by Bill McBride on 8/09/2010 02:24:00 PM
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Monday, August 09, 2010
A few articles of interest ...
Personal income declined in 2009 in most of the nation’s metropolitan statistical areas (MSAs), according to estimates released today by the U.S. Bureau of Economic Analysis.The per capita income in my MSA fell 3.8% last year.
An unstable economic environment has rekindled talk of a double-dip recession. The Conference Board’s Leading Economic Index provides data for predicting the probability of a recession but is limited by the weight assigned to its indicators and the varying efficacy of those indicators over different time horizons. Statistical experiments with LEI data can mitigate these limitations and suggest that a recessionary relapse is a significant possibility sometime in the next two years.The authors make some adjustment to the LEI, including removing the yield curve:
However, the term structure may not presently be an accurate signal. Monetary policy has been operating near the zero lower bound to provide maximum monetary stimulus. In addition, the Greek fiscal crisis has generated a considerable flight to quality that has pushed down yields on U.S. Treasury securities. Indeed, ... omitting the rate-spread indicator generates far more pessimistic forecasts. For the period 18 to 24 months in the future, the probability of recession goes above 0.5, putting the odds of recession slightly above the odds of expansion.
There is quite a bit about deflaton and monetary policy in this 1999 paper from Ben Bernanke, including arguing for a higher inflation target of 3% to 4%. Bernanke even made some "helicopter drop" comments before his well known speech in 2002: Deflation: Making Sure "It" Doesn't Happen Here
From the 1999 paper:
An alternative strategy, which does not rely at all on trade diversion, is money-financed transfers to domestic households—-the real-life equivalent of that hoary thought experiment, the “helicopter drop” of newly printed money. I think most economists would agree that a large enough helicopter drop must raise the price level.And relevant to the FOMC meeting tomorrow:
A nonstandard open-market operation ... is the purchase of some asset by the central bank (long-term government bonds, for example) at fair market value. The object of such purchases would be to raise asset prices, which in turn would stimulate spending (for example, by raising collateral values). I think there is little doubt that such operations, if aggressively pursued, would indeed have the desired effect ...
Incoming data give the Fed a green light to ease further. There is frequent chatter from unnamed sources that the Fed can do more and will consider more at this Tuesday's FOMC meeting. The public stance of Fed officials is recent weeks has tended to downplay the necessity for action at this juncture. This combination leaves the outcome of this week's FOMC meeting in doubt. My baseline expectation is that the FOMC statement acknowledges the weakness in recent data, but leaves the current policy stance intact. There is a nontrivial possibility that the Fed either implicitly or explicitly ends the policy of passive balance sheet contraction. I believe it very unlikely that the Fed sets in motion an expansion of the balance sheet.There is much more in Duy's piece.
Posted by Bill McBride on 8/09/2010 02:24:00 PM