The Greenback Remains the Preferred Choice of Official Foreign Exchange Reserves

Wednesday, April 11th, 2012

The IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) database continues to indicate that dollar remains the preferred reserve currency. In the fourth quarter of 2011, the dollar made up 62.1% of official reserves vs. 61.8% in the third quarter. The dollar accounted for 61.4% of official reserves in 2011 vs. 61.8% in 2010 and 62% in 2009. The euro’s share was virtually unchanged in 2011 at 26%. The small dip in the dollar’s share was taken over by “other currencies” component of the IMF’s categories. Mr. Derrick of BNY Mellon has identified the Aussie dollar as the beneficiary. It is also noteworthy that the euro’s share has decline to 25.94% in 2011 from 27.66% in 2009. Is the dollar’s role as an official reserve currency shrinking? A small decline is visible prior to the onset of the crisis but the dollar has prevailed in the past three years (see Chart 1).

Tags: Accuracy, Aussie Dollar, Beneficiary, Bny Mellon, Completeness, Composition, Currencies, Currency Exchange, Decline, Derrick, Exchange Currency, Foreign Currency, Foreign Exchange Reserves, Fourth Quarter, Greenback, Imf, Investment Decisions, Northern Trust Company, Preferred Choice, Reserve Currency
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Real GDP unchanged in Q4 2011, Corporate Profits Advanced

Friday, March 30th, 2012

Real GDP unchanged in 2011:Q4, Corporate Profits Advanced

by Asha Bangalore, Northern Trust

Real GDP of the US economy grew 3.0% in the fourth quarter of 2011, unchanged from the prior estimate. However, some components of GDP were modified. Equipment and software spending (+7.5% vs. +4.8%), government outlays (-4.2% vs. -4.4%), and structures (-0.9% vs. -2.6%) show upward revisions, while exports show a downward revision in the final report of fourth quarter GDP.

Corporate profits before tax with inventory valuation and capital consumption adjustments rose 0.9% in the fourth quarter vs. a 1.7% increase in the third quarter. In the fourth quarter, the entire increase in corporate profits was from domestic industries (+3.8%), with profits from operations in the rest of the world posting a decline (-9.2%).

There is a controversy about whether one should use real gross domestic product (GDP) or real gross domestic income (GDI) to evaluate the performance of the U.S. economy. Real GDP is obtained by adding up spending across the economy and real GDI is computed by adding up income earned. Conceptually, GDP and GDI are identical but the source data for each is different and they yield different numbers. As Chart 3 shows, the two measures drift apart sometimes. The GDI measure is gaining attention; Jeremy Nalewaik of the Federal Reserve has pointed out the National Bureau of Economic Research uses monthly indicators, GDI and GDP to determine official dates of business cycle peaks and troughs. Going forward, an average of the two measures may become the preferred measure.

Tags: Business Cycle, Capital Consumption, Corporate Profits, Different Numbers, Downward Revision, Federal Reserve, Fourth Quarter, GDP, Government Outlays, Gross Domestic Product, Inventory Valuation, Investment Decisions, National Bureau Of Economic Research, Northern Trust Company, Preferred Measure, Quarter Gdp, Real Gdp, Source Data, Troughs, Upward Revisions
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Paul Kasriel’s Parting Thoughts – Mary Matlin’s Economics

Friday, March 30th, 2012

Kasriel’s Parting Thoughts – Mary Matlin’s Economics

As many of you know, I will be retiring from The Northern Trust Company on April 30. In the few remaining days of my tenure, I will be sharing with you some of my parting thoughts with regard to economics as time permits and the spirit moves me. By the way, after April 30, my Northern Trust email address will disappear into the ether, but I hope I will not follow it there. If you feel the need to contact me after April 30, and I cannot imagine why you would, I have established a personal email address, which has gone live: econtrarian@gmail.com.

