman, Ben Bernanke, that the Fed might be able to begin to back off from its aggressive monetary stance later this year.

Even with this week’s dip, however, the United States market has done better since early 2009 than any of the next nine largest economies in the world, as can be seen in the accompanying charts. Those charts reflect MSCI indexes, based in dollars, in each country except the United States, where the S. P. 500 is used.

The United States market lagged many others early in the recovery. But as its economy kept growing, albeit slowly, and European economies faltered and worries grew that emerging economies might experience slower growth, the American market overtook the others.

Of the next nine — ranked on the size of the economies in 2009, only India’s market came close to the performance of the United States market since early 2009. Like the Chinese and Brazilian markets, it excelled early on but is now well below the peak it hit in 2011.

If you put your dollars into the Italian or Spanish stock markets when Mr. Obama took office, your shares would now be worth less than you paid for them. Over all, the world’s stock markets outside the United States have risen less than two-thirds as much as the American one has.

The Wall Street performance has not made Mr. Obama particularly popular among financiers. Indeed, some of the language about the president’s perceived support of socialism and hostility to capitalism during last year’s campaign was the harshest seen in any campaign since 1936, when Franklin D. Roosevelt was seeking a second term and was strongly opposed by many financiers.

By the time Mr. Roosevelt died in 1945, the S. P. 500 was 141 percent higher than it had been when he took office. But he was in office so long that the annual rate of gain was only 7.5 percent, less than half of the rate so far for the Obama administration.

The other presidents whose term in office included a doubling in the S. P. were Dwight D. Eisenhower, Ronald Reagan and Bill Clinton. Each served two full terms, and none came close to the average annual gain so far under Mr. Obama. Mr. Clinton’s 15.2 percent was the highest of that group. He had the good fortune to enter office when markets were relatively low and to leave just as the technology stock bubble was starting to collapse.

There is, of course, no guarantee that a market that rises will endure. Mr. Roosevelt’s record would be better if he had left after one term in office; the market was lower when he died in 1945 than it had been when he took the oath of office in 1937 for his second term.

And the president with the best stock market record in the 20th century — using the Dow Jones industrial average, whose history is longer than that of the S. P. — is Calvin Coolidge. The Dow rose 256 percent — an annual rate of 25.5 percent — from his inauguration in 1923 until he left office in early 1929. The market went up an additional 20 percent before the crash. But by the end of 1931 all of the Coolidge gains had been lost.

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

Article source: http://www.nytimes.com/2013/05/25/business/economy/sp-has-more-than-doubled-under-obama.html?partner=rss&emc=rss

Fed Maintains Rates and Strategy

WASHINGTON — The Federal Reserve produced no surprises on Wednesday, affirming that it would plow ahead with its efforts to stimulate the economy even as it hailed “a return to moderate economic growth following a pause late last year.”

The Fed under its chairman, Ben S. Bernanke, has made clear that it regards its program of low interest rates and large asset purchases as necessary for the economy to keep growing fast enough to return unemployment to normal levels.

In a statement issued after a two-day meeting of its policy-making committee, the Fed reiterated that it would continue to hold short-term interest rates near zero at least until the unemployment rate falls below 6.5 percent, which forecasters expect no sooner than 2015. The February unemployment rate was 7.7 percent.

To hasten that process, the central bank said it also would keep to buy $85 billion a month in Treasury and mortgage-backed securities.

While spending by consumers and businesses has increased recently, the Fed noted that fiscal policy “has become somewhat more restrictive.”

“The committee continues to see downside risks to the economic outlook,” the statement said.

The decision was supported by 11 members of the Federal Open Market Committee. Esther George, the president of the Federal Reserve Bank of Kansas City, recorded the only dissent, as she did in January, again citing her concerns that the Fed’s efforts could destabilize markets and seed future inflation.

The Fed separately released economic forecasts by 19 of its senior officials showing a slight strengthening in the consensus view that the central bank will need to suppress short-term interest rates for several more years. While a majority of the officials continued to predict that the Fed would begin to raise its benchmark interest rate by the end of 2015, the average predicted rate declined slightly as a number of officials shifted forecasts downward.

In keeping with that shift, the officials’ expectations for the economy soured slightly. They predicted that the economy would expand between 2.3 and 2.8 percent this year, down from their December forecast of growth between 2.3 and 3 percent. The consensus forecast for 2014 also fell. Officials now expect growth between 2.9 and 3.4 percent in 2014, compared to a December forecast of growth between 3 and 3.5 percent.

Concerns about inflation remained in abeyance. Fed officials do not expect inflation above 2 percent over the next three years, well below their self-imposed ceiling of 2.5 percent inflation. They forecast slightly less inflation during the current year and slightly more by 2015, as compared with their December projections.

At the same time, officials were modestly more optimistic about job growth. They predicted that the unemployment rate would rest between 6.7 and 7 percent at the end of 2014. In December they had predicted that the rate would sit between 6.8 and 7.3 percent at the end of 2014.

The unusual rigidity of the Fed’s basic course has diminished the importance of the regular meetings of its policy-making committee. Unless economic circumstances change dramatically, the year could pass without significant action.

Dissenters on the policy-making committee – most of whom are not voting members this year — have increased the volume of their protestations in recent months. Increasingly, the focus of their concerns has shifted from the specter of future inflation to the possibility that asset purchases and low interest rates will destabilize financial markets.

Historically, such divisions often presaged a turn, or at least a moderation, in the thrust of Fed policy. But analysts who follow the central bank see little evidence of a shift in the current debate. They say that Mr. Bernanke and his allies remain firmly in control and do not seem inclined to take further steps to appease the concerns of the minority.

“The hawks are nothing more than an irritant,” Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisers, wrote in a note to clients ahead of Wednesday’s announcement. “The chairman will be unmoved by their protestations, not least because their fears that QE would spark rampant inflation have been so wide of the mark,” he wrote, referring to the Fed’s quantitative easing.

In the absence of major business, the committee has turned its attention to fine-tuning its current efforts. It is considering changes to improve the clarity of its public communications and in the details of its plan to unwind its huge investment portfolio. More details about those discussions are likely to emerge in three weeks, when the Fed publishes an account of its meetings Tuesday and Wednesday.

Article source: http://www.nytimes.com/2013/03/21/business/economy/fed-maintains-rates-and-strategy.html?partner=rss&emc=rss

In Survey, Fed Finds Economic Growth Is Widespread

The survey noted that 10 of the Fed’s 12 banking districts reported moderate growth, while the Boston and Chicago districts reported slow growth. The survey, called the beige book, provided anecdotal information on economic conditions through Feb. 22.

The information will be discussed along with other economic data during the Fed’s next policy meeting on March 19 and 20Consumer spending increased in most regions, but much of the gains were driven by auto sales.

Many districts said consumers spent slightly less after taxes rose and gas prices increased. Some districts also expressed concern about federal spending cuts that started March 1.

Housing markets showed increased strength in nearly all of the country. Manufacturing grew modestly in most districts after struggling through most of 2012. Many districts reported improvement in individual job markets.

Analysts said the survey was slightly more upbeat than the previous one by the Fed, noting the modest rebound in manufacturing in the last two months. Jennifer Lee, senior economist at BMO Capital Markets, said the latest survey was “more encouraging news on the U.S. economy.”

Many economists believe the Fed will maintain its low-interest-rate policies at current levels, taking no new steps at the March meeting.

In January, the Fed stood behind aggressive steps it introduced in December to try to lower unemployment. It repeated its intention to keep its key short-term interest rate at a record low at least until unemployment falls below 6.5 percent. The Fed also said it would keep buying Treasuries and mortgage bonds to help lower borrowing costs and encourage spending.

When the Fed last met in January, the unemployment rate was 7.9 percent. The government will report on February’s unemployment figures on Friday, and some economists are forecasting that the jobless rate will decline to 7.8 percent, with the economy adding 152,000 jobs.

The payroll processor A.D.P. said Wednesday that American businesses added 198,000 jobs in February. The private survey also revised January’s hiring figures to show that companies added 215,000 jobs that month, 23,000 more than what had initially been reported.

That suggests the government’s February unemployment report could come in above economists’ forecasts.

In another positive economic sign, orders for machinery and other factory goods that signal business investment surged in January.

Orders for so-called core capital goods, which also include equipment and computers, rose 7.2 percent from December, the Commerce Department reported Wednesday. It was the largest gain in more than a year and higher than the initial 6.3 percent increase estimated by the government last week.

Total factory orders fell 2 percent in January compared with December. But the decline was mostly a result of a steep drop in aircraft and military orders.

Demand for durable goods, items expected to last at least three years, dropped 4.9 percent. Demand for nondurable goods, such as chemicals and paper, rose 0.6 percent.

Article source: http://www.nytimes.com/2013/03/07/business/economy/in-survey-fed-finds-economic-growth-is-widespread.html?partner=rss&emc=rss

News Analysis: A Federal Reserve That Is Focused on the Value of Clarity


The Federal Reserve’s decision on Wednesday to announce specific economic objectives for its policies would have stunned and dismayed earlier generations of central bankers, who regarded secrecy as a virtue and obfuscation as a prized technique for manipulating financial markets.

“Since I’ve become a central banker, I’ve learned to mumble with great coherence,” Alan Greenspan, a former Fed chairman, told reporters in 1987. “If I seem unduly clear to you, you must have misunderstood what I said.”

But a greater appreciation for the virtues of transparency has been one of the most important shifts in central banking in recent decades. It is a response to public demands for increased accountability and an embrace of economic research on monetary policy that finds speaking clearly is more effective than mumbling. The Fed’s vice chairwoman, Janet Yellen, last month described the result as a “revolution.”

Until recently, the Fed under Mr. Greenspan and his successor, Ben S. Bernanke, were tentative participants in this revolution. Mr. Bernanke spoke often about the need to speak clearly, but there were few tangible changes.

It now appears that he was simply busy dealing with a financial crisis. Over the last two years, Mr. Bernanke and his colleagues have announced a series of changes intended to increase the transparency of the Fed’s decision-making. Some of those moves have also transformed the way those decisions are made and, the Fed hopes, increased the power of its efforts to revive the economy.

Several of those changes were tied together by Wednesday’s announcement that the Fed would hold short-term interest rates near zero as long as the unemployment rate remained above 6.5 percent and inflation remained under control.

The new policy quantifies the goals that the Fed formally articulated for the first time in a statement in January. It extends the Fed’s recent willingness to forecast the level of interest rates. It will require the Fed to publish a consensus forecast of inflation for the first time. And it was announced on Wednesday, Mr. Bernanke said, in part because he was scheduled to hold a news conference, another of his innovations.

The Fed’s push to speak more clearly is partly motivated by political considerations. During the prosperous 1990s, the success of monetary policy was its own justification. After a financial crisis that the Fed failed to avert or predict, in the fourth year of a recovery that continues to disappoint, the Fed has no better defense than to explain what it is doing as clearly as possible.

It is primarily the result, however, of taking research seriously. While some economists, notably Milton Friedman, long argued that transparency would fortify the Fed’s independence, the economic case crystallized more recently.

“It was an article of faith in central banking that secrecy about monetary policy decisions was the best policy,” Ms. Yellen recalled in a recent speech.

Absurd as it may seem now, until the mid-1990s, the Fed did not announce changes in its benchmark interest rate. It let the movement speak for itself.

Ms. Yellen and her colleagues have now concluded that transparency actually enhances the impact of the Fed’s policies, particularly in the current circumstance. The Fed cannot push short-term rates below zero, but it still can reduce long-term rates, which are based on the expected level of short-term rates over the life of a loan, by persuading investors that those rates will remain near zero.

The Fed first experimented with this approach in 2003, when it announced that it would keep its benchmark rate at 1 percent for a “considerable period.”

In recent years, since pushing rates nearly to zero in December 2008, the Fed has steadily elaborated on that idea. It promised to keep rates near zero for an “extended period.” Then it announced a series of specific timetables, most recently promising in September to hold rates near zero at least until mid-2015.

Mr. Bernanke said on Wednesday that he did not expect the change to an unemployment rate peg to have a significant short-term impact. The Fed still expects to start raising rates no earlier than the second half of 2015. For now, the central bank is simply clarifying its reasons.

Article source: http://www.nytimes.com/2012/12/14/business/economy/a-federal-reserve-that-is-focused-on-the-value-of-clarity.html?partner=rss&emc=rss

Wealth Matters: Low Bond Yields Make Building a Portfolio Harder

United States Treasury bonds and other high-grade bonds used to be the safe way for older investors to generate income in their portfolios. But yields on these bonds are now so low, they are not generating much income.

The Federal Reserve’s announcement on Wednesday that short-term interest rates would remain close to zero through 2014 confirmed that there was little hope in the near term for much change in bond income.

But it is not easy to find something to replace that income. Other options are not nearly as safe. The wild gyrations in the stock market at the end of last year further unsettled investors who did not need much to remind them of their losses from 2008.

