The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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April 29, 2006

Odds And Ends -- April 30 Edition

A busy week kept me from my appointed blog reading, and a vacation Sunday gives me the opportunity to recoup.  The things I found:

The economic news of the week skewed optimistic, but was still not universally loved.  Bizzyblog pronounces the advance 1st Quarter GDP report "very good news."  Voluntary Exchange grades it a "high B."  The Skeptical Speculator stamps the report  "about as good as expected." But Barry Ritholtz says "use some common sense" and average '05 quarter 4 and '06 quarter 1 to get the big picture.  William Polley also looks at the last two quarters and opines "acceptable but not breaking any records."(On the point of looking over the course of several quarters, there is an interesting picture at Economist's View on the seasonal pattern of GDP growth.)  Jim Hamilton likes what he sees in the investment and export stats, but doubts that the rest of the year will be as "rosy."  pgl takes some comfort in the recent path of government spending (but remains, I think, a rather grumpy Bear with respect to the longer-term prognosis).  Andrew Samwick agrees it's a very good number, but frets about the low personal saving rateCalculated Risk proposes that the trade deficit may bring downward revisions. I think Brad Setser would agree. And Mike Shedlock is the least impressed of all.  Well, he and Mr. Naybob.

The canary watch continues in the real estate markets.  Calculated Risk does its usual exemplary work on rounding up all the news you need to know about developments in residential housing: On existing home sales, on mortgage applications and rates, on new home sales (here and here

No surprise that much of the week's focus was on energy prices of all sorts, and Econbrowser remains the gold standard for discussion on the topic.  You will find there an explanation of how supply-and-demand and speculation are part of the same process -- a topic on which Arnold Kling shares some thoughts -- and a defense of (some of) President Bush's energy-related policy proposals.  Also on the policy front, Greg Mankiw dissects the suddenly popular $100 rebate plan, and makes the case for a gasoline or carbon taxAndrew Chamberlain dumps on the windfall profits tax. Lynne Kiesling wants Congress to take this testSun Bin thinks nuclear.

There was, in fact, much help to be found in sorting out the supply and demand basics of the energy situation. Although I don't endorse the name-calling, Captain Capitalism has a demand-side story to tell, in pictures. On the supply side, Steve Reardon observes that Nigeria is a problem. David. K Smith makes that point too, while itemizing the various supply and demand components of the oil-price story. Hispanic Pundit concurs: "It's as simple as supply vs. demand." You can find a lesson on how demand and supply works at Angry Bear. At Cafe Hayek and at The Commons Blog, there is more on the market in action. However, the Dallas Fed (via Mark Thoma) sees market interference in action. All of which is why Tim Schilling sees the oil price story as a prime opportunity to teach about how prices work.

Ther's more: Mike Moffat explores the connection between oil prices and the value of the dollar.  Daniel Drezner asks "What Is So Special About Gas Prices?", and Jane Galt attempts to answer.  Also at Asymmetrical Information, readers weigh in on three questions about the price of oil.  Arnold Kling (in an exasperated tone) asks three really important questions about energy policy.  (Aside: Drezner links to a Forbes article pointing out that "energy is an increasingly less important component to the American consumer."  True -- Phil Miller has the picture -- but as I once noted, the share of GDP that we have to import has not fallen along with relative energy usage.)  If you want to know how big a bite gas prices are compared to your brethren in other states, Environmental Economics has the map for you. Tim Iacono has last Monday's California SUV Fill Up Index, which may be obsolete by now.

Other trade/global-economy items: Don Boudreaux says worry about the fiscal deficit, not the trade deficit. (He takes on Paul Krugman on the issue as well.)  On the other hand, Menzie Chinn wants you to know that, according to his calculations, the fiscal and trade deficits are connected. (While you are there, be sure to check out his post on new research on the sources of current account deficits.) Brad Setser offer his latest thoughts on dark matter.  You might also detect bit of dark matter reasoning from the Bank of England's Monetary Policy Council, posted at the New Economist. Daniel Drezner reports that the U.S. Labor Department has decided to extend Trade Adjustment Assistance to service-sector workers who's jobs have been offshored -- more of whom will be in need, according to this post at Outsourcing TimersMartin Feldstein (tip o' bowler to Mark Thoma) wants to see dollar depreciationSimon World updates the progress on the Chinese march (or stroll, depending on your point of view) toward capital-control liberalization.  See also William Polley's discussion of this point. While I am thanking MT, I'll add a gracias for this interview on the economics of immigration.