Now, on to Mary Matalin. I saw her on one of the cable news shows on Wednesday defending Republican presidential candidate Mitt Romney’s planned car “elevator” in his new La Jolla home in terms of job creation. Ms. Matalin argued that by installing this elevator, Romney would be creating new jobs for the economy. How might Bastiat, the 19th century French political economist, have reacted to Ms. Matalin’s argument? My suspicion is that he would have made a distinction between what Ms. Matalin “sees” and what is “unseen.” Ms. Matalin sees the additional workers manufacturing and installing the elevator. What she apparently does not see are the workers who otherwise would have been hired for some other unrelated project had Mr. Romney forgone the installation of the elevator and rather invested, or saved, these “elevator” funds. Ms. Matalin, a Republican partisan, appears to have bought into the Keynesian fallacy often trumpeted by Democratic (or is it Democrat?) partisans that an increase in saving implies less total spending in the economy and diminished job creation. If Mr. Romney chooses to forgo the installation of a car elevator in favor of, say, purchasing some additional financial assets, in effect, he is transferring some of his purchasing power to another entity – a business, another household or a governmental body – that has a greater urgency to spend currently than does Mr. Romney. So, although Mr. Romney would be hiring fewer workers to manufacture and install a car elevator, the recipient of Mr. Romney’s investment funds would be hiring additional workers to produce whatever they were purchasing. (This concept of transfer credit comes from the Austrian school of economics, whose pupils greatly admire Bastiat.)The only way Mr. Romney’s decision to forgo the installation of a car elevator would not lead to a creation of jobs is if Mr. Romney chose to increase his saving by holding more bank deposits and/or currency, in which case would result in a decline in the velocity of money.

So, boys and girls, like Bastiat, keep your eyes open. Try to see everything when analyzing economic issues. Ms. Matalin was not incorrect to argue that Mr. Romney’s decision to install a car elevator in his new abode would create new jobs. But what she apparently failed to see is that new jobs would have also been created if Mr. Romney had chosen to forgo the purchase of the car elevator and instead invested those funds. Increased saving in general does not result in decreased aggregate spending. Rather, it merely changes the composition of who is engaging in the new spending.

Copyright © Northern Trust

Tags: Cable News, Chief Economist, Elevator, Fallacy, Financial Assets, Job Creation, La Jolla, Mary Matalin, Mary Matlin, Mitt Romney, New Jobs, Northern Trust Company, Parting Thoughts, Partisan, Partisans, Paul Kasriel, Political Economist, Purchasing Power, Republican Presidential Candidate, Republican Presidential Candidate Mitt Romney
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Outlook for U.S. Small Businesses Improves

Wednesday, January 11th, 2012

This post is a guest contribution by Asha Bangalore, vice president and economist of The Northern Trust Company.

The Small Business Optimism Index moved up to 93.8 during December from 92 in the prior month. The improvement is noteworthy and it is the highest since February 2011. However, the level of the index is within the range seen during the recession (see Chart 1).

Of the sub-indexes, the percentage of respondents indicating that poor sales have been problematic declined to 23% in December vs. 25% in the previous month. Further reductions of this component of the survey would point to a turnaround in business conditions.

Among other highlights of the survey, only 8.0% reported credit is harder to get, one of the lowest readings for the year (see Chart 3). Somewhat contradicting the December employment report is the fact that only 1.0% of respondents indicated that they increased employment in the last three months. Overall, the December report on small businesses records more positives than negatives.

Source: Asha Bangalore, Northern Trust – Daily Economic Commentary, January 10, 2011.

Tags: Business Conditions, Business Optimism, Economic Commentary, Economist, Employment Report, Further Reductions, Indexes, Northern Trust Company, Outlook, Recession, Respondents, Small Business, Small Businesses, Three Months, Turnaround, Vice President
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Paul Kasriel: We’re All Keynesians Now – Except Me

Thursday, November 24th, 2011

This post is a guest contribution by Paul Kasriel, chief economist of The Northern Trust  Company.

