by Calculated Risk on 10/16/2010 03:19:00 PM

From Chicago Fed President Charles Evans: Monetary Policy in a Low-Inflation Environment: Developing a State-Contingent Price-Level Target

I think there are special circumstances when price-level targeting would be a helpful complement to our current and prospective strategies in the U.S. ... There are quite a number of academic studies of liquidity trap crises that find either price-level targeting or temporary above-average inflation to be nearly optimal policies; and yet, central bankers and the public generally loathe the idea that even a temporarily higher inflation rate could be beneficial or be consistent with price stability over the longer term.
...
In my opinion, much more policy accommodation is appropriate today. In a speech two weeks ago, I stated that I believe the U.S. economy is best described as being in a bona fide liquidity trap.
...
In this setting, even a moderate expansion without a double dip will not lead to appropriate labor market improvement. Accordingly, highly plausible projections are 1 percent for core Personal Consumption Expenditure Price Index (PCE) inflation at the end of 2012 and 8 percent for the unemployment rate. For me, the Fed’s dual mandate misses are too large to shrug off, and there is currently no policy conflict between improving employment and inflation outcomes.
[CR Note: the currect FOMC forecast is for the unemployment rate to be in the 7.1% to 7.5% range in 2012, so clearly Evans is even more pessimistic]
...
If the Federal Reserve decided to increase the degree of policy accommodation today, two avenues could be: 1) additional large-scale asset purchases, and 2) a communication that policy rates will remain at zero for longer than “an extended period.”

A third and complementary policy tool would be to announce that, given the current liquidity trap conditions, monetary policy would seek to target a path for the price level. Simply stated, a price-level target is a path for the price level that the central bank should strive to hit within a reasonable period of time. For example, if the slope of the price path, which I will refer to as P*, is 2 percent and inflation has been underrunning the path for some time, monetary policy would strive to catch up to the path: Inflation would be higher than 2 percent for a time until the path was reattained. I refer to this as a state-contingent policy because the price-level targeting regime is only intended for the duration of the liquidity trap episode.

Evans suggests committing to low rates until the price level target is achieved. That way investor know that rates will stay low even with an increase in inflation. Once the price level is achieved, the Fed will move back to a 2% inflation target.

by Calculated Risk on 10/16/2010 12:12:00 PM

From Boston Fed President Eric Rosengren: Revisiting Monetary Policy in a Low Inflation Environment. Rosengren reviewed the Japanese experience and the 1999 Boston Fed conference on monetary policy in a low inflation environment. He noted:

From a policy perspective I take several lessons from the Japanese experience. First, should deflation occur, it can be quite difficult to overcome. Second, insuring against the risk of deflation may be much cheaper than waiting until it has occurred and then trying to address it. Finally, financially fragile economies may be particularly vulnerable to negative impacts from premature austerity measures.

He also said

[A] policy of gradually adjusting monetary and fiscal policy, as conducted in Japan after deflation first occurred, may not be as effective as an active policy response taken before deflation has become embedded in the economy. Of course, it should depend on the given situation and incoming data.

Also of interest, Rosengren discussed the policy channels of the Fed's Large Scale Asset Purchase or “LSAP” program. In his view there were several channels:

LSAP Channels

LSAP can successfully reduce long-term rates

Cross-correlation of assets implies other rates will fall

Does signal intent to keep rates low –medium term Treasuries did move

Exchange rate channel may be important

Lending channel –firms with access to markets leave banks, providing more capacity for banks to focus

Rosengren is current on the FOMC.

by Calculated Risk on 10/16/2010 09:09:00 AM

Note: this is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for Oct 15, 2010.

Changes and comments from surferdude808:

The Unofficial Problem Bank List shrank this week in both the number of institutions and assets. There were eight removals and six additions leaving the list at 875 institutions, down from 877 last week.

The removal of mid-size regional contributed to the decline in aggregate assets to $401.6 billion from $417.3 billion.

The removals include two of the three failed banks -- Security Savings Bank, F.S.B. ($508 million) and Westbridge Bank and Trust ($91 million). Interestingly, the other failure this week -- Premier Bank ($1.2 billion) was not subject to a published enforcement action.

Eastern National Bank ($446 million) had its action terminated. Carolina First Bank ($11.6 billion) merged into TD Bank, N.A. at the end of September. Three subsidiaries of Lauritzen Corporation (Ticker FINN) -- First National Bank, Fort Collins, CO ($1.9 billion); Castle Bank, National Association, Dekalb, IL ($1.1 billion); and First National Bank of Kansas, Overland, KS ($745 million) merged into their affiliate First National Bank of Omaha, which leaves one affiliate, First National Bank South Dakota, still on the list. We anticipate other multi-bank holding companies such as Premier Financial Bancorp (Ticker: PFBI) to merge its weak subsidiaries into a stronger affiliate. The other removal was an unassisted merger of First Bank, Farmersville, TX ($95 million) into Independent Bank, McKinney, TX.

