Posts Tagged ‘FOMC’

U6 Stalks The Hawk

Thursday, August 21st, 2014

Put an “HMS” in front of the word “Hawk” in the title of this post and one might think it describes some World War II duel between a German U-boat and a British destroyer, but in fact the “Hawk” in question is any Federal Reserve official inclined to tighten monetary policy, and the “U6” lurks not beneath the frigid waters of the North Atlantic but rather in the data of the Bureau of Labor Statistics, though it’s certain to surface at this week’s Jackson Hole conference on central bank policy.

A broader measure of distress in the labor market than the U3 statistic generally referred to as the unemployment rate, U6 reflects not only unemployed workers but those who are “marginally attached,” including those with part-time jobs wishing for fuller employment as well as potential workers discouraged or otherwise incentivized to cease looking for work. Thus, U6 represents hidden slack in the labor market, a reserve of individuals whose potential reentry into the workforce could help contain wage inflation even as the Fed maintains unusually accommodative monetary policy.

The reality is that even as an inflation-wary FOMC tapers its quantitative easing program and looks to the day it can raise short-term interest rates from essentially zero, Janet Yellen and her colleagues confront an extraordinarily high number of underemployed and discouraged workers, especially as compared to the number of “conventionally” unemployed measured by U3. One can get a sense of this by comparing the ratio of marginally attached workers included in U6 to the unemployed as measured in U3*. The result can be seen in the chart below:

Marginally Attached-Unemployed RatioThe data goes back to the beginning of 1994, when the BLS began tracking marginally attached workers and computing U6. As the chart shows, for most of the last twenty years the ratio has floated around .8, falling at times to a bit above .6 and rising to a little below .9 on occasion. Yet, in the current recovery, the ratio has risen to unprecedented heights (especially in the last few months) rising above 1 for the first time in June even as U3 itself declined (in July the ratio eased slightly to just above .99). This reflects the fact that even as U3 unemployment has fallen, a large pool of jobless or underemployed have remained in that unhappy position and uncounted in the generally reported unemployment figure.

The bottom line is that for every person officially unemployed there is another either not looking for a job or desiring more work than they have been able to attain. That spells enough hidden supply in the labor market to potentially discourage accelerated tightening, even as just released Fed minutes indicate increased hiring has made some FOMC members hopeful of a chance to raise rates sooner rather than later.

Unless U6 dives a fair bit deeper, it remains poised to torpedo the hawk’s plans for an early return to more “normal” monetary policy.

*Since the BLS uses the civilian labor force alone for the base in calculating U3 and adds marginally attached workers in figuring U6, the ratio here is computed by taking the ratio of the difference between U6 and an “adjusted” U3 to that same adjusted U3, the adjustment consisting of multiplying U3 by the sum of the civilian labor force and marginally attached workers, then dividing by the civilian labor force. All figures are seasonally adjusted except attached workers, which the BLS does are not seasonally adjust though it uses that series in calculating seasonally adjusted U6.


Does “Helicopter Ben’s” Napalm Drop Smell Like Victory?

Thursday, August 22nd, 2013

Those who’ve seen Francis Ford Coppola’s “Apocalypse Now” will recall Robert Duvall’s air-cavalry colonel (and surfing enthusiast) by his declaration of love for “the smell of napalm in the morning….smelled like…victory.” Since then, few people have been similarly associated with the power of things dropped from the sky (metaphoric or not) so much as Fed Chairman Bernanke, whose famous remark referencing Milton Freidman’s concept of countering deflation via a “helicopter drop” of money earned him the nickname “Helicopter Ben.” That moniker has only been reinforced by the money creation and Fed balance sheet expansions of the central bank’s Quantitative Easing programs.

However, back on May 22, when Bernanke didn’t rule out some so-called “tapering” (he didn’t actually use that term) of the Fed’s asset purchases as early as this coming September, the fixed-income market has behaved as if he’d called in an airstrike. Indeed, the sell-off seemed to motivate some of Bernanke’s colleagues on the FOMC (as well as the big man himself) to at least project the appearance of walking back the incendiary comments, emphasizing that the decision process on tapering would be data driven and even implying that weak numbers might move the central bank to increase purchases. Case in point: the equivocation evinced in the July Fed minutes released yesterday.

This uncertainty is understandable in the face of less than robust indications of economic expansion, e.g., second-quarter GDP growth of 1.7%. Moreover, inflation continues to be subdued, begging the question of why Bernanke & Co. would choose to discuss reining in bond buying now.

Perhaps one hint is to be found in the yield spread between Treasuries and the inflation-indexed variety known as TIPs. An indicator of market expectations of future inflation, the ten-year TIP spread has widened from near zero in late November 2009 to around 2.15% as of this writing. While in excess of the 2% rate the FOMC has generally acknowledged to be their current target (though some have indicated a willingness to consider a range about this figure), the problem is that as the taper rhetoric has increased, the TIP spread has been contracting. As can be seen from the accompanying graph (with Fed assets expressed as a fraction of their 1/2/2008 value), even as Fed asset growth accelerated in 2013, the central bank has struggled to increase inflation expectations, with the TIP spread maxing out at 2.59 this past February before beginning its fall to current levels. To be sure, by many measures actual inflation has increased since its post-crisis lows, but with the Core Personal Consumption Expenditure price index (the Fed’s preferred measure of inflation) still running at only 1.22%, neither current inflation nor expectations give the Fed vast breathing room.



