The market thinks the June jobs report is taperific and that looks basically correct: at this pace of payrolls growth a September slowing of QE3 seems likely. But there are enough complications to make the market reaction – 10-year Treasury yield up eighteen basis points at 2.68 per cent – look over the top. Read more
When we look back on the FOMC meeting on June 19 2013, it will probably be seen as the moment when the Fed signalled that it was beginning the long and gradual exit from its programme of unconventional monetary easing. The reason for this was clear in the committee’s statement, which said that the downside risks to economic activity had diminished since last autumn, presumably because the US economy had navigated the fiscal tightening better than expected and the risks surrounding the euro had abated.
This was the smoking gun in the statement. With downside risks declining, the need for an emergency programme of monetary easing was no longer so compelling. The Fed has been the unequivocal friend of the markets for much of the time since 2009, and certainly ever since last September. That comfortable assumption no longer applies. Read more
All markets want from Ben Bernanke when he testifies before Congress on Tuesday and Wednesday is reassurance that he is not getting cold feet about the Fed’s open-ended, $85bn-a-month, QE3 programme of asset purchases. That follows minutes which, while notably vague, showed “many” participants worrying about QE3′s costs and risks.
They are likely to get that reassurance — although maybe not in the most straightforward manner. It is important to note that, when Mr Bernanke testifies, he is speaking for the committee and not for himself. This is the statutory language: Read more
To understand Ben Bernanke, it helps to set aside the ubiquitous pictures of today’s 59-year-old: the controlled beard, the pristine shirts, the worn-down weary look. Instead, search for a snap of the freshly minted graduate who gazes from the pages of the 1975 Harvard yearbook. Unlike the other young men pictured alongside him, Mr Bernanke sports no tie and no blazer. He has a loud checked shirt, long hair and a tremendous, rebellious handlebar moustache.
The moustache may be gone, but the US Federal Reserve chairman remains a rebel – and the world is better off for it. The Financial Times has already crowned its man of the year: Mario Draghi, the European Central Bank president. But my pick for silver medal is Mr Bernanke. The fact that he is sometimes pilloried only underlines his fortitude. Read more
The most interesting part of Ben Bernanke’s speech today is what he says about the recession reducing potential growth in the US.
“The accumulating evidence does appear consistent with the financial crisis and the associated recession having reduced the potential growth rate of our economy somewhat during the past few years. In particular, slower growth of potential output would help explain why the unemployment rate has declined in the face of the relatively modest output gains we have seen during the recovery.”
This is quite a big evolution in Mr Bernanke’s arguments about the weakness of the recovery and why the unemployment rate has fallen faster than expected. This is from his March speech on the labour market:
“Notably, an examination of recent deviations from Okun’s law suggests that the recent decline in the unemployment rate may reflect, at least in part, a reversal of the unusually large layoffs that occurred during late 2008 and over 2009. To the extent that this reversal has been completed, further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.”
Binyamin Applebaum at the New York Times has a good piece today about who Mitt Romney might appoint as Federal Reserve chairman and what that might mean. His analysis is similar to that of Macro Advisers, and I don’t have much to add, save that I think Glenn Hubbard or Greg Mankiw are more likely choices than John Taylor.
It is worth considering, though, how a more hawkish Fed chairman would interact with the rest of the FOMC. The seven Fed governors at present are:
||Chairman until Jan 2014
||Vice chair until Oct 2014
The Federal Reserve’s decision last week to expand its balance sheet by a potentially unlimited amount until the labour market shows some “substantial” signs of improvement has been described as “stunningly aggressive” and “a dramatic step forward“.
But Charles Evans, president for the Chicago Federal Reserve, is not satisfied. The Federal Open Market Committee’s arch-dove wants more.
Mr Evans on Tuesday again called for the rest of the FOMC to explicitly target an unemployment rate of 7 per cent and medium-term inflation of 3 per cent before ending its easing policy – so long as inflation expectations remain reasonably well anchored.
Will the bulk of the FOMC’s voters back such a so-called ‘Evans rule’? For the time being, no.
But, for the most part, Mr Evans has already got what he wants. Read more
Ben Bernanke, the Fed chairman, has replied to a series of questions from Congressman Darrell Issa, who chairs the House Oversight and Government Reform Committee.
The answers are mostly pretty unrevealing — a large percentage of them simply cite the Fed’s mandate — but if you share concerns about excess bank reserves, QE as a tax on savers, or exiting from easy monetary policy then Mr Bernanke’s responses are here. Read more
There is some kremlinology going on about the Fed’s new easing bias language:
“The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
In the Greenspan era “closely monitor” was sometimes code for an intermeeting action by the Fed, notes Eric Green at TD Securities, via Business Insider. Read more