Modern Monetary Theory: The Last Progressive Left Standing
By Warren Mosler
Gross misunderstandings continue
He’s completely lost it:
US Is in Even Worse Shape Financially Than Greece: Gross
By Jeff Cox
June 13 (CNBC) — When adding in all of the money owed to cover future liabilities in entitlement programs the US is actually in worse financial shape than Greece and other debt-laden European countries, Pimco’s Bill Gross told CNBC Monday.
Roubini’s latest
He must have just read my year end post.
And he left out US fiscal tightening:
Roubini Says a ‘Perfect Storm’ May Converge on the Global Economy in 2013
By Shamim Adam
June 12 (Bloomberg) — A “perfect storm” of fiscal woe in the U.S., a slowdown in China, European debt restructuring and stagnation in Japan may converge on the global economy, New York University professor Nouriel Roubini said.
Comments on Summers latest
The deficit hawks have ripped the headline deficit doves to shreds.
The problem is the deficit doves, as previously discussed.
Again, here’s why:
How to avoid our own lost decade
By Lawrence Summers
June 12 (FT) — Even with the 2008-2009 policy effort that successfully prevented financial collapse, the US is now halfway to a lost economic decade. In the past five years, our economy’s growth rate averaged less than one per cent a year, similar to Japan when its bubble burst. At the same time, the fraction of the population working has fallen from 63.1 per cent to 58.4 per cent, reducing the number of those in jobs by more than 10m. Reports suggest growth is slowing.
True!
Beyond the lack of jobs and incomes, an economy producing below its potential for a prolonged interval sacrifices its future. To an extent once unimaginable, new college graduates are moving back in with their parents. Strapped school districts across the country are cutting out advanced courses in maths and science. Reduced income and tax collections are the most critical cause of unacceptable budget deficits now and in the future.
True!
You cannot prescribe for a malady unless you diagnose it accurately and understand its causes. That the problem in a period of high unemployment, as now, is a lack of business demand for employees not any lack of desire to work is all but self-evident, as shown by three points: the propensity of workers to quit jobs and the level of job openings are at near-record low; rises in non-employment have taken place among all demographic groups; rising rates of profit and falling rates of wage growth suggest employers, not workers, have the power in almost every market.
True!
A sick economy constrained by demand works very differently from a normal one. Measures that usually promote growth and job creation can have little effect, or backfire.
A ‘normal’ economy is one with sufficient demand for full employment, so there’s no particular need to promote even more demand.
When demand is constraining an economy, there is little to be gained from increasing potential supply.
True. The mainstream theory is that increased supply will lower prices so the same incomes and nominal spending will buy the additional output. But it doesn’t work because the lower prices (in theory) work to lower incomes to where the extra supply doesn’t get sold and therefore doesn’t get produced. And it’s all because the currency is a (govt) monopoly, and a shortage in aggregate demand can only be overcome by either a govt fiscal adjustment and/or a drop in non govt savings desires, generally via increased debt. And in a weak economy with weak incomes the non govt sectors don’t tend to have the ability or willingness to increase their debt.
In a recession, if more people seek to borrow less or save more there is reduced demand, hence fewer jobs. Training programmes or measures to increase work incentives for those with high and low incomes may affect who gets the jobs, but in a demand-constrained economy will not affect the total number of jobs. Measures that increase productivity and efficiency, if they do not also translate into increased demand, may actually reduce the number of people working as the level of total output remains demand-constrained.
True!
Traditionally, the US economy has recovered robustly from recession as demand has been quickly renewed. Within a couple of years after the only two deep recessions of the post first world war period, the economy grew in the range of 6 per cent or more – that seems inconceivable today.
True!
Why?
Inflation dynamics defined the traditional postwar US business cycle. Recoveries continued and sometimes even accelerated until they were murdered by the Federal Reserve with inflation control as the motive. After inflation slowed, rapid recovery propelled by dramatic reductions in interest rates and a backlog of deferred investment, was almost inevitable.
Not so true, but not worth discussion at this point.
Our current situation is very different. With more prudent monetary policies, expansions are no longer cut short by rising inflation and the Fed hitting the brakes. All three expansions since Paul Volcker as Fed chairman brought inflation back under control in the 1980s have run long. They end after a period of overconfidence drives the prices of capital assets too high and the apparent increases in wealth give rise to excessive borrowing, lending and spending.
Not so true, but again, I’ll leave that discussion for another day.
