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October 18, 2012

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'Supporting Price Stability'

Posted: 10 Oct 2012 12:15 AM PDT

David Altig of the Federal Reserve Bank of Atlanta argues that the Fed's quantitative easing and twist polices were necessary to preserve price stability (Dave will be in Portland, Oregon on Thursday along with Bruce Bartlett and others at the annual Oregon Economic Forum (scroll down) that Tim Duy puts on, and I am disappointed I can't be there this year -- I'm headed to the St. Louis Fed today for a conference):

Supporting Price Stability, by David Altig: All of the five questions that Chairman Ben Bernanke addressed in his October 1 speech to the Economic Club of Indiana rank high on the list of most frequently asked questions I encounter in my own travels about the Southeast. But if I had to choose a number one question, on the scale of intensity if not frequency, it would probably be this one: "What is the risk that the Fed's accommodative monetary policy will lead to inflation?"

The Chairman gave a fine answer, of course, and I hope it is especially noted that Mr. Bernanke was not dismissive that risks do exist:

"I'm confident that we have the necessary tools to withdraw policy accommodation when needed, and that we can do so in a way that allows us to shrink our balance sheet in a deliberate and orderly way. ...

"Of course, having effective tools is one thing; using them in a timely way, neither too early nor too late, is another. Determining precisely the right time to 'take away the punch bowl' is always a challenge for central bankers, but that is true whether they are using traditional or nontraditional policy tools. I can assure you that my colleagues and I will carefully consider how best to foster both of our mandated objectives, maximum employment and price stability, when the time comes to make these decisions."

While the world waits for "take away the punch bowl" time to arrive, here is another question that I think worthy of consideration: "Looking back over the past several years, what is the risk that the Fed's price stability mandate would have been compromised absent accommodative monetary policy?"

As the Chairman noted in his speech, it isn't easy to take the evidence at hand and argue any inconsistency between the Federal Open Market Committee's (FOMC) policy actions and its price stability mandate:

"I will start by pointing out that the Federal Reserve's price stability record is excellent, and we are fully committed to maintaining it. Inflation has averaged close to 2 percent per year for several decades, and that's about where it is today. In particular, the low interest rate policies the Fed has been following for about five years now have not led to increased inflation. Moreover, according to a variety of measures, the public's expectations of inflation over the long run remain quite stable within the range that they have been for many years."

To the question I posed earlier, I am tempted to take those observations one step further. Without the policy steps taken by the FOMC over the past several years, the "excellent" price stability record would indeed have been compromised.

Consider the so-called five-year/five-year-forward breakeven inflation rate, a closely monitored market-based measure of longer-term inflation expectations. If you are not completely familiar with this statistic—and you can skip this paragraph if you are—think about buying a Treasury security five years from now that will mature five years after you buy it. When you make such a purchase, you are going to care about the rate of inflation that prevails between a period that spans from five years from today (when you buy the security) through 10 years from today (when the asset matures and pays off). By comparing the difference between the yield on a Treasury security that provides some insurance against inflation and one that does not, we can estimate what the people buying these securities believe about future inflation. The reason is that, if the two securities are otherwise similar, you would only buy the security that does not provide inflation insurance if the interest rate you get is high enough relative to inflation-protected security to compensate you for the inflation that you expect over the five years that you hold the asset. In other words, the difference in the interest rates across an inflation-protected Treasury and a plain-vanilla Treasury that does not provide protection should mainly reflect the market's expected rate of inflation.

When you look at a chart of these market-based inflation expectations along with the general timing of the FOMC's policy actions, from the first large-scale asset purchase in 2008–2009 (QE1) to the second asset purchase program (QE2) in 2010 to the maturity extension program (Operation Twist) in 2011, the relationship between monetary policy and inflation expectations is pretty clear:

In each case, policy actions were generally taken in periods when the momentum of inflation expectations was discernibly downward. A simple-minded conclusion is that FOMC actions have been consistent with holding the bottom on inflation expectations. A bolder conclusion would be that as inflation expectations go, so eventually goes inflation and, had these monetary policy actions not been taken, the Fed's price stability objectives would have been jeopardized.
Statements like this do not come without caveats. A perfectly clean measure of inflation expectations requires that Treasuries that do and do not carry inflation protection really are otherwise identical. If that is not the case, differences in rates on the two types of assets can be driven by changes in things like market liquidity, and not changes in inflation expectations. Calculations of five-year/five-year-forward breakeven rates attempt to control for some of these non-inflation differences, but certainly only do so imperfectly.
Perhaps more pertinent to the current policy discussion, inflation expectations have, in fact, moved up following the latest policy action—which I guess people are destined to call QE3. But unlike the periods around QE1, QE2, and Twist, QE3 was not preceded by a period of generally falling longer-term breakeven inflation rates. So this time around there will be another, and perhaps more challenging, chance to test the proposition that monetary accommodation is consistent with price stability. As for previous actions, however, I'm pretty comfortable arguing the case that the price stability mandate was not only consistent with accommodation, it actually required it.

