Back in April when I planned my move to the US, August looked like a safe time to be packing boxes and dealing with utility companies. The economy was growing, the Fed seemed set to keep policy on hold for at least a year, and surely nobody would do anything in the heat of the summer anyway? So much for my skills as an economic forecaster.
I’m back to find the Fed reinvesting the proceeds from maturing mortgage-backed securities – after what seems to have been a pretty lively FOMC meeting on the 10th – with no change to the steady decline in the economic data.
What strikes me is how continuously bad the news has been in the last month, with no progress in the labour market, and series such as today’s new home sales still hitting record lows.
I was watching a segment on the Federal Reserve on CNBC television earlier today, and a couple of times the guests on the show referred to the resumption of quantitative easing as Ben Bernanke’s “bazooka”.
And that brought me way back to the summer of 2008 – when then treasury secretary Hank Paulson sought authority from Congress to bailout Fannie Mae and Freddie Mac, the huge mortgage giants, if necessary. Mr Paulson argued that if markets knew the government would rescue the companies, that would be sufficient to restore confidence, and a bail-out would not be necessary. But the opposite occurred, and little more than a month later, Fannie and Freddie were in conservatorship.
Back to Mr Bernanke.
There was about a 50-50 chance that the Federal Reserve would take the course it chose today with the decision to reinvest proceeds from expiring mortgage-backed securities – a level of uncertainty over the outcome of a Fed meeting not seen in months.
For Ben Bernanke, this probably marked his trickiest day in the office since being confirmed to a second term as chairman in January. And Mr Bernanke certainly delivered on his reputation for being an able consensus-builder.
Are economics bloggers a more gloomy bunch, or do they just lack the political constraints that force the smiles of policymakers?
Below is a word cloud of bloggers’ responses to the question: “How do you rate the assess the overall condition of the US economy right now?” posed in a quarterly survey by the Kauffman Foundation. The words ‘good’, ‘promising’ and ‘dynamic’ are present, but they are roughly the same size as ‘encrusted’ and ‘moribund’ – not, one imagines, popular choices in a free text field.
There were some very good presentations at the Monetary Policy Forum, organised by Fathom Consulting this morning, all of which highlighted what a difficult job the Bank of England’s Monetary Policy Committee has at the moment. Cogent arguments can be made both for loosening and tightening monetary policy.
Charles Goodhart, former Bank chief economist, MPC member and general guru, said that were he on the MPC now, he would wish he could do a Rip Van Winkle, go to sleep until 2012, and wake up once some of the uncertainty over the recovery is removed. Why? “Because the next year and a bit will be fairly horrific”.
The reason things look so difficult for monetary policy is that the outlook for the inflation-growth trade-off has worsened. When Fathom plug the latest data through their replica of the Bank of England’s main economic model they first find that the Bank seems to be seriously over-optimistic on growth as their chart shows.
Now, neither Fathom nor anyone else can accurately replicate the MPC forecasts because the published versions rest on judgments by the Committee members as much as the model’s outputs. But the argument put forward
Ben Bernanke is not quite a native of South Carolina – he was actually born in nearby Georgia. But he did grow up in the state, and returned there this morning to give his latest assessment of the US economy.
The headline, in my view, was that there is a “considerable way” to go before the US recovery is complete – a no-less dreary variation on his comments last week that the economic outlook is “unusually uncertain”.
Unemployment is high, the housing market is weak, financial conditions are less supportive of growth than they were earlier in the year, Mr Bernanke said, in his first remarks following Friday’s disappointing growth data, which showed real gross domestic product increasing at a slower pace in the second quarter than it did in the first.
But if anyone was hoping for Mr Bernanke to discuss what steps the Fed might consider at their monetary policy meeting next week to reboot the recovery, they were disappointed. Mr Bernanke did not address the issue, presumably to avoid speaking ahead of his colleagues on such a crucial, market-sensitive matter.
For an inflation hawk, James Bullard, the president of the St Louis Fed, has some radical views on what to do if the economy weakens and the Fed decides to ease policy further.
Today he argued forcefully in a research paper that the Fed should use asset purchases if it has to ease further because promising to keep rates lower for longer – one of the other options – increases the chance of Japan-style deflation. Let me try to explain why. This post is long, wonkish, and probably not 100% technically accurate.
This is the chart that Mr Bullard uses. Look at the two lines this way:
- The curved line is the central bank. If inflation is high, it raises interest rates by more than one-to-one, in order to bring inflation back to target.
- The dashed red line basically says that money and prices don’t change anything real. You may have higher inflation and higher nominal interest rates but the gap between the two – the real interest rate – stays the same.