Tag Archives: QE3

Fed’s Williams slips in a plug for a fiscal response

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So look what slipped into a Fed statement:

*DJ Fed’s Williams: Current Economic Conditions Call For Strong Fed Response
*DJ Williams: Weak Total Demand Calls Supports Fed Policy Action
*DJ Williams: Sees Value In Targeted Stimulus Actions
*DJ Williams: Mortgage Bond Buying Has Helped Housing Market
*DJ Williams: Fiscal Actions May Also Help Revive Housing, Aid Economy
*DJ Williams: Fiscal Stimulus May Be More Potent Than Monetary Policy Now
*DJ Williams: Housing Has Hurt Economy, Not Sole Cause Of Slow Recovery

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CPI, Empire, and Bernanke’s managing of expectations

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Right, core is giving Bernanke ‘cover’ to not do any more QE.

I think he now realizes QE doesn’t actually do anything positive for the economy, as all his staff studies show. Yes, it can lower term rates a tad, but it also removes interest income as he himself seemed to have recognized in his own 2004 research paper.

But he also recognizes that it does scare the living daylight out of the likes of China and other portfolio managers who don’t understand monetary operations.

So he’s in a bit of a bind, as his tone of voice showed while responding to live questions.

If he says QE doesn’t do anything, he destroys what he now considers the useful fiction that the Fed has more tools in its toolbox, as markets would realize they are now flying without a net vs the belief in a ‘Bernanke put.’

And so he assures China there will be no more QE, while explaining to Congress that higher core inflation makes QE inappropriate at this time. And while this could be called intellectually dishonest, it’s also required under ‘expectations theory’ that says managing expectations is critical to price stability and optimal output.

As previously discussed, they all believe in the Confidence Fairy, and that economic performance is in no small way a function of expectations.

Also, while outlooks were positive, below, they were less positive than before.

And Michigan just came in lower than expected as well. The jury is still out on when the economic soft spot might end.

And Aug 3 looks to remove US and therefore world aggregate demand, one way or another.


Karim writes:
CPI

  • Headline declines as expected on energy (-0.2%); core much stronger than expected (0.3%)
  • Supports key message BB has been delivering that bar is high for QE3 due to core inflation high and rising now, vs low and falling a year ago
  • A year ago, Core CPI was 0.9%, with the 3mth and 6mth rate annualized rates of change near Zero
  • Now, Core CPI is 1.6% (highest since late 2009) and the 3mth and 6mth annualized rates of change are 2.9% and 2.5%.
  • What is interesting in looking at the attached chart is that the change from the lows is the highest in about 5yrs, and much higher than when oil went to $150 back in the summer of 2008
  • The key is OER (1/3 of core) is now trending at 0.1-0.2% m/m; combined with the other ‘sticky’ components of core (i.e., medical, education), its hard to see core falling back below 1.5%

Empire Survey: Modest gains in current conditions and strong gains in 6mth Outlook



Current July June
Business Conditions -3.76 -7.79
Prices Paid 43.33 56.12
New Orders -5.45 -3.61
Shipments 2.22 -8.02
Delivery Times 1.11 -3.06
Inventories -5.56 1.02
Employees 1.11 10.20
Workweek -15.56 -2.04


6MTH Outlook July June
Business Conditions 32.22 22.45
Prices Paid 51.11 55.10
Prices Received 30.00 19.39
New Orders 25.56 15.31
Shipments 30.00 17.35
Delivery Times 6.67 2.04
Inventories 1.11 -9.18
Unfilled Orders 5.56 -9.18
Employees 17.78 6.12
Workweek 2.22 -2.04
Capital Expenditures 22.22 26.53
Technology Spending 12.22 14.29
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Researcher: China Worried About US Economy

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>   
>   (email exchange)
>   
>   On Jul 14, 2011, at 2:58 AM, wrote:
>   
>   Interesting article on Chinese being concerned on Bernankes speech hinting on more stimulus.
>   Seems like they are very wary.
>   

Agreed!

To the point he’s probably given assurances in no uncertain terms that it won’t happen.

Researcher: China worried about US economy

By Joe McDonald

July 14 (AP) — China is watching whether the Federal Reserve launches a new stimulus that might hurt China by pushing up commodity prices, a Cabinet researcher said Thursday.

The U.S. economy “has been doing worse than expected” and Beijing needs to “seriously assess” possible risks to its vast holdings of American debt, said Yu Bin, an economist in the Cabinet’s Development Research Center.

