stimulus

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. 

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.

 

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. 

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. 

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. 

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. 

$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: 

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 Macroblog

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 

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: