by Calculated Risk on 12/05/2011 01:45:00 PM

Over the weekend, the WSJ had an article about a new communication strategy at the Fed: Federal Reserve Prepares to Make Itself Perfectly Clear

Here are some related comments from Chicago Fed president Charles Evans today: A Risk Management Approach to Monetary Policy

The Fed could sharpen its forward guidance in two directions by implementing a state-contingent policy. The first part of such a policy would be to communicate that we will keep the funds rate at exceptionally low levels as long as unemployment is somewhat above its natural rate. The second part of the policy is to have an essential safeguard — that is, a commitment to pull back on accommodation if inflation rises above a particular threshold. This inflation safeguard would insure us against the risks that the supply constraints central to the structural impediments scenario are stronger than I think. Rates would remain low as long as the conditions were unmet.

Furthermore, I believe the inflation-safeguard threshold needs to be above our current 2 percent inflation objective — perhaps something like 3 percent. Now, the “3 percent inflation” number may seem shocking coming from a conservative central banker. However, as Kenneth Rogoff recently wrote in a Financial Times piece, “Any inflation above 2 percent may seem anathema to those who still remember the anti-inflation wars of the 1970s and 1980s, but a once-in-75-year crisis calls for outside-the-box measures.”[5] I agree wholeheartedly with Professor Rogoff.

And actually, this middle ground policy guidance is not as out-of-the box as one might think. Importantly, it is consistent with the most recent liquidity trap research, which shows that improved economic performance during a liquidity trap requires the central bank, if necessary, to allow inflation to run higher than its target for some time over the medium term. Such policies can generate the above-trend growth necessary to reduce unemployment and return overall economic activity to its productive potential. In fact, I have seen model simulation results that suggest to me that core inflation is unlikely to rise as high as 3 percent under such a policy.
...
If, as I fear, the liquidity trap scenario describes the present environment, we risk being mired in recession-like circumstances for an unacceptably long period. Indeed, each passing month of stagnation represents real economic losses that are borne by all. In addition, I worry that even when the economy does regain traction, its new potential growth path will be permanently impaired. The skills of the long-term unemployed may atrophy and incentives for workers to invest in acquiring new skills may be diminished. Similarly, businesses facing uncertain demand are less inclined to invest in new productive capacity and technologies. All of these factors may permanently lower the path of potential output.

As I said in the fall of 2010 and I repeat the message again today: I think state-contingent policies such as those I just described are a productive way to provide such necessary monetary accommodation. There is simply too much at stake for us to be excessively complacent while the economy is in such dire shape. It is imperative to undertake action now.

by Calculated Risk on 12/05/2011 10:00:00 AM

The November ISM Non-manufacturing index was at 52.0%, down from 52.9% in October. The employment index decreased in November to 48.9%, down from 53.3% in October. Note: Above 50 indicates expansion, below 50 contraction.

From the Institute for Supply Management: November 2011 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in November for the 24th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee. "The NMI registered 52 percent in November, 0.9 percentage point lower than the 52.9 percent registered in October, and indicating continued growth at a slightly slower rate in the non-manufacturing sector. This is the lowest reading since January 2010, when the index registered 50.7 percent. The Non-Manufacturing Business Activity Index increased 2.4 percentage points to 56.2 percent, reflecting growth for the 28th consecutive month. The New Orders Index increased by 0.6 percentage point to 53 percent. The Employment Index decreased 4.4 percentage points to 48.9 percent, indicating contraction in employment after one month of growth. The Prices Index increased 5.4 percentage points to 62.5 percent, indicating prices increased at a faster rate in November when compared to October. According to the NMI, 12 non-manufacturing industries reported growth in November. Respondents' comments for the most part project continued slow, incremental growth. There still remains a strong concern about lagging employment."
emphasis added

Click on graph for larger image.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

This was below the consensus forecast of 53.8% and indicates slower expansion in November than in October.

by Calculated Risk on 12/05/2011 08:46:00 AM

From the Financial Times Rolling blog: Eurozone crisis lists today's events in Europe:

• Italy’s technocrat-prime minister, Mario Monti, has unveiled tough austerity measures and economic reforms
• Nicolas Sarkozy ... and Angela Merkel ... will meet in Paris ... the structure and rules of a new “fiscal union” in Europe
• Herman Van Rompuy, the European Council president ... meets with foreign ministers to outline the scope of the talks leading up to Friday
• The Irish government presents its austerity budget ...