If you want federal debt reduction, you are going to get it Super-Committee “failure” or not. The recent debt-ceiling legislation calls for $1.0 trillion less-than-otherwise federal spending over the next 10 years. The “trigger” calls for $1.2 trillion less-than-otherwise federal spending over the next 10 years. And, with the return to the Clinton-era personal tax rates for all household income groups on January 1, 2013, revenues will increase by $3.5 trillion more-than-otherwise over the next 10 years. So, that is $5.7 trillion of less federal debt issuance than otherwise over the next 10 years. Now, that’s what I would call a grand bargain. And don’t forget, unless Congress acts before yearend 2011, an extra $168 billion of federal debt that otherwise would have been issued won’t be because of an expiring FICA tax “holiday” (just in time for the holidays?) and the expiration of extended unemployment insurance benefits. The U.S. as the next Greece? I beg your pardon. Try Canada, eh?

But most economists are not celebrating this significant prospective slower growth in federal debt. Rather, this dismal lot is busy marking down their real GDP forecasts. Why? Because they are partial-equilibrium Keynesians. Allow me to explain why I think they are too quick to reduce their forecasts of economic activity.

If the government borrows less than otherwise, then, all else the same, the demand for credit, at the margin, will have fallen. Entities that had intended to restrain their current spending in order to transfer that spending power to the government now find themselves with more spendable funds than planned. They may be able to entice someone else to borrow and spend if the interest rate at which they are willing to lend is lowered marginally. And/or, at a lower interest rate level, these lenders may decide to become spenders themselves. So, with the government demanding less credit over the next 10 years, private borrowers will step up to absorb the “excess” offered credit and/or lenders will become spenders themselves. So, why mark down your GDP forecast?

It could be a bit more complicated if we take into consideration Fed policy and banking system credit creation. And, this is where some markdown in the GDP forecast could be appropriate. Suppose the Fed is targeting the level of the federal funds rate when the government’s demand for credit is increasing more slowly. As I indicated, this weaker demand for credit would result in a decline in the interest-rate structure, all else the same. But all else is not the same if the Fed is targeting the level of the federal funds rate. If the Fed maintains the same target level of the federal funds rate in the face of weaker overall credit demand, then the interest-rate structure will not be permitted to fall fully to its new lower equilibrium level.

How does the Fed maintain the same level of the federal funds rate in the face of weaker overall credit demand? By draining cash reserves from the banking system. What happens to bank credit growth under these circumstances? It slows. Why? With the interest rate structure not being allowed to decline to its new lower equilibrium level, the quantity demanded of nongovernment credit (a movement along the credit demand curve) will not increase enough to offset the decline in the demand for government credit (shift back in the credit demand curve). Some of the credit demand that banks were providing is now being accommodated by the entities who were formerly lending to the government. Hence, with overall credit demand growing more slowly, bank credit growth slows. Why don’t banks lower their loan rates more to restore their loan growth? Because banks’ marginal cost of funds, the federal funds rate, has not declined even as their loan rates have. In effect, banks’ marginal return on capital has declined.

In this case, the slower growth in the demand for government credit will lead to a decline in the growth of bank credit. Remember, banking system credit, along with Fed credit, is credit created “out of thin air.” An increase in the growth of “thin air” credit results in a net increase in the growth in spending in the economy. Conversely, a decrease in the growth of “thin air” credit results in a net decrease in the growth in spending in the economy. Thus, to the extent that weaker growth in government credit demand results in weaker growth in bank credit, then the GDP forecast should be marked down. But because the decline in the dollar change in bank credit is likely to be of a smaller magnitude than the decline in the dollar change in government credit demand, the markdown in GDP growth would be much smaller than the Keynesian forecasters are contemplating.

If the Federal Reserve were targeting a rate of growth in bank credit (or even more radical, targeting a rate of growth in the sum of bank and Fed credit), then, in the face of weaker growth in government credit, the Fed would operate so as to maintain the growth rate in bank credit rather than passively allowing it to slow. In this case, weaker growth in government credit demand would not result in weaker bank credit growth. Thus, there is no reason to markdown one’s GDP forecast.

So, in my non-Keynesian (lonely) world, whether slower growth in government credit demand leads to slower growth in overall economic activity depends critically on the behavior of bank credit growth. If the Fed is targeting the federal funds rate, which it normally does, and does not lower its target rate so as to maintain the growth in bank credit, then the pace of future economic activity likely will be slower, but not nearly as slow as the Keynesians argue.

Note: The comments above are dedicated to the memory of Robert (Bob) Laurent, Milton Friedman’s most brilliant student (in my opinion) and my most brilliant “teacher.” If only Bob were here, someone would understand these comments. I miss you, man.

Are We about to Find Out that the Fed “Has no Clothes?”

From the minutes of the November 1-2 FOMC meeting, we learn that the Committee had an in depth discussion about policy communication. (I wonder if they brought in consultants and engaged in role playing.) As usual, no decisions on changing the FOMC’s communications policy were made. Below is a passage that caught my attention:

“More broadly, a majority of participants agreed that it could be beneficial to formulate and publish a statement that would elucidate the Committee’s policy approach, and participants generally expressed interest in providing additional information to the public about the likely future path of the target federal funds rate. The Chairman asked the subcommittee on communications to give consideration to a possible statement of the Committee’s longer-run goals and policy strategy, and he also encouraged the subcommittee to explore potential approaches for incorporating information about participants’ assessments of appropriate monetary policy into the Summary of Economic Projections.”

The first rule of economic forecasting is never give a date along with a numerical forecast for GDP/inflation/unemployment. The second rule of forecasting is that if you violate the first rule, never give a fed funds rate forecast with your GDP/inflation/unemployment forecast. This is sure to embarrass you if anyone keeps a record. Now, just after I read this passage from the FOMC minutes, I happened to catch this Reuters News headline:

“[Minneapolis Fed President] Kocherlakota [says] FOMC Forecasts Do Not Reveal ‘Special Information’ About Economy.”

Talk about an understatement! If the FOMC begins to lay out a federal funds rate forecast that it thinks is consistent with its economic forecast, the public is going to find out, indeed, that the FOMC has no “special information.” At a time when the American people are losing confidence in so many of our institutions, is wise for the Fed to expose itself to such public scrutiny?

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Source: Paul Kasriel, Northern Trust – Daily Economic Commentary, November 22, 2011.

Tags: Chief Economist, Clinton Era, Congress Acts, Debt Ceiling, Debt Issuance, Federal Debt Reduction, Federal Spending, Fica Tax, Gdp Forecasts, Grand Bargain, Household Income, Income Groups, Keynesians, Northern Trust Company, Partial Equilibrium, Paul Kasriel, Personal Tax Rates, Real Gdp, Spending Power, Unemployment Insurance Benefits
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QE3 is Likely if Economy Slips – FOMC Minutes (Sept 20-21)

Thursday, October 13th, 2011

by Asha Bangalore, vice president and economist of The Northern Trust  Company.

The minutes of the September 20-21 FOMC meeting indicate that several members see significant downside risks to economic growth. They do not project a decline in GDP, but noted that the economy was “vulnerable to adverse shocks.” In this context, the sources of adverse shocks included “pronounced or more protracted deleveraging by households, the chance of a large-than-expected near-term fiscal tightening, and potential spillovers to the United States if the financial situation in Europe were to worsen appreciably.”

The FOMC views that risks are balanced with regard to inflation. Stable inflation expectations and a continued dissipation of the impact of the past increases in energy and commodity prices are factors that support members cited to support projections of both headline and core inflation settling close to levels consistent with the Fed’s dual mandate. The minutes indicate that despite these expectations, the “outlook for growth and inflation as more uncertain than usual.”