“The prospects of the U.S. economy are worrying,” Yu said at a government-organized briefing. Beijing uses such briefings to explain official views, though the researchers do not act as government spokespeople.

Yu expressed concern about a possible third round of Fed purchases of government bonds, known as “quantitative easing” or QE. He said that might hurt China by depressing the value of the dollar and driving up prices of commodities needed by its industries. Most commodities are traded in dollars.

The Fed bought $600 billion in bonds late last year and early this year to keep interest rates low and support prices of assets such as stocks. On Wednesday, Chairman Ben Bernanke said the Fed was ready to take action if the U.S. economy weakens and said a third round of purchases was a possible option.

“We are following closely whether the United States will introduce QE3, because we believe it will have a major impact on China’s economy,” said Yu, director-general of the Development Research Center’s Department of Macroeconomic Research.

“The drastic rise in commodity prices caused by the devaluation of the U.S. dollar will have a major impact on inflation, on economic growth and on Chinese people’s daily lives.”

Yu warned that such a move also would affect the “long-term trajectory of the U.S. economy.”

“Therefore, I believe the United States should be careful,” he said.

China held some $1.15 trillion in U.S. Treasury debt as of the end of April, according to the latest U.S. government data. Chinese leaders have repeatedly appealed to Washington to avoid taking steps in response to U.S. economic weakness that might erode the value of the dollar and Beijing’s holdings.

“As the largest buyer and holder of U.S. Treasury bonds, we need to seriously assess the risks,” Yu said.

Yu said Beijing could reduce risks by restructuring its portfolio of foreign reserves and assets, though he gave no details. And he said that in the long run, Beijing has to keep a reasonable level of foreign reserves.

Moody’s Investors Service on Wednesday said it was reviewing the U.S. bond rating for a possible downgrade, saying there is a small but rising risk that the government will default.

Asked by a reporter if China was concerned about the issue, Foreign Ministry spokesman Hong Lei said: “We hope that the U.S. government adopts a responsible policy to ensure the interests of the investors.”

Also Thursday, a Chinese rating agency said it was putting U.S. sovereign debt on watch for a possible downgrade.

“Factors influencing the U.S. government’s ability to repay its debt are steadily worsening,” said the Dagong Global Credit Rating Co. “If there is no substantive improvement in its repayment ability or willingness during the observation period, Dagong will appropriately downgrade the national rating of the United States.”

Dagong, founded in 1994, is little-known outside China but says it hopes to compete with global ratings agencies Moody’s, Standard & Poor’s and Fitch.

In its first sovereign debt report in July 2010, Dagong gave Washington a credit rating below China, Singapore and some other governments. That was a break with the global agencies, which say U.S. debt is among the world’s safest.

In November, Dagong downgraded the United States from AA to A-plus, citing what it said was deteriorating U.S. ability and willingness to repay debt.

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Bernanke Admits Economy Slowing; No Hint of New Stimulus

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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.

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China Has Divested 97 Percent of Its Holdings in U.S. Treasury Bills

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So it looks like QE2 indeed managed to scare China out of the dollar. This is the portfolio shifting previously discussed that’s been dragging down the dollar even though, fundamentally sound, as Fed Chairman Bernanke correctly stated.

And when China (and Japan) offered to buy Spanish and other euro zone national govt debt to ‘help out’, the euro zone fell for that one, watching their currency rise against their better judgement with regards to their euro wide exports.

And maybe Fed Chairman Bernanke is aware of this, and has assured China he does favor a strong dollar as per his latest public statements, and let them know that QE3 is unlikely, and has ‘won them back’? No way to tell except by watching the market prices.

And with most everyone out of paradigm with regards to monetary operations, there’s no telling what they all might actually do next.

What is known is that world fiscal balance is tight enough to be slowing things down, and looking to keep getting tighter.
And QE/lower overall term structure of rates removes interest income from the economy, and shifts income from savers to bank net interest margins.
And if China’s growth is going to slow dramatically, its most likely to happen the second half as they tend to front load their state lending and deficit spending each year.

And all the while our own pension funds continue to allocate to passive commodity strategies, distorting those markets and sending out price signals that continue to bring out increasing levels of supply that are filling up already overflowing storage bins.

Note in particular that reserve accumulation has been high and rising recently, though UST accumulation has been moderate.

