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Federal Reserve policy makers meet Wednesday to discuss ways to accelerate economic growth. Under consideration are another round of quantitative easing and better communications strategy. However, as discussed below, interest rates would have to be pushed to negative levels–something that is simply not possible–to jump-start the housing market. And the Fed has made clear it intends to keep the federal-funds rate near zero through mid 2013. Likely nothing it says could spur more borrowing for investment or consumer durable purchases now.

Federal Reserve officials are flailing about for new tools to jump-start the economy. Sadly, the Fed has few arrows left in its quill, most are crooked, and Fed Chairman Ben Bernanke appears to not know where the target is.

The legend on Wall Street is the economy remains dormant because depressed housing values prevent homeowners from refinancing their mortgages to free up disposable income and boost consumer spending. Continue reading…

This is a column by James Moore and Scott Mather of PIMCO.

In the Fed’s zeal to try to stimulate the market through a retread of the so-called Operation Twist, this nation’s central bankers seem to have stepped into a realm where No Good Deed Goes Unpunished. In addition to the long bond dropping in yield 40 basis points in the wake of the announcement that the central bank will buy long-term Treasurys, broad equity markets have dropped some 6%. Some sectors, notably financials, have fallen even further.

That the patient has responded violently to the medicine of Dr. Bernanke and team reflects the realization that the cure may be worse than the disease. As we near the zero bound for interest rates, the usual rules do not apply–the second order side effects now dominate and cause more harm to the patient than good.

In its attempt to stimulate borrowing by making long-term money cheap, the Fed has harmed large swaths of savers. A look at three groups in particular proves instructive: pension plans, life insurance companies, and households saving both inside and out of 401(k)s. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Seeking to boost housing and jumpstart the flagging economy, the Federal Reserve will push down mortgage rates a bit by purchasing $400 billion in long term Treasury securities.

Operation Twist will likely raise short rates even as it lowers long rates, because the Fed will sell Treasurys with maturities of less than three years to purchase an equal amount of Treasurys with maturities from six to 30 years. Those purchases will be undertaken gradually and completed by the end June 2012

Lowering mortgage rates a bit may help, but it won’t have the salutary effect on home purchases needed to raise real-estate prices and get consumers, whose balance sheets remain weak and have lost confidence in President Obama and Congress, to start spending again. Continue reading…

These are the views of Thomas Lam, group chief economist at OSK Group/DMG & Partners:

With the policy decision on interest rates universally expected to have remained unchanged at the April 26-27 meeting, the focus, as always, was on the accompanying Federal Open Market Committee (FOMC) statement. The evolution of the statement, however, contains minimal surprises. Instead, the key highlight was Chairman Ben Bernanke’s post-meeting press briefing debut (going forward, the briefings will be held four times a year, coinciding with the release of the economic projections from participants–FOMC members and other FRB Presidents–normally in January, April, June and November).

In the April statement, the FOMC toned down their description of the ongoing economic recovery to “proceeding at a moderate pace” from “firmer footing” in March, but gained more conviction in the “gradually improving” labor market conditions. This implies that the Committee does not view the 1Q 2011 soft patch in the economy as a likely turning point.

In addition, while the FOMC further acknowledges the pass-through from higher commodity prices to inflation, the Committee maintains that the spillover is likely to be “transitory” and that it is crucial to be vigilant of the changing dynamics of longer-term inflation expectations and underlying inflation.

Finally, the FOMC also confirmed, as we expected, its intention to “complete” the $600 billion Treasury purchase program by June and maintain the existing reinvestment policy for now.

Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Wednesday, Federal Reserve Chairman Ben Bernanke will discuss with reporters decisions taken by the Federal Open Market Committee. For this unprecedented press conference to be successful, Bernanke must venture where Fed chairmen are most reluctant to go–into politics.

Economists have long held that transparency about goals and means makes monetary policy more effective. However, genuine transparency requires that Bernanke acknowledge the limits imposed on the Fed policy by the actions of Congress, the administration and foreign governments.

Inflation is heating up, thanks to rising oil, food and other commodity prices. Many in Congress and financial markets blame QE2–the Fed’s policy of purchasing Treasury securities to moderate interest rates on mortgages, corporate bonds and the like–but easy money is not causing inflation.

China and several other Asian governments choose to keep their currencies substantially undervalued against the dollar and regulate domestic gasoline and other commodity prices. Those policies boost Asian exports and growth, slow U.S. and European growth, and push up global prices for oil and other commodities.

Continue reading…

(These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission.)

Federal finances are in shambles, and Americans should be amused if not disgusted by the explanations and solutions both political parties offer.

President Obama’s budget plan issued in February projects a $1.6 trillion deficit for 2011 and a cumulative shortfall of $11 trillion through 2021.

Things may get worse, as additional revenue and cost savings from health care reforms don’t materialize and the 4% growth assumed by the president’s budget for the next four years proves Pollyanna.

Time and again, Obama and House Democratic leader Nancy Pelosi have demagogued the problem, blaming two wars and tax cuts instigated by President Bush and the Great Recession.

Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

S&P has downgraded Japan’s long-term debt from AA to AA-, indicating the U.S.’s AAA rating should be taken down several notches to less than AA-.

National economies must generate foreign currency for their governments to pay foreign creditors, and national governments must be able to tax, sell bonds or print money, without causing inflation, to cover operating expenses and pay interest.

Japan’s ability to pay is simply much stronger than the U.S.