The September meeting included an extensive discussion of tools available to support the economy if economic conditions weaken. The deliberations were focused on three options. First, reinvest principal payments it receives on holdings of agency bonds in long-term Treasury securities. Second, purchases long-term Treasury securities and sell a matching amount of shorter-term Treasury securities in such a manner that reserves and the Fed’s balance sheet would not be affected. Third, the FOMC would purchase longer-term Treasury securities and increase the balance sheet size of the Fed. The minutes note that a “large number of participants saw large-scale asset purchases as a more potent tool that should be retained as an option in the event further policy action to support a stronger economic recovery was warranted.”

The FOMC chose the second option of the three, which is known as Operation Twist. The vote was 7-3 in favor of Operation Twist. The minutes reveal that two members would have preferred to take more aggressive steps compared with Operation Twist. They were willing to consider Operation Twist because additional future support was not ruled out. The implications of reducing interest on reserve balances (IOR) were also part of the discussion. A range of opinions were presented and it was noted that additional information would be necessary to assess the usefulness of this tool in the current economic environment.

The minutes also show that the Committee is examining modifications of its communications policy: “Most participants indicated that they favored taking steps to increase further the transparency of monetary policy, including providing more information about the committee’s longer-run policy objectives and about the factors that influence the committee’s policy decisions.” The Committee also looked into “ways to elucidate the economic conditions that could warrant raising the level of short-term interest rates.” Overall, it appears that the Fed is working on improving its communication about monetary policy changes with the public.

Source: Asha Bangalore, Northern Trust – Daily Economic Commentary, October 12, 2011.

Tags: Agency Bonds, Asset Purchases, Balance Sheet, Bonds, Commodity Prices, Core Inflation, Deliberations, Dissipation, Downside Risks, Dual Mandate, Economic Conditions, Economic Recovery, Financial Situation, Fomc Minutes, Inflation Expectations, Northern Trust Company, Outlook, Potent Tool, Principal Payments, Stable Inflation, Support Members, Treasury Securities
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A Decade of Household Deleveraging?

Wednesday, October 12th, 2011

by Asha Bangalore, vice president and economist at The Northern Trust  Company.

The recent trend of consumer spending is lackluster and, in fact, worrisome such that Chairman Bernanke has mentioned it in speeches over the past month. Real disposable personal income has posted a meager 0.3% gain in August 2011 (see Chart 1) and consumer spending shows a noticeably decelerating trend. The obvious reply to answers about the reasons for soft growth in consumer spending is related to lack of hiring.

A reduction of household debt is an important adjustment process which is playing a role in the muted trend of consumer spending. Households are focused on rebuilding their net worth following significant losses. Pessimism about asset price gains lifting their net worth has led to the old fashioned route of deleveraging and saving. Outstanding household debt as a percentage of disposable income is trending down after registering a historical peak in the second quarter of 2007 (130.34%, see Chart 2). This ratio stood at 114.6% in the second quarter of 2011. Essentially, the economy has experienced four years of voluntary and involuntary (foreclosures) deleveraging. Hypothetically, if household debt to disposable income were to stabilize at its long-term average of 76%, it would imply a significant reduction of debt over an extended period. The direct impact would be slower growth of consumer spending, particularly in an environment of tepid economic growth.

Source: Asha Bangalore, Northern Trust – Daily Economic Commentary, October 11, 2011.

Tags: Asset Price, Bernanke, Consumer Spending, Disposable Income, Disposable Personal Income, Economic Commentary, Economic Growth, Economist, Foreclosures, Household Debt, Households, Hypothetically, Losses, Net Worth, Northern Trust Company, October 11, Outlook, Pessimism, Reply, Second Quarter, Speeches
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Reserve currency: Greenback’s share declines, but still largest player

Tuesday, October 4th, 2011

It is not a surprise the dollar continues to be the preferred official foreign exchange reserve currency, but the share shows a gradual decline in the past ten years. According to Asha Bangalore, vice president and economist of The Northern Trust  Company, the IMF’s Currency Composition of Official Foreign Exchange Reserves for the first and second quarter of 2011 places the greenback’s share at 60.6% of official foreign exchange reserves, down from a high of 71.5% in 2001.

