Happy Friday –
“We want to see more jobs. We want to see lower unemployment. We want to see a stronger economy that can cause the improvement to be sustained.”
Those words could belong to any number of folks in Washington these days, but yesterday they were Fed Chairman Ben Bernanke’s at a press conference following the announcement of another round of quantitative easing (or as George Will makes clear, government speak for “printing money”).
As the Economist explains, “the decision to launch this third round of quantitative easing, or QE3, was a long time coming. As far back as June it had become apparent the economy was faltering.” So what does all this mean? “The Fed is now buying $85 billion worth of long-term securities a month, after including the $45 billion of Treasurys it buys under Operation Twist. Whether that pace rises or falls will depend on how the economy performs.”
We’ll be watching.
Didn’t catch Chairman Bernanke’s press conference yesterday? Don’t worry, Reuters has the highlights for you.
On our radar: The White House says it will send Congress its already-overdue report detailing sequestration cuts today. Retail sales and Consumer Price Index out at 8:30 AM; Consumer Sentiment at 9:55 AM; Business Inventories at 10 AM.
Doug’s Daily Economic Outlook
What happens next? The Fed has proven that it can creatively exercise the central bankers’ role as the lender of last resort during a liquidity panic. Tomorrow is the 4th anniversary of the collapse of Lehmann Brothers. The roll call of financial institutions is largely unchanged in the interim, a tribute to the Fed's $1 trillion rescue mission. In the years since, the Fed has kept its foot firmly on the gas (QE2, Twist, QE3) and worked to push investors out of treasuries and into riskier asset classes. It has worked beautifully, as evidenced by the equity market rally yesterday, but fell short of its ultimate objective: faster growth.
Now, the Fed is committing to "never giving up" – asset purchases will continue until the economic growth and unemployment rate improve — and sustained low interest rates into 2015. Will this playbook work as the textbook suggests: consumers' understanding that prices will rise in the future, increasing the incentives to spend now? Financial markets delivering a flatter term structure in all risk levels, generating stronger investment incentives? More importantly, if it does work, how large are these incentives compared to the negative incentives provided by the fiscal cliff, ballooning debt, a President committed to higher taxes on pass-thru businesses, and a slowing global economy? Count me skeptical.
What We’re Reading
Fed Acts to Fix Jobs Market – The Federal Reserve, frustrated by persistently high U.S. unemployment and the torpid recovery, launched an aggressive program to spur the economy through open-ended commitments to buy mortgage-backed securities and a promise to keep interest rates low for years. In the move significant of its new moves, the Fed said Thursday it would buy $40 billion of mortgage-backed securities every month and would keep buying them until the job market improves, an unusually strong commitment by the central bank. (WSJ)
Shutdown averted but ‘fiscal cliff’ awaits – Congress is moving to quash a threat of a government shutdown, but the prospect of a one-two punch of tax increases and slashing, automatic spending cuts will still confront lawmakers when they return to Washington after Election Day. The House on Thursday passed a six-month stopgap spending bill to keep federal agencies running past the end of the budget year, the elections and into the spring. It effectively scratched a major item off of Congress’ to-do list heading into a potentially brutal postelection, lame duck session. (AP)
Retail Sales in U.S. Probably Climbed in August on Auto Demand – Retail sales probably improved for a second month in August as consumers overcame a lack of jobs and stagnant wages, economists said before a report today. Purchases climbed 0.8 percent, matching the July advance, according to the median estimate in a Bloomberg survey or economists before today’s Commerce Department figures. Other reports may sow consumer price rose in August for the first time in five months and industrial production declined. (Bloomberg)
CPS deal up in air as talks extend into early morning – Chicago Public Schools and the teachers union began the day saying they were close to a deal that could return teachers and students to the classroom Monday, but gave little information subsequently as negotiations to iron out details extended well into Thursday evening…Talks are scheduled again at 9 a.m. Friday and the union’s House of Delegates is scheduled to meet at 2 p.m. Friday to discuss the district’s latest proposals. The delegates’ approval is needed to end the strike and put teachers back on the job, but the union did not say whether the body will vote at Friday’s meeting. (Chicago Tribune)
Mortgage rates show little change – Mortgage rates showed little change this week, according to the latest data released Thursday by Freddie Mac. The 30-year fixed-rate average was unchanged from the previous week, remaining at 3.55 percent. A year ago at this time, it was 4.09 percent. The 30-year average has stayed below 4 percent for all but one week this year. The 15-year fixed-rate average fell slightly, down to 2.85 percent from 2.86 percent a week ago. Last year at this time it was 3.30 percent. The 15-year average has been below 3 percent since the end of May. (WaPo)
Eminent Domain Furor Hits Capitol Hill – The battle over whether local governments should have the right to seize and restructure troubled mortgages is moving to Capitol Hill. Rep. John Campbell (R-Calif.) is set to introduce legislation on Thursday that would aim to put a stake in the heart of the movement to let cities take over severely underwater loans. (WSJ)
Spain urged to clarify aid needs at euro zone meeting – Euro zone finance ministers pressed Spain on Friday to clarify whether it will seek financial support after the announcement of the European Central Bank’s new bond-buying program brought Madrid’s borrowing costs sharply lower. Spanish Finance Minister Luis de Guindos deflected questions about a possible aid application on arriving for talks in Cyprus, saying they would discuss in general terms the conditions for ECB intervention in the markets. (Reuters)
Financially troubled parts of Europe consider taxing church properties – Cash strapped officials in Europe are looking for a way to ease their financial burden by upending centuries of tradition and seeking to tap one of the last untouched sources of wealth: the Catholic Church. Thousands of public officials who have seen the financial crisis hit their budgets are chipping away at the various tax breaks and privileges the church has enjoyed for centuries. (WaPo)
Also From the Forum
White House Misses Yet Another Deadline – Granted, the sequester is terrible policy, and it was never supposed to become law. But for now, it is. And providing guidance for it is also the law. If the Administration believes the sequester should not be implemented then it needs to work with Congress to replace the cuts, something the House of Representatives has already done. But in the meantime, their report to Congress is overdue. (Blog here)
$16 Trillion and Counting – In a time when gross debt is spiraling out of control and about to breach $16 trillion, an assessment of the regional distribution of federal indebtedness is appropriate. Distributing this individual share of the national debt provides a more localized perspective on the magnitude of the national debt, and necessarily, the urgent need to address its unsustainable growth. (Full breakdown here)
Debt and Deficits: The Obama Factor – The total Public Debt stands at over $16 trillion, with FY2011’s $1.3 trillion deficit, 8.7 percent of GDP, having contributed significantly to our nation’s credit card bill. (More Debt Facts here)