by Calculated Risk on 9/07/2011 12:20:00 PM

From Chicago Fed President Charles Evans: The Fed's Dual Mandate Responsibilities and Challenges Facing U.S. Monetary Policy

Suppose we faced a very different economic environment: Imagine that inflation was running at 5% against our inflation objective of 2%. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.

In the United States, the Federal Reserve Act charges us with maintaining monetary and financial conditions that support maximum employment and price stability. This is referred to as the Fed’s dual mandate and it has the force of law behind it.

The most reasonable interpretation of our maximum employment objective is an unemployment rate near its natural rate, and a fairly conservative estimate of that natural rate is 6%. So, when unemployment stands at 9%, we’re missing on our employment mandate by 3 full percentage points. That’s just as bad as 5% inflation versus a 2% target. So, if 5% inflation would have our hair on fire, so should 9% unemployment.

The current unemployment rate of 9.1% (16.2% U-6) is a tragedy. Even though the high unemployment rate was a direct result of the bursting of the housing bubble and the financial crisis - Evans argues that we shouldn't just accept a sluggish recovery:

In their book This Time is Different, Carmen Reinhart and Ken Rogoff documented the substantially more detrimental effects that financial crises typically impose on economic recoveries. Recoveries following severe financial crises take many years longer than usual, and the risk of a second recession before the ultimate economic recovery returns to the previous business cycle peak is substantially higher. In a related study of the current U.S. experience, Reinhart and Rogoff show that the current anemic recovery is following the typical post-financial crisis path quite closely, given the size of the financial contraction. It would be nice to point to some features of the recovery that suggest greater progress relative to the Reinhart-Rogoff benchmark. But those are hard to come by.

It bears keeping in mind that the Reinhart-Rogoff predictions of a slow recovery are based on historical averages of macroeconomic performances across many different countries at many different times. They highlight a challenge we face today, but from the standpoint of the underlying economic analysis, there is nothing pre-ordained about these outcomes. They are not theoretical predictions—rather, they are reduced form correlations. The economy can perform better than it did in these past episodes if policy responds better than it did in those situations. In my opinion, maintaining the Fed’s focus on both of our dual-mandate responsibilities is a necessary and critical element of an appropriate response to the financial crisis that can produce better economic outcomes.

by Calculated Risk on 9/07/2011 10:00:00 AM

From the BLS: Job Openings and Labor Turnover Summary

The number of job openings in July was 3.2 million, little changed from June. Although the number of job openings remained below the 4.4 million openings when the recession began in December 2007, the level in July was 1.1 million openings higher than in July 2009 (the most recent trough).

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

Unfortunately this is a new series and only 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 July, the most recent employment report was for August.

Click on graph for larger image in graph gallery.

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

In general job openings (yellow) has been trending up - and job openings increased slightly again in July - and are up about 13% year-over-year compared to July 2010.

Overall turnover is increasing too, but remains low. Quits increased slightly in July, and have been trending up - and quits are now up about 9% year-over-year.

by Calculated Risk on 9/07/2011 07:26:00 AM

The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey

The Refinance Index decreased 6.3 percent from the previous week. The seasonally adjusted Purchase Index increased 0.2 percent from one week earlier.
...
"Heading into the Labor Day weekend, the 30-year rate was at its second lowest level in the history of our survey (the low point was reached last October), and the 15-year rate marked a new low in our survey," said Mike Fratantoni, MBA's Vice President of Research and Economics. "Despite these rates however, refinance application volume fell for the third straight week, and is more than 35 percent below levels at this time last year. Purchase application volume remains relatively flat at extremely low levels, close to lows last seen in 1996."
...
The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.23 percent from 4.32 percent, with points decreasing to 1.04 from 1.29 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. This is the second lowest 30-year rate recorded in the survey.

The following graph shows the MBA Purchase Index and four week moving average since 1990.

Click on graph for larger image in graph gallery.

The four week average of the purchase index is now at the lowest levels since August 1995.

This doesn't include the large number of cash buyers ... but purchase application activity was especially weak over the previous month, and this suggests weak home sales in September and October.

Also - with the 10 year treasury yield below 2% this week - mortgage rates will probably be at record lows in the survey next week.

by Calculated Risk on 9/06/2011 09:33:00 PM

Some analysis from Kash Mansori: Swiss FAQs. Excerpts:

6. Will the announced exchange rate floor of 1.20 CHF/euro be modified?
It's possible, and in fact, the announcement by the SNB indicated that they would like the CHF to weaken further over time. This is a very sensible strategy by the SNB, and I wouldn't be surprised if they soon make an explicit promise to gradually ratchet up the exchange rate from 1.20. The reason is because only by promising investors that their CHF portfolio will suffer exchange rate losses over time can the SNB really do something to staunch the flow of funds into Switzerland -- a fixed exchange rate of 1.20 won't do it. The SNB will probably give it a little time to see if the flow of funds into Switzerland slows as a result of today's action, but if it doesn't, then look for the SNB to set a gradually rising target exchange rate going forward.

7. How will this affect the eurozone?
That depends in part on what the SNB decides to do with all of those euro it will be accumulating. Some reports suggest that the SNB (typically cautious) had decided to only buy German and French government bonds with those euro, and not bonds from other eurozone countries. That will have the effect of exacerbating the interest rate differentials between the eurozone core and periphery, potentially making things worse. It would be reasonable to interpret this as indicating that the SNB believes that there's a good chance that eurozone is going to lose the periphery countries.

Alternatively, the SNB could decide to place a bet on the survival of the eurozone, or at least on continued Spanish and Italian inclusion. If so, then it could help to make that positive outcome happen by using some of its growing stash of euros to buy Spanish and Italian government bonds. Not only would this directly help to narrow interest rate spreads between the core and periphery, but it would be interpreted by the markets as a major vote of confidence.

by Calculated Risk on 9/06/2011 06:18:00 PM

Since I haven't posted this in some time - from Doug Short: S&P 500 Snapshot: Cliff Dive and Partial Recovery


This graph (click on graph for larger image) from Doug Short shows the wild market swings over the last few weeks.