by Calculated Risk on 7/10/2013 04:10:00 PM

Note: This is an interesting speech, but the key will be the Q&A.

Speech from Fed Chairman Ben Bernanke: A Century of U.S. Central Banking: Goals, Frameworks, Accountability

Today, I'll discuss the evolution over the past 100 years of three key aspects of Federal Reserve policymaking: the goals of policy, the policy framework, and accountability and communication. The changes over time in these three areas provide a useful perspective, I believe, on how the role and functioning of the Federal Reserve have changed since its founding in 1913, as well as some lessons for the present and for the future. I will pay particular attention to several key episodes of the Fed's history, all of which have been referred to in various contexts with the adjective "Great" attached to them: the Great Experiment of the Federal Reserve's founding, the Great Depression, the Great Inflation and subsequent disinflation, the Great Moderation, and the recent Great Recession.

by Calculated Risk on 7/10/2013 02:00:00 PM

Note: We will probably know more on the Fed's plans after Bernanke's speech and Q&A later today.

From the Fed: Minutes of the Federal Open Market Committee, June 18-19, 2013. A few excerpts on asset purchases:

While recognizing the improvement in a number of indicators of economic activity and labor market conditions since the fall, many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases. ...

Participants discussed how best to communicate the Committee's approach to decisions about its asset purchase program and how to reduce uncertainty about how the Committee might adjust its purchases in response to economic developments. Importantly, participants wanted to emphasize that the pace, composition, and extent of asset purchases would continue to be dependent on the Committee's assessment of the implications of incoming information for the economic outlook, as well as the cumulative progress toward the Committee's economic objectives since the institution of the program last September. The discussion centered on the possibility of providing a rough description of the path for asset purchases that the Committee would anticipate implementing if economic conditions evolved in a manner broadly consistent with the outcomes the Committee saw as most likely. Several participants pointed to the challenge of making it clear that policymakers necessarily weigh a broad range of economic variables and longer-run economic trends in assessing the outlook. As an alternative, some suggested providing forward guidance about asset purchases based on numerical values for one or more economic variables, broadly akin to the Committee's guidance regarding its target for the federal funds rate, arguing that such guidance would be more effective in reducing uncertainty and communicating the conditionality of policy. However, participants also noted possible disadvantages of such an approach, including that such forward guidance might inappropriately constrain the Committee's decisionmaking, or that it might prove difficult to communicate to investors and the general public.

Since the September meeting, some participants had become more confident of sustained improvement in the outlook for the labor market and so thought that a downward adjustment in asset purchases had or would likely soon become appropriate; they saw a need to clearly communicate an intention to lower the pace of purchases before long. However, to some other participants, this approach appeared likely to limit the Committee's flexibility in adjusting asset purchases in response to changes in economic conditions, which they viewed as a key element in the design of the purchase program. Others were concerned that stating an intention to slow the pace of asset purchases, even if the intention were conditional on the economy developing about in line with the Committee's expectations, might be misinterpreted as signaling an end to the addition of policy accommodation or even be seen as the initial step toward exit from the Committee's highly accommodative policy stance. It was suggested that any statement about asset purchases make clear that decisions concerning the pace of purchases are distinct from decisions concerning the federal funds rate.

Participants generally agreed that the Committee should provide additional clarity about its asset purchase program relatively soon. A number thought that the postmeeting statement might be the appropriate vehicle for providing additional information on the Committee's thinking. However, some saw potential difficulties in being able to convey succinctly the desired information in the postmeeting statement. Others noted the need to ensure that any new statement language intended to provide more information about the asset purchase program be clearly integrated with communication about the Committee's other policy tools. At the conclusion of the discussion, most participants thought that the Chairman, during his postmeeting press conference, should describe a likely path for asset purchases in coming quarters that was conditional on economic outcomes broadly in line with the Committee's expectations. In addition, he would make clear that decisions about asset purchases and other policy tools would continue to be dependent on the Committee's ongoing assessment of the economic outlook. He would also draw the distinction between the asset purchase program and the forward guidance regarding the target for the federal funds rate, noting that the Committee anticipates that there will be a considerable time between the end of asset purchases and the time when it becomes appropriate to increase the target for the federal funds rate.
emphasis added

by Calculated Risk on 7/10/2013 11:03:00 AM

From Nick Timiraos at the WSJ: Foreclosure Squeeze Crimps Las Vegas Real-Estate Market

The number of available homes has plunged here after a sweeping state law subjected lenders to stiff new foreclosure rules and penalties. With banks exercising caution, many homeowners—including those seriously delinquent on their loans—have been allowed to remain in place. As a result, there is little on the market at a time when first-time buyers and real-estate speculators are anxious to tap both cheap prices and low-interest mortgages.
...
The perverse outcome: Inventory shortages have spurred new developments despite a glut of properties stuck in foreclosure limbo.
...
The inventory shortages, meanwhile, have been a boon for some—especially builders. "A.B. 284 has been great for us. It darn near eliminated the constant inflow of foreclosures on the resale market," says Robert Beville, president of Harmony Homes, a local home builder.
...
Studies by researchers at the Federal Reserve Bank of Boston show that "delaying the foreclosure process does not in the end lead to fewer foreclosures," said Paul Willen, a senior economist at the Boston Fed. "If they're delaying a foreclosure that is going to happen eventually, what we're really concerned about is that they're reducing the quality of life for the neighborhood."
emphasis added

