Grand Central: Do You Still Think The Fed Is Behind the Curve? – Real Time Economics

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HILSENRATH’S TAKE: DO YOU STILL THINK THE FED IS BEHIND THE CURVE?

Pablo Martinez Monsivais/Associated

When The Wall Street Journal asked economists last August what worried them more – that the Federal Reserve would raise interest rates too soon or too late – the response was overwhelming. More than 90% of those asked said they feared the central bank would be behind the curve, meaning they would raise rates too late and risk spurring inflation or a financial bubble.

Their angst is shifting. The majority of economists still worry the Fed will be late to pull the low-rate punch bowl from the financial system party, but by much smaller margins than before. In the Wall Street Journal’s latest monthly survey of economists, released Thursday, more than a third of those surveyed said they feared the Fed would raise rates too soon, not too late.

Two explanations are at play.

First, Fed Chairwoman Janet Yellen might have proven to skeptics in the economics community that she’s not the mechanical “dove” committed to low interest rates that some expected her to be when she became the central bank’s leader last year. In the past six months, Ms. Yellen has engineered an end to the Fed’s bond buying program, otherwise known as quantitative easing. She has also shifted the Fed’s interest rate guidance away from making promises of continued low rates.

Second, economists might be second-guessing their own sense of the risks building in the economy. Inflation has run below the Fed’s 2% objective for 34 straight months. It’s getting harder and harder to say with a straight face that the Fed’s low rate and money printing policies are a threatening source of inflation pressure when the central bank has been below its own objective for so long.

Read below for more about the WSJ survey.

-By Jon Hilsenrath

MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD

WSJ Survey: Most Economists See Fed Raising Rates in June or September. The Federal Reserve will start raising short-term interest rates in June or September, according to most economists who responded to a Wall Street Journal survey published Thursday. The poll of 63 economists, conducted March 6-10, found 29 expected the Fed to make its first move in June, 23 in September and four in July.

More from the WSJ economist survey:

Full Employment First, Faster Wage Growth Next.

– Explore our Economic Forecasting Survey interactive graphic.

Fed Says U.S. Household Net Worth Climbed in 4th Quarter. Americans’ wealth rose to its highest level ever in the fourth quarter of last year, thanks to gains in the stock market and home prices. The net worth of U.S. households and nonprofit organizations—the value of homes, stocks and other assets minus debts and other liabilities—climbed about 2% in the last three months of the year to $82.9 trillion, according to a Fed report released Thursday.

Fed ‘Stress Tests’ Still Pose Puzzle to Banks.  Six years after the Federal Reserve’s stress tests began, the biggest Wall Street banks are still unsure how to ace them. While no big U.S. bank failed the test, some of Wall Street’s marquee names were shocked by the disparity between their expectations and the Fed’s, such as projections for how banks’ assets and net income would fare in a severe economic downturn, according to people close to the banks.

Agence France-Presse/Getty Images

ECB Official Details First QE Purchases. The European Central Bank bought €9.8 billion ($10.33 billion) of bonds with an average maturity of nine years in the first three days of its new stimulus program, ECB executive board member Benoît Coeuré said Thursday. The ECB has said it would buy €60 billion a month in eurozone government bonds, debt instruments issued by European Union institutions and private debt instruments through to September 2016.

Bundesbank Says No Problem With Asset Purchase Targets. Germany’s central bank president Jens Weidmann said Thursday his institution will be able to meet its asset purchase targets under the ECB new quantitative easing program, playing down concerns that negative bond yields and reduced debt issuance by Germany will make it tough to find enough securities to buy.

Weak Euro Offers Hope for Corporate Europe, Headache for Some in U.S. The tumbling euro and central banks’ easy-money policies are boosting optimism in corporate Europe that the long-struggling region might finally begin a recovery worthy of the name. But Europe’s good fortune is a headache for U.S. corporate competitors that face a squeeze on overseas sales from the rising dollar

BOE’s Carney: Subdued Inflation Will Delay Rate Rises. Interest rates in the U.K. may rise at a slower pace than expected if global inflation remains subdued, Bank of England Gov. Mark Carney said Thursday. In a speech in Sheffield, England, Mr. Carney said annual inflation in the U.K. may take longer to return to its 2% target if the global economy experiences a persistent spell of weak price growth.

Russia Cuts Interest Rates. Russia’s central bank on Friday cut its key interest rate for the second time in two months, by one percentage point to 14%, and said more rate cuts are in the pipeline. The latest cut follows the central bank’s emergency move in December to sharply raise interest rates to avert a collapse in the ruble.

Bloomberg News

Danish Central Banker Defends Currency Peg. Denmark’s central bank is committed to defending the krone’s peg to the euro, and further cuts in its benchmark interest rate, as well as interventions in the foreign exchange markets, remain options, Gov. Lars Rohde said Thursday. The krone’s peg to the euro came under strain after the ECB announced a large-scale bond-buying program in January, sending the shared currency spiraling downward.