China Has Divested 97 Percent of Its Holdings in U.S. Treasury Bills

By Terence P. Jeffrey

Jun 4 (CNSNews.com) — China has dropped 97 percent of its holdings in U.S. Treasury bills, decreasing its ownership of the short-term U.S. government securities from a peak of $210.4 billion in May 2009 to $5.69 billion in March 2011, the most recent month reported by the U.S. Treasury.
Treasury bills are securities that mature in one year or less that are sold by the U.S. Treasury Department to fund the nation’s debt.

Mainland Chinese holdings of U.S. Treasury bills are reported in column 9 of the Treasury report linked here.

Until October, the Chinese were generally making up for their decreasing holdings in Treasury bills by increasing their holdings of longer-term U.S. Treasury securities. Thus, until October, China’s overall holdings of U.S. debt continued to increase.

Since October, however, China has also started to divest from longer-term U.S. Treasury securities. Thus, as reported by the Treasury Department, China’s ownership of the U.S. national debt has decreased in each of the last five months on record, including November, December, January, February and March.

Prior to the fall of 2008, acccording to Treasury Department data, Chinese ownership of short-term Treasury bills was modest, standing at only $19.8 billion in August of that year. But when President George W. Bush signed legislation to authorize a $700-billion bailout of the U.S. financial industry in October 2008 and President Barack Obama signed a $787-billion economic stimulus law in February 2009, Chinese ownership of short-term U.S. Treasury bills skyrocketed.

By December 2008, China owned $165.2 billion in U.S. Treasury bills, according to the Treasury Department. By March 2009, Chinese Treasury bill holdings were at $191.1 billion. By May 2009, Chinese holdings of Treasury bills were peaking at $210.4 billion.

However, China’s overall appetite for U.S. debt increased over a longer span than did its appetite for short-term U.S. Treasury bills.
In August 2008, before the bank bailout and the stimulus law, overall Chinese holdings of U.S. debt stood at $573.7 billion. That number continued to escalate past May 2009– when China started to reduce its holdings in short-term Treasury bills–and ultimately peaked at $1.1753 trillion last October.

As of March 2011, overall Chinese holdings of U.S. debt had decreased to 1.1449 trillion.

Most of the U.S. national debt is made up of publicly marketable securities sold by the Treasury Department and I.O.U.s called “intragovernmental” bonds that the Treasury has given to so-called government trust funds—such as the Social Security trust funds—when it has spent the trust funds’ money on other government expenses.

The publicly marketable segment of the national debt includes Treasury bills, which (as defined by the Treasury) mature in terms of one-year or less; Treasury notes, which mature in terms of 2 to 10 years; Treasury Inflation-Protected Securities (TIPS), which mature in terms of 5, 10 and 30 years; and Treasury bonds, which mature in terms of 30 years.

At the end of August 2008, before the financial bailout and the stimulus, the publicly marketable segment of the U.S. national debt was 4.88 trillion. Of that, $2.56 trillion was in the intermediate-term Treasury notes, $1.22 trillion was in short-term Treasury bills, $582.8 billion was in long-term Treasury bonds, and $521.3 billion was in TIPS.

At the end of March 2011, by which time the Chinese had dropped their Treasury bill holdings 97 percent from their peak, the publicly marketable segment of the U.S. national debt had almost doubled from August 2008, hitting $9.11 trillion. Of that $9.11 trillion, $5.8 trillion was in intermediate-term Treasury notes, $1.7 trillion was in short-term Treasury bills; $931.5 billion was in long-term Treasury bonds, and $640.7 billion was in TIPS.

Before the end of March 2012, the Treasury must redeem all of the $1.7 trillion in Treasury bills that were extant as of March 2011 and find new or old buyers who will continue to invest in U.S. debt. But, for now, the Chinese at least do not appear to be bullish customers of short-term U.S. debt.

Treasury bills carry lower interest rates than longer-term Treasury notes and bonds, but the longer term notes and bonds are exposed to a greater risk of losing their value to inflation. To the degree that the $1.7 trillion in short-term U.S. Treasury bills extant as of March must be converted into longer-term U.S. Treasury securities, the U.S. government will be forced to pay a higher annual interest rate on the national debt.

As of the close of business on Thursday, the total U.S. debt was $14.34 trillion, according to the Daily Treasury Statement. Of that, approximately $9.74 trillion was debt held by the public and approximately $4.61 trillion was “intragovernmental” debt.

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