Friday, September 14, 2012

Economic Events of the Week

Friday – Consumer Price Index, Retail Sales, Industrial Production

Story of the Day
Fed Undertakes QE3 With $40 Billion Monthly MBS Purchases (Bloomberg)

Washington Update
House Passes Stopgap Funding Bill To Keep Government Open Until After Election (The Washington Post)
Lawmakers Look to Lame-Duck Session With Hopes for Spending Bills (CQ)
Fed to Politicians: We’re Not Swayed (National Journal)

Market Talk
Analysis: Bernanke Delivered (Calculated Risk Blog)
Fed Insists Politics Had No Role In Decision (Financial Times)
A Look Inside the Fed’s Balance Sheet (The Wall Street Journal)

Editorials & Opinions
Health Care’s Heap Of Wasteful Spending (The Washington Post)
The Price Of Politics: A Bit Over $1 Trillion (Keith Hennessey Blog)
Mr. Romney, Trust Your Pants (Kimberley Strassel in The Wall Street Journal)

Story of the Day

Fed Undertakes QE3 With $40 Billion Monthly MBS Purchases (Bloomberg)

The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment. “We’re looking for ongoing, sustained improvement in the labor market,” Chairman Ben S. Bernanke said in his press conference today in Washington following the conclusion of a two-day meeting of the Federal Open Market Committee. “There’s not a specific number we have in mind. What we’ve seen in the last six months isn’t it.” Stocks jumped, sending benchmark indexes to the highest levels since 2007, and gold climbed as the Fed said it will continue buying assets, undertake additional purchases and employ other policy tools as appropriate “if the outlook for the labor market does not improve substantially.”

Washington Update

House Passes Stopgap Funding Bill To Keep Government Open Until After Election (The Washington Post)

The U.S. House of Representatives has approved a six-month stopgap government funding bill on a 329 to 91 vote, putting aside the partisan warfare of the past 18 months in bipartisan resolve to avoid a budget showdown ahead of the November election. The Senate is expected to pass the same measure late next week, providing funding for agencies for the first six months of the fiscal year and avoiding any threat of a government shutdown when the year ends Sept. 30. The drama with Thursday’s vote came less from the outcome of the vote than from the appearance of Republican vice presidential candidate Paul Ryan, who chairs the House Budget Committee and came to the Capitol to cast a vote in favor of the measure. His vote was intended to send a message to members of the raucous GOP freshman caucus that they should also sign off on a measure that will set a $1.047 trillion funding level for the first half of the year, the same figure enshrined in the deal to raise the nation’s debt ceiling last summer.

Lawmakers Look to Lame-Duck Session With Hopes for Spending Bills (CQ)

Even before the House passed its much-derided but must-pass stopgap funding bill Thursday, the opening shots were underway to pressure Congress into finishing fiscal 2013 appropriations during the lame-duck session. The fiscal 2013 continuing resolution, passed 329-91, is meant to keep the federal government running Oct. 1 through March 27, 2013. The Senate is expected next week to clear the measure, which congressional leaders and the White House negotiated in advance. Under an agreement reached by leaders Thursday, the Senate is expected to hold a cloture vote on the motion to proceed to the measure Sept. 19. 

Fed to Politicians: We’re Not Swayed (National Journal)

Federal Reserve Chairman Ben Bernanke doesn’t care about Capitol Hill or campaign-trail bullies. He has said repeatedly as the central bank has come under a political magnifying glass this year: The Fed bases its decisions on economics, not politics. On Thursday, the Fed chairman backed up that assertion with action. The central bank acted boldly this week—about as boldly as it could have, kicking off an open-ended round of bond-buying, extending its commitment to keep short-term interest rates low, and pledging to do even more if the labor market doesn’t improve “substantially.” All this just 54 days before the presidential election. “We have tried very, very hard—and I think we’ve been successful at the Federal Reserve—to be nonpartisan and apolitical, to make our decisions based entirely on the state of the economy and the needs of the economy for policy accommodation,” Bernanke said at a press conference following the Fed's policy announcement. “We think that’s the best way to maintain our independence and maintain the trust of the public,” he added. Politicians have put a lot of pressure on the Fed to do one thing or another this year. GOP presidential nominee Mitt Romney expressed an opinion widely held in his party when said that he didn’t think the Fed should start a fresh round of bond-buying, known as quantitative easing or QE3.

Market Talk

Analysis: Bernanke Delivered (Calculated Risk Blog)

The FOMC delivered everything I expected - and more. This was a very strong move and I suspect many analysts are underestimating the potential positive impact on the economy. However, as Fed Chairman said, monetary policy is "not a panacea". I do think this will help, but this will not solve the unemployment problem. Here are a few key points: Forward guidance is a critical part of Fed policy (see Michael Woodford's paper presented at Jackson Hole). The FOMC didn't go as far as targeting nominal GDP, but they took two key steps today: 1) they extended the forward guidance until mid-2015, and 2) the FOMC made it clear that "a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens". "AFTER the economic recovery strengthens" is key. This easing was not based on new economic weakness. From the FOMC statement: "economic activity has continued to expand at a moderate pace in recent months". This easing was intended to help increase the pace of recovery.”