“The euro’s role has grown from a share of 17.9% in 1999 (when the euro was introduced) to 26.5% in the first two quarters of 2011 (see Chart). It is largely a tussle between the dollar and the euro, for now. It is noteworthy that the share of ‘other currencies’ has risen threefold to 4.8% in the first-half of 20o11 vs. 1.6% in 1999. The IMF notes that details of this category are unknown,” said Bangalore.

Source: Asha Bangalore, Northern Trust – Daily Economic Commentary, September 30, 2011.

Tags: Composition, Currencies, Decline, Declines, Economic Commentary, Economist, Euro, Exchange Currency, Exchange Reserve, Foreign Currency, Foreign Exchange Reserves, Greenback, Imf, Northern Trust Company, Outlook, Quarters, Reserve Currency, Second Quarter, Surprise, Tussle, Vice President
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FOMC Engages in ‘Operation Twist,’ Another Unconventional Step

Thursday, September 22nd, 2011

This post is a guest contribution by Asha Bangalore, vice president and economist at The Northern Trust  Company.

The Fed left the federal funds rate unchanged, as expected, at 0.0-0.25%. The much awaited action called “Operation Twist” was part of the policy announcement. It was not an unanimous vote, three Fed Presidents — Richard Fisher of Dallas, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia – who are concerned about inflation dissented. These three Fed officials opposed the FOMC’s August 9, 2011, decision that included an assurance of holding short-term interest rates near zero until mid-2013.

As per today’s announcement, the Fed will purchase $400 billion of Treasury securities with maturities of 6-30 years and finance this operation with sales of an equal amount of Treasuries with three years or less left on them. Operation Twist will not increase the current size of the Fed’s balance sheet. It is unlike the $600 billion program (known as QE2) which increased the size of the balance sheet to around $2.8 trillion and ended in June 2011. The objective of Operation Twist is to lift economic activity, that has slowed in the first-half of the year, by bringing about lower interest rates for home mortgages and business investment outlays. The FOMC included a surprise package – it will now reinvest early payment of mortgage securities back in debt issued by Fannie Mae and Freddie Mac.

The Fed continues to believe that “there are significant downside risks to the economic outlook, including strains in global financial markets.” The reference to global financial markets is new in the September statement and reflects the ongoing debt crisis in Euroland. The Fed anticipates a deceleration of inflation in the months ahead and continues to maintain that longer-term inflation expectations are stable.

In the Fed’s opinion, the rearrangement of it current portfolio “should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.” However, if the unemployment rate fails to register a significant improvement, households who were not able to obtain a mortgage at already historically low rates (see Chart 1) are unlikely to pass strict underwriting standards that are in place now. The likely limited benefit of Operation Twist is the subject of the U.S. Economic Outlook of September 9, 2011. If this forecast is accurate and economic growth remains lackluster, Chairman Bernanke would most likely embark on QE3 in the early part of 2012.

Source: Asha Bangalore, Northern Trust – Daily Economic Commentary, September 21, 2011.

Tags: Charles Plosser, Debt Crisis, Downside Risks, Economic Outlook, Fannie Mae, Fannie Mae And Freddie Mac, Fed Officials, Federal Funds Rate, Global Financial Markets, Home Mortgages, Inflation Expectations, Mortgage Securities, Narayana, Northern Trust Company, Outlook, Policy Announcement, Qe2, Surprise Package, Term Inflation, Treasury Securities, Unanimous Vote
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Fed Signals Intention to Complete Asset Purchases

Thursday, April 28th, 2011

This post (with the exception of the two video clips at the end) is a guest contribution by Asha Bangalore, vice president and economist at The Northern Trust  Company.

