Everybody loves cheap money, right? Well, if you’re a borrower, you’ve definitely benefited from actions taken by the Federal Reserve to keep interest rates at record lows.
Posts tagged ‘Federal Reserve’
If you’re looking for a gauge on U.S. inflation, you’ve got two primary options. There’s CPI – the consumer price index. And there’s PCE – personal consumption expenditures. Both CPI and PCE serve as broad measures of inflation (i.e. how much prices are going up on consumer goods and services). That’s useful information if you’re trying to predict economic activity, because rapid and unexpected inflation can be bad for economic growth. So, what would you say if I told you that while CPI and PCE generally track in the same direction, there is a difference between the two estimates? And what if I told you that in March 2013, that difference hit its highest level since the start of the 2008-2009 recession? In March, core CPI showed 1.9% year-over-year growth, while core PCE showed a 1.1% increase over the same period. Sure, it’s only a difference of 0.8%, but 0.8% could mean the difference between extending quantitative easing and wrapping it up. 0.8% could mean the difference between projected growth and a return to recession. Read more
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