“We think the search for yield will continue for a few structural reasons,” Barbara M. Reinhard, chief investment strategist at Credit Suisse’s private bank, said.

The first, she said, is low interest rates. But the second reason is what keeps many retirees awake at night. “You have this aging population in the U.S. saying: ‘I need to supplement my retirement through income generation. My life expectancy is long. I retired at 65, but I could live another 18, 20 years,’ ” Ms. Reinhard said.

So what can investors, particularly those nearing or in retirement, do to guarantee a big enough and regular stream of income? Here is a look at three variations.

LESS RISK It may seem obvious, but low risk means lower return. Tom McNulty in Scottsdale, Ariz., who worked in the automobile and mortgage businesses before retiring six years ago, found an adviser who practiced a variation on this theme.

Mr. McNulty said he depended on income from his portfolio for about 70 percent of the living expenses for him and his wife, Peggy. His adviser keeps four years of expenses in safe but low-yielding bonds, leaving the rest of the portfolio to grow.

“It wasn’t just providing us the income but protecting the asset base we did have,” Mr. McNulty said. “We hope to live another 20 or 30 years. We learned that 70-30 in stocks and bonds in the accumulation phase and reversing it in the distribution phase is just not going to work.”

Jeremy A. Kisner, president of Sure-Vest Capital Management, which works with Mr. McNulty, said his firm wanted clients to feel as if they had a pension even if they did not. “What we’ve found is that retirees who have a pension sleep really well at night and they’re happy,” he said. “The clients who don’t have that worry about running out of money, no matter how much money they have. We try to create a pension for them.”

Mr. Kisner said his firm settled on putting aside four years of income for two reasons: If the growth part of the portfolio has a down year, money will not have to be moved into the safe assets, and the firm found that five years of safe money was too much, given the need to increase the rest of the portfolio through retirement.

“The strategy of ‘I’m just going to live off this interest’ was never the right strategy,” Mr. Kisner said. “This low-interest environment has laid that bare.”

MORE INCOME Henry Fleischer, a retired engineer who lives outside Detroit, has opted for a strategy that will provide more income now, require him to dip less into the principal of his retirement account and still have little exposure to equities.

His sizable nest egg is divided among investments in three income-producing assets: real estate investment trusts, master limited partnerships — most commonly companies involved in the transportation of natural resources — and annuities.

“We don’t need to be superaggressive,” said David B. White, his adviser, who runs David B. White Financial. “We don’t want the volatility of the stock market.”

Last year, REITs had yields of 4.5 percent, according to the FTSE Nareit index, and master limited partnerships had 5.6 percent yields, according to the Alerian MLP index. But neither is risk-free. Another downturn and collapse in the rental market could hurt REITs, and master limited partnerships can be volatile; they fell as much as the equity markets in 2008.

What is telling about these nervous times is that Mr. Fleischer should not have to worry. He is 89, and while he wants to make sure his wife has enough money if he dies first, he is less concerned about his two sons, who are successful and self-sufficient. Still, his portfolio lets him sleep well.

Article source: http://feeds.nytimes.com/click.phdo?i=2b8f19506a148fb0868ec4bcd3f1ffcd

Shares Shrug Off Italian Downgrade

Stocks rose Tuesday as investors appeared to anticipate progress on two fronts: efforts to resolve debt problems in Greece, and efforts by Federal Reserve policy makers to stimulate the United States economy, analysts said.

The gains also suggested that investors had shrugged off the downgrade of Italy’s debt by the credit ratings agency Standard Poor’s late on Monday. The S.P. move took aim at the euro region’s most indebted member after Greece and opened up the latest development in the European sovereign debt crisis.

Jason Pride, director of investment strategy at Glenmede, said that the S.P. move was “emblematic” of the already known and, in some cases, priced-in problems in the euro zone. The European Central Bank has already been buying Italy’s bonds.

“The markets have backed off a good amount on these concerns,” Mr. Pride said. “To have one additional downgrade, where the E.C.B. is already out there purchasing the bonds? We are telling our clients that you have got to take the backdrop as it is. There is a lot of risk out there.”

In addition, many investors have concluded that the central bank will announce new steps to promote economic growth after a highly anticipated meeting of the Fed that ends on Wednesday.