Meanwhile, recent job creation figures have been only modestly solicitous, with a stubbornly low participation rate even as employers confront incentives to move full-time workers to part-time status under health care reform. The prospect of coming quarters is also haunted by the specters of fiscal drags from the delayed effects of sequestration and increased taxes.

Of course, regardless of the economic statistics, the Chairman could be forgiven for wanting to put in train at least a reduction in the rate of Fed asset purchases so as to indicate the will to deal with the central bank’s massive and growing balance sheet before leaving office, let alone prior to a more meaningful increase in inflation or fall in the value of the dollar. After all, the Fed’s assets now stand at over 20% of the national debt, and the central bank current bond purchase rate has it pretty much buying up the entire Federal deficit this year, raising fears of monetization (see “Uncle Ben’s Reverted Price”). Yet with unemployment still high, corporate profits decelerating and even the hint of tapering having caused mortgage rates to spike, there is a serious potential for taper-induced economic deceleration. Given that inflation is at best just nudging up into its perceived target range, if any Fed taper is followed by a fall in growth it may be difficult for Bernanke or his successor to justify meaningfully dialing back quantitative easing. Even as far from the ocean as Jackson Hole, FOMC members gathered without their leader must feel the alternatives are a bit like the choice Duvall’s colonel gave his men: engage in a firefight or attempt to surf under an artillery barrage.

Uncle Ben’s Reverted Price

Thursday, April 19th, 2012

The price of financing the U.S. debt is the interest paid to America’s creditors, but to whom does America pay that interest? Who owns the biggest slice of the U.S. debt? If you’re thinking China or Japan, those trade deficit bogeymen of the East, you’d be wrong and by quite some distance: those relative pikers are in a close battle for second, with the PRC slightly edging out Nippon but each holding about a trillion dollars worth, good for 7% apiece. The reigning champ out-distances both by 70%, holding $1.7 trillion dollars or nearly 12% of America’s $14.28 trillion national debt. Fortunately for Uncle Sam, however, that top lender is like no other, for this is a creditor from whom all interest paid on the debt it holds is “reverted” straight back to the borrower, which is to say the U.S. Treasury. I refer, of course, to the Federal Reserve.

With the Fed funds rate hovering near zero, the Fed resorted to massive Treasury purchases in an effort to drive down interest rates and stimulate the economy, a policy which has made the central bank Washington’s largest creditor. Because all Fed profits are rebated back to the Treasury, the interest on the 12% of U.S. debt held by the Fed is being returned directly to the Federal government’s coffers and, by extension, to American taxpayers, since every dollar of interest the Treasury receives back from the Fed is a dollar it does not have to collect from taxpayers in order to finance the debt. Given that 20% of tax revenue goes to servicing this debt, that’s quite a break we’re receiving from Bernanke & Company.

Yet it gets better. Like disk jockeys programming an oldies station, the FOMC’s members recently brought back a blast from the past, the 1961 monetary policy sensation known as “Operation Twist.” In the September 2011 remix of this interest rate two-step, the Fed announced it would sell $400 billion of Treasuries with maturities of no more than three years, using the proceeds to purchase an equal amount of 6- to 30-year T-bonds. Given how low short rates already are, the idea is to lower rates at the long end of the yield curve by pushing out the maturity of the central bank’s holdings and taking longer-dated T-bonds out of the market. The theoretical argument is that lowering the long rates should stimulate the economy, while the counter-balancing short-maturity sales hold the size of the Fed’s balance sheet constant. A side effect of this kind of maneuver is that, as it skews the Fed’s holdings toward higher-yielding long Treasuries, the fraction of total interest on U.S. debt rebated to the Treasury by the Fed will increase even though the value of the Fed’s Treasury holdings are held constant. As an added bonus, those lower long-term rates mean reduced long term costs of further borrowing by the Treasury as it finances that ever-increasing U.S. debt.

All this may sound suspiciously like the free lunch your economics professors told you was but a culinary myth. But the tab’s arrival may be delayed while markets extract a higher price for the fiscal over-consumption of other nations. The Fed’s epic Treasury purchases are funded by money the central bank creates and injects into the markets, which, ceteris paribus, might be expected to depress the value of the dollar and increase inflation. However, ceteris hasn’t been particularly paribus lately; ongoing Euro-antics continue to place a safe haven premium on both the currency and debt of the United States (see “Send Treasury Your Retired, Your Not-So-Poor, Your Befuddled Classes Yearning To Invest Risk-Free…”) while, in the wake of the financial crisis, sluggish global growth has restrained increases in both labor and commodity costs. This trend has been reinforced of late by recent slowdowns in China and India, engineered by those countries’ central banks in the hopes of restraining their own domestic price pressures.

Nevertheless, the nascent recovery in the U.S. has been attended by a run-up in the price of oil and, recently, rising unit labor costs, causing the TIP spread between regular and and inflation-protected Treