Friday, May 11, 2012

Economic Events of the Week

Friday – Producer Price Index

Story of the Day
Fed’s Kocherlakota: Economy Closer to Max Employment Than Data Suggest (The Wall Street Journal)

Washington Update
Republicans Plan to Introduce Budgets in Senate (CQ)
Bernanke Warns Senate Dems to Take Action on Fiscal Cliff (National Journal)
Student Loan Bill Remains on Hold in Senate (CQ)

Market Talk
Bernanke Says Stronger Banks Must Still Improve Liquidity (Bloomberg)
Trade Deficit increased in March to $51.8 Billion (Calculated Risk Blog)
U.S. Monetary Authorities Did Not Intervene in FX Markets During The First Quarter (NY Fed)

Editorials & Opinions
A Volcker Leap of 'Faith' (The Wall Street Journal Editorial)
A Cautionary Tale of Inflation and Growth (Mark Carney in Financial Times)
The Fight over Medicare Double Counting (Donald Marron Blog)
Easy Useless Economics (Paul Krugman in The New York Times)

Story of the Day

Fed’s Kocherlakota: Economy Closer to Max Employment Than Data Suggest (The Wall Street Journal)

A top Federal Reserve official said Thursday he is paying close attention to inflation and that recent elevated readings signal that the economy is closer to maximum employment than labor-market reports alone might suggest. Speaking before the Economic Club of Minnesota about the central bank’s latest transparency initiatives, Federal Reserve Bank of Minneapolis president Narayana Kocherlakota said the term “maximum employment” is particularly difficult to gauge right now as the economy has evolved since the financial crisis. But using the behavior in inflation as a signal, the “distinctly higher” rise in prices in the past two years suggests perhaps the unemployment rate doesn’t have too much more room to fall. “I see these changes as a signal that our country’s current labor market performance is much closer to ‘maximum employment’ than the post-World War II U.S. data alone would suggest,” Kocherlakota said. “As I’ve argued in the past, appropriate policy should be responsive to such signals.”

Washington Update

Republicans Plan to Introduce Budgets in Senate (CQ)

Senate Republicans plan to offer several budget plans on the floor next week, including the 2013 budget resolution adopted by the House and what they will describe as President Obama’s proposed budget for next year. Although their plans are not final, Republicans are likely to offer budgets written by Sens. Patrick J. Toomey of Pennsylvania, Rand Paul of Kentucky and Mike Lee of Utah, as well as the plan authored by House Budget Chairman Paul D. Ryan, R-Wis., and a GOP rendering of the budget Obama sent to Congress in February. The proposals have little hope of gaining enough support to be debated and voted on. But the GOP will use their introduction to remind observers that the chamber has not formally adopted a budget resolution since 2009.

Bernanke Warns Senate Dems to Take Action on Fiscal Cliff (National Journal)

Federal Reserve Chairman Ben Bernanke warned Senate Democrats at a caucus lunch on Thursday of the serious damage a combination of tax hikes and spending cuts scheduled to kick in at the end of the year could exert on the country's frail recovery. Senate Democrats said Bernanke discussed the general state of the economy at the lunch and said it would suffer a major blow if a series of expiring year-end provisions are not extended or altered. Those include the pending sunset of 2001 and 2003 tax cuts, sequestration, and expiration of both federal unemployment benefits and reduced employee payroll tax rates. This combination of events has been dubbed a coming "fiscal cliff." Senate Budget Chairman Kent Conrad, D-N.D., declined to discuss details of Bernanke comments but said the meeting included the potentially disastrous impact of a congressional failure to reach a broad budget and tax deal in the post-election lame duck session, or sooner. Senate Finance Chairman Max Baucus, D-Mont., said the discussion covered ground senators are already familiar with. “It doesn’t take a rocket scientist to be concerned about the fiscal cliff,” Baucus said.

Student Loan Bill Remains on Hold in Senate (CQ)

Without a path forward for Senate Democrats’ bill to prevent a student loan interest rate hike, Majority Leader Harry Reid nixed a scheduled revote Thursday. Democrats had planned a second attempt to limit debate on a motion to proceed to the bill (S 2343). But with Republicans committed to blocking cloture and no resolution to the impasse in sight, Reid, D-Nev., tabled the measure — at least for now. Further complicating matters in the Senate on Thursday, Reid said that a Republican was attempting to offer a student loan amendment to the Export-Import Bank bill that was also pending on the floor. On Tuesday, Republicans blocked cloture on the student loan bill in a 52-45 vote. Sixty votes were needed to limit debate.

Market Talk

Bernanke Says Stronger Banks Must Still Improve Liquidity (Bloomberg)

Federal Reserve Chairman Ben S. Bernanke said the U.S. banking system is stronger and more resilient while still facing challenges on credit quality and liquidity. “Banks still have more to do to restore their health and adapt to the post-crisis regulatory and economic environment,” Bernanke said today in a speech at the Chicago Fed’s annual conference on banks. As the economic expansion proceeds, “a financially stronger banking system will be well positioned to expand its lending.” Some large firms still face “challenges on the liquidity front” as they rely heavily on wholesale short-term funding, he said, and as government guarantees on some of their liabilities expire. Loan delinquency rates on credit-backed by commercial and residential real estate “remain elevated.” The Fed has tightened bank oversight and stepped up its research on financial risk in the aftermath of the 2008-2009 credit crisis, which plunged the U.S. into the worst recession since the Great Depression and cost 8.8 million Americans their jobs. Bankers, including JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, have told the Fed that oversight is too stringent and limits profitability.

