Michael Steen

You still need a strong constitution or a taste for gallows humour to read most eurozone economic statistics, as today’s release of the preliminary Q1 gross domestic product growth contraction data shows.

The bloc is now in its longest recession since the birth of the single currency, beating the post-Lehman Brothers slump in duration, though not in the depth of the downturn. Read more

Developing countries should not be tempted to stimulate their economies this year in the face of weak growth, the World Bank warned on Wednesday even though the world faces another challenging year.

In forecasts that suggest 2013 will see only marginally stronger growth than last year, the Bank recommends that poor and middle-income countries concentrate on fundamental drivers of prosperity rather than attempt a quick fix.

 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

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

Robin Harding

The NY Fed has announced its tentative schedule for bond purchases through to mid-January. The Desk plans to buy $105bn in Treasury securities. Two observations:

(1) It’s a little less than expected. The $75bn related to QE2 is unchanged, but the schedule includes only $30bn for reinvestment of mortgage prepayments, less than the $35bn a month predicted as of the beginning of November. That suggests the rise in 10-year rates is already affecting the NY Fed’s forecast of mortgage prepayments. I’m trying to find out a bit more about this but with an FOMC meeting next week I doubt the FRBNY will be especially forthcoming. Read more

Robin Harding

In the last few hours I’ve had ten separate emails from the White House announcing that various senators, Congresspeople, governors and mayors are backing its tax deal. I’ve never seen anything like it. They must be seriously worried about whether it will pass (or at least the political backlash from their own side).

Sorry, make that eleven. Read more

$1,000bn: that’s the estimated fiscal stimulus if current US tax deal discussions come to fruition. Economists have upped their 2011 growth forecasts by 50-70bp on the news; traders have brought forward their estimates of a fed funds raise as yields rose significantly. The policy couldn’t be more different from yesterday’s austerity measures in Ireland.

US citizens at both ends of the pay spectrum would be better off under the deal, paying less tax and therefore having more to spend. Under the current deal – which has some way to go before it is passed – the 2 per cent employee payroll tax cut would be kept, saving some families about $2,000 and costing about $200bn. The main, $800bn part of the deal would extend Bush-era tax cuts across all income groups – including the very wealthy, who are more likely to save the additional income.

Robin writes: Read more

We’ve said a few times that there are right ways and wrong ways to criticise QE2. One of the wrong ways, it seems to us, is to say that the policy hasn’t had its intended affect on markets.

The goal of quantitative easing at the zero lower bound isn’t to lower nominal treasury yields (though that’s not a surprising immediate effect) but to lower expected real yields by raising inflation expectations.

As St Louis Fed president James Bullard explained last Thursday, so far so good. Since Bernanke gave his Jackson Hole speech telegraphing further QE, real interest rates are lower, inflation expectations and US equities are higher, and the dollar has broadly depreciated against other currencies.

Or if you want to look at it another way, at the very least the expected probability of deflation is lower than it was earlier this year — as you can see in this new chart from MacroblogRead more

Robin Harding

Fed chairman Ben Bernanke is taking his QE2 outreach on the road to Columbus, Ohio, tomorrow for a ‘conversation on the economy’ with business leaders. It’s supposed to focus on the job market but I imagine it will turn to monetary policy. Businesspeople scheduled to attend include:

Alan Mulally, President and CEO, Ford Motor Company, Dearborn, MI
Samuel Palmisano, Chairman of the Board and CEO, IBM Corporation, Armonk, NY
Curtis Moody, President and CEO, Moody•Nolan, Inc., Columbus, OH
Jeni Britton Bauer, President, Jeni’s Splendid Ice Creams, Columbus, OH
Dwight Smith, CEO, Sophisticated Systems, Columbus, OH Read more

Today’s publication of the latest FOMC minutes will probably unveil significant downward revisions to the Committee’s inflation and gross domestic product forecasts for 2011, as well as a large upward revision to its unemployment forecast. More interestingly, the minutes will show whether the FOMC is broadly united on the strategy of quantitative easing which it has now adopted. Is the FOMC clear about how QE is intended to work? I raise the question because Mr Bernanke’s most recent speech made the rather startling claim that the policy should not even be called “quantitative easing” in the first place. Not all of his colleagues on the FOMC, and few of his outside critics, appear to agree with him.

The term “quantitative easing” first came into prominence about a decade ago, when the Bank of Japan was being urged by economic commentators to take direct measures to increase the money supply, after its zero interest rate policy had failed to reverse deflationary forces in the economy. In an article co-authored by Mr Bernanke in 2004, the Bank of Japan was defined as conducting a policy of QE when it “added liquidity to the system beyond what is needed to achieve a (short term interest) rate of zero”. The Bernanke paper suggested that this was normally done “through open market purchases of bonds or other securities which have the effect of increasing the supply of bank reserves”. These are the standard definitions, which have been widely used by economists ever since.

