by Calculated Risk on 8/31/2012 12:33:00 PM

First from Jon Hilsenrath and Kristina Peterson at the WSJ: Bernanke Signals Readiness to Do More

Federal Reserve Chairman Ben Bernanke offered a robust defense of the effectiveness of the central bank's easy-money policies in his speech Friday at the Fed conference here, and left little doubt that he is looking toward doing more to give the economy a lift at the Fed's next policy meeting in September.

As Hilsenrath notes, Bernanke argued: 1) QE has been effective, 2) Additional QE would be helpful, 3) the costs of additional QE "appear manageable", and 4) the economy is "far from satisfactory.

• In Bernanke's view, QE has been effective. From his speech:

How effective are balance sheet policies? After nearly four years of experience with large-scale asset purchases, a substantial body of empirical work on their effects has emerged. Generally, this research finds that the Federal Reserve's large-scale purchases have significantly lowered long-term Treasury yields. ... These effects are economically meaningful.

... a study using the Board's FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred. The Bank of England has used LSAPs in a manner similar to that of the Federal Reserve, so it is of interest that researchers have found the financial and macroeconomic effects of the British programs to be qualitatively similar to those in the United States.

To be sure, these estimates of the macroeconomic effects of LSAPs should be treated with caution. ... Overall, however, a balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks.

• The costs of additional QE are "manageable":

[T]he costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.

• The economy is still very weak:

[T]he economic situation is obviously far from satisfactory ... The unemployment rate remains more than 2 percentage points above what most FOMC participants see as its longer-run normal value ... Further, the rate of improvement in the labor market has been painfully slow. I have noted on other occasions that the declines in unemployment we have seen would likely continue only if economic growth picked up to a rate above its longer-term trend. In fact, growth in recent quarters has been tepid, and so, not surprisingly, we have seen no net improvement in the unemployment rate since January.
Unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time.

Bernanke's comments suggest QE3 will be launched very soon, perhaps on September 13th following the next FOMC meeting.

I thought the odds of QE3 in August were high - and the minutes of the meeting indicated they were very very close. It is possible that the FOMC in September will announce an extension of the extended period until 2015 (from late 2014), and wait again for QE3, but that would seem at odds with Bernanke's comments today.

by Calculated Risk on 8/31/2012 10:06:00 AM

From Fed Chairman Ben Bernanke at the Jackson Hole Economic Symposium: Monetary Policy since the Onset of the Crisis

The potential benefit of policy action, of course, is the possibility of better economic outcomes--outcomes more consistent with the FOMC's dual mandate. In light of the evidence I discussed, it appears reasonable to conclude that nontraditional policy tools have been and can continue to be effective in providing financial accommodation, though we are less certain about the magnitude and persistence of these effects than we are about those of more-traditional policies.
...
In sum, both the benefits and costs of nontraditional monetary policies are uncertain; in all likelihood, they will also vary over time, depending on factors such as the state of the economy and financial markets and the extent of prior Federal Reserve asset purchases. Moreover, nontraditional policies have potential costs that may be less relevant for traditional policies. For these reasons, the hurdle for using nontraditional policies should be higher than for traditional policies. At the same time, the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.
...
the economic situation is obviously far from satisfactory.
...
Early in my tenure as a member of the Board of Governors, I gave a speech that considered options for monetary policy when the short-term policy interest rate is close to its effective lower bound. I was reacting to common assertions at the time that monetary policymakers would be "out of ammunition" as the federal funds rate came closer to zero. I argued that, to the contrary, policy could still be effective near the lower bound. Now, with several years of experience with nontraditional policies both in the United States and in other advanced economies, we know more about how such policies work. It seems clear, based on this experience, that such policies can be effective, and that, in their absence, the 2007-09 recession would have been deeper and the current recovery would have been slower than has actually occurred.

As I have discussed today, it is also true that nontraditional policies are relatively more difficult to apply, at least given the present state of our knowledge. Estimates of the effects of nontraditional policies on economic activity and inflation are uncertain, and the use of nontraditional policies involves costs beyond those generally associated with more-standard policies. Consequently, the bar for the use of nontraditional policies is higher than for traditional policies. In addition, in the present context, nontraditional policies share the limitations of monetary policy more generally: Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve; in particular, it cannot neutralize the fiscal and financial risks that the country faces. It certainly cannot fine-tune economic outcomes.

As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.

Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

QE has been effective and costs appear manageable.

by Calculated Risk on 8/31/2012 09:51:00 AM

From Chicago ISM: Chicago Business Barometer Anemic

The Chicago Purchasing Managers reported the CHICAGO BUSINESS BAROMETER posted a small gain in August but remained steady for the last four months. Among the Business Activity measures, declines into contraction for both Order Backlogs and Supplier Deliveries offset minor gains in Production, New Orders, and Employment in August.

• EMPLOYMENT recovered more than half of last month's slowing; • PRICES PAID slight gain; • ORDER BACKLOGS lowest since September 2009; • SUPPLIER DELIVERIES lowest since July 2009.

The PMI decreased to 53.0 from 53.7. Expectations were for a decrease to 53.0.

The employment index increased to 57.1 from 53.3, and new orders increased to 54.8 from 52.9.

by Calculated Risk on 8/30/2012 09:10:00 PM

The focus on Friday will be Fed Chairman Ben Bernanke's speech at the Jackson Hole Economic Symposium.

Earlier this week, ECB President Mario Draghi cancelled his speech on Saturday. Here is an update on Europe, from the Financial Times: Brussels pushes for wide ECB powers

The European Central Bank would be given sweeping authority over all 6,000 eurozone banks under a plan being drawn up by the European Commission ... The plan, agreed at a meeting this week between top aides to José Manuel Barroso, commission president, and Michel Barnier, the EU’s senior financial regulator, would strip existing national supervisors of almost all authority to shut down or restructure their countries’ failing banks, giving those powers to Frankfurt.
Excerpt with permission.

Europe will be back on the front pages next week.

On Friday:
• At 9:45 AM ET, the Chicago Purchasing Managers Index for August will be released. The consensus is for a decrease to 53.0, down from 53.7 in July.

• At 9:55 AM ET, the final Reuter's/University of Michigan's Consumer sentiment index for August will be released. The consensus is for a reading of 73.5, down from the preliminary August reading of 73.6, and up from the July reading of 72.3.

• At 10:00 AM, the Manufacturers' Shipments, Inventories and Orders (Factory Orders) for July will be released. The consensus is for a 0.9% increase in orders.

• Also at 10:00 AM, Fed Chairman Ben Bernanke will speak at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming, "Monetary Policy Since the Crisis"

by Calculated Risk on 8/30/2012 06:55:00 PM

Yesterday the National Association of Realtors reported that its “National” Pending Home Sales Index increased by 2.4% on a seasonally adjusted basis in July to its highest level since April 2010.

The NAR’s PHSI did not signal the “dip” in June/July closed existing home sales, for reasons that are difficult to discern. It’s not easy to figure out “fallout” rates from the PHSI for several reasons: first, the PHSI is an index number with 2001 “activity” equal to 100, making numerical comparisons to the NAR’s existing home sales estimate difficult, especially since there is a “discontinuity” in the NAR’s existing home sales methodology in 2007; and second, the NAR’s PHSI is based on a sample size not much more than half that used to estimate existing home sales. To really delve into the relationship between pending sales and closed sales, one needs to get local data—which unfortunately isn’t available to the public in that many places.

Click on graph for larger image.

CR Note: This graph from Tom Lawler shows Pending and Closed home sales since January 2008. For this graph, Tom Lawler set both series to 100 in 2008.

More from Lawler: For fun, however, I looked at pending sales vs. closed sales data reported by MRIS for the mid-Atlantic region. While I have limited historical data, that data suggests that (1) contract fallout over the past two and a half years is up considerably from earlier periods; and (2) that increased fallout coincided with a significant increase in the share of pending sales that were “contingent. Other MRIS data/analyses suggests that a rise in the share of pending contracts that are short-sales, which (1) take much longer time to close; and (2) which have very high contract fall-out rates, has significantly impacted the relationship between pending sales and closed sales.

Here is a chart showing closed home sales by MRIS for the mid-Atlantic region compared to lagged new pending contracts, using a weighting of 60% for the previous month and 40% for two months earlier.

This chart suggests that over the last two years the number of closed home sales has been significantly lower than one would have expected based on the past relationship between past new pending sales and closed sales. While not shown here, a more “sophisticated” look at leads and lags suggests that the reason is not simply delayed closings, but is mainly contract fallout.

CR Note: It appears short sales are distorting the relationship between pending and closed sales, and the "pending home sales" report should currently be taken with an extra grain of salt.