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January 4, 2013

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Economic Events of the Week

Friday – Employment Situation

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Story of the Day
Right to the Middle (Ramesh Ponnuru in National Review)

Washington Update
Source: Geithner To Leave By Month's End (Politico)
John Boehner Reelected As House Speaker (The Washington Post)
GOP Sees End of Tax Increases, Democrats See the Start (CQ)

Market Talk
Most FOMC Participants Saw QE3 Ending In 2013 (Bloomberg)
Fresh Budget Fights Brewing (The Wall Street Journal)
Freddie Mac: Mortgage Rates Near Record Lows (Calculated Risk Blog)

Editorials & Opinions
The New Tell-All Fed (Randall Kroszner in The New York Times)
No Debt Fix In Sight (John Taylor's Blog)
Corporate Spending: Why so Little? (The Financialist)

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Story of the Day

Right to the Middle (Ramesh Ponnuru in National Review)

The public has never fully trusted Republicans to advance the economic interests of the middle class rather than those of the rich, and that problem may be getting more acute. That’s the reason Republicans never became the country’s majority party after the Democrats lost that status. It’s the reason Mitt Romney beat President Obama by only one point in the exit polls on the question of who would better handle the economy. It’s the reason Obama found it so easy to convince 53 percent of the electorate that Romney’s policies generally favor the rich. It’s part of the reason Romney and other Republicans have done so poorly among Hispanics, young people, and single women, and sometimes, as in the election just finished, failed to motivate blue-collar whites to vote in great numbers. If Obama’s second term is sufficiently disastrous, Republicans may bounce back without having to solve this problem. To achieve lasting success, though, they will have to find a way to make a plausible case that conservative policies will yield tangible benefits for most people. That means, first, that they will have to devise policies with the actual circumstances of today in mind. So, for example, they will have to rethink an approach to taxes that has been frozen in 1981 for too long. Across-the-board cuts in income-tax rates worked politically at that time, but for many years now, middle-class families have been paying more in payroll taxes than in income taxes.


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Washington Update

Source: Geithner To Leave By Month's End (Politico)

Treasury Secretary Tim Geithner plans to leave the administration by the end of the month — and he really means it this time. Geithner intends to leave his post at the end of January, whether or not a deal is in place to raise the debt ceiling, according a source close to the Treasury secretary.Geithner previously pushed back his departure plans to work on the resolution to the fiscal cliff at the request of President Barack Obama. The source said Geithner will return to New York City and that he had long planned to leave Washington after the fiscal cliff fight was over. "Secretary Geithner has previously stated that he plans to be at Treasury until around the inauguration. We do not plan to make any further announcements about the timing of the Secretary's departure until after his successor is named," said a Treasury spokesperson. Bloomberg first reported the news, citing two people familiar with the matter. The move will ramp up the pressure on the White House to soon nominate Geithner’s successor. White House Chief of Staff Jack Lew remains the frontrunner.

John Boehner Reelected As House Speaker (The Washington Post)

John A. Boehner was narrowly reelected speaker of the House on Thursday, giving him a another chance to lead the chamber — a task that has been difficult for him over the past two years. The Ohio Republican survived a mini-rebellion among the most conservative members the GOP caucus to win his second term as speaker. Twelve Republican defected, with 10 voting for other conservatives and two abstaining. The final vote was 220 for Boehner to 192 for House Minority Leader Nancy Pelosi (D-Calif.). The winner needed 214 votes, a simple majority of the 427 lawmakers who voted. Boehner watched the white-knuckle proceedings from off the floor. It was the closest any speaker has come to not securing a first-ballot victory since Newt Gingrich’s narrow reelection in January 1997, following an ethics admonishment. The anti-Boehner faction cast its votes for a odd collection of Republicans, including tea party icon Allen B. West of Florida, a one-term congressman who lost his reelection bid in November. But it did not drain away enough support to topple the speaker. The position, second in the line of succession for the presidency, does not have to be held by a current member of Congress.

GOP Sees End of Tax Increases, Democrats See the Start (CQ)

As Congress cleared a compromise tax package this week to avert an economic crisis, Democrats and Republicans remained sharply divided about what it meant for the future of tax policy. For Democrats, the bill was a significant achievement because it represented the first substantial tax increase in almost 20 years. “This legislation breaks the iron barrier that for far too long has prevented additional tax revenues from the very wealthiest,” Rep. Sander M. Levin of Michigan, the ranking Democrat on the Ways and Means Committee, said during floor debate Tuesday evening. Moreover, Levin said, by replacing two months of automatic discretionary spending cuts with equal amounts of new revenue enhancements and spending reductions the bill established a precedent that tax increases will be part of future deficit reduction efforts. Most House and Senate Democrats voted for the measure, which extends tax rates set during the George W. Bush administration up to $450,000 for couples filing jointly but allows tax rates to go up on the ordinary income and investment earnings of people in the highest tax bracket.


