Randomly Noted

All we need are jobs.

The U.S. economy, as described by the U.S. Federal Reserve and based on incoming data such as mildly encouraging holiday shopping to date, is doing all right. There is growth. The haves (those with jobs) are a bit more confident they will stay employed and are therefore spending more.

The have nots without jobs remain in too high numbers.

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The U.S. Treasury Secretary got his tense wrong.

“It is very important to keep politics out of monetary policy,” said Treasury Secretary Timothy Geithner on Friday, in a Bloomberg television interview.

Really, he should have said it would have been nice to have kept politics out of monetary policy. They are in, big time. Politics and the Federal Reserve may have traditionallly enjoyed an arms’-length relationship, but they were never completely separate. Now they are in a bear hug.

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Call it the authoritarian advantage.

The notion gets tossed around all the time in macroeconomic discussions. In difficult economic times, non-democratic countries have an advantage. They can make fast decisions by fiat, steering their economies as they see fit. In democracies, of course, things are messier and slower.

Of course, no one here is advocating dictatorship, economic or otherwise. The freer the economy and the citizen the better. But it is worth noting in these troubling times, America is following an expected pattern in which so-called economic and business elites believe in certain paths to economic improvement and growing numbers of voting citizens think otherwise.

Call it a populist backlash.

Example one is the bank bailout. Lots of people now call TARP (Troubled Asset Relief Program) some variant on the best program that also managed to be the most hated. Many people understand that letting the financial system collapse in 2008-09 would have meant greater disaster for everyone, but having voted for bank bailouts is now no badge of honor for politicians seeking re-election.

Trade is another one. It wasn’t long ago there was a pretty broad coalition in the U.S. that believed the freer the trade, the better. The U.S. would benefit because from agriculture to banking services to manufacturing equipment, we had some useful things to sell the world.

Sure, many unions and other advocates of manufacturing workers, whose jobs could easily be shipped abroad, stood long opposed to freer trade, but they now have lots of company. It’s understandable that when jobs get scarce people want to build walls around the jobs that remain, but such policies, especially if widely adopted by nations, will hurt everyone.

The U.S. Federal Reserve is expected to embark on another round of quantitative easing to help spur the stuck-in-the-mud economy. The essential increased printing of money to buy Treasury securities will hurt the value of the dollar, but the Fed believes a stronger level of inflation and even higher inflation expectations are needed to get people and businesses spending again, eventually increasing employment and keeping the scary deflation monster at bay.

But the notion of higher inflation, especially engineered by a central bank, likely won’t sit well with many people. In a recent issue of The New Yorker magazine, James Surowiecki cited a 1996 study by the well-known Yale economist, Robert Shiller, that showed “sizable majorities” of people globally are dead set against inflation, even in a trade-off for higher employment.

That might well be a reasonable stance, because once ignited inflation and its expectations are tough to tame. Also, the Treasury bond buying plans bythe Fed might simply not work. At least Fed officials don’t have to worry about getting re-elected.

People in Congress do, and that’s why it’s a pretty sure bet there won’t be another big round of fiscal stimulus coming, absent an economic disaster. Too much worry about the giant federal deficits already created.

Even though, abstractly at least, the case could be made the Fed’s efforts would have a better chance of success if there was a stimulative assist from fiscal policy, leaving the essential and extraordinarily diffiicult deficit reduction issue for another day.

The bailout package for Greece has not stemmed the bleeding in global markets, but for Asia the declines in currencies and stocks may soon lure investors back in.

What we are seeing is Asia and the U.S. catching a cold from Europe, as violence grows in Greece over the planned austerity measures and as ratings agencies sound warnings on the fiscal health of others in the region, including Spain and Portugal.

Just as an example, Hong Kong’s share market has fallen three days in a row, losing 3.7% over that period, while the Taiwan dollar Wednesday fell to its lowest level against the greenback since April 9. Thursday, the Nikkei is down more than 3.0% and South Korea’s Kospi has shed 2.3%, with the Korean won around six-week lows against the U.S. dollar.

The declines in Asia, which have included a widening in credit default swaps in an otherwise encouraging environment for the region’s companies and debt, come as investors react to the latest woes in the euro-zone.

The contagion though for now is peripheral; it’s just the end result of a fading global mood for risk. Strip that away, and what do you find?

Asian banks have minimal exposure to European debt–certainly that from Greece, Spain and Portugal. It seems prudence continues to win the day. Asian banks and their economies came through the recent U.S.-induced financial crisis in relatively good shape precisely because they had steered clear of subordinated debt products and repackaged debt generally.

Asian governments have also–some more so than others–worked to overcome the frailties in their banking and financial systems that were exposed so violently when the Asian financial crisis hit more than a decade ago. That’s left systems in much stronger shape, and central banks much better armed with foreign exchange reserves.

