Continuing my previous thoughts on last week’s Atlanta Federal Reserve Financial Markets Conference, I thought I’d cover another of the conference’s big themes: the efficiency of the regulatory system.
Two things matter to a well-functioning regulatory system: the complexity in the regulation and the political system that backs up that regulation. Political systems matter because of the potential influence on a majority party. Democracies where one party cannot easily take control (political economists call them “liberal democracies”) are least likely to have banking crises. This is because liberal democracies such as Canada and New Zealand are less likely to have one party in the majority, one party whose special interests form the regulation of the banking system.
Complexity also matters. Read more
The President of Federal Reserve Bank of Chicago came to speak at the CFA Society of Iowa Strategy Dinner last night and I was lucky enough to attend. Although, we did not learn anything really new from the speech, Evans nicely summarized the Fed’s motivation for implementing the unemployment and inflation thresholds that are his namesake along with the reiterating that the Fed will not remove accommodation, whether it be QE or the near zero federal funds rate too quickly. His view on the economic growth was pretty optimistic. Evans stated,
I am optimistic that we have appropriate policies in place to help the economy achieve escape velocity by 2014. So, after rising a disappointing 1-1/2 percent in 2012, real gross domestic product (GDP) should increase in the range of 2-1/2 to 3 percent this year and then grow between 3-1/2 and 4 percent in 2014, according to my forecast. This growth ought to be sufficient to bring the unemployment rate close or maybe even a little below 7 percent by the end of next year.” Read more
After the fiscal-cliff deal, the payroll tax rate – income withheld from our paychecks for social security – went up from 4.2% to 6.2%. For the last two years, American employees were paying a little bit less in social security withholding and the jig was up last week. This rate increase is an effective increase in taxes of about $16 per week (or about $850 per year) for the average American worker.
What does this reduction in income mean for economic growth for 2013? A lot of retailers are concerned that, with less money in their pockets, Americans will spend less. In line with economic theory (taxes increase, demand goes down), many economists forecast that the payroll tax cut will have drag on consumer spending for the year (J.P Morgan expects 0.6% drag on growth, Goldman expects the same drag, Credit Suisse expects consumption spending to move from 2% in Q4 2012 to 1.5% in Q1 2013). We also think the payroll tax cut may have a bit of drag on consumer spending (here and here) in the first half of the year, along with the other changes in tax policy and uncertainty surrounding sequestration and the debt ceiling. Read more
Last week, we put out a 2013 economic outlook. Our take on the U.S. economy is fairly positive…if the U.S. government can avoid the nastiest parts of the fiscal cliff. So let’s say that Republicans and Democrats can come to a solution, and the United States manages to avoid recession in the first half of the year. As the U.S. economy keeps improving in 2013, the unemployment rate should keep dropping, right? It’s dropped from 8.8% last November to its current level of 7.8% in about 12 months.
Well, as we get into 2013, don’t be too worried if that pace seems to stall for a while…at least, don’t worry that the recovery has stalled. Read more
Today, the Federal Reserve announced that it will keep its foot on the easy-money pedal until the unemployment rate drops below 6.5% or inflation looks to go above 2.5%. The proposal has been getting some press as of late (you can see my recent post after Fed Vice Chair Yellen brought up the idea in November). This is almost exactly what Chicago Fed president Charles Evans proposed back in 2011. Well, Evans has evidently convinced everyone else at the Fed. Read more
In his high-profile speech to the New York Economic Club yesterday, Fed chairman Ben Bernanke didn’t give any new thoughts on monetary policy. He did reaffirm his view from September – that the Fed will be accommodative not just until the economy recovers, but until it’s clear that the recovery is sustainable.
…we expect – as we indicated in our September statement – that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In other words, we will want to be sure that the recovery is established before we begin to normalize policy.
However, there were some interesting thoughts about the fiscal cliff (a term that Bernanke himself coined) and on where we are headed post-cliff. First, and not surprisingly, Bernanke was really concerned about the fiscal cliff and the elevated risk of a recession if a deal is not reached. Second, though, dear Ben was downright sunny about the U.S. economy in the event that Washington can make a deal on fiscal policy. Read more
Janet Yellen, the vice chairman of the Federal Reserve, is the latest in a string of Fed bigwigs to get behind an idea of using explicit inflation and unemployment targets to inform the market about the Fed’s future plans – forward guidance, in Fed-speak. During a speech to the Haas School of Business at the University of California, Berkley, Yellen endorsed the idea of moving beyond calendar-date approximations as the means of conveying information on the Fed’s future moves. Now, she stopped short of actually naming any sort of numbers, but this seems like a good direction for the Fed to move. Ms. Yellen knows what she’s talking about too; in 2010, Fed chairman Ben Bernanke appointed her the chair of a new FOMC communications subcommittee. Not to mention that if Bernanke decides not to accept a third term at the head of the Fed, Ms. Yellen is widely seen as first in line as his replacement.