After bubbles burst there is no pent-up desire to invest. Instead there is a glut of capital caused by over-investment during the period of confidence – vacant houses, malls without tenants and factories without customers. At the same time consumers discover they have less wealth than they expected, less collateral to borrow against and are under more pressure than they expected from their creditors.
True!
Pressure on private spending is enhanced by structural changes. Take the publishing industry. As local bookstores have given way to megastores, megastores have given way to internet retailers, and internet retailers have given way to e-books, two things have happened. The economy’s productive potential has increased and its ability to generate demand has been compromised as resources have been transferred from middle-class retail and wholesale workers with a high propensity to spend up the scale to those with a much lower propensity to spend.
Probably has some effect.
What, then, is to be done? This is no time for fatalism or for traditional political agendas. The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending. Unless and until this is done other policies, no matter how apparently appealing or effective in normal times, will be futile at best.
Partially true. It’s all about spending and sales. We lost 8 million jobs almost all at once a few years back because sales collapsed. Businesses hire to service sales. So until we get sales high enough to keep everyone employed who’s willing and able to work we will have over capacity, an output gap, and unemployment.
The fiscal debate must accept that the greatest threat to our creditworthiness is a sustained period of slow growth.
NOT TRUE!!! And here’s where the headline deficit doves lose the battles and now the war. There is no threat to the credit worthiness of the US Government. We can not become the next Greece- there simply is no such thing for the issuer of its currency. Credit worthiness applies to currency users, not currency issuers.
Discussions about medium-term austerity need to be coupled with a focus on near-term growth.
There he goes again. This is the open door the deficit hawks have used to win the day, with both sides now agreeing on the need for long term deficit reduction. And in that context, the deficit dove position that we need more deficit spending first, and then deficit reduction later comes across as a ploy to never cut the deficit, and allow the ‘problem’ to compound until it buries us, etc.
Without the payroll tax cuts and unemployment insurance negotiated last autumn we might now be looking at the possibility of a double dip.
They certainly helped, and ending work for pay hurt, and even with whatever support that provided, we are still facing the prospect of a double dip.
Substantial withdrawal of fiscal stimulus at the end of 2011 would be premature. Stimulus should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees.
True, except the extension to employers works to lower prices, as it lowers business costs. This is a good thing, but it adds to aggregate demand only very indirectly. To get it right, I’d suspend all FICA taxes to increase take home pay of those working for a living which will help sales and employment, and to cut business costs, which, in competitive markets, works to lower prices.
Raising the share of payroll from 2 per cent to 3 per cent is desirable, too. These measures raise the prospect of sizeable improvement in economic performance over the next few years.
True, as far as it goes. Too bad he reinforces the overhanging fears of deficit spending per se. You’d think he’d realize everyone would like to cut taxes, and that it’s the fears of deficit spending that are in the way…
At the same time we should recognize that it is a false economy to defer infrastructure maintenance and replacement,
True!
and take advantage of a moment when 10-year interest rates are below 3 per cent
Bad statement!!! This implies that if rates were higher it would make a difference with regards to our infrastructure needs during times of a large output gap, as it perpetuates the myths about the govt somehow being subjected to market forces with regard to its ability to deficit spend. Again, this mainstream deficit dove position only serves to support the deficit hawk fear mongering that’s won the day.
and construction unemployment approaches 20 per cent to expand infrastructure investment.
It is far too soon for financial policy to shift towards preventing future bubbles and possible inflation, and away from assuring adequate demand.
True! But, as above, he’s already defeated himself by reinforcing the fears of deficits and borrowing.
The underlying rate of inflation is still trending downwards and the problems of insufficient borrowing and investing exceed any problems of overconfidence. The Dodd-Frank legislation is a broadly appropriate response to the challenge of preventing any recurrence of the events of 2008. It needs to be vigorously implemented. But under-, not overconfidence is the problem, and needs to be the focus of policy.
Policy in other dimensions should be informed by the shortage of demand that is a defining characteristic of our economy. The Obama administration is doing important work in promoting export growth by modernising export controls, promoting US products abroad and reaching and enforcing trade agreements. Much more could be done through changes in visa policy to promote exports of tourism as well as education and health services. Recent presidential directives regarding relaxation of inappropriate regulatory burdens should also be rigorously implemented.
Too bad he’s turned partisan here, as I’m sure he’s aware of how exports are real costs, and imports real benefits, and how real terms of trade work to alter standards of living. So much for intellectual honesty…
Perhaps the US’ most fundamental strength is its resilience. We averted Depression in 2008/2009 by acting decisively. Now we can avert a lost decade by recognising economic reality.