Fed Insists Politics Had No Role In Decision (Financial Times)

Ben Bernanke’s reign at the US Federal Reserve since 2006 has seen much drama and many policy innovations. But the launch of open-ended quantitative easing, with a pledge to continue until the labour market improves, may turn out to be one of the most important. One of the biggest failures of previous rounds of QE – as the policy of buying assets in order to drive down interest rates is known – was that its effects were lumpy and hard to predict. Once the purchases were announced, markets priced them in and that was that. The new policy will mean that whenever there is weak economic data the market will assume a continuation of QE. That should prove to be a powerful stabilising force to support the recovery.

A Look Inside the Fed’s Balance Sheet (The Wall Street Journal)

The Federal Reserve‘s declaration of a new bond-buying program will begin bulking back of a balance sheet that has been basically flat for more than a year. Assets on the Fed’s balance sheet sit at around $2.8 trillion as of Wednesday. The level has held pretty stable since June 2011, when the central bank ended its previous bond-buying program, commonly known as QE2. The central bank has been engaged in a program known as Operation Twist since September of last year. The action shifts the Fed’s holdings into longer-dated government bonds without substantially increasing the size of the balance sheet. But the new program will send the size of the balance sheet climbing again. The balance sheet is up from less than $1 trillion prior to the recession. During the downturn the Fed expanded its balance sheet through several programs aimed at keeping markets functioning. As markets stabilized the Fed shifted out of emergency programs and into purchases of U.S. Treasurys, mortgage-backed securities and agency debt securities to drive down interest rates and encourage more borrowing and growth in two separate rounds of what is known as quantitative easing. The new program announced Thursday will start bulking up the holdings of MBS.

Editorials & Opinions

Health Care’s Heap Of Wasteful Spending (The Washington Post)

How much waste is there in this nation’s health care system? Try $765 billion. That’s the estimate from the Institute of Medicine, covering everything from unneeded tests to excessive administrative costs. The estimate is for 2009, when health spending totaled $2.5 trillion. “Waste” was 31 percent, or almost one dollar in three. Wow! Even if waste is only half this, there’s ample room to cut costs without weakening quality of care. By all logic, we should be debating how to achieve these savings, because runaway health spending is the crux of our budget impasse. From 1980 to 2011, health care went from 11 percent to 27 percent of federal spending — and it’s headed higher. Naturally, we aren’t having this debate. The campaign’s discussion of health care is purely political. Democrats say Republican proposals to turn Medicare — federal insurance for the elderly — into a voucher program would “end Medicare as we know it.” Well, that’s true; it’s also true that Medicare “as we know it” is busting the budget. Vouchers might control costs. For their part, Republicans denounce the Affordable Care Act (Obamacare) without fully explaining why their alternative is better. The stakes transcend Medicare and Medicaid (federal-state insurance for the poor), because the federal government is the largest purchaser of health services. Its policies shape, for better or worse, the rest of the system. If Medicare promotes lower-cost, higher-quality care, everyone would benefit. Hospitals and doctors would transfer improvements to other patients.

The Price Of Politics: A Bit Over $1 Trillion (Keith Hennessey Blog)

At almost every recent campaign stop President Obama has said a version of this: “Independent analysis shows my plan for reducing the deficit would cut it by $4 trillion. I’ve already worked with Republicans in Congress to cut a trillion dollars’ worth of spending, and I’m willing to do more.” Here is an excerpt from Bob Woodward’s new book, The Price of Politics: “Obama was getting fired up as he worked through what to say and how to say it. He wanted a $ 4 trillion deficit plan too, but the cuts were too severe. The progressive and liberal base would be deeply distressed.” “Sperling suggested an old trick from the Clinton years: Stick with the $ 4 trillion— that was easy to understand— but instead of projecting it over the traditional 10 years, do it over 12. No one would really notice. Few would do the math. By stretching the plan out and loading most of the cuts into its final years, the early cuts were substantially smaller.”

Mr. Romney, Trust Your Pants (Kimberley Strassel in The Wall Street Journal)

In the classic 1968 film "Once Upon a Time in the West," a villainous Henry Fonda shoots one of his lackeys, in part for the sin of wearing both a belt and suspenders. How do you trust a man, muses Fonda, who "can't even trust his own pants?" Mitt Romney is slipping in the polls because, when it comes to his own policies, he is once again wearing a belt, suspenders, and even some elasticized waistbands. The bold Romney who picked Paul Ryan as a catalyst to run on ideas has been ousted by the return of the careful Romney who wants this race to be about Barack Obama. And America is unwilling to trust a man who seems unwilling to trust his own agenda. The re-emergence of the well-belted Romney began at the GOP convention, where he delivered a speech that had been pared away to nothing but a fleeting reference to his policies. It was on vivid display, too, in Mr. Romney's Sunday appearance on NBC's "Meet the Press," in which he managed to use 30 minutes of prime time to talk mainly of flotsam, as well as (news flash!) how bad Mr. Obama had made the economy. As for how he would create "more jobs" and "higher income," Mr. Romney wasn't saying. His references to his "tax policy" served mainly to explain what it doesn't do. He vowed to replace ObamaCare with his "own plan"—which is? He explained he had "big policy differences" with the president on Afghanistan. Those differences are "important." So important that he moved to the next question.

e21: Economic Policies for the 21st Century is a nonprofit, nonpartisan organization dedicated to economic research and innovative public policies for the 21st century. Drawing on the expertise of practitioners, policymakers, and academics, we aim to advance free enterprise, fiscal discipline, economic growth, and the rule of law.

2011, e21: Economic Policies for the 21st Century