Japan has a strong current account surplus, thanks to a powerful manufacturing export machine, and the Bank of Japan sits on $1 trillion in foreign-currency reserves. It has more than enough cash flow and adequate reserves to service the claims of foreign creditors. The U.S. can hardly make such a claim.

Domestically, Japan suffers from deflation, slow growth and maintains a large budget deficit to prop up domestic demand because Japanese citizens save so much. With prices falling, even in the face of global commodity inflation, the Japanese government has adequate latitude to sell bonds to its savers, and the Bank of Japan has more than enough flexibility to purchase those bonds as needed without instigating domestic inflation or creating other adverse macroeconomic consequences.

The U.S. is a different situation. The U.S. has a gaping current account deficit–on oil and with China–and policies pursued by the Bush and Obama administrations are worsening those conditions. Owing to the large current account deficit, the U.S. must run a huge budget deficit, close to 10% of gross domestic product, just to sustain growth at 3.5% and keep unemployment from flying out of control.

The large U.S. current account deficit indicates the U.S. economy as a whole isn’t generating adequate revenue to pay foreign creditors interest due on U.S. debt, and Washington must service the interest on externally held debt by printing more bonds and selling those abroad, but foreign private demand for those bonds is satiated. Consequently, the U.S. is much too dependent on the government of China to print yuan to buy dollars and, in turn, to use those dollars to buy Treasurys to finance the U.S. private economy’s current account deficit and the federal budget deficit.

Beijing plays along because the resulting weak yuan and trade surplus with the U.S. helps deal with Chinese unemployment, but printing so many yuan requires Beijing to sterilize those extra yuan by persuading Chinese investors to purchase too many yuan-denominated government bonds, bonds the private sector doesn’t want. Continue reading…

These are the views of Thomas Lam, group chief economist at OSK Group/DMG & Partners

The Jan. 25-26 Federal Open Market Committee meeting ended without any drama, though the tone of the accompanying statement might be somewhat dovish.

The upgrade to the growth description, while in line with expectations, was more modest. Moreover, the ongoing progress of the recovery was still deemed “disappointingly slow”. And the four new rotating members of the FOMC coalesced with the other seven permanent members on the January vote.

The key message of the post-meeting statement is that with a timid recovery in broad labor market conditions and underlying inflation trending lower, the FOMC has no immediate plans to deviate from the current policy stance of purchasing longer-term Treasury securities and maintaining the policy rate at current levels. This is consistent with our prevailing view that the $600 billion Treasury purchase program would be fully absorbed. Continue reading…

These are the personal views of Thomas Lam, group chief economist at OSK Group/DMG & Partners:

The Federal Open Market Committee’s announcement of another round of longer-term Treasury purchases and balance sheet expansion at the conclusion of the Nov. 2-3 meeting was well-anticipated.

The premeeting debate was essentially on the structure of the Treasury-purchase program (by shrinking the term premium) and potential enhancements to the forward-looking language (by lowering the path of expected future short-term rates) in the accompanying statement.

The FOMC decided to purchase $600 billion of longer-term Treasury securities by the end of second-quarter 2011, which is around $75 billion of purchases a month.

Overall, the announced Treasury purchases, according to our calculations, are equivalent to a pseudo-reduction of 50 to 100 basis points in the fed funds rate.

The announced magnitude and timing of purchases were only slightly different from expectations of up to $500 billion over six months or about $85 billion a month. Hence, the market reaction to the foregoing information should have been fairly limited.

The additional details on the breakdown across maturities, however, seemed to have surprised some market participants, as evidenced by the knee-jerk rise in the 30-year Treasury yield. When compared to the composition of the 2009 Treasury purchases (of $300 billion), this time there is greater emphasis on the four to seven-year area but less across the other parts of the curve (in particular the four-year or less, and 10- to 17-year segments).

To be sure, one key difference between the latest round of asset purchases and the 2008-09 purchase program is the keen focus on actively pursuing the dual mandate of sustainable employment and price stability this time. The postmeeting statement underscores the mandate, either directly or indirectly, at least six times. In addition, the FOMC also seeks increased flexibility in structuring the purchases this time, as emphasized by the reference that the “committee will regularly review the pace … and overall size of the asset-purchase program in light of incoming information and will adjust … as needed.” In reality, determining the scale and pace of purchases by tying them to the “statutory mandate” will be challenging simply because there is no historical precedent to this policy approach.

One surprise from the accompanying statement, however, is that the FOMC left the forward-looking language, or the “extended period” reference, on the fed funds rate unchanged. Perhaps, the committee decided that there could be a more opportune time, if needed, to come out with all guns blazing. While it is often recognized that the communication strategy associated with this approach might be reasonably challenging, there is room to lower the path of expected future short-term rates.

Finally, Kansas City Federal Reserve Bank President Thomas Hoenig unsurprisingly dissented on the action. Well, he has one more meeting on Dec. 14 to cast his final dissent. Next year, however, the FOMC lineup is unlikely to produce fewer dissents.

(The author can be reached at thomas.lam@dmgaps.com.sg.)

It has become a pair of powerful headlights on the highway that blind you to everything else.

Currency markets are so focused on the possibility of further quantitative easing from the U.S. Federal Reserve that other market drivers have receded into the background.

They are still there, but only dimly visible at best.

But once the Fed unveils its stimulus plan Wednesday–and the market absorbs its impact–those other themes could resurface with a vengeance.

“I would say [the market] has had collective myopia vis-a-vis QE,” said Jeremy Stretch, foreign-exchange strategist at CIBC World Markets in London.

Continue reading…