And even more on globalization and trade: John Irons promotes (apparently via Brad DeLong) a terrific review of Thomas Friedman's  The World is Flat, from UCLA's Ed Leamer. (It's a very worthwhile 58 pages, but here is the short version: The world ain't flat, its small.)  Mark Thoma channels economists Paul Krugman and Maurice Obstfeld, who provide their own presentation of some of the trade theory in the Leamer piece.  Truck and Barter summarizes what looks like an interesting Scientific American article on globalization and poverty. (My quick take -- it's a good thing.)    

Chairman Bernanke's testimony to the Joint Economic Committee received a fair amount of attention.  At The Big Picture, the assessment was "the Fed is now more likely to stop at 5.0% than I previously believed," (which TBP is not putting into the good-thing category).  Mark Thoma is of the same mind on the taking-a-break probability, and Tim Duy agrees that "Bernanke & Co. want to pause." But The Capital Spectator hears "no promises," and William Polley thinks the comments "a necessary step to pave the way for a pause, but not sufficient to guarantee that it will come in any definite time frame." Daniel Gross complains "Hear no inflation, see no inflation, speak no inflation".  Calculated Risk highlights the Chairman's comments on the housing market ("most likely ... a gradual cooling rather than a sharp slowdown"). CR has items on both scenarios, here and here, and Daniel Gross has more.  Environmental Economics notices BB's comments on energy prices (" Unfortunately there's nothing, really, that can be done that's going to affect energy prices or gasoline prices in the very short run.")  John Irons points out Mr. Bernanke's skepticism about the proposition that tax cuts raise revenues. 

Elsewhere on taxes: John Irons makes his case for comprehensive tax reform (though ends, I think, with some fairly modest proposals).  Don Boudreaux suggests that maybe we ought to spend more time thinking about simplifying the tax system than worrying about high gasoline prices.  Tax Policy Blog wishes you a Happy Tax Freedom Day. Dr. Eamonn Butler "celebrates" in the UK as well.

Worthy of notice:

As an antidote to Martin Wolf's contention that the "normal link between productivity and real earnings is broken," Gary Becker argues that rising earnings inequality in the United States is a symptom of productivity gains (though one that highlights the need to answer the vital question of why gains from human capital development are not more widely exploited).  For a global perspective on the distribution of income, check out this post at Economist's View.  For the theory piece of that conversation, EV has this post.

The Adam Smith Institute Blog honors the anniversary of the publication of The Theory of Moral Sentiments.

Edward Hugh notices that the "French Shop As Germans Save."

Mark Thoma reviews Martin Feldstein's review of the Economic Report of the President.

Greg Mankiw shares his opinions on the minimum wage.

Many have noted the passing of John Kenneth Galbraith.  The Glittering Eye collects some of the reactionsTyler Cowen bids adieu (or see you later, depending on what you believe about these things) to Jane Jacobs.

April 29, 2006 in This, That, and the Other | Permalink


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"gives me the opportunity to recoup"

And what a recoup that is :) - good one!

Posted by: claus vistesen | May 02, 2006 at 03:39 AM

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April 27, 2006

Wanna See Some More Data Dependence?

Given the rash of news this week suggesting that the U.S. economy just keeps on truckin' -- The Skeptical Speculator has the round-up here and here -- I couldn't resist this special edition of the Carlson-Craig-Melick estimates of market expectations for the June meeting of the Federal Open Market Committee:




If you are new to this, you can read about the Carlson-Craig-Melick estimates in this paper:

Download CCM.pdf

If you're an old pro, here's the data:

Download june_pdfs_april_26.xls

April 27, 2006 in Fed Funds Futures | Permalink


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After Chairman Bernanke's comments today, the reaction (at least in the media) is that its 'one and done' - at least a pause in June.

Without Bernanke's comments, I would have expected at least two more rates hikes based on recent data - unless we see weakness in the economy in the interim. And your graph shows 25 bps at both the May and June meetings.

Barry Ritholtz thinks "Pause/Resume Scenario Increasingly Likely"

Hmmm ... I'm confused (a common state of mind!).

Best Wishes and thanks for these updates.

Posted by: CalculatedRisk | April 27, 2006 at 06:39 PM

I have thought that with the data this strong, rates would go up to 5.5%. Some true bears think that they can't stop until 6%. The good news is that China raised its rates for the first time in a long time. Would like to see more hikes from them.

Posted by: jeff | April 27, 2006 at 08:30 PM


If monetary policy affects the economy with a 12-18 month lag, how come the Fed is in a data dependent mode?

Posted by: cb | April 28, 2006 at 12:35 PM

cb, i am not a PhD, but I would like to take a shot at that. First, they need to rely on something. Moving rates around because you feel like it is no good!

They also look at other indicators, like the stock market. Stocks basically forward look, and a rallying market will give you an indication that the economy is expanding. Greenspan looked a lot at productivity and utilization. He also looked a lot at the employment cost index.

Data changes over time, and the specific data that they look at changes over time as well. Back when I began trading, it was all about Merchandise Trade, and every Thursday, money supply figures were big.

I think the fed looks at the data, and tries to extrapolate the numbers into the future based on random walk or some other model.

Dave I am sure can answer this question better. He can use the "chile cheese burrito index" to illustrate his point!

Posted by: jeff | April 29, 2006 at 06:58 PM

Prudent Bear's Doug Noland presents YTD data suggesting pausing at this time is NOT what we need: bank credit+12.4%, securities credit+ 9.1%, c&I loans+15.5%, R.E. loans+11%, m2+5.6%, commercial paper+17%. An especially interesting number to watch is durable goods that are running YOY +19.7, with x-transports +11.5%. To those who whine about housing sales demise, existing home sales are running at 6.92 million annualized. That's up from an avg of 3.99 million for the decade of the 1990s. Have we had a population surge I missed?
So, there are plenty of reasons to question why BB chose this time to suggest it may be time for the Fed to look through the numbers, to pause until we see how past increases play out.
I think BB deserves more credit & more time before he's metaphorically lambasted for this call. These days, NO ONE, not the Administration, not Congress, not our business leaders, not even our "religious leaders" wants to question our bubbling economy. My guess is BB's facing a revolution of his FOMC peers (supported by politicians up for reelection this fall.) Ever hear the expression, "give them enough rope, ..."? Well, it's my guess this is the best & only strategy BB has in his arsenal at the moment.
But, all's not lost. The ten year yield influences mtg. rates, not fed funds. And, it will be fun to watch Europe try once again to argue that our dollar should NOT fall through the floor.
The tremendous benefits we have with BB are that he is NOT a power-groupie & he's EARNED the right to lead the Fed in these most trying times. So, for the time being I'm all for "looking through the data" and giving BB my full support. My greatest hope is that BB has Fed Staff behind him for the job ahead.

Posted by: bailey | May 01, 2006 at 12:17 PM

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April 26, 2006

China (Et Al) To G7: Thanks For The Input

From the Financial Times:

The US dollar strengthened against Asian currencies for a second straight day in European morning trade on Wednesday amid further signs that Asian nations are unwilling to play ball with the G7 group of major industrial countries.

Most Asian currencies rallied on Monday after the G7 reiterated its call for emerging Asia to allow greater currency flexibility in order to help reduce global economic imbalances, principally the vast US current account deficit.

However Asian currencies handed back some of these gains on Tuesday as a swathe of regional nations intervened either verbally or physically to stem currency strength, and the trend continued on Wednesday.

The Chinese renminbi, the prime target of the G7’s ire and heavily managed by Beijing, ended exchange trading a fraction lower at Rmb8.0175 to the dollar. Indeed, the currency has actually now weakened during April, having started the month at Rmb8.0155 to the dollar, despite the greenback’s weakness against currencies such as the euro, yen and South Korean won this month.

Verbal intervention also raised its head with Zhang Tao, deputy director general of the People’s Bank’s research department, saying that “we need to be very cautious about large fluctuations in the exchange rate”.

Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi UFJ, commented: “These developments suggest little prospect of the Chinese authorities adhering to the calls from G7 to allow greater flexibility.

“The price action is a clear indication that the Chinese authorities are not yet strictly managing the renminbi against a basket of currencies.”

So there.

April 26, 2006 in Exchange Rates and the Dollar | Permalink


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Central Banks: Independent And Unaccountable?

This, from today's Wall Street Journal's opinion page, caught my eye:

Paul Pillar, another former CIA analyst well known for opposing Mr. Bush while he was at Langley... recently wrote in Foreign Affairs that the intelligence community should be treated like the Federal Reserve and have independent political status. In other words, the intelligence community should be a sort of clerisy accountable to no one.