From the WSJ: Italy Plan Opens Pivotal Week for Euro

Italian Prime Minister Mario Monti, in his first test since taking office two weeks ago, outlined a three-year plan made up of €30 billion ($40.2 billion) in tax increases, spending cuts, pension overhauls and growth-boosting measures.

The package—equivalent to 1.9% of Italy's €1.6 trillion gross domestic product—will likely be followed by Franco-German proposals on Monday to create a new regime for budget policies in the euro zone, which European leaders could adopt at a summit on Dec. 8-9.

From the NY Times: Italy’s Leader Unveils Radical Austerity Measures

Telling Italians that the fate of their country and the euro was at stake, Prime Minister Mario Monti unveiled a radical and ambitious package of spending cuts and tax increases on Sunday, including deeply unpopular moves like raising the country’s retirement age.
...
The standard retirement age, now 60 for many women and 65 for most men, would quickly rise to 62 and 66, with incentives to keep working until age 70; the standard age for women would eventually rise to match that for men. Pensions would be based on the number of years of contributions, not on the worker’s salary at the time of retirement, as is common now.

Weekend:
• Summary for Week ending Dec 2nd
• Schedule for Week of Dec 4th

by Calculated Risk on 12/04/2011 09:08:00 PM

From Jon Hilsenrath and Luca Di Leo at the WSJ: Federal Reserve Prepares to Make Itself Perfectly Clear

The Fed has been working on revamping its communication strategy for months. ... Informally, the Fed already has made clear it wants the annual inflation rate to run at 2% or a bit lower over the long-run. A formal statement would codify the commitment. Such a declaration would likely run alongside a description of the Fed's goals for employment, which Congress requires it to mind along with inflation. Most Fed officials believe the unemployment rate could fall to 5% or 6% without triggering higher inflation.

To articulate its interest-rate strategy, the Fed would expand its quarterly release of the officials' projections for economic growth, inflation and unemployment. It would add details on the Fed's interest rate expectations underlying its economic projections, along with some description of the policy it expects to employ to reach its goals.

I think this would be helpful.

Yesterday:
• Summary for Week ending Dec 2nd
• Schedule for Week of Dec 4th

by Calculated Risk on 12/04/2011 05:35:00 PM

This will be an interesting week ...

From the WSJ: Euro Faces Tests From ECB, EU Summit

This Thursday, policy makers at the ECB will gather for a meeting that is widely expected to lead to a reduction in interest rates by at least 0.25 percentage point, to 1%. On Friday, European Union leaders have scheduled a summit meeting, where euro-zone officials are expected to lay out plans to enforce stricter budget rules across the currency bloc in an effort to keep the Continent's turmoil from worsening.

Market observers say the ECB and the EU summit are intertwined. Investors are eager for the central bank to take a more aggressive role in buying euro-zone government debt, driving down interest rates. But unless euro-zone countries overhaul their fiscal policies, the ECB is reluctant to expand its emergency bond-buying...

From the Financial Times: Monti cabinet agrees Italy austerity plans

Rome’s planned tax increases, pension changes and spending cuts amount to a savings of €30bn over the next three years, of which about €10bn will be put back into the economy through measures to promote growth, including cuts in the cost of labour and incentives to get more women and young people into the workforce.
excerpt with permission

Yesterday:
• Summary for Week ending Dec 2nd
• Schedule for Week of Dec 4th