October 20, 2021

Diverging Debate at Fed on When to End Stimulus

Mr. Bernanke has begun to prepare the way for the Fed to scale back on its effort to cut borrowing costs for businesses and consumers through the monthly purchase of vast quantities of Treasuries and mortgage-backed securities. Although a growing number of Fed officials want the bond buying to end more quickly, Mr. Bernanke sought on Wednesday to emphasize that an end to bond buying would not signal a broader change in the Fed’s commitment to support economic expansion and reduce unemployment.

“The overall message is accommodation,” Mr. Bernanke told a gathering of economists in Cambridge, Mass. “There is some prospective, gradual and possible change in the mix of instruments, but that shouldn’t be confused with the overall thrust of policy.”

The Fed has said that it plans to hold short-term interest rates near zero at least as long as the unemployment rate remains above 6.5 percent. Mr. Bernanke echoed recent remarks by other Fed officials in suggesting that the Fed was likely to maintain its suppression of short-term interest rates for some time after unemployment dropped below that threshold, and that officials were considering lowering the threshold.

Mr. Bernanke and other Fed officials have not fully explained this emerging shift in their strategy, in part because they do not seem to agree. Some officials say that asset purchases have been effective but are no longer necessary. Other officials say the purchases have failed to meet expectations. Still others say they are worried that the purchases could destabilize financial markets.

The Fed began last September to expand its holdings of Treasuries and mortgage bonds by $85 billion a month, the third major expansion of its investment holdings since the financial crisis. It now owns more than $3 trillion in bonds.

Mr. Bernanke said last month, after the most recent meeting of the Fed’s policy-making committee, that the central bank planned to gradually taper its monthly bond purchases starting later this year and ending in the middle of next year, so long as economic growth continues.

But “about half” of the 19 officials who participated in the policy meeting said in an internal survey beforehand “that it likely would be appropriate to end asset purchases late this year,” according to an account of the meeting that the Fed released Wednesday after a standard delay.

The account does not imply an earlier endpoint to the bond-buying program. Only 12 of the 19 officials vote each year, and proponents of a later end date still command a majority of the votes. Moreover, officials have said repeatedly that the timing will depend on economic conditions, in particular on evidence that the labor market outlook has improved substantially.

That is a standard the economy has yet to meet, at least to the satisfaction of the majority that backs the bond-buying program, known as quantitative easing. The account underscored that a decision to decelerate later this year still hangs in the balance.

“Many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases,” the account said. “Some added that they would, as well, need to see more evidence that the projected acceleration in economic activity would occur, before reducing the pace of asset purchases.”

Mr. Bernanke’s earlier announcement that the Fed intended to dial back the pace of its purchases later this year unsettled investors who have staked vast sums on the Fed’s plans. Longer-term borrowing costs rose, in part because of the assertion that the economy was doing better and in part because of the suggestion that the central bank intended to provide less help than investors had expected.

The average rate on a 30-year home mortgage has increased from 3.35 percent in early May to 4.29 percent last week, according to Freddie Mac, causing refinancing to diminish and raising questions about whether higher rates might soon start affecting home buying.

A flurry of follow-up speeches by Fed officials helped to stabilize markets, but did not reverse the initial rise in interest rates.

Article source: http://www.nytimes.com/2013/07/11/business/economy/rising-chorus-at-the-fed-to-end-stimulus-sooner.html?partner=rss&emc=rss

C.B.O. Cuts 2013 Deficit Estimate by 24%

That is the thrust of a new report released Tuesday by the nonpartisan Congressional Budget Office, estimating that the deficit for this fiscal year, which ends on Sept. 30, will fall to about $642 billion, or 4 percent of the nation’s annual economic output, about $200 billion lower than the agency estimated just three months ago.

The agency forecast that the deficit, which topped 10 percent of gross domestic product in 2009, could shrink to as little as 2.1 percent of gross domestic product by 2015 — a level that most analysts say would be easily sustainable over the long run — before beginning to climb gradually through the rest of the decade.

“The underlying deficit is improving,” said Mark Zandi, chief economist at Moody’s Analytics, citing the strengthening economy as a force in opposition to fiscal tightening. “The economy continues to grow, but the script’s still being written” given how fast the deficit is shrinking.

Over all, the figures demonstrate how the economic recovery has begun to refill the government’s coffers. At the same time, Washington, despite its political paralysis, has proved remarkably successful at slashing the deficit through a variety of tax increases and cuts in domestic and military programs.