Geez.  Was it really necessary to drag the Fed into this?  I have no dog in the fight over the appropriate responsibilities of the intelligence community in relation to the executive branch (or at least none I'm willing to unleash on this weblog). But on that Fed thing, let me just note that being independent is not the same thing as being unaccountable.  Here's a little help on the issue, from B.W. Fraser, former Governor of the Reserve Bank of Australia:

‘Independence’ in this context means the freedom of central banks to pursue monetary policies which are not dictated by political considerations. It does not preclude Ministers from commenting on monetary policies, and it does not preclude central banks from consulting with the government on monetary and other policies.

On accountability:

In general, central banks should be accountable for achieving the goals specified for them in their charters, and they should be accountable to the parliament, as representatives of the public. Other bodies – such as the media and the financial markets – will also take it upon themselves to pass judgments upon monetary policy; they are entitled to do that...

Central banks should be accountable in terms of their charters, but they can express their accountability in different ways. In New Zealand, the Governor reports on progress in achieving the government’s very specific inflation target. In the United States, the Chairman of the Federal Reserve is obliged by the Humphrey-Hawkins Act to testify before Congress several times a year. In the United Kingdom, the Bank of England now publishes a Quarterly Inflation Report as part of its endeavours to be more accountable

In Australia, the Reserve Bank engages in the usual practices of regular public speeches, quarterly articles and annual reports, and testimony before parliament. In addition, and unlike some other central banks, it issues relatively detailed press statements at the time of each change in interest rates, both to announce the change and to explain the reasons for it. This serves to increase the transparency of the monetary policy process and helps to avoid confusion in the market place. More generally, by reducing the mystique surrounding the process and clarifying the central bank’s role in it, this transparency serves not only to increase accountability but also independence.

That was written in 1994, and some things have changed since -- the creation of the ECB, institutional changes in the Bank of England, the introduction of new legislation in the United States to take the place of the expired Humphrey-Hawkins legislation, to name a few.  But all of those changes are yet more examples of Fraser's central point that independence and accountability are not incompatible.  Quite the opposite -- the latter is a precondition for the former:

If central banks are to be independent of the government, then they must be accountable for their actions. Not only is this proper in a well run society, but public accountability can help to preserve the independence of central banks.

April 26, 2006 in Federal Reserve and Monetary Policy | Permalink


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The fed is independent "in" the government, not independent "of" the government. Like the supreme court, it als reads the paper and is influenced by public opinion.

The CIA is two organizations. One is the analytical, intelligence analysis side and the other is the collection, activity side of the house. There has always been a strong element within the analytical side of the house that it would be better to complete separate the two sides of the house so they would be more independent.

Posted by: spencer | April 26, 2006 at 09:04 AM

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April 25, 2006

The G7 Finds A Job For The IMF

Last Friday's Wall Street Journal (page A1 in the print edition) contained an article that I'm sure had people all over the world reaching for their violins. The headline really said all you need to know:

Booming Economy Leaves the IMF Groping for Mission

With Fewer Global Deadbeats, The Agency Loses Clout, And a Source of Income

Well, shed no tears, dear reader.  Bloomberg's Andy Mukherjee reports that the G-7 is coming to the rescue:

Having seen the futility of trying to browbeat China into accepting a stronger currency, the Group of Seven industrial nations has decided to outsource the task.

The job has now gone to the International Monetary Fund. Or so it appears from the G-7 finance ministers' statement at the end of their recently concluded meeting in Washington.

In their April 21 statement, the G-7 finance ministers reiterated that ``greater exchange rate flexibility is desirable in emerging economies with large current account surpluses, especially China.''

In the same breath, the ministers vowed to "support a new remit for bilateral and multilateral surveillance by the IMF'' and added that "an ad hoc quota increase would help better to reflect members' international economic weight.''

Surveillance, at its core, is all about the IMF using its unique mandate to monitor economic policies of member countries and imposing its will on any nation that is endangering global financial stability...

One of [U.S. Treasury's undersecretary of international affairs Tim] Adams's proposals was for the Fund to hold "special consultations'' with countries whose exchange rates were found to be grossly misaligned. The IMF has tried such consultations, a euphemism for organized arm-twisting, only twice in its history - - with Sweden in 1982 and South Korea in 1987.

John Williamson, a senior fellow at the Institute for International Economics in Washington, has made a case for the IMF to publish reference exchange rates for its member economies. Along with internationally accepted rules on the purchase and sale of foreign currencies by central banks, the reference rates are supposed to force countries with skewed exchange rates toward the equilibrium.

I suppose that, in a twisted sort of way, this would move the IMF back toward its original mandate.  But is this really a good idea?   