As anticipated last week, the OCC released its enforcement actions for late August/early September. Six national banks were added this week include First Texoma National Bank, Durant, TX ($215 million); The First National Bank of Eagle River, Eagle Rover, WI ($158 million); North Georgia National Bank, Calhoun, GA ($142 million); The Camden National Bank, Camden, AL ($119 million); First National Bank, Groesbeck, TX ($50 million); and Nevada National Bank, Las Vegas, NV ($39 million).

Other modifications this week include a Prompt Corrective Action order issued by the OTS against Appalachian Community Bank ($90 million), and a name change and charter flip for Bay Cities National Bank ($273 million) to Opus Bank and state non-member status.

by Calculated Risk on 10/15/2010 07:07:00 PM

No Tan Man purp walk.
Bank C.E.O.'s breath relief sigh.
Joe "Coors" hangs his head.
by Soylent Green is People
From the FDIC: Providence Bank, Columbia, Missouri, Assumes All of the Deposits of Premier Bank, Jefferson City, Missouri

As of June 30, 2010, Premier Bank had approximately $1.18 billion in total assets and $1.03 billion in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $406.9 million. ... Premier Bank is the 132nd FDIC-insured institution to fail in the nation this year, and the sixth in Missouri.

That makes 3 today ... almost 40% loss on Premier.

by Calculated Risk on 10/15/2010 06:16:00 PM

Banking Titanic
Collides with the Hindenburg
It's really that bad.
by Soylent Green is People
From the FDIC: Simmons First National Bank, Pine Bluff, Arkansas, Assumes All of the Deposits of Security Savings Bank, F.S.B., Olathe, Kansas

As of June 30, 2010, Security Savings Bank, F.S.B. had approximately $508.4 million in total assets and $397.0 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $82.2 million. .... Security Savings Bank, F.S.B. is the 130th FDIC-insured institution to fail in the nation this year, and the second in Kansas.

From the FDIC: Midland States Bank, Effingham, Illinois, Assumes All of the Deposits of WestBridge Bank and Trust Company, Chesterfield, Missouri

As of June 30, 2010, WestBridge Bank and Trust Company had approximately $91.5 million in total assets and $72.5 million in total deposit ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $18.7 million. ... WestBridge Bank and Trust Company is the 131st FDIC-insured institution to fail in the nation this year, and the fifth in Missouri.

The FDIC is back to work ...

by Calculated Risk on 10/15/2010 04:18:00 PM

Notes: this data is not seasonally adjusted. There is a very distinct seasonal pattern for imports, but not for exports. LA area ports handle about 40% of the nation's container port traffic.

The following graph shows the loaded inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported.

Click on graph for larger image in new window.

Loaded inbound traffic was up 24% compared to September 2009.

Loaded outbound traffic was up 5% from September 2009.

For imports, there is a clear seasonal pattern and frequently a double peak - first in late summer, and then in October as retailers build inventory for the holiday season - so part of this decrease in September imports is just the normal seasonal pattern. And imports will probably increase in October.

For exports there is no clear seasonal pattern, and it appears exports have stalled or even be declining.

Not only have the pre-crisis global imbalances returned, but exports appear to have peaked in May (no clear seasonal pattern), and have moved down over the last 7 months.

by Calculated Risk on 10/15/2010 12:56:00 PM

From Fed Chairman Ben Bernanke:

The significant moderation in price increases has been widespread across many categories of spending, as is evident from various measures that exclude the most extreme price movements in each period. For example, the so-called trimmed mean consumer price index (CPI) has risen by only 0.9 percent over the past 12 months, and a related measure, the median CPI, has increased by only 0.5 percent over the same period.

The Cleveland Fed released the measures of inflation that Bernanke mentioned for September this morning:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index was virtually unchanged at 0.0% (0.6% annualized rate) in September. The 16% trimmed-mean Consumer Price Index increased 0.1% (0.9% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.1% (1.2% annualized rate) in September. The CPI less food and energy was unchanged at 0.0% (0.0% annualized rate) on a seasonally adjusted basis.

Over the last 12 months, the median CPI rose 0.5%, the trimmed-mean CPI rose 0.8%, the CPI rose 1.1%, and the CPI less food and energy rose 0.8%

So these three measures: core CPI, median CPI and trimmed-mean CPI, were all below 1% in September, and also under 1% for the last 12 months.

Click on graph for larger image in new window.

This graph shows these three measure of inflation on a year-over-year basis.

They all show that inflation has been falling, and that measured inflation is up less than 1% year-over-year. Core CPI and median CPI were flat in September, and the 16% trimmed mean CPI was up 0.1%.

