James Politi

Brian Sack’s decision to stay on at the Federal Reserve Bank of New York as an adviser could stoke speculation that further monetary easing is around the corner at the US central bank.

Mr Sack – who is stepping down as planned as head of the markets group –  played a key role in the previous rounds of “quantitative easing”, managing and executing the expansion of Fed’s balance sheet. So keeping him around would certainly be helpful. Read more

James Politi

Politics in Washington are notoriously unpredictable – but for anyone gaming whether or not the US will face a government shutdown on March 18 – here are a few good reasons why it won’t happen.

The most likely scenario at this point appears to be another short-term extension of the budget – somewhere between two and four weeks – that would give all sides a bit more time to negotiate.

Republicans in the House of Representatives are currently putting together a bill along those lines – and the Obama administration may well be open to accepting it. The White House has already suggested $6.5bn in cuts that could be applied towards that short-term extension without causing too much political furore.   Read more

James Politi

A war of words and numbers has broken out in Washington over the geekiest of subjects: which budget baseline should be used to calculate the level of spending cuts being negotiated by the White House and congressional leaders.

On Thursday afternoon, Gene Sperling, director of the National Economic Council, announced that the Obama administration was putting on the table an additional $6.5bn in spending cuts to woo Republicans into a deal before March 18, the new deadline for a government shutdown. At least everyone agrees on those basic facts.

Here’s where things get tricky. Mr Sperling said that with those cuts, the White House was meeting Republicans “halfway” compared to their own spending targets – a clear sign of the administration’s willingness to negotiate. Read more

James Politi

In Ben Bernanke’s testimony before the Senate banking committee today, there was plenty of talk about US fiscal and budgetary policy.

It’s the hot topic on Capitol Hill, with Congress moving this week towards a deal to cut spending by $4bn and avert a government shutdown – at least for two weeks.

Needless to say, in the question-and-answer session, lawmakers from both parties were desperately trying to get the Federal Reserve chairman’s approval for their positions.

Republicans are advocating for aggressive cuts in discretionary spending, while Democrats, in the words of Harry Reid, the Senate majority leader, want to apply a ”scalpel” rather than a “meat axe” to the US budget. Read more

James Politi

The US is little more than $200bn away – or about 2 months – away from reaching its congressionally mandated national debt limit of $14,300bn.

The need to increase it to avoid a potentially disastrous US default is the next fiscal battleground in Washington, after the lawmakers stop squabbling over a government shutdown.

Republicans want to use the opportunity to push for more spending cuts, while Democrats say this is not the place to negotiate.

On Thursday, Moody’s Investors Service offered its analysis of the likelihood that a major crisis will ensue, threatening America’s triple-A credit rating much earlier than even the most ardent fiscal hawks would imagine. Read more

James Politi

Goldman Sachs has waded into the raging political war over US fiscal policy, with a note explaining the economic ramifications of the battles on government spending, a possible shutdown of federal operations, and even the furore over collective bargaining rights in Wisconsin and some other midwestern states.

On the budget itself, Goldman economist Alec Phillips says the Republican plan approved by the House of Representatives last Saturday – with $61bn in spending cuts between now and September, would lead to a drag on US GDP growth of 1.5 to 2 percentage points in Q2 and Q3, before it tails off.

Mr Phillips also points out that the more likely scenario – a compromise with $25bn in spending cuts – would lead to a 1 percentage point hit to GDP growth in Q2, fading thereafter, with “negligible” impact on growth by the end of the year.  Read more

James Politi

The biggest open question for US fiscal policy in the long run is whether the political system can forge a consensus to rein in the long-term debt through some combination of spending cuts and tax increases.

But in the short-term, at least for the next ten days, it is whether the US government is facing its first shutdown since the mid 1990s.

On March 4, the “continuing resolution” funding the government for the current fiscal year, which runs through September, will expire.

Unless a deal is approved by the Republican House, the Democratic Senate, and the White House, all non-essential federal operations will have to close, which could, if the standoff is lengthy, have significant consequences for the US economy. Read more

James Politi

President Barack Obama certainly made America’s fiscal health a pillar of his “state of the union” address, calling it a key element of his plans to secure US global competitiveness. “A critical step in winning the future is to make sure we aren’t buried under a mountain of debt,” Mr Obama said. “We have to confront the fact that our government spends more than it takes in.”

Mr Obama did indeed dedicate plenty of space to deficit reduction in his speech – but there were no major surprises in terms of specific proposals for budget cuts, and there was no push for a comprehensive deficit reduction plan along the lines of last year’s Bowles-Simpson debt commission, which proposed cutting politically explosive areas such as social security, Medicare, and individual tax breaks.

Instead, this is what Mr Obama proposed, which fiscal hawks may find underwhelming, but others may argue is perfectly consistent with a strategy designed to continue stimulating the economy now and begin to move in the direction of fiscal retrenchment at a later date. Read more

James Politi

President Barack Obama delivers his “state of the union” address to Congress on Tuesday night: it’s one of the biggest political events of the year in the US, in that it sets the tone for the legislative agenda and the big policy debates for the rest of the year.

 Fiscal policy is expected to be at the heart of Mr Obama’s speech in 2011. From what we know at this stage, he will use the opportunity to call for new investments to boost America’s competitiveness in global economy.

At the same time, he will make an appeal for the US political system to start considering serious deficit reduction proposals to rein in the country’s debt burden, which is expected to balloon in the coming decades if no action is taken.

One big question heading into the ”state of the union” is what the balance will be between new spending proposals – from infrastructure, to clean energy technology to education - and deficit reduction initatives. Read more

James Politi

Gene Sperling, the adviser to treasury secretary Tim Geithner, appears increasingly likely to be appointed director of the US National Economic Council on Friday.

In recent days, his candidacy has risen in standing as the prospects for Roger Altman, chairman of Evercore, the investment bank, and Rick Levin, president of Yale University, appear to be waning. The White House still hasn’t confirmed that a decision has been made however. Read more

James Politi

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, has just offered a tutorial of sorts on the merits of dissenting opinions within the Federal Open Market Committee. In a speech, Mr Hoenig argues that the role of dissents in formulating policy is misunderstood, with too many believing that they are counterproductive and confuse the central bank’s message. On the contrary, Mr Hoenig says dissents are a very good thing, because they increase transparency, boost the institution’s credibility, and, incidentally, have been used previously – most notably in the 1980s when Paul Volcker, then Fed chairman, came close to losing a vote.  Read more

James Politi

An Ivy League handover may be in the cards for the post of National Economic Council director, president Barack Obama’s top economic adviser. Departing the White House is Larry Summers, former head of Harvard University, who will be returning to the famed Boston institution to teach, after delivering his farewell speech at the Economic Policy Institute on Monday. Potentially arriving is Rick Levin, an industrial economist – and president of Yale University since 1993 -  who has already been active in Washington and is being considered for the job.

Mr Levin is facing competition from at least two other potential candidates – Roger Altman, the investment banker and former deputy treasury secretary who chairs Evercore Partners, and Gene Sperling, an adviser to the treasury department who recently played a big role in forging the deal with congressional leaders on the Bush tax cuts. There may be others in the mix too.  ”The president is interviewing a number of qualified candidates and no decision has been made,” an administration official said on Tuesday.

Mr Levin would make a good choice for Mr Obama on several levels. Read more

James Politi

With the political fate of the $858bn deal to extend Bush-era tax rates beginning to clear – the Senate is expected to advance the legislation in a first procedural vote on Monday -  the winners and losers of the proposed legislation are also becoming more apparent.

Victorious in the battle are clearly the wealthiest Americans, who will benefit from current tax treatment of income, as well as capital gains, dividends, and their inheritance, through 2012. There are also some strong provisions designed to boost business investment, which have been cheered by corporate America. And there is some reason for comfort to middle and lower income Americans, who will benefit the extension of a series of individual tax credits that were part of last year’s $787bn stimulus bill.  Depending on whether you talk to Republicans or Democrats – each of these provisions could be critical to strengthening the US economic recovery.

But not everyone is happy with the outcome. Read more

James Politi

Here’s the latest update on the White House’s search for a replacement for Larry Summers, the departing director of the National Economic Council. As this blog wrote on Monday, Roger Altman, chairman of Evercore and former deputy treasury secretary, is definitely in the mix for the post.

So much so, that he was spotted near the Oval Office on Tuesday as he was about to be interviewed for the job by none other than Barack Obama, US president. Although discussions have gotten pretty serious with Mr Obama, it doesn’t necessarily mean that the job is his, of course, and it is still unclear whether he can be considered the absolute front-runner. Read more

James Politi

Speculation has been rising in Washington in recent days that Roger Altman, the former deputy treasury secretary under Bill Clinton and chairman of Evercore, the New York financial advisory boutique, is in the mix for the position of National Economic Council director, left open by the departing Larry Summers.