April 25, 2006 in Exchange Rates and the Dollar | Permalink


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Q: Is it a good idea?
A: Yes. Unless you think globalization implies an ever widening global imbalances (i.e. US CAD shoudl go to 8% of GDP by q4 06, and more in 07 ...) or you think the market will bring about the needed adjustment in a smooth, non-disruptive way ...

Posted by: brad setser | April 25, 2006 at 01:43 PM

I second Brad's comment. Richard Duncan makes (in my view) a very persuasive case for the IMF or some other international body to obviate global imblances in his book "The Dollar Cisis;" see the following interview to get some flavor of his view. JB


Posted by: JB | April 27, 2006 at 09:50 PM

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The Tea Leaves, According To The Wall Street Journal

Christopher Conkey reveals (on page A2 of yesterday's print edition) how you too can divine the economic future:

Here is a guide to five telling indicators that will give early signals on the economy's direction.

Orders for capital goods

On Wednesday, the Commerce Department will release figures on new orders for durable goods -- items like turbines, computers and dishwashers that are meant to last at least three years. The headline number gets distorted by the volatile aircraft sector, so economists look to orders for nondefense capital goods excluding aircraft, or "core capital goods," to gauge how much equipment companies will buy in the near future.

A few months of upward movement is a good omen, suggesting manufacturers are confident enough to invest in expansion...

In a prelude to the robust growth in the first quarter, orders for core capital goods rose 6.2% between September and January. Orders were flat in January and fell 0.8% in February...  Because it is impossible to spot a trend in one week, economists track the "four-week moving average" of claims...

Home-builder sentiment

The National Association of Home Builders/Wells Fargo monthly housing-market index gauges builders' attitudes about the climate for new-home sales..

NAHB readings above 50 mean the outlook is positive, and below 50 suggest times are tough. The index topped at 72 in June 2005, accurately predicting the peak in new-home sales the following month, and has declined steadily to 50. That is the lowest level in a decade, except for a brief period after the 9/11 attacks. David Seiders, the builders' chief economist, expects the index to decline further but to remain above 40.

Retail sales

The Commerce Department's monthly retail-sales report is an important signpost of consumer spending...

The bond market

After stubbornly refusing to respond to the Fed's increases in short-term interest rates, the bond market has pushed the yield on the benchmark 10-year Treasury note above 5%, the highest in nearly four years. While that creates opportunities for investors, it raises borrowing costs for businesses and pushes up mortgage rates. That, in turn, could damp growth prospects.

Oh, man.  I was almost with him all the way.  That last bit violates one of Dave's five key lessons from macroeconomics: Prices -- in this case, interest rates -- are what they are, neither good nor bad in and of themselves.  It makes no sense to say that interest rates rising, and then to infer that this is a positive or negative for the economy as a whole (as opposed, perhaps, to particular sectors).  The key question is "why are interest rates rising?".

I have for some time held that the housing market boom has in large part been a relatively passive response to low real interest rates driven by relatively weak investment demand in the US (with an appeal to the now well-traveled global savings-glut/investment-bust story).  As business fixed investment and commercial real estate spending in the US turns around, we should anticipate rising interest rates, and another passive response in the residential housing market, this time in the direction of slowing.  If that is the pattern that actually emerges, I am not convinced that slowdowns in home-building, home-buying, and home prices are harbingers of bad stuff to come.

UPDATE: On that interest rate point, note this, from Bloomberg:

German business confidence unexpectedly climbed to a 15-year high in April as growth in Europe's largest economy accelerated, prompting investors to increase bets on higher interest rates.

The article points to the ECB as the likely source of the higher interest rates, but we know better.

April 25, 2006 in Data Releases | Permalink


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I would add demographics to your list of factors contributing to residential housing market activity.

Posted by: cb | April 25, 2006 at 02:54 PM

Great article! Mortgage. Find best mortgage rate and mortgage calculator.

Posted by: Mortgage broker | June 15, 2006 at 07:02 AM

About the Home-builder sentiment.Now I think home building and home sales are in their peak.