Note: The Cleveland Fed has a discussion of a number of measures of inflation: Measuring Inflation

by Calculated Risk on 10/15/2010 10:03:00 AM

So much data ...

COLA: It is now official - CPI-W averaged 214.126 in Q3 2010, below the previous Q3 peak of 215.495 in 2008 - so there will be no increase in Social Security benefits or the maximum contribution base for 2011. For an explanation, see my post last month: No increase to Social Security Benefits for 2011 (unofficial)

Consumer Sentiment

From MarketWatch: Consumer sentiment edges lower in October

The preliminary Reuters-University of Michigan consumer sentiment index edged lower in October, falling to 67.9 ... from 68.2 last month.

Click on graph for larger image in new window.

Consumer sentiment is a coincident indicator - and this suggests a sluggish economy.

This was a big story in July when consumer sentiment collapsed to the lowest level since late 2009. It has moved sideways since then ...

NY Fed Manufacturing index increases in October

From the NY Fed: Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that conditions improved in October for New York State manufacturers. The general business conditions index rose 12 points, to 15.7. The new orders and shipments indexes were also positive and well above their September levels.
...
The index for number of employees climbed for a third consecutive month, although the average workweek index dipped slightly.

Here is a graph from the NY Fed.

These regional surveys had been showing a slowdown in manufacturing and are being closely watched right now. This was above expectations.

by Calculated Risk on 10/15/2010 09:15:00 AM

On a monthly basis, retail sales increased 0.6% from August to September (seasonally adjusted, after revisions - August sales were revised up), and sales were up 7.3% from September 2009. This is an easy YoY comparison because of the slump in auto sales last September following Cash-for-Clunkers.

Retail sales increased 0.4% ex-autos - about at expectations.

Click on graph for larger image in new window.

This graph shows retail sales since 1992. This is monthly retail sales, seasonally adjusted (total and ex-gasoline).

Retail sales are up 9.6% from the bottom, but still off 3.2% from the pre-recession peak.

Retail sales had moved mostly moved sideways for six months, but this is now the high for the year.

The second graph shows the year-over-year change in retail sales (ex-gasoline) since 1993.

Retail sales ex-gasoline increased by 7.0% on a YoY basis (7.3% for all retail sales).

Here is the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for September, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $367.7 billion, an increase of 0.6 percent (±0.5%) from the previous month, and 7.3 percent (±0.7%) above September 2009. ... The July to August 2010 percent change was revised from +0.4 percent (±0.5%)* to +0.7 percent (±0.3%).

by Calculated Risk on 10/15/2010 08:15:00 AM

From Fed Chairman Ben Bernanke: Monetary Policy Objectives and Tools in a Low-Inflation Environment

Given the Committee's objectives, there would appear--all else being equal--to be a case for further action. However, as I indicated earlier, one of the implications of a low-inflation environment is that policy is more likely to be constrained by the fact that nominal interest rates cannot be reduced below zero.
...
For example, a means of providing additional monetary stimulus, if warranted, would be to expand the Federal Reserve's holdings of longer-term securities. Empirical evidence suggests that our previous program of securities purchases was successful in bringing down longer-term interest rates and thereby supporting the economic recovery.
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Central bank communication provides additional means of increasing the degree of policy accommodation when short-term nominal interest rates are near zero. For example, FOMC postmeeting statements have included forward policy guidance since December 2008, and the most recent statements have reflected the FOMC's anticipation that exceptionally low levels of the federal funds rate are likely to be warranted "for an extended period," contingent on economic conditions. A step the Committee could consider, if conditions called for it, would be to modify the language of the statement in some way that indicates that the Committee expects to keep the target for the federal funds rate low for longer than markets expect. Such a change would presumably lower longer-term rates by an amount related to the revision in policy expectations. A potential drawback of using the FOMC's statement in this way is that, at least without a more comprehensive framework in place, it may be difficult to convey the Committee's policy intentions with sufficient precision and conditionality. The Committee will continue to actively review its communications strategy with the goal of providing as much clarity as possible about its outlook, policy objectives, and policy strategies.

This is less of a framework than I expected. There was one key paragraph on inflation:

Although the attainment of price stability after a period of higher inflation was a landmark achievement, monetary policymaking in an era of low inflation has not proved to be entirely straightforward. In the 1980s and 1990s, few ever questioned the desired direction for inflation; lower was always better. During those years, the key questions related to tactics: How quickly should inflation be reduced? Should the central bank be proactive or "opportunistic" in reducing inflation? As average inflation levels declined, however, the issues became more complex. The statement of the Federal Open Market Committee (FOMC) following its May 2003 meeting was something of a watershed, in that it noted that, in the Committee's view, further disinflation would be "unwelcome." In other words, the risks to price stability had become two-sided: With inflation close to levels consistent with price stability, central banks, for the first time in many decades, had to take seriously the possibility that inflation can be too low as well as too high.