Today’s post-FOMC meeting analysis has two components: policy statement and Chairman Bernanke’s press conference. Starting with the policy statement, the Fed held the federal funds rate unchanged at the narrow band of 0 to ¼ percent. There were no dissents, although in recent speeches, Fed Presidents Plosser and Fisher (both voting members) had voiced their concern about imminent inflationary pressures.

The Fed’s views about the economy shows a minor difference from the March 15 policy statement. The first sentence of the today’s policy statement describes the economic recovery as “proceeding at a moderate pace.” The March statement upgraded the economic recovery to be on “firmer footing” from the January 2011 statement which simply noted that the “economic recovery is continuing.”

The Fed’s take on spending components of GDP was left intact, with housing sector continuing to be depicted as “depressed” and household expenditures and equipment and software outlays as expanding The Fed indicated that “inflation has picked up in recent months” but continues to view higher prices of energy and other commodities as “transitory.” Rhetoric about closely tracking inflation and inflation expectations was retained in today’s statement.

The policy statement settled the uncertainty about whether the Fed will complete the $600 billion purchase of Treasury securities, referred to as QE2, by noting that it “will complete” these planned purchases.

There was no change to the Fed’s near term outlook for monetary policy as the phrase “low levels for federal funds rate for an extended period” continues to be part of the policy statement.

The much awaited first press conference of Chairman Bernanke after an FOMC meeting revealed that the Fed plans to reinvest maturing securities and maintain the size of the balance sheet. Effectively, the amount of monetary policy easing will be unchanged after the completion of the $600 billion purchase. The Fed’s balance sheet as of April 20 stood at $2.67 trillion (see Chart 1). The Fed has purchased $548 billion of the $600 billion target so far.

The looming question at the present time is the course of monetary policy if oil prices continue to advance. Chairman indicated that the Fed expects oil prices to stabilize and trend down. In the event that this does not occur, Chairman Bernanke noted that the evolution of inflation expectations would be the Fed’s guide to monetary policy action. He went on to add that if inflation expectations fail to be stable and well anchored (which is the case at present) the Fed will have to take action. The five and 10-year break-evens obtained from Treasury inflation-protected securities are currently at levels seen prior to the onset of the financial crisis (see Chart 2). Markets will be tracking these levels closely in the days and months ahead.

Chairman Bernanke responded to a question about the meaning of the phrase “extended period” by noting that it would imply the Fed is unlikely to take any action for a “couple of meetings.” June 21-22, August 9 and September 20 are dates of the next three meetings of the FOMC .

There are many unanswered questions about the Fed’s exit strategy such as the actions it is likely to take to tighten monetary policy when economic conditions improve and inflation is a threat. Chairman Bernanke pointed out that the early step would be to stop reinvesting all or some part of maturing securities. In other words, if maturing securities are not replaced, the action would be akin to open market sale of securities, the action the Fed typically takes to tighten monetary policy.

The Fed also made available its latest forecast of real GDP growth, inflation, and unemployment rate today. The Fed has lowered projections of real GDP growth for 2011 and raised estimates of the unemployment rate, overall inflation, and core inflation for 2011 compared with the predictions published in January 2011.

In the two clips below, Fed Chairman Ben Bernanke takes questions on yesterday’s FOMC decision, the fate of QE2 and the Federal Reserve’s plan for dealing with creeping inflation.

Part 1

Source: CNBC, April 27, 2011.

Part 2

Source: CNBC, April 27, 2011.

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, April 27, 2011.

Tags: Asset Purchases, Commodities, Dissents, Economic Recovery, Economist, Federal Funds Rate, Fomc Meeting, Footing, Household Expenditures, Inflation Expectations, Inflationary Pressures, Moderate Pace, Monetary Policy, Northern Trust Company, Outlays, Qe2, Rhetoric, Term Outlook, Treasury Securities, Voting Members
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