Posted by: steven davies | July 11, 2007 at 04:49 AM

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April 24, 2006

5-1/4 By June: Back To Even Money

Well, almost.  After taking a dive on triple-threat Tuesday, the estimated probability of at least two more quarter-point hikes in the federal funds rate made something of a comeback:




No surprise -- May is still a done deal (or so says the market):




The data and such:

Download imp_pdf_slides_042406.ppt

Download imp_pdf_slides_042406.swf

Download implied_pdf_may_042106.xls

Download implied_pdf_june_042106.xls

April 24, 2006 in Fed Funds Futures | Permalink


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Am I missing something? Isn't the purpose of monetary policy to balance spending & saving, & hasn't the Fed been talking about our need to save.
I understand topline CPI is 4.3% through March, annualized. Adding back in the Boskin reductions of 1%, puts inflation @ 5.3%. Ford Motor Credit (of the high-risk JUNK-rated Ford family) is paying a whopping 5.64% on its Interest Advantage Notes this week, but that's before the "investor" pays taxes on his gain. A 30% tax rate puts the "gain" at 3.94%, which is really a 1.36% LOSS to inflation. So, I'm at a loss at just what the Fed policy objective would be if it STOPS raising Fed Funds @ 5%.
I understand the Fed's desire to encourage me to save, I just can't believe the Fed wants me to ignore my real costs in making investment decisions for my family? So, help me out here please, what's the real agenda of the Federal Reserve?

Posted by: bailey | April 25, 2006 at 08:31 AM

bailey -- I think the best answer is in President Yellen's speech last week:

"I am increasingly concerned about the well-known long and variable lags in monetary policy—specifically, that the delayed effects of our past policy actions might impact spending with greater force than expected. This could show up especially in the housing market and via housing prices and balance sheet effects on consumer spending. While I expect the housing sector to slow somewhat, I will be highly alert to the possibility of the policy tightening going too far. So, I'm watching the data for confirmation of my forecast and for surprises that would make me alter my forecast. It's not really data dependence, but more accurately, data-surprise dependence.

In summary, I would not want to prejudge future decisions to raise rates—or to hold them steady—but rather I will be highly sensitive to the implications of incoming data for the forecast for economic growth, employment, and inflation."

Posted by: Dave Altig | April 26, 2006 at 09:05 AM

Dave, I'm concerned about the long-term bind Bush Administration policies have put us ALL in. The sooner BB can convince his peers the Fed's an independent body responsible for acting for our LONG-TERM economic well-being, the better we'll be. I recognize this is not easy when so many are suffering from an Administration induced fever. But, S.F. President Yellen is a Brownie, I'd have hoped she'd be one of the first on board, refocusing media attention at every opportunity to our macro challenges.
The principal cause of the housing "boom" that's put us all at great risk was NOT of the Fed's making. It was CAUSED by the greatly relaxed GSE house purchase criteria & an enormous tax benefit Congress threw at home-sellers, both framed to forward Bush's "ownership" society. These programs enabled & encouraged many with NO savings & NO documented earnings history to buy first homes & MANY more with little understanding of mean reversion to leverage paper profits to buy second homes, both at fastly inflating prices. The result is an increase in residential property top-line "value" of some $8 TRILLION in JUST a few years. But, the gain's "paper", and present earnings can NOT support our new high level of household debt, unless the Fed reinvigorates the "cash-out" cycle. It would be disastrous for the Fed to accept responsibility for feeding this monster.
Beyond the housing price & debt expansion we've seen, we face an enormous threat from commodities price increases that have gone way beyong a supply explanation. It's clear BB's "Global liquidity" call was on point. Why aren't we hearing anyone arguing about the likely impact of attacks if they are not addressed responsibly.
Everyone knew BB's Fed would face a severe & immediate test. It's obvious to me his first challenge is internal, within the FOMC. It's not the Fed's job to see we never again face another business cycle. It's certainly not its job to encourage the wholesale printing of money needed to support an disastrously irresponsible fiscal policy. It IS the Fed's job to see we don't become another banana republic.

Posted by: bailey | April 26, 2006 at 01:37 PM

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April 21, 2006

Dollar Diversification In Sweden

From the Financial Times:

The US dollar fell against the euro in European morning trade on Friday as Sweden’s central bank said it had slashed its dollar holdings almost in half.

The Riksbank revealed that it had cut the proportion of dollars in its reserves from 37 to 20 per cent, as well as selling off all its holdings of yen, which previously amounted to 8 per cent of its reserves.

The central bank balanced these disposals by increasing its holdings of euros from 37 to 50 per cent, as well as building a new Norwegian krone position of 10 per cent...

"Today’s announcement will merely add to market fears that the end to the Federal Reserve tightening cycle will encourage more diversification away from the dollar, and into the most liquid alternative of the euro,” said Chris Turner, head of FX strategy research at ING Financial Markets, who reiterated its view that the euro will return to $1.35 by the end of the year.

$1.35. Write that one down.