“The thought is that Operation Twist is going to be announced tomorrow,” said Michael A. Mullaney, a vice president, of the Fiduciary Trust Company, using an insider phrase to describe when the Fed sells shorter term securities for longer term ones. “Quite frankly, most likely it is going to be ‘buy the rumor, sell the news.’ ”

Such a move by the Fed would reflect an effort to reduce long-term interest rates, which would allow businesses and consumers to borrow more cheaply. Already, long-term interest rates have moved as if the Fed had already announced the decision.

Investors could also be reacting to hopeful signals on discussions about aiding Greece.

Greek Finance Minister Evangelos Venizelos described the talks on Monday with a so-called troika of foreign creditors — the International Monetary Fund, the European Commission and the European Central Bank — as productive. The talks were to continue later Tuesday. The troika would be the one to release the latest tranche of loans, which the country needs by mid-October to avoid running out of cash to pay its bills.

Keith B. Hembre, the chief economist and chief investment strategist at Nuveen Asset Management, said equities also could be responding also to the news that Greece had made an interest payment, lessening the possibility of immediate default.

Overall, “It seems like probably a very calm, low-volume day, based on the market moves,” said Mr. Hembre. “You get these moves that are unexplained, and it sort of appears to be movements are more flow-related as opposed to reaction to information.”

The Euro Stoxx 50 index of euro zone blue chips ended trading up 2.1 percent. The FTSE 100 in London rose 1.9 percent. In afternoon trading on Wall Street, the Dow Jones industrial average and the Standard Poor’s 500-share index were up just over 1 percent, and the Nasdaq composite was up by 0.7 percent.

United States government 10-year Treasury yields were 1.95 percent, about the same as levels on Monday. Yields on the benchmark 10-year note fell to a record low of 1.88 percent earlier this month.

S.P. cited Italy’s weakening economic growth prospects and higher-than-expected levels of government debt as reasons for cutting its debt rating by one notch to A from A+.

S. P. said Italy’s fragile governing coalition and policy differences in Parliament would continue to limit the government’s ability to respond decisively to economic head winds. It also cast doubt on whether the government’s projected 60 billion euros, or $82 billion, in fiscal savings would be realized because growth prospects are weakening, the budgetary savings rely on revenue increases, and market interest rates are anticipated to rise.

The Italian government reacted angrily, describing the move as out of touch with reality.

Prime Minister Silvio Berlusconi’s office issued a statement early Tuesday noting that his government had a solid majority in Parliament. It said the government was preparing steps to lift growth and recently passed measures to control public finances through tax increases and spending cuts.

“The evaluations of Standard Poor’s seem dictated more by behind the scenes reports in newspapers than reality and seem influenced by political considerations,” the statement said. The yield on Italian 10-year bonds was up slightly Tuesday, but at more than 5.6 percent, Italy’s borrowing costs are more than three times what Germany, the euro-zone anchor, pays. S. P.’s A rating for Italy is still five steps above junk status, but it is three below that given by another agency Moody’s Investors Service, which is currently assessing Italy.

Investors have also been scrutinizing economic data to gauge to what extent the economy is slowing. The latest on Tuesday showed a decline of 5 percent in housing starts in the United States in August, a steeper decline than forecast. Problems in the housing and construction sector, while well known, still put a dampening effect on sentiment, but it is usually confined to related trading sectors rather than the overall market.

A research note from Capital Economics said that the statistics suggest demand for new homes remains close to “rock bottom.”

“This goes some way to explaining why equity prices of homebuilders have recently fallen by more than the wider market,” the economists said.

Matthew Saltmarsh reported from London. Elisabetta Povoledo contributed reporting from Rome.

Article source: http://www.nytimes.com/2011/09/21/business/daily-stock-market-activity.html?partner=rss&emc=rss

Adam Posen Presses Central Banks to Act More Aggressively

GOVERNMENTS are pushing austerity; bankers are hoarding cash; a recession looms in the United States and Europe. But Adam S. Posen has a solution: a shock-and-awe display of coordinated central bank attacks aimed at reviving sluggish economies.

An American economist on the Bank of England’s monetary policy committee, Mr. Posen is no academic scribbler or lonely blogger, but someone inside the central banking establishment.

And, as a leading expert on what is often called Japan’s lost decade, he is particularly worried that the Federal Reserve in the United States and the European Central Bank are making the same monetary policy mistakes that left Japan’s once-robust economy stagnant all through the 1990s and even into the 21st century.

For months now, Mr. Posen — who got his bully pulpit at the Bank of England by answering an ad in The Economist — has been warning that policy makers in Washington and in Europe have been too optimistic about how quickly the global economy would recover from the financial crisis.

The joint action by central banks on Thursday to make it easier for weak European banks to borrow dollars is no doubt a policy nod in Mr. Posen’s direction, but it is still a far cry from the type of unified bond purchasing program, or quantitative easing, that he is advocating.

When Fed officials meet this week, they are widely expected to take further action to reduce long-term interest rates, a significant turnabout after months of suggesting that a recovery was solidly under way. The European Central Bank has not yet gone so far, but officials have recently signaled a new openness to reducing interest rates or at least to stop raising them.

In simplest terms, Mr. Posen wants central banks to print more money. A lot more money.

There is a certain tilting-at-windmills aspect to his crusade. The Fed will probably stop well short of the aggressive bond buying that Mr. Posen has advocated. Already, some Fed officials — and most Republican leaders, including the presidential hopefuls Rick Perry and Mitt Romney — believe that the Fed is at risk of rekindling inflation.

But that hasn’t stopped Mr. Posen from pressing his case. Earlier this month, he had lunch with Kiyohiko Nishimura, a deputy governor at the Bank of Japan, and Charles Evans, the president of the Federal Reserve Bank of Chicago. And, last Tuesday, he traveled to this small hamlet in southeast England to issue his most passionate cry yet ”I am here to warn policy makers in the United States, Europe, everywhere that we cannot take our foot off the pedal,” Mr. Posen said before a roomful of small-business leaders and bankers. “The outlook is grim — the right thing to do now is engage in more monetary stimulus.”

Although a few bubbles of sweat appeared on his forehead, Mr. Posen argued his brief here with aplomb — mixing self-deprecating remarks that touched on the oddity of a 44-year-old American prescribing monetary policy in Britain (“I get paid in pounds and pay rent in pounds,” he assured his audience) with a trenchant analysis of the economy’s various ills (stagnant growth, increasing unemployment and banks that will not lend).

His listeners hailed his proposal that the Bank of England and the British Treasury form a government-backed bank to make small-business loans. But on a day when inflation ticked up to 4.5 percent, among the highest annual rates in Europe, his call to monetary arms received a muted response.

”I am very worried about the consequences of quantitative easing,” said John Thurston, chairman of Watts, a local company that supplies parts and services to commercial vehicles. Watts has felt the effect of the business slump, but the inflationary impact of more government bond buying worried him.

“I just don’t know how you unwind it,” he said.

Mr. Thurston is not alone in his concern.

On the Bank of England’s nine-member monetary policy committee, Mr. Posen was the only one to vote last month for the bank to resume its bond purchasing program, according to minutes of the meeting.

IN addition to the Fed’s reluctance to start another bond-buying effort, the European Central Bank is also not expected to continue its current program of purchasing the bonds of weak euro zone economies for much longer.

Mr. Posen’s central premise is that governments in Japan, Europe and the United States are running the risk of repeating the policy mistakes of the 1930s, when the conventional wisdom called for strict monetary policy and budget cutting, only deepening the Depression.

Not that central bankers have exactly been sitting on their hands.

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Markets Will Look for Hints in Bernanke’s Words

It was just a year ago, after all, that the economy was in almost exactly the same position: pitifully slow job and output growth, fears about another financial shock from Europe’s debt crisis, warnings of a double-dip recession. And a year ago, at this same conference, the chairman, Ben S. Bernanke, pointedly described all the weapons the Fed had available to rescue the economy — you know, just in case.

Several months later, the Fed opened its arsenal and began a major asset-purchasing program intended to stimulate growth.

Given Congress’s unwillingness to engage in more fiscal stimulus — in fact, it plans to pull back on spending — analysts and investors are wondering whether history will repeat itself, especially if the economy deteriorates further. Stock markets have been rallying this week, partly on hopes that Mr. Bernanke may signal more monetary stimulus is on the way, or at least under what conditions more stimulus would be likely. Broad stock indexes gained 3 percent or more on Tuesday, with the Dow industrial average pushing back above 11,000.

Among the options Mr. Bernanke is expected to lay out on Friday would be engaging in another round of major asset purchases, known as quantitative easing, which is meant to lower long-term interest rates; lowering the interest rate the Federal Reserve pays banks on their reserves; and extending the maturity structure of the Fed’s current portfolio of Treasuries, which analysts expect to be the most likely course of action. All these potential strategies would be intended to encourage more lending, among other goals, and thereby increase growth. The Fed might also raise its medium-term target for inflation, which would discourage banks, businesses and consumers from sitting on their cash, and so induce them to spend more.