Perhaps too successful. Given that the economy continues to perform well below its potential and that unemployment has so far failed to fall below 7.5 percent, many economists are cautioning that the deficit is coming down too fast, too soon.

“It’s good news for the budget deficit and bad news for the jobs deficit,” said Jared Bernstein of the Center on Budget and Policy Priorities, a left-of-center research group in Washington. “I’m more worried about the latter.”

Others, however, are warning that the deficit — even if it looks manageable over the next decade — still remains a major long-term challenge, given that rising health care spending on the elderly and debt service payments are projected to eat up a bigger and bigger portion of the budget as the baby boom generation enters retirement.

“It takes a little heat off, and undercuts the sense of fiscal panic that prevailed one or two years ago when the debt-to-G.D.P. ratio was climbing,” said Joel Prakken, a co-founder of the St. Louis-based forecasting firm Macroeconomic Advisers, referring to the growth of the country’s debt relative to the size of the economy. “These revisions probably release some pressure to reach a longer-term deal, which is too bad, because the longer-term problem hasn’t gone away.”

With the government running a hefty $113 billion surplus in the tax payment month of April, according to the Treasury, analysts now do not expect the country to run out of room under its debt ceiling — a statutory borrowing limit Congress needs to raise to avoid default — until sometime in the fall. That has left both Democrats and Republicans hesitant to enter another round of negotiations over painful cuts to entitlement programs like Social Security and Medicare, and tax increases on a broader swath of Americans, despite the still-heated rhetoric on both sides.

For the moment, the deficit is largely repairing itself. Just three months ago, the Congressional Budget Office projected that the current-year deficit would be $845 billion, or about 5.3 percent of economic output.

The $200 billion reduction to the estimated deficit comes not from the $85 billion in mandatory cuts known as sequestration, nor from the package of tax increases that Congress passed this winter to avoid the so-called fiscal cliff. The office had already incorporated those policy changes into its February forecasts.

Rather, it comes from higher-than-expected tax payments from businesses and individuals, as well as an increase in payments from Fannie Mae and Freddie Mac, the mortgage finance companies the government took over as part of the wave of bailouts thrust upon Washington in the darkest days of the financial crisis.

The C.B.O. said it had bumped up its estimates of current-year tax receipts from individuals by about $69 billion and from corporations by about $40 billion. The office said the factors lifting tax payments seemed to be “largely temporary,” due in part, probably, to higher-income households realizing gains from investments before tax rates went up in the 2013 calendar year.

It also reduced its estimated outlays on Fannie and Freddie by about $95 billion. The mortgage giants, which have required more than $180 billion in taxpayer financing since the government rescued them in 2008, have returned to profitability in recent quarters on the back of a stronger housing market and have begun to repay the Treasury for the loans.

But there is a darker side to the brighter outlook for the deficit. The immediate spending cuts and tax increases Congress agreed to for this year are serving as a partial brake on the recovery, cutting government jobs and preventing growth from accelerating to a more robust pace, many economists have warned. The International Monetary Fund has called the country’s pace of deficit reduction “overly strong,” arguing that Washington should delay some of its budget cuts while adopting a longer-term strategy to hold down future deficits.

In revising its estimates for the current year, the budget office also cut its projections of the 10-year cumulative deficit by $618 billion. Those longer-term adjustments are mostly a result of smaller projected outlays for the entitlement programs of Social Security, Medicaid and Medicare, as well as smaller interest payments on the debt.

The report noted that the growth in health care costs seemed to have slowed — a trend that, if it lasted, would eliminate much of the budget pressure and probably help restore a stronger economy as well. The C.B.O. has quietly erased hundreds of billions of dollars in projected government health spending over the last few years.

It did so again on Tuesday. In February, the budget office projected that the United States would spend about $8.1 trillion on Medicare and $4.4 trillion on Medicaid over the next 10 fiscal years. It now projects it will spend $7.9 trillion on Medicare and $4.3 trillion on Medicaid.

This article has been revised to reflect the following correction:

Correction: May 14, 2013

Because of an editing error, an earlier version of this article misspelled the author’s surname. She is Annie Lowrey, not Lowery.

Article source: http://www.nytimes.com/2013/05/15/business/cbo-cuts-2013-deficit-estimate-by-24-percent.html?partner=rss&emc=rss