April 21, 2006 in Exchange Rates and the Dollar | Permalink


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Last September, the Riksbank made the unwise move of selling gold and buying foreign [non-Swedish] bonds. Since then, gold have risen nearly 50% while the yield on those bonds have been only about 2%.

This move is likely to be less of a disaster as I find it likely that the dollar will fall against most currencies, including the euro.

Posted by: Stefan Karlsson | April 21, 2006 at 04:20 PM

Do you mean ex ante unwise or ex post unwise? The latter is inconsequential, no?

What do you believe is a fair EUR/USD rate anyway?

For the moment, I belive that there's too many hikes priced in, in euroland, but I don't believe in more than 5.0 percent by the Fed either. I wouldn't rule out a Fed rate cut within 12-15 months either.

Posted by: Martin E | April 22, 2006 at 11:57 AM

"Do you mean ex ante unwise or ex post unwise? The latter is inconsequential, no?"

I regarded the move to sell gold and buy non-Swedish bonds as unwise at the time, so it was unwise both ex-ante and ex-post.

"What do you believe is a fair EUR/USD rate anyway?"

Difficult to say. It is clearly much higher than the current $1.23/€. Just how much higher is difficult to say, but it is higher than the late 2004 peak of $1.38/€.

Posted by: Stefan Karlsson | April 22, 2006 at 04:52 PM

I think that despite recent fed rhetoric, they are not done. I could see 5.5%. It depends on prices, and I think that oil and metals will sustain huge rallies ths summer. This will bring new inflationary pressure. the fed will have to deal with it.

besides, when everyone is short the dollar against the euro, you know that trade is going to go the other way. warren buffet found that out last year.

$1.35-I might like to short the euro there!

Posted by: jeff | April 23, 2006 at 10:59 AM

Jeff: That's quite possible.

My thinking that the Fed will soon stop depends on the housing market. I expect the slowdown of the housing market to feed through to consumption within 12 months time. This should also push the savings ratio upwards. Investments should also continue to decline the next few months.

Posted by: Martin E | April 24, 2006 at 02:32 AM

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April 20, 2006

We Are The World, And We Never Had It So Good

From Wall Street Journal:

The global economy is moving ahead at a healthy clip, with almost every country posting positive economic growth this year, according to an International Monetary Fund report.

Despite soaring oil prices, just three of the 184 IMF member nations are expected to see their economies shrink this year -- Equatorial Guinea, the Seychelles and Zimbabwe. The world as a whole will top 4% growth for the fourth-consecutive year, the IMF predicted in its twice-yearly World Economic Outlook. This year's growth may reach 4.9%, the report said.

"It would be fair to say to the world, 'You've never had it so good,'" IMF chief economist Raghuram Rajan told journalists at the report's release yesterday.

Well, David Farrar is not that happy, and Rajan does suggest that it may be best if you step away from the punchbowl, especially if you are an American:

Mr. Rajan said the IMF's primary concern is that world leaders aren't taking advantage of this happy economic moment to adopt the tough measures that would be even harder to sell should the global economy slow down. Failure to deal with the massive trade imbalances increases the possibility that currencies will adjust suddenly -- the dollar might plunge, for instance -- causing a spike in interest rates and a screeching slowdown in economic growth.

To prevent such an event, Mr. Rajan advised, the U.S. should increase its national savings -- code for cutting the federal budget deficit more aggressively than the Bush administration has so far indicated it plans to attempt.

If that isn't exactly novel advice, neither is this:

China, which runs an enormous trade surplus with the U.S., should allow the yuan to rise against the dollar, the IMF said, and create conditions that will encourage Chinese citizens and businesses to spend their earnings, creating a larger market for American goods and services. Other Asian nations that keep their currencies artificially weak against the dollar should do the same, the IMF said.

Repetitive, of course, doesn't necessarily mean wrong.

UPDATE: The IMF report is here.

April 20, 2006 in This, That, and the Other | Permalink


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» World Growth from voluntaryXchange
The IMF reports that the real economic growth rate will average over 4% worldwide for the 4th consecutive year. Such a high average for so long is unprecedented. Sharp people will also recognize that this is part of the reason [Read More]

Tracked on Apr 25, 2006 3:16:59 AM


I would agree with that-especially cutting budgets and letting the yuan float. i have heard from a lot of big brains that the chinese will dominate the next century. they won't if they don't have a good legal system(they don't), and a good banking system(they don't). they cannot dominate unless they embrace freedom and full fledged capitalism.

times may get tough in the US, but with fortitude we will stay on top. my fear is that the government will not have the fortitude to do what is necessary, and we will float down the path to european socialism.