But beyond such potential options, the announcement of a clear monetary policy road map seems unlikely. Fed speeches are constructed to cause minimal market excitement — either good or bad — and there are reasons to think Mr. Bernanke’s speech may be especially noncommittal.

First, only two weeks ago the board’s Federal Open Market Committee, which sets benchmarks on interest rates, severely dimmed its economic forecasts and took the unusual step of pledging to keep short-term interest rates near zero through at least mid-2013. It seems unlikely that the Fed would make major news so soon after that announcement, economists say.

“I don’t think the picture has changed all that much from two weeks ago,” said Paul Dales, senior United States economist at Capital Economics. “Suggesting more is in the pipeline already would smack of panic.”

Moreover, Mr. Bernanke could not unilaterally make a major policy change; he would need to seek approval from other Fed officials. Such consensus has become more challenging, since the composition of voting members on the Federal Open Market Committee has changed since last year.

Last year there was one steady dissenter, the Federal Reserve Bank of Kansas City president, Thomas M. Hoenig. Mr. Hoenig consistently voted against keeping short-term interest rates near zero for so long, and voted against the second round of quantitative easing begun by the Fed last November.

The voting members of the committee rotate each year, and now there is not one but three strongly hawkish voices: Narayana Kocherlakota, Charles I. Plosser and Richard W. Fisher, who are the presidents of the Federal Reserve Banks of Minneapolis, Philadelphia and Dallas, respectively. These three voted against the Aug. 9 announcement keeping short-term interest rates low through mid-2013, and so seem unlikely to endorse further easing measures.

There is also mounting political pressure from outside the Fed — on Capitol Hill and the presidential campaign trail — against expanding the central bank’s balance sheet.

Another reason Mr. Bernanke may be especially reluctant to signal commitment to further monetary stimulus is that inflation has picked up. Monetary stimulus, after all, generally increases inflation since it pumps more money into the economy and chases prices higher.

Last year, when economists gathered at Jackson Hole, the most recent consumer price index report had shown prices to have risen over the previous year by 1.2 percent. With inflation so low — and below the Fed’s target rate of inflation — many economists worried that the country could descend into a deflationary spiral akin to the one seen during the Great Depression, and more recently in Japan. With the threat of deflation, another round of quantitative easing seemed prudent, or at least less risky.

Today, though, consumer prices are 3.6 percent higher than a year ago, softening the case for further monetary stimulus. The Fed has a dual mandate, maximum employment and stable prices; even if Fed policy makers believe further easing might help employment, they may be reluctant to compromise the other half of their mandate.

The final reason Mr. Bernanke may be reluctant to go further is that it is not clear how powerful more monetary stimulus would be. And it is not just anti-Fed types like the presidential candidate Rick Perry who doubt the usefulness of more easing; Ph.D. economists are skeptical too.

“At this point you’re really pushing on a string,” said Nigel Gault, chief United States economist at IHS Global Insight.

Economists are still debating the effectiveness of the quantitative easing program begun last November, raising questions about the potency of yet more asset purchases.

Quantitative easing is supposed to help lending (and thereby growth) by pushing down long-term interest rates, which are already quite low. It is not clear that lowering them further would do much to encourage lending, especially since many companies do not see a need to borrow primarily because demand is so weak, and not because credit is expensive.

The other way that quantitative easing is intended to help spur growth is by encouraging investment in riskier assets, like stocks, because the return is so low on long-term Treasuries. If investors flee to these assets — as they did last year, following the Jackson Hole speech — that could raise the price of these assets, causing consumers to feel richer and so more comfortable with spending.

Commodity prices are higher today than they were a year ago, though, and policy makers may worry about pushing them even further up. If energy and food prices rise again, that would actually discourage consumers from spending.

For these reasons, many economists say they believe that, should the Fed engage in more stimulus, it will be unlikely to select quantitative easing as its weapon. But the other options, too, present their own hurdles, and many are still untested.

In the end, economists say, any additional Fed action may depend on what seems most politically palatable, even though the central bank is officially an independent entity. And that logic seems to point to changing the maturity of the assets on the Fed’s balance sheet.

Article source: http://www.nytimes.com/2011/08/24/business/markets-will-look-for-hints-in-bernankes-words.html?partner=rss&emc=rss