Czech President All But Confirms Next Central Bank Head. Czech President Milos Zeman all but confirmed Jiri Rusnok as his choice to be the next governor of the central bank when Miroslav Singer’s term expires next year. Mr. Zeman appointed Mr. Rusnok to the central bank’s board in March 2014, after the latter had done a stint as caretaker prime minister –Dow Jones Newswires.

Bank Indonesia Plays Down Worries Over Weak Rupiah. Indonesia’s central bank Friday said it wasn’t concerned about the weakening rupiah, a sign the central bank may be viewing a weaker currency as a way of helping boost manufacturing exports.

Brazil Central Bank Indicates Tightening Cycle Might Be Nearing an End. Brazil’s central bank said on Thursday that it expects inflation pressures to ease next year, which analysts think could mean that the bank’s two-year cycle of rate increases might be nearing an end. Despite continuing price pressures from the weakening of the local currency, the real, and the rise of government-set prices, the outlook for inflation next year has improved, the bank said in the minutes from last week’s monetary policy committee meeting that were published on Thursday.

Chile’s Central Banker Rules Out More Monetary Easing. Chile’s central bank President Rodrigo Vergara said there are early signs of an economic recovery, but persistent inflation means there is no scope for any more easing of monetary policy in the short term. The central bank began an easing cycle in October 2013, cutting the monetary policy rate by two percentage points to 3.0%.

GRAPHIC CONTENT

Americans’ Spending at Gas Stations Rises for the First Time Since May. Purchases at gas stations—by and large dollars spent on fuel—rose a seasonally adjusted 1.5% last month, the Commerce Department said Thursday. It was the first increase for the category in nine months, and the largest monthly gain since December 2013. Gasoline stations had been a drag on overall retail sales for several months, but their February turnaround didn’t overcome reduced spending elsewhere. Overall sales were down 0.6%, largely due to weaker spending at auto dealerships. 

FORWARD GUIDANCE

-BOE’s Haldane speaks in New York at 1515 GMT

RESEARCH 

A Better Gauge of Labor Slack May Be the Gap Between Two Jobless Rates. The unemployment rate has fallen to a level that has some economists suggesting the U.S. is nearing “full employment,“ but the spread between that number and a broader measure of joblessness remains stubbornly large. At the National Association for Business Economics conference in Washington this week, a handful of economists suggested the Fed should be keeping an eye on the gap between the two measures as it nears a decision for when to raise short-term interest rates.

COMMENTARY            

The Fed’s bear hug won’t be so tight, headlines David Reilly’s “Heard on the Street” column. Looming Fed rate increases aren’t likely to be abrupt or persistent, in the way they were in the middle of the last decade or in 1994, he says. Instead, Fed moves may be separated by long pauses, and interest rates’ eventual resting place may be well below what markets would normally expect. Until the Fed can convince investors of that, U.S. stocks and other risk assets will be in for a rough time. But, longer term, the ride may not prove as jarring as investors would expect.

Stress Test Keeps Getting Less Stressful for Big Banks, writes Matt Levine at Bloomberg View. “It seems clear enough to me that the point of capital regulation is to require banks to have X amount of capital, and that banks don’t want to have any more than X, because if they did then you wouldn’t need the regulation to tell them to. (Just as the point of tax law is to require people to pay Y percent of their income in taxes, and no one wants to pay any more than Y.) It also seems clear enough to me that the stress tests are simply another form of capital regulation.”

Monetary Policy in a Post-Inflation World. Writing for the Brookings Institution, Alice M. Rivlin identifies a “cultural lag” in thinking about the objectives of economic policy, including monetary policy. “We have to get used to the idea that the primary job of a central bank (together with other regulators) is to reduce the risk of financial collapse that could throw the country and the world into another deep and prolonged recession. Financial instability in the advanced economies is a far greater threat to world prosperity than the risk that inflation could get out of control. ”

BASIS POINTS

– U.S. retail sales fell for the third consecutive month in February as a mix of bad weather and consumer caution outweighed an improving labor market and cheap gasoline prices. Sales at retailers and restaurants decreased 0.6% last month to a seasonally adjusted $437 billion, the Commerce Department said Thursday. Retail sales fell 0.8% in January and 0.9% in December.

Prices of imported goods rose for the first time in eight months, a sign that downward pressure on inflation is beginning to ease as gas prices stabilize. Import prices rose 0.4% in February from January, the Labor Department said Thursday. Economists surveyed by The Wall Street Journal had forecast a 0.2% advance.

The number of Americans seeking first-time unemployment benefits fell last week, a sign of continued improvement in the labor market. Initial jobless claims decreased by 36,000 to a seasonally adjusted 289,000 in the week ended March 7, the Labor Department said Thursday. Economists surveyed by The Wall Street Journal had expected 305,000 new claims.

Correction: The 31 firms subject to the Fed’s stress tests had combined common equity of $1.1 trillion in the fourth quarter of 2014, up $641 billion since 2009. An early version of Jon Hilsenrath’s Take in Thursday’s Grand Central incorrectly said the firms combined equity was up from $641 billion.

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13 March 2015 | 11:09 am – Source: blogs.wsj.com

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