Posted by: jeff | April 20, 2006 at 10:43 PM

“…the dollar might plunge, for instance -- causing a spike in interest rates and a screeching slowdown in economic growth”

(This isn’t a novel response, either, but I feel like one has to keep saying it.) Possibly a depreciation causes higher interest rates in the US and slower growth abroad, but why should US growth slow (and why ever should non-US interest rates rise)? The scenario described seems to be modeled on experience of developing countries that borrow in dollars. They can’t afford a severe depreciation (which would make it much harder to get dollars), so when their currency softens, they tighten monetary policy aggressively, producing a "screeching slowdown".

The US, by contrast, can print its own dollars. Consequently, it can perfectly well afford a severe depreciation (in fact, arguably, the more severe, the better, since it reduces the exchange value of existing debts). The US only need tighten enough to prevent an overheating, not to cause a recession. (There may be a one-time inflation hit from rising import prices, but if the Fed trusts its own credibility, it should be willing to accommodate this inherently temporary inflationary impulse. In any case, since the US is a large nation which still produces mostly domestically, the hit would not be a huge one.)

Meanwhile, the rest of the world would respond to a dollar collapse by dramatically reducing interest rates. Faced with the prospect of reduced American demand for their products, they would need to stimulate their economies with monetary policy to make up the difference. If nobody (inside or outside the US) makes any mistakes in responding to the declining dollar, there is no reason it should have a significant net effect on global growth or on global interest rates.

Posted by: knzn | April 21, 2006 at 08:32 AM

After my last comment, I should probably say that I do agree with the IMF’s prescription. I just think they’re exaggerating the urgency of the situation. Yes, if you’re a foreign investor with a huge, unhedged portfolio of American bonds, maybe you should stop reading this immediately and go to your broker’s Web site. But if you’re George W. Bush and Hu Jintao, you can probably afford to spend a few more minutes talking about Iran before you launch an emergency attack on global imbalances.

Posted by: knzn | April 21, 2006 at 09:18 AM

The IMF's concerns are falling on deaf ears. It's clear neither the US nor China wants anything to change. Look at John Snow's arrogant op-ed in the Washington Post for proof of that: Don't Blame Just Us

Posted by: fred c. dobbs | April 21, 2006 at 03:11 PM

Yes, reading Snow and the Treasury study that supports his argument (see "eight-page study" link at http://economistsview.typepad.com/economistsview/2006/04/treasury_cuttin.html ) makes me want to get with the IMF and say the sky is falling. I actually think Snow is right to say this is mostly not a US problem, but that doesn’t mean the US can abdicate responsibility. US action is precisely what would force other nations into changing their policies.

Posted by: knzn | April 21, 2006 at 03:43 PM

Has anyone modelled what the Chinese would buy with a stronger yuan? How much would be from the US and not Japan, Germany, Taiwan, India or Brazil?

I don't buy the neat closing of the circle suggested in Farrar's final paragraph.

Posted by: Jack | April 22, 2006 at 04:54 AM

Jack --
I don't know of anyone who has formally modeled that, but Frankel and Chinn have done some work on the probable competitor to the dollar in general -- and, perhaps not surprisingly, the only really viable potential alternative would look to be the euro.

Posted by: Dave Altig | April 22, 2006 at 10:33 PM

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Declaring War On Inflation

Nope, not here.  From Euractiv:

Jürgen Stark, the candidate for a vacant post on the European Central Bank's executive board, has presented himself to Parliament as a tough inflation fighter and critic of member states' monetary policy...

In a statement sent to members of the Parliament's Economic and Monetary Affairs Committee prior to his 18 April 2006 hearing, Stark declared the "war on inflation" as his top priority.


Stark said, however, that this does not mean the ECB will have to raise interest rates: "There is no automatic process of reaction."

One of those things is what the Committee wanted to hear:

Following Stark's presentation, the ECON committee voted in favour of his nomination. The vote has to be confirmed by the Parliament's Plenary before Stark may replace Issing, who will withdraw from the post at the end of May 2006.

April 20, 2006 in Europe | Permalink


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Can you comment on the recent surge in the Cleveland Fed’s
median CPI measure to an 11 year high? It's a measure I am not accustomed to. Thanks, S.

Posted by: SamK | April 21, 2006 at 08:59 AM

He commented in the post below this one.

Posted by: cb | April 21, 2006 at 10:53 AM

Duh... Stupid me! Thanks.

Posted by: SamK | April 21, 2006 at 02:24 PM

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