'Grudging Declines in Part-Time Employment'

Posted: 10 Oct 2012 12:06 AM PDT

This is from Robert Barbera of the Center for Financial Economics at John Hopkins:

Much Ado About Not Much, by Robert J. Barbera, Center for Financial Economics, Johns Hopkins University: The allegedly shocking increase in September's tally of household employment, and the fact that the lion's share of that increase reflected gains in those self-identifying as part time employees for economic reasons is much ado about almost nothing. ...[T]he surge in part time employment is almost certainly a reflection of faulty seasonal adjustments. We witnessed three monthly spikes in the tally for part time for economic reasons. A spike in 2010 totaled 579,000. A spike in 2011 totaled 483,000. Most recently, we witnessed a spike of 582,000. All three occurred in September. ...
Two Pictures Tell The Story:
Glance at the two charts below. The spike in monthly part timers is visible three times. Three-month average data and it is hard to see.
How do we get out from under seasonals? The second chart below looks at part time, not seasonally adjusted (NSA), 12-month moving average data. Grudging declines in part time employment is the unambiguous message.

Part-time1

Part-time2

Links for 10-10-2012

Posted: 10 Oct 2012 12:03 AM PDT

There He Goes Again...

Posted: 09 Oct 2012 09:14 PM PDT

Jack Welch's response to the uproar he caused is -- well, it's something, not sure what the right word for this is.

First, as many people on Twitter have noted, he tries to play the victim in all this. He was just asking an innocent question, and people jumped all over him!

Imagine a country where challenging the ruling authorities—questioning, say, a piece of data released by central headquarters—would result in mobs of administration sympathizers claiming you should feel "embarrassed" and labeling you a fool, or worse. Soviet Russia perhaps? Communist China? Nope, that would be the United States right now, when a person (like me, for instance) suggests that a certain government datum (like the September unemployment rate of 7.8%) doesn't make sense.

Yes, if you accuse the White House of manipulating data, and question the integrity of the employees of the BLS, people might use their constitutional right to free speech (those Commies!) to tell you what they think. And they did. Acting like it was an innocent question mischaracterizes the attack that was made on the integrity of the BLS.

This part is good too, trying to walk away from the part that caused the uproar:

Now, I realize my tweets about this matter have been somewhat incendiary. In my first tweet, sent the night before the unemployment figure was released, I wrote: "Tomorrow unemployment numbers for Sept. with all the assumptions Labor Department can make..wonder about participation assumption??" The response was a big yawn.
My next tweet, on Oct. 5, the one that got the attention of the Obama campaign and its supporters, read: "Unbelievable jobs numbers..these Chicago guys will do anything..can't debate so change numbers."
As I said that same evening in an interview on CNN, if I could write that tweet again, I would have added a few question marks at the end, as with my earlier tweet, to make it clear I was raising a question.

I didn't really mean to accuse people people of impropriety! I should have added a question mark to make it clear I was questioning their integrity! Just asking a question... Yeah, right.

Then, he goes at it again:

To suggest that the input to the BLS data-collection system is precise and bias-free is—well, let's just say, overstated

He also talks about "subjectivity creeping into the process" and he suggests it's entirely possible that the people in charge of data collection suddenly changed the "subjective" decisions they make to favor Obama (I guess they're all Democrats, or that only Democrats would do this? -- it's a silly arguement in any case).

If he's not accusing anyone of manipulation, his whole argument comes down to 'these numbers are measured with error," so people should be wary. Really? The WSJ gave you space to say that statistics are measured with error? No, I don't think so. He's still making accusations, and he'll probably wonder, once again, why people have the right to tell him what they think in a free country like the US -- he seems to think that people who are free to say what they think (in no uncertain terms) must live in "Soviet Russia perhaps? Communist China?"

To suggest that the input to the WSJ editorial page "is precise and bias-free is—well, let's just say, overstated," and this is a prime example.

'Potential Debt Problems More Common among the Educated'

Posted: 09 Oct 2012 11:55 AM PDT

Busy day, so a quick one -- I'll have to leave comments to you:

Potential debt problems more common among the educated, EurekAlert: Before the financial crash of 2008, it was highly educated Americans who were most likely to pile on unmanageable levels of debt, a new study suggests.
Overall, the percentage of Americans who were paying more than 40 percent of their income for debts like mortgages and credit card bills increased from about 17 percent in 1992 to 27 percent in 2008.
But college-educated people were more likely than those with high school or less education to be above this 40 percent threshold - considered to be a risky amount of debt for most households.
The association between more education and higher debt was true even after taking into account the fact that people with more education tend to have higher incomes.
In addition, people who reported being more optimistic about the future of the economy for the next five years were more likely to have a heavy debt burden, the study found.
"People who piled on debt may have been too optimistic about their economic future, but you can't blame that on a lack of education," said Sherman Hanna, co-author of the research and professor of consumer sciences at Ohio State University.
"People with college educations may have thought they were immune to any economic problems. But when people stop believing things might go bad, that's when they get in trouble."
Hanna and his colleagues also found that the debt crisis didn't just involve homeowners who took out bigger mortgages than they could afford. In fact, 35 percent of renters had a heavy debt burden in 2007, compared to 21 percent of homeowners.
Overall, Hanna said the research suggests that despite generally held assumptions, it wasn't just uneducated people, and not just homeowners, who precipitated the financial crisis by taking on too much debt.
"There wasn't just one group of Americans who were at fault," Hanna said.
"All types of households, renters and homeowners, educated and not, were taking on more of debt burden than they could bear. And lenders of all types - not just mortgage lenders - seemed to be taking more risks." ...

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