Trade Deficit increased in March to $51.8 Billion (Calculated Risk Blog)

The Department of Commerce reported: “Total March exports of $186.8 billion and imports of $238.6 billion resulted in a goods and services deficit of $51.8 billion, up from $45.4 billion in February, revised. March exports were $5.3 billion more than February exports of $181.5 billion. March imports were $11.7 billion more than February imports of $226.9 billion.” The trade deficit was above the consensus forecast of $49.5 billion.

U.S. Monetary Authorities Did Not Intervene in FX Markets During The First Quarter (NY Fed)

The U.S. monetary authorities did not intervene in the foreign exchange markets during the January—March quarter, the Federal Reserve Bank of New York said today in its quarterly report to the U.S. Congress. During the three months that ended March 31, 2012, the dollar depreciated broadly, including 2.8 percent against the euro, but appreciated 7.8 percent against the Japanese yen. In this period, the dollar's nominal trade-weighted exchange value depreciated 0.8 percent, as measured by the Federal Reserve Board's major currencies index.

Editorials & Opinions

A Volcker Leap of 'Faith' (The Wall Street Journal Editorial)

Thursday's surprise news of J.P. Morgan's $2 billion trading loss shows again why taxpayers don't want to stand behind Wall Street trading desks. But nailing down a precise definition of the Volcker rule, which was supposed to prevent taxpayer-backed gambling in the securities markets, is proving to be harder than forecasting changes in the Chinese politburo. Even the seemingly mundane task of figuring out when the rule will take effect has become a challenge. A recent letter on Volcker from the Federal Reserve is Washington's latest monument to opacity. Opting for hazy regulator discretion over bright statutory lines, a Democratic Congress joined with President Obama in 2010 to create Dodd-Frank. Among other things, the law purported to include former Fed Chairman Paul Volcker's concept to ban so-called proprietary trading at banks that enjoy federal deposit insurance. In other words, the banks could fulfill customer orders but they could not make trades for their own account. No more betting the firm's capital when the taxpayer is the ultimate backstop.

A Cautionary Tale of Inflation and Growth (Mark Carney in Financial Times)

The financial crisis has shaken the world economy and prompted questions that strike at the heart of monetary economics. As governments, banks and households in advanced economies struggle to reduce debt, growth has plummeted. Weak growth is undermining efforts to repair balance sheets and causing more austerity. This vicious circle is creating problems for all economies.  Against this backdrop, many question whether central banks are capable of supporting demand while maintaining economic stability. Some have even advocated extreme responses, such as pursuing higher inflation or abandoning existing monetary policy frameworks. These views are misguided. Now is not the time to risk abandoning frameworks that have proved their worth through the crisis and will be essential to sustain the recovery.

The Fight over Medicare Double Counting (Donald Marron Blog)

The recent double-counting dispute isn’t just about politics; it also reveals a flaw in budgeting for Medicare Part A. Budget experts are waging a spirited battle over the Medicare changes that helped pay for 2010’s health reform. In April, Chuck Blahous, one of two public trustees of the program, released a study arguing that the Affordable Care Act (ACA) would increase the deficit by at least $340 billion by 2021, a sharp contrast from the $210 billion in deficit reduction estimated by the Congressional Budget Office (CBO). Chuck bases his estimates on several factors, but the item that has garnered the most attention is his charge that the ACA’s spending cuts and revenue increases in Medicare Part A are being double counted: once to help pay for the ACA’s coverage expansion and a second time to improve the finances of the Part A trust fund, whose predicted exhaustion was delayed by several years. Chuck notes that those resources can be used only once: They can either offset some costs of health reform or strengthen Medicare, but not both. He believes those resources will ultimately finance additional Medicare spending and thus can’t offset any health reform costs. For that reason, he concludes that the ACA would increase deficits, rather than reduce them.

Easy Useless Economics (Paul Krugman in The New York Times)

A few days ago, I read an authoritative-sounding paper in The American Economic Review, one of the leading journals in the field, arguing at length that the nation’s high unemployment rate had deep structural roots and wasn’t amenable to any quick solution. The author’s diagnosis was that the U.S. economy just wasn’t flexible enough to cope with rapid technological change. The paper was especially critical of programs like unemployment insurance, which it argued actually hurt workers because they reduced the incentive to adjust. O.K., there’s something I didn’t tell you: The paper in question was published in June 1939. Just a few months later, World War II broke out, and the United States — though not yet at war itself — began a large military buildup, finally providing fiscal stimulus on a scale commensurate with the depth of the slump. And, in the two years after that article about the impossibility of rapid job creation was published, U.S. nonfarm employment rose 20 percent — the equivalent of creating 26 million jobs today.

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