The logic in favour of Mr Altman’s candidacy is undeniable. He already has economic policy experience at the highest levels, which would make him suitable to play the honest-broker role in terms of presenting options and advice to president Barack Obama. But has also spent the last fifteen years in the private sector, not only as leader of his own company but also nurturing relationships with clients including top executives from across the country. This make him an ideal choice if Mr Obama wants to improve relations with the business community over the next two years.

There are potential drawbacks to Mr Altman as NEC director. His appointment may upset the Democratic base, which doesn’t like the continuous return by Mr Obama to Clinton-era officials and would like to see more significant change towards the left in its economic policy thinking.

Then there is the question of whether Mr Altman would want the job. Read more

James Politi

The drumbeat of Republican criticism of the Federal Reserve’s quantitative easing plan is getting louder. A few minutes ago, Richard Shelby, the party’s top lawmaker on the Senate banking committee, told the FT in an emailed statement: “While I share chairman Bernanke’s concern regarding the economy, I am worried about the risks associated with his actions.”

He added: “However, chairman Bernanke would not be in this position had president Obama and the Democrats used their power to to enact pro-growth policies.  Instead, they have grown government and created the most anti-business regulatory environment our country has ever seen.”

Several top Republicans have criticised the Fed’s plans to purchase $600bn in additional Treasury bonds since the move was announced last Wednesday, including former House speaker Newt Gingrich and former vice-presidential nominee Sarah Palin, but the top ranks of the congressional leadership on financial issues had been relatively silent. Read more

James Politi

One of the key debates within the Federal Reserve and US economic policy circles in recent months has been whether the high unemployment rate is mainly due to structural or cyclical factors.

In the end, the prevailing view is that although there are some mismatches in skills and geography in the US labour market, the main problem is a broad-based lack of demand, which will hopefully be aided by even lower borrowing costs – hence next week’s likely move towards a second round of quantitative easing.

But a survey out today by Challenger Gray & Christmas, may, on the margins, challenge that certainty. A quarterly poll by the Chicago-based employment group found that the “relocation rate” of American workers – or the percentage of job seekers who found a new position and moved to a different region as a result – hit a record low of 6.9 per cent  in the third quarter (the survey started in the 1980s).

To be sure, US labour market mobility – traditionally one of the strengths of America’s economic structure – has been on the decline. The annual average relocation rate in 1990 was 30.5 per cent, sliding to 22.9 per cent in 2000 and 13.3 per cent in 2009. But it has taken a plunge this year, with the average for 2010 now at 7.3 per cent. Read more

James Politi

Peter Orszag is certainly not worried about ruffling feathers in Washington. Last month, the former budget director under Barack Obama surprised the White House by taking a public stand in favour of a temporary extension of Bush-era tax cuts for wealthy Americans, which the administration opposes.

And today, Mr Orszag, now at the Council on Foreign Relations, offered a critical view of the Federal Reserve’s plans for a second round of quantitative easing in a blog post for the New York Times.

Mr Orszag’s view is that QE2 may “create more problems than it solves”, based on the notion that the effect of the Fed’s fresh round of monetary easing will be similar to “having the Treasury sell short-term T-bills and using the proceeds to buy back 10-year bonds”. Read more

James Politi

Conventional wisdom in Washington is that Ben Bernanke, Federal Reserve chairman, is pretty much alone in his quest to deliver a jolt to the US recovery.

With concerns about the deficit running rampant, Congress is unlikely to push through any significant fiscal stimulus anytime soon, particularly if there is a shift in power with strong Republican gains in the midterm congressional elections. As much as the Obama administration may want to move forward with new economic programmes, it is clearly hamstrung by the headwinds on Capitol Hill.

But not all may be lost…..

A research note by Michael Feroli, economist at JPMorgan, just highlighted some interesting ways in which fiscal policy could achieve what Charles Evans, president of the Federal Reserve Bank of Chicago, recently described as a crucial policy objective: lower short term real interest rates. Read more

James Politi

Sheila Bair, chair of the Federal Deposit Insurance Corporation, gained much respect and notoriety in Washington for her warnings about - and handling of - the subprime mortgage crisis.

And so it is somewhat unnerving to see her offer remarks today warning about the potential for a bond bubble that could do significant damage to the US financial system if banks do not prepare for higher interest rates down the road. Especially in a context of possible additional quantitative easing by the Federal Reserve, which could easily push treasury yields even lower than they are now.

“The consensus is that this low-rate environment will persist for some time into the future,” said Ms Bair. “But what will happen when interest rates inevitably rise, and how disruptive will that process be? “ Read more