The Nevada law was passed with good intentions - and the banks were definitely bad actors - but the result is Las Vegas will have a high level of foreclosures for years (and poorly maintained homes). 

by Calculated Risk on 7/10/2013 08:14:00 AM

From the MBA: Mortgage Applications Decrease as Rates Reach Two-year High in Latest MBA Weekly Survey

The Refinance Index decreased 4 percent from the previous week. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier.
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 4.68 percent, the highest rate since July 2011, from 4.58 percent, with points increasing to 0.46 from0.43 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
emphasis added

Note: This was for a holiday week with a large seasonal adjustment. I expect a large decline in refinance activity in the survey next week.

Click on graph for larger image.

The first graph shows the refinance index.

With 30 year mortgage rates above 4.5%, refinance activity has fallen sharply, decreasing in 8 of the last 9 weeks.

This index is down 50% over the last nine weeks.

The second graph shows the MBA mortgage purchase index.  The 4-week average of the purchase index has generally been trending up over the last year, and even with the recent decline, the 4-week average of the purchase index is up almost 10% from a year ago.

by Calculated Risk on 7/09/2013 08:31:00 PM

Not a usual topic, but an interesting article from Nick Bilton at the NY Times: The Money Side of Driverless Cars

Washington, an average of six parking tickets are issued every minute of a normal workday. That is about 5,300 tickets on each of those days. Those slips of paper have added up to $80 million in parking fines a year, according to a report by AAA Mid-Atlantic.

As I noted in my Disruptions column this week, ”How Driverless Cars Could Reshape Cities,” the parking ticket could vanish from the future city as cars park themselves ...

According to the National Highway Traffic Safety Administration, 93 percent of all traffic accidents result from human error. If cars are smart enough to avoid accidents — and many researchers working on these cars believe they will be — the multibillion-dollar car insurance industry could completely change and be reimagined.

Smart cars will have a huge impact on some areas ... I hope this happens quickly!

Wednesday:
• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index. Expect higher mortgage rates and a decline in refinance activity.

• At 10:00 AM, Monthly Wholesale Trade: Sales and Inventories for May. The consensus is for a 0.3% increase in inventories.

• At 2:00 PM, FOMC Minutes for Meeting of June 18-19, 2013 will be released. These will be scrutinized for timing of the tapering of QE3 asset purchases.

• At 4:10 PM, Fed Chairman Ben Bernanke will speak, A Century of U.S. Central Banking: Goals, Frameworks, Accountability, At the National Bureau of Economic Research Conference: The First 100 Years of the Federal Reserve: The Policy Record, Lessons Learned, and Prospects for the Future, Cambridge, Mass.

by Calculated Risk on 7/09/2013 06:24:00 PM

From San Francisco Fed President John Williams: A Defense of Moderation in Monetary Policy. From the abstract:

This paper examines the implications of uncertainty about the effects of monetary policy for optimal monetary policy with an application to the current situation. Using a stylized macroeconomic model, I derive optimal policies under uncertainty for both conventional and unconventional monetary policies. According to an estimated version of this model, the U.S. economy is currently suffering from a large and persistent adverse demand shock. Optimal monetary policy absent uncertainty would quickly restore real GDP close to its potential level and allow the inflation rate to rise temporarily above the longer-run target. By contrast, the optimal policy under uncertainty is more muted in its response. As a result, output and inflation return to target levels only gradually. This analysis highlights three important insights for monetary policy under uncertainty. First, even in the presence of considerable uncertainty about the effects of monetary policy, the optimal policy nevertheless responds strongly to shocks: uncertainty does not imply inaction. Second, one cannot simply look at point forecasts and judge whether policy is optimal. Indeed, once one recognizes uncertainty, some moderation in monetary policy may well be optimal. Third, in the context of multiple policy instruments, the optimal strategy is to rely on the instrument associated with the least uncertainty and use alternative, more uncertain instruments only when the least uncertain instrument is employed to its fullest extent possible.
emphasis added

Currently inflation is below the Fed's target (and is forecast to remain below the target), and unemployment is significantly above target (and forecast to remain above target). In general the current situation and forecasts would suggest more accommodation.

Williams argues because of uncertainty that current policy might be optimal. Note: Williams is an influential Fed president and has been supportive of QE.  Maybe ... but high unemployment is a serious problem now (and also keeps down wages for almost everyone), and I'd think monetary and fiscal policymakers would be discussing this daily.  With the current Congress, fiscal policy aimed at reducing unemployment is off the table, so all we have is monetary policy.   And now Williams is defending "moderation" ...

by Calculated Risk on 7/09/2013 03:54:00 PM

The Freddie Mac Weekly Primary Mortgage Market Survey® will be released on Thursday (the series I usually follow), but since everyone is curious about mortgage rates, here is a release from Zillow today: 30-Year Fixed Mortgage Rates Surge to Highest Level in 2 Years

Mortgage rates for 30-year fixed mortgages rose this week, with the current rate borrowers were quoted on Zillow Mortgage Marketplace at 4.41 percent, up from 4.17 percent at this same time last week.