First we need to recognize financial reality, and unfortunately he and the other headline deficit doves continue to provide the support for the deficit myths and hand it all over to the deficit hawks. Note that, as per the President, everything must be on the table, including Social Security and Medicare. To repeat, fearing becoming the next Greece is working to turn ourselves into the next Japan.
The writer is Charles W. Eliot University Professor at Harvard and former US Treasury Secretary. He is an FT contributing editor
(Feel free to distribute, repost, etc.)
Major Banks Likely to Get Reprieve on New Capital Rules
The real problem is if you understand what a bank is, you wouldn’t be trying to use capital ratios to protect taxpayer money.
First, notice that the many of the same people clamoring for higher capital ratios have also supported ‘nationalization’ of banks, which means there is no private capital. So it should be obvious that something other than private capital is employed to protect taxpayer money.
Taxpayer money is protected on the asset side (loans and other investments held by banks) with lending regulations. That includes what type of investments are legal for banks, what kind of lending is legal, including collateral requirements and income requirements. That means if Congress thought the problem in 2008 was lax and misguided lending, to further protect taxpayer money they need to tighten things up on that side. And that would include tightening up on supervision and enforcement as well.
(Of course, they think the current problem is banks are being too cautious, but Congress talking out of both sides of its mouth has never seemed to get in the way before. Just look at the China policy- they want China to strengthen its currency which means they want the dollar to go down vs the yuan, but at the same time they are careful not to employ policy that might cause China to sell their dollars and drive the dollar down vs the yuan.)
So what is the point of bank capital requirements? It’s the pricing of risk.
With an entirely publicly owned bank, risk is priced by government officials which means it’s politicized, with government officials deciding the interest rates that are charged. With private capital in first loss position, risk is priced by employees who are agents for the shareholders, who want the highest possible risk adjusted returns on their investment. This introduces an entirely different set of incentives vs publicly owned institutions. And the choice between the two, and the two alternative outcomes, is a purely political choice.
With our current arrangement of banking being public/private partnerships, the ratio between the two is called the capital ratio. For example, with a 10% capital ratio banks have 10% private capital, and 90% tax payer money (via FDIC deposit insurance). And what changing the capital ratio does is alter the pricing of risk.
Banks lending profits from the spread between the cost of funds and the rates charged to borrowers. And with any given spread, the return on equity falls as capital ratios rise. And looked at from the other perspective, higher capital ratios mean banks have to charge more for loans to make the same return on equity.
Additionally, investors/market forces decide what risk adjusted return on investment is needed to invest in a bank. Higher capital requirements lower returns on investment, but risk goes down as well. But it’s not a ‘straight line’ relationship. It takes a bit of work to sort out all the variables before an informed decision can be made by policy makers when setting required capital ratios.
So where are we?
We have policy makers and everyone else sounding off on the issue who all grossly misunderstand the actual dynamics trying to use capital requirements to protect taxpayer money.
Good luck to us!
For more on this see Proposals for the Banking System, Treasury, Fed, and FDIC
Major Banks Likely to Get Reprieve on New Capital Rules
By Steve Liesman
June 10 (CNBC) — The world’s major banks may get a break from regulators and be forced to set aside only 2 percent-to-2.5 percent more capital rather than the 3 percent reported earlier, officials familiar with the discussions told CNBC.
News of the potential reprieve—which would affect major global banks such as JPMorgan , Citigroup , Bank of America , Wells Fargo , UBS and HSBC —helped stocks pare losses Friday afternoon.
The new rule, which would force the world’s biggest financial institutions to set aside more capital as a cushion against potential losses, is being imposed after the recent credit crisis nearly caused the collapse of the banking system.
The increased capital buffer would be in addition to a seven percent capital increase for all banks, which was negotiated at last year’s Basel III meeting.
The officials, who asked not to be named, made their comments after global banking regulators met this week in Frankfurt. The US has proposed a tougher three percent charge for big banks, but there has been pushback from some European nations, especially France. Negotiations are continuing.
The news comes after JPMorgan Chief Jamie Dimon rose in an Atlanta meeting this week and directly confronted Fed Chairman Ben Bernanke over the numerous new banking regulations, including a new surcharge for the biggest banks.
Officials say there is a more formal meeting in two weeks of regulators in Basel, Switzerland, where the actual percentage should be formalized as a proposal to global leaders.