The region’s economies have also been faster and more convincing in their recovery over the past six to 12 months. Many challenges remain, none the least from how and when to exit the large spending measures put in place during the crisis, and how and when to tighten monetary policy (as inflation starts to rise), but if there’s one place that offers any sort of sanctuary right now, it would be Asia.

The region needs Europe and the U.S. to keep buying its products, but intra-regional trade has taken up some of the slack, particularly from China.

Sounder economic fundamentals and a stronger banking system mean Asian markets may soon appear more attractive to investors in currencies and stocks (and also the better Asian credits), even if the Greek wobbles continue. It would take a lot more than what we’re currently seeing to suggest we’re heading anew for some sort of global banking or debt crisis.
That may mean the declines start to slow over the coming week as value appears.

While the world expected the U.S. administration to answer on April 15 the freighted question of whether it believed China a foreign exchange “manipulator,” the U.S. Treasury secretary found a third path that avoided yes or no. It was, of course, delay.

While no doubt disappointing to those who desire a bit of drama and conflict in the economic and diplomatic relations between powerful nations, delay has too many compelling advantages to ignore.

Once China’s preisdent, Hu Jintao, said last week he’d be boarding a plane for Washington to attend a nuclear summit in mid-April, it was clear the “manipulator” label, no matter how warranted by facts on the ground, was off the table. To make such a declaration with the Chinese president in town or just departed would be diplomatic insanity. China and the U.S. need each other far too much for that.

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It’s getting hot in here. With less than three weeks before the U.S. Treasury announces whether it is going to name China as a currency manipulator (for keeping a lid on the yuan to help its exporters), the rhetoric is kicking into high gear.
But how much will the U.S. complaints achieve? If we look at history, the answer is…not much. China hates to be told what to do, and it rarely responds favorably to outside pressure.
Indeed, the U.S. rhetoric could end up being counterproductive. It’s also unclear what would be the end result if Treasury in its semi-annual report opts to label China a currency manipulator. That could potentially open a large can of worms; such a designation sets in train a process whereby trade penalties could be the end result.
China has been getting testier in the past few weeks. Its message (which is being given on a daily basis right now) remains the same: The yuan is not undervalued, and calls for change are counterproductive. But the tone is clearly getting crankier.
Indeed, China’s Minister of Commerce Chen Deming recently warned Beijing “won’t turn a blind eye” to attempts to cite the yuan as a reason for imposing trade sanctions, and central bank Governor Zhou Xiaochuan has said “too much noise” coming from U.S. lawmakers regarding the yuan isn’t helpful in economic policy discussions.
China could yet crank up things up a notch by firmly reminding the U.S. (and the rest of the world) of the massive amounts of U.S. Treasurys held in Chinese coffers. It is already warning that yuan gains may not be to the U.S.’ overall benefit.
Some in the U.S. are calling for everyone to calm down. Several currency experts this week urged Congress not to unilaterally punish China with trade sanctions.
Let’s hope saner heads prevail before someone does or says something regrettable. For more, there’s my recent column on the topic on Dow Jones Newswires: =MONEY TALKS: Yuan A Piece Of Me?

It’s time for banks to wean themselves off cheap Fed credit. This is what the Fed is instigating by boosting the discount rate this afternoon. It’s the rate the U.S. Federal Reserve charges banks for emergency loans, and as of tomorrow it will be a quarter percentage point higher. Others can weigh in on the technicalities. Today’s action feels more like a psychological boost than anything especially substantive — monetary policy remains essentially the same, according to a Fed statement. In my broad-brush view, the Fed’s move counts as a milestone in the financial-crisis era. Maybe, just maybe, the fiasco is really and truly ending and we can go back to normal.

What is “normal” in the aftermath of a crisis that killed banks, insurers, life savings and livelihoods? For banks, the new normal is, after today, a bit more self-sufficiency.  ”These changes are intended as a further normalization of the Federal Reserve’s lending facilities,” the Fed said. This action was expected but currencies are moving on the news – the dollar’s up – and this is probably because well-primed investors nonetheless couldn’t quite believe that the monetary mechanisms put in place during the crisis would ever be unwound. Have a look at colleagues’ Luca Di Leo and Jon Hilsenrath’s coverage.

James Bullard comes across like the guy-next-door, saying things like, “That sounds kinda funny,” when he catches himself talking about “a normal response to a crisis situation,” and saying, “Okay, I have a new line on this” when asked about Congress’s efforts to rein in the Fed.  But of course he’s anything but ordinary: The 48-year-old Bullard is president and CEO of the Federal Reserve Bank of St. Louis, and as such has been involved in the Fed’s extraordinary crisis-era activities. At the moment, he’s out and about, talking publicly about what he thinks the Fed board should do next – which is why he visited our newsroom today. One thing Bullard believes the Fed should NOT do is succumb to conventional wisdom. For example, he notes, we’re all obsessed with jobs, and that’s natural because the unemployment rate stands at an ugly 10.2% and could creep higher. But we should remember that the last couple of post-recession recoveries were “jobless” – and it’s likely this one will be, too. Bullard argues that employers’ recent modus operandi is to emerge from recessions with cautious hiring plans. Therefore, as the Fed mulls when to boost the funds rate rates from zero, it need not hold off until unemployment begins to come down, he maintains. That said, Bullard believes the Fed board will, in fact, wait for unemployment to ease – because that’s what politics, and conventional wisdom, dictate. And this waiting game means the funds rate may not be changed until 2012 – even though pent-up inflationary pressures mean the central bank should actually hike rates much earlier. Continue reading…