Compare this with what Mr Bernanke said last week: Read more

China and other developing countries should act to reduce their current account surpluses, US Federal Reserve chairman Ben Bernanke said in a firm rebuff to complaints that the Fed is manipulating the dollar.

“The current international monetary system is not working as well as it should,” Mr Bernanke said in a speech delivered at a European Central Bank conference on Friday morning. “Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals.” Read more

The Bank of England’s forecasts suggest that, were it not for inflation, it should maintain the large stimulus it is providing to the UK economy or take it even further, according to Martin Weale, a member of the monetary policy committee.

The Bank’s projections for the economy point to a substantial amount of slack remaining even at the end of the forecast period in three years, Mr Weale said in a speech on Monday, suggesting that current loose monetary policy or a further boost would be necessary. Read more

Details are out for the Fed’s bond purchase plan for the rest of the year. $105bn, split into $75bn as part of the $600bn stimulus, and $30bn of ongoing reinvestment of principal payments.

The bond purchase plan is spread across 2012-2040 maturities, though it is front loaded with far more bonds to be bought with 2013-2020 maturities (as the chart shows). Almost all of the purchases will be purchases of regular Treasuries, with just (just!) $2-4bn of TIPS on the menu.

Full details in table below the jump: Read more

A deputy governor at the People’s Bank of China has indirectly criticised the Fed’s $600bn stimulus plan, saying emerging market economies will have to stay alert for inflation and bubbles as a result of the scheme. Ma Delun also said the stimulus might also increase global imbalances, though it might help the US economy “to some extent”.

Similar comments – which amount to indirect accusations of selfish irresponsibility – were levelled by the Brazilian central bank governor on Friday. Henrique Meirelles said: “excess liquidity in the US is creating problems in other countries” and that this should be addressed at G20 meetings in South Korea. 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

Chris Giles

The recent battle of words on the MPC translated into a 1-7-1 vote at the October meeting with Adam Posen voting to increase quantitative easing by £50bn over an unspecified period and Andrew Sentance continuing to vote for a rise in interest rates to 0.75 per cent.

Between these two now entrenched positions, the rest sit in no-man’s-land, unsure whether the risk that high inflation will dislodge expectations is greater than the risk that significant spare capacity will bring medium-term inflation sharply lower.

The bias of this mushy middle was slightly dovish:

“Some of those members felt the likelihood that further monetary stimulus would become necessary in order to meet the inflation target in the medium term had increased in recent months. But, for them, the evidence was not sufficiently compelling to imply that such a course of action was necessary at present.”

What will be fascinating is Read more

James Politi

Fears of tame inflation – or even deflation – are the main driver of the Federal Reserve’s push towards a new round of quantitative easing, along with the high unemployment rate. And today’s data on producer prices from the labor department, won’t do much to continue its drive towards more asset purchases when officials meet in early November.

The producer price index increased in September by 0.4 per cent, strong beating expectations as higher food and energy prices boosted the headline figure. But the core measure, which matters more to central bankers, rose by only 0.1 per cent, in line with economists’ forecasts.

This is consistent with muted inflationary pressures, and will do little to bolster the hawks on the committee who are arguing for no action next week. Read more

James Politi

The Great Recession of 2007-2009 hit hardest in two areas: sun-belt states such as Arizona and Florida that were exposed by the housing boom and bust, as well as rust-belt states like Michigan and Ohio that were already suffering from the erosion of America’s manufacturing base. Interestingly enough, Texas and the Midwest, which bore the brunt of the 1980-1982 recession, managed to escape most of the pain this time around. 

The worst-off communities in this cycle were the focus of a conference this morning organised by the Brookings Institution’s Hamilton Project, which conducts research on economic policy and counts Robert Rubin, former treasury secretary, and Roger Altman, former deputy treasury secretary, as senior advisers. Read more

James Politi

The Federal Reserve has just released minutes from its September 21 meeting, and it does seem that the path towards a new round of quantitative easing, starting as early as November, is set.

Although there are still a few hold-outs who believe the threshold for action should be higher and involve further deterioration in the economy, Ben Bernanke, Fed chairman, seems to have forged a consensus along the belief that conditions are already bad enough to warrant more monetary stimulus.

Arguably the most interesting segment of the minutes came when officials began reviewing the benefits and costs of additional easing, and the “best means to calibrate and implement such [asset] purchases”. Read more