Sources caution that the situation is still a moving target, with the U.S. apparently holding out for a higher global surcharge if other countries push lower forms of capital, other than common equity, to be used to meet capital requirements.
Earlier this week, U.S. Treasury Department Secretary Tim Geithner suggested that the higher the quality of capital, the lower the surcharge can be.
Saudis to pump 10 million bpd
The Saudis don’t sell in the spot markets, they only post prices to refiners and then take orders at those prices.
That is, they post price and let quantity vary.
So the only way they could definitively get to 10 million bpd would be to change policy and sell in the spot market, which would let loose a downward price spiral until some other producer decided to cut production to stop the fall.
As always, it’s their political decision, and no telling what they might actually do.
Saudi Shows Who’s Boss, to Pump 10 Million Barrels Per Day
June 10 (Reuters) — Saudi Arabia will raise output to 10 million barrels day in July, Saudi newspaper al-Hayat reported on Friday, as Riyadh goes it alone in unilaterally pumping more outside OPEC policy.
Citing OPEC and industry officials, the newspaper said output would rise from 8.8 million bpd in May. There was no immediate independent verification of the story.
The report suggests Riyadh is asserting its authority over fellow members of the Organization of the Petroleum Exporting Countries after it failed to convince the 12-member cartel to lift output at an acrimonious meeting in Vienna on Wednesday.
“The Saudi intention is to show that they cannot be pushed around,” said Middle East energy analyst Sam Ciszuk at IHS. “Either OPEC follows the Saudi lead or they will have problems.”
A proposal by Saudi and its Gulf Arab allies the UAE and Kuwait to lift OPEC production was blocked by seven producers including Iran, Venezuela and Algeria.
The two sides blamed each other for the breakdown in talks. Saudi Oil Minister Ali ali-Naimi called those opposed to the deal obstinate. Iran’s OPEC governor Mohammad Ali Khatibi responded by saying Riyadh had been overly-influenced by U.S.-led consumer country demands for cheaper fuel.
“The hawks in OPEC called their bluff and now it is up to Riyadh to show that they were not bluffing — that they will go ahead unilaterally if pushed,” said Cizsuk.
Saudi Arabia has not pumped 10 million bpd for at least a decade, according to Reuters data, production having peaked at 9.7 million bpd in July 2008 after prices hit a record $147 a barrel. It is the only oil producer inside or outside OPEC with any significant spare capacity.
Asked in Vienna on Thursday whether Saudi would reach 10 million bpd Naimi said: “Just send the customers, don’t worry about the volumes.”
Gulf delegates said Riyadh was planning to pump an average 9.5-9.7 million bpd in June.
Saudi is already offering more crude to refiners in Asia, which, led by China, is driving a global rise in oil consumption.
Forecasts from OPEC headquarters show demand will increase about 1.7 million bpd in the second half of the year from recent cartel output of about 29 million bpd.
Brent crude rose to a 5-week high of $120 a barrel after the OPEC talks broke down. Prices eased after Friday’s Saudi news, last dipping 63 cents to trade near $118.94 a barrel.
China GDP history
This is year over year ‘real’ GDP growth.
Note the recurring first quarter spikes followed by dips, presumably due to front loading annual state spending and lending.
Not much of a spike this year, due to cutbacks in state spending/lending, but the reduced spending/lending that resulted in the reported growth was likewise front loaded for 2011.
Question now is what the traditional second half dip will look like.
Seems to me it could get pretty ugly.
Also, Japan’s earthquake looks to have weakened world growth more than originally expected. And it’s all probably path dependent, meaning growth simply resumes from the lower, post quake base, especially in light of their reluctance to increase their deficit spending.
Europe is also weakening due to self imposed austerity.
And the US is heck bent on doing same as both parties agree on the need for multi trillions of deficit reduction, while Fed policies continue to work to reduce govt. interest payments to the economy and continue to shift income from savers to bank net interest margins.
H2 is still looking hopeless to me, and also looking like we’re flying without a net.
OPEC indecision of no consequence
It doesn’t matter what OPEC decides with regard to increases.
The only ones with excess capacity, for all practical purposes, are Saudis.
The others have always pumped all they could and let the Saudis be the swing producer.
Historically, the hard part has been to get anyone other than the Saudis to cut production when the Saudis needed help to keep a floor under prices. Invariably the others would cheat and produce to capacity, letting the Saudis carry the burden of reduced sales.