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Market Talk

Most FOMC Participants Saw QE3 Ending In 2013 (Bloomberg)

Federal Reserve policy makers said they will probably end their $85 billion monthly bond purchases sometime in 2013, with members divided between a mid- or end-of- year finish. “A few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013” while a few others specified no time frame, according to the record of the Federal Open Market Committee’s Dec. 11-12 gathering released today in Washington. “Several others thought that it would probably be appropriate to slow or stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet.” Four years after cutting the main interest rate to near zero, policy makers are expanding their third round of so-called quantitative easing to boost economic growth and cut the jobless rate, now at 7.7 percent. In prior rounds of bond purchases, the central bank bought $2.3 trillion in securities. The minutes show a divide among FOMC participants on how long the purchases should last. Participants who provided estimates were “approximately evenly divided” between those who said it would be appropriate to end the purchases around mid-2013 and those who said they should continue beyond that date.

Fresh Budget Fights Brewing (The Wall Street Journal)

The completion of a tax deal between the White House and Congress sent stocks soaring Wednesday, but the sense of relief belied the fact that more tax-and-spending brinkmanship is expected as soon as February. The Dow Jones Industrial Average shot up 308.41 points, or 2.35%, to close at 13412.55—its best day in more than a year—on top of Monday's preholiday gain of 1.3%. In Washington, the mood was distinctly less ebullient. There was muted satisfaction that Congress had sent to President Barack Obama legislation to avoid sudden tax increases and spending cuts that threatened to provoke a recession. The president signed the legislation into law on Wednesday. Moody's Investors Service, one of the firms that rate government debt, said Wednesday that the agreement didn't do enough to reduce the deficit.

Freddie Mac: Mortgage Rates Near Record Lows (Calculated Risk Blog)

From Freddie Mac today: Mortgage Rates Start the New Year Near All-Time Record Lows “Freddie Mac today released the results of its Primary Mortgage Market Survey, showing fixed mortgage rates continuing to hover near their all-time record lows ... 30-year fixed-rate mortgage (FRM) averaged 3.34 percent with an average 0.7 point for the week ending January 3, 2013, down from last week when it averaged 3.35 percent. Last year at this time, the 30-year FRM averaged 3.91 percent.  15-year FRM this week averaged 2.64 percent with an average 0.7 point, down from last week when it averaged 2.65 percent. A year ago at this time, the 15-year FRM averaged 3.23 percent.” The Freddie Mac survey started in 1971 and mortgage rates are currently near the record low for the last 40 years.


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Editorials & Opinions

The New Tell-All Fed (Randall Kroszner in The New York Times)

Within moments of their release on Thursday afternoon, the minutes from the Federal Reserve’s December policy meeting caused a bond-market sell-off. Yields on Treasury bonds jumped as traders quickly dumped 10- and 30-year government bonds. What was the profound economic news that caused this mini-convulsion in the market? Did the minutes reveal a weak spot in the nation’s economic-growth prospects? Was word of December’s employment numbers, scheduled for announcement on Friday, somehow leaked? No. What spooked traders was surprise. The Fed minutes revealed deeper divisions within the central bank’s ranks about the Fed’s aggressive bond-buying efforts than many observers had supposed. The events in the bond market today are an instructive lesson in the power of communication: when the Fed speaks, the fewer surprises, the better.

No Debt Fix In Sight (John Taylor's Blog)

The election is over, the fiscal cliff is over, and the problems remain. For the past several years on this blog I have been showing simple charts to monitor progress—or lack of progress—on the persistent deficit and the growing debt, which in my view are impediments to returning to strong economic growth. Unfortunately neither the election nor the fiscal cliff deal has resulted in any meaningful change in these budget charts. Here is the latest spending chart. It shows the Administration’s spending proposal prior to the debt deal of 2011, a CBO forecast with the fiscal cliff deal, and my pro-growth alternative which would balance the budget.

Corporate Spending: Why so Little? (The Financialist)

Difficult economic conditions over the last four years have caused American and European companies to curb spending in an attempt to grow their cash reserves. The looming question is: When will they start spending again? American companies seem poised to open their checkbooks sooner than their European counterparts, according to a recent Credit Suisse survey of 120 European and U.S. corporations. While the Euro-zone crisis and the U.S. fiscal cliff have made companies in both places hesitant to spend, European companies face higher hurdles and are less optimistic about the future, the Credit Suisse Executive Panel reported. “The spending plans of European corporates have deteriorated markedly,” the Executive Panel report said. “The picture is most acute in the peripheral countries of the Eurozone, though perhaps worryingly, Germany has seen the picture soften.”


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