Some policymakers at the U.S. Federal Reserve apparently are worried about a quite unpleasant possibility, a slow-growth economy that still potentially kicks up inflation over the longer term.

That’s one interpretation of the minutes of the Fed’s most recent rate-setting meeting, held early this month. Those minutes were released today.

Those policymakers worried about inflation might be deemed the ‘sullen some,’ since Fed minutes characterize different Fed actors as all, many, most, some or few. In this case the word used was some.

“However, some participants noted that the recent rise in the prices of oil and other commodities, as well as increases in import prices stemming from the decline in the foreign exchange value of the dollar, could boost inflation pressures.”

Of course, there were ‘some’ on the other side, counting on significant economic slack among other factors to keep inflation and, very important, expectations about inflation, down.

But the ‘sullen some’ thought inflation risks tilted to the upside “over a long horizon,” because the huge government stimulus spending and resultant stratospheric federal budget deficits could unmoor the famously anchored inflation expectations of market participants and the broader citizenry.

The ‘sullen some’ added to their dark scenario the possibility that banks might try to cut reserves as the economy recovers by buying securities or lowering credit standards and pumping out loans.

Meanwhile, the spectre of a long-standing too-high jobless rate turning this into a truly long slog rather than a rapid recovery was apparent to all who attended the Federal Open Market Committee meeting.

The weakness in labor market conditions remained an important concern to meeting participants, with unemployment expected to remain elevated for some time, the minutes said.

When it came to their ‘central tendency’ economic forecasts, everyone remained sullen on the jobs outlook. The 2010 unemployment rate is seen at 9.3% to 9.7%. The outlying range prediction was for 10.2%.

“Participants discussed the possibility that this recovery could resemble the past two, which were characterized by a slow pace of hiring for a time even after aggregate demand picked up.” The Fed could have saved some words with the phrase ‘jobless recovery.’

The Congressional moves to hem in the U.S. Federal Reserve attack both the central bank’s regulatory powers as well as the independence of monetary policy.

We, and perhaps the Fed, which is pushing back on all fronts, ought to get our priorities straight. What is it we want the Fed to do and what’s its most important role?

I vote for independent monetary policy above all else. Without a Fed as free as possible from political influence, the global credibility of interest rate decisions is diminished and we can look in the long run to a future of higher inflation and a weaker currency. Yes, we have a weak dollar now, but that doesn’t need to be permanent.

If the Fed has to give up bank regulation, it’s much less of a problem. Bank regulators are a more common breed. Look how many already exist in the U.S. And the Fed’s track record here isn’t great.

So instead of a blanket rejection of every populist-themed attack on the Fed emanating from Capitol Hill, maybe we ought to accept some refashioning of the central bank.

Given the current Congressional thrusts, that means leaning toward the Senate and away from the House of Representatives.

It is in the Senate where the Banking Committee is mulling taking away the Fed’s regulatory authority over big banks. It’s an authority the Obama administration wants to ramp up, giving the Fed power over systemically important financial institutions.

There is an upside to taking regulatory authority away from the Fed related to monetary policy independence. As the Fed’s regulatory role grows, it would be enmeshed in the policies and priorities of whatever political party controlled the White House and/or Congress. There would be consistent second-guessing of regulatory decisions and the central bank would look more like just another government agency.

The Fed’s counter-argument is that without regulation it can’t fight financial crises. Federal Reserve Bank of Chicago President Charles Evans is quoted in The Wall Street Journal saying that without supervision “I don’t think we would know enough” about problems in the financial services industry.

Well, the current crisis shows the Fed and other regulators weren’t as plugged in as they ought to have been, even with regulatory powers. And there is a difference between information and oversight. It could be arranged for the Fed to have access to whatever banking information it needed, which could be shared with others in government.

That implies, as it should, that the Fed’s power to lend to troubled institutions remains intact. Let’s remember the Fed was the nimble agency that helped keep last autumn’s credit crisis from becoming something much worse.

It’s also important that the more direct attacks on Fed monetary independence brewing in the House be stopped. There’s no compelling reason to strip regional Fed presidents of  voting rights when interest rate policy is set, nor to send a Congressional watchdog to audit monetary policy decisions.

If Congress wants more transparency from the Fed, there are much less harmful ways of achieving that.