In any case, the Saudis will continue to post their prices to their refiners and fill any and all orders at those posted prices.
And the rest of OPEC will likely keep producing at near max levels.
And most expect Lybia to be back on line in a few weeks or so, in which case Saudi production will ‘automatically’ fall back.
OPEC Talks Break Down, No Deal to Lift Oil Supply
June 8 (Reuters) — OPEC talks broke down on Wednesday without an agreement to raise output after Saudi Arabia failed to convince the cartel to lift production.
Secretary General Abdullah El-Badri said the effective decision was no change in policy and that OPEC hoped to meet again in three months time. No date has been set for another meeting.
“Unfortunately we are unable to reach a consensus to reduce or raise production,” El-Badri told reporters.
Gulf Arab delegates said Iran, Venezuela and Algeria refused to consider an output increase. Non Gulf delegates said Saudi Arabia had proposed an increase on top of April supplies that was too high for them to contemplate.
Moody’s Analyst: Weak Growth, Fiscal Slips Could Lose UK ‘AAA’
The wonder is how Moody’s keeps it’s prized credibility and Sarah Carlson her prized job.
Moody’s Analyst: Weak Growth, Fiscal Slips Could Lose UK ‘AAA’
Jun 8 (MNI) — The UK could lose its prized ‘Aaa’ credit rating if growth remains weak and the coalition government fails to meet its fiscal consolidation targets, a senior analyst at ratings agency Moody’s has told Market News International.
Sarah Carlson, VP-Senior Analyst at Moody’s, told MNI that weak growth and fiscal slippage could see the country’s ‘debt metrics’ deteriorate to a point that would trigger a downgrade.
“Although the weaker economic growth prospects in 2011 and 2012 do not directly cast doubt on the UK’s sovereign rating level, we believe that slower growth combined with weaker-than-expected fiscal consolidation efforts could cause the UK’s debt metrics to deteriorate to a point that would be inconsistent with a Aaa rating,” she said.
Carlson also said that due to their sheer size the UK’s austerity plans have a degree of ‘implementation risk’.
“As is true of any large fiscal consolidation effort, the government’s austerity plans entail some implementation risk. Moreover, a multi-year austerity programme of this magnitude is a political challenge,” she said.
Carlson’s comments come in a week of frenzied debate as to whether UK Chancellor of the Exchequer George Osborne’s fiscal consolidation plans are working.
At present, the government aims to close Britain’s structural deficit will by the end of 2014-15, slashing departmental budgets by almost stg100 billion over four years.
But a weaker-than-expected Q1 GDP outturn and a slew of disappointing economic data since then, has led several economists to question the wisdom of such a rapid deficit-reduction plan while others have said there is no other choice.
On Sunday, a group of leading economists led by Prof. Tony Atkinson of Oxford and centre-left pressure group Compass wrote a letter to the Observer newspaper questioning the wisdom of the current plan.
Carlson said that the government’s creation of a cross-departmental committee to monitor progress in public spending cuts could be useful in reinforcing commitment to consolidation.
“The creation of the Public Expenditure Cabinet Committee (PEX) – a cross-government spending committee that will monitor the progress of individual departments against their budget plans – has the potential to be a promising institutional change that could further bolster confidence in the government’s ability to follow through with its ambitious austerity programme.”
On Monday, a group of centre-right economists wrote a letter to the Telegraph newspaper which argued against relaxing austerity measures.
In its Article IV Consultation Report on the UK released Monday, the IMF said that there had been unexpected weaknesses in UK economy over the past few months but labelled the troubles temporary and advised the government to keep to its current deficit-reduction plan.
Bernanke Admits Economy Slowing; No Hint of New Stimulus
In fact, no one on the FOMC has called for QE3, so it’s highly unlikely with anything short of actual negative growth.
So the question is, why the unamimous consensus?
I’d say it varies from member to member, with each concerned for his own reason, for better or for worse.
And I do think the odds of their being an understanding with China are high, particularly with China having let their T bill portfolio run off, while directing additions to reserves to currencies other than the $US, as well as evidence of a multitude of other portfolio managers doing much the same thing. This includes buying gold and other commodities, all in response to (misguided notions of) QE2 and monetary and fiscal policy in general. So the Fed may be hoping to reverse the (mistaken) notion that they are ‘printing money and creating inflation’ by making it clear that there are no plans for further QE.
Hence the ‘new’ strong dollar rhetoric: no more ‘monetary stimulus’ and lots of talk about keeping the dollar strong fundamentally via low inflation and pro growth policy. And the tough talk about the long term deficit plays to this theme as well, even as the Chairman recognizes the downside risks to immediate budget cuts, as he continues to see the risks as asymetric. The Fed believes it can deal with inflation, should that happen, but that it’s come to the end of the tool box, for all practical purposes, in their fight against deflation, even as they fail to meet either of their dual mandates of full employment and price stability to their satisfaction.
They also see downside risk to US GDP from China, Japan, and Europe for all the well publicized reasons.
And, with regard to statements warning against immediate budget cuts, I have some reason to believe at least one Fed official has read my book and is aware of MMT in general.
Bernanke Admits Economy Slowing; No Hint of New Stimulus
June 7 (Reuters) — Federal Reserve Chairman Ben Bernanke Tuesday acknowledged a slowdown in the U.S. economy but offered no suggestion the central bank is considering any further monetary stimulus to support growth.
He also issued a stern warning to lawmakers in Washington who are considering aggressive budget cuts, saying they have the potential to derail the economic recovery if cuts in government spending take hold too soon.
A recent spate of weak economic data, capped by a report Friday showing U.S. employers expanded payrolls by a meager 54,000 workers last month, has renewed investor speculation the economy could need more help from the Fed.
“U.S. economic growth so far this year looks to have been somewhat slower than expected,” Bernanke told a banking conference. “A number of indicators also suggest some loss in momentum in labor markets in recent weeks.”
He said the recovery was still weak enough to warrant keeping in place the Fed’s strong monetary support, saying the economy was still growing well below its full potential.
At the same time, Bernanke argued that the latest bout of weakness would likely not last very long, and should give way to stronger growth in the second half of the year. He said a recent spike in U.S. inflation, while worrisome, should be similarly transitory. Weak growth in wages and stable inflation expectations suggest few lasting inflation pressures, Bernanke said.
On the budget, Bernanke repeated his call for a long-term plan for a sustainable fiscal path, but warned politicians against massive short-term reductions in spending.
“A sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery,” Bernanke said.
“By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk,” he said.
All Tapped Out?
The central bank has already slashed overnight interest rates to zero and purchased more than $2 trillion in government bonds in an effort to pull the economy from a deep recession and spur a stronger recovery.
With the central bank’s balance sheet already bloated, officials have made clear the bar is high for any further easing of monetary policy. The Fed’s current $600 billion round of government bond buying, known as QE2, runs its course later this month.
Sharp criticism in the wake of QE2 is one factor likely to make policymakers reluctant to push the limits of unconventional policy. They also may have concerns that more stimulus would face diminishing economic returns, while potentially complicating their effort to return policy to a more normal footing.
But a further worsening of economic conditions, particularly one that is accompanied by a reversal of recent upward pressure on inflation, could change that outlook.
The government’s jobs report Friday was almost uniformly bleak. The pace of hiring was just over a third of what economists had expected and the unemployment rate rose to 9.1 percent, defying predictions for a slight drop.
In a Reuters poll of U.S. primary dealer banks conducted after the employment data, analysts saw only a 10 percent chance for another round of government bond purchases by the central bank over the next two years. Dealers also pushed back the timing of an eventual rate hike further into 2012.
The weakening in the U.S. recovery comes against a backdrop of uncertainty over the course of fiscal policy and bickering over the U.S. debt limit in Congress, with Republicans pushing hard for deep budget cuts.
Fragility is Global
Hurdles to better economic health have emerged from overseas as well. Europe is struggling with a debt crisis, while Japan is still reeling from the effects of a traumatic earthquake and tsunami.
In emerging markets, China is trying to rein in its red-hot growth to prevent inflation.
Fed policymakers have admitted to being surprised by how weak the economy appears, but none have yet called for more stimulus.
In an interview with the Wall Street Journal, Chicago Federal Reserve Bank President Charles Evans, a noted policy dove, said he was not yet ready to support a third round of so-called quantitative easing. His counterpart in Atlanta, Dennis Lockhart, also said the economy was not weak enough to warrant further support.
While Boston Fed President Eric Rosengren told CNBC Monday the economy’s weakness might delay the timing of an eventual monetary tightening, the head of the Dallas Federal Reserve Bank, Richard Fisher, said the Fed may have already done too much.
Evans and Fisher have a policy vote on the Fed this year while Rosengren and Lockhart do not.