The 30-year fixed mortgage rate hovered between 4.2 and 4.3 percent early last week and spiked at 4.6 percent on Friday before declining near the current rate early this week. The last time rates exceeded 4.4 percent was July 26, 2011.

“Rates surged on Friday after a stronger-than-expected jobs report and upward revisions to prior months’ unemployment levels,” said Erin Lantz, director of Zillow Mortgage Marketplace. “This week, rate movement will depend on whether Wednesday’s release of the Federal Open Market Committee meeting minutes and Fed Chairman Ben Bernanke’s speech reinforce or depress market expectations of a September start of easing federal stimulus.”

The ten year Treasury yield closed at 2.71% on Friday, but has fallen to 2.63% today.

by Calculated Risk on 7/09/2013 11:21:00 AM

From the BLS: Job Openings and Labor Turnover Summary

There were 3.8 million job openings on the last business day of May, little changed from April, the U.S. Bureau of Labor Statistics reported today. The hires rate (3.3 percent) and separations rate (3.2 percent) also were little changed in May. ...
...
Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs. ...The number of quits (not seasonally adjusted) was little changed over the 12 months ending in May for total nonfarm, total private, government, and in all four regions.

The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

This series started in December 2000.

Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for May, the most recent employment report was for June.

Click on graph for larger image.

Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of turnover.  When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.

Jobs openings increased in May to 3.828 million, up from 3.800 million in April. The number of job openings (yellow) has generally been trending up, but openings are only up 1% year-over-year compared to May 2012. 

Quits were up in May, and quits are up about 2% year-over-year. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits").

Not much changes month-to-month in this report - and the data is noisy month-to-month, but the general trend suggests a gradually improving labor market.

by Calculated Risk on 7/09/2013 09:50:00 AM

Reis reported that the apartment vacancy rate was unchanged in Q2. The vacancy rate was at 4.8% in Q2 2012 (a year ago) and peaked at 8.0% at the end of 2009.

Some data and comments from Reis Senior Economist Ryan Severino:

Vacancy was unchanged during first quarter at 4.3%. While the rate of vacancy compression has been slowing in recent quarters, this marks the first time that the quarterly vacancy rate has not fallen since the first quarter of 2010. Over the last four quarters national vacancies have declined by 50 basis points, a bit slower than last quarter's year‐over‐year decline in vacancy of 70 basis points. This dynamic is somewhat to be expected ‐ as the market gets tighter and tighter, it becomes increasingly difficult for vacancy to continue falling at a high rate as vacant units, or at least palatable vacant units, disappear from the market.

The aforementioned stalling in vacancy decline is more a function of increasingly supply than decreasing demand. On the demand side, the sector absorbed 31,973 units in the second quarter, about on par with absorption from one year ago during 2Q2012 and down slightly from the 39,319 units that were absorbed during the first quarter of 2013. Year‐to‐date, the sector has absorbed more units in 2013 than were absorbed through this point in 2012. However, new construction is finally starting to pick up a bit. Completions during the second quarter were 26,584 units, an increase relative to last quarter's 16,578 units and slightly below the 29,523 units that were delivered during the fourth quarter of 2012. This appears to be the front end of the relatively large wave of new supply that is estimated to come online over the next few years.

Asking and effective rents grew by 0.6% and 0.7%, respectively, during the second quarter. This is a slight increase relative to the first quarter when asking and effective rents grew by 0.5% and 0.6%, respectively. However, during the last few quarters rent growth has slowed relative to the mini‐spike that was observed during mid‐2012

Click on graph for larger image.

This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999). Note: Reis is just for large cities.

New supply is finally coming on the market and the vacancy rate has stopped falling (at least for one quarter).

Apartment vacancy data courtesy of Reis.

by Calculated Risk on 7/09/2013 08:19:00 AM

From the National Federation of Independent Business (NFIB): Small Business Optimism Drops in June, Ends 2 Months of Increases

Small-business optimism remained in tepid territory in June, as NFIB’s monthly economic Index dropped just under a point (0.9) and landed at 93.5 ...

Job creation plans rose 2 points to a net 7% planning to increase total employment, better, but still a weak reading.
...
Five percent of the owners reported that all their credit needs were not met, unchanged and the lowest reading since February 2008.

In a little sign of good news, only 18% of owners reported weak sales as the top problem (lack of demand).  During good times, small business owners usually complain about taxes and regulations - and those are now the top problems again.

Click on graph for larger image.

This graph shows the small business optimism index since 1986. The index decreased to 93.5 in June from 94.4 in May.   This is still low, but just below the post-recession high.

Note: Small businesses have a larger percentage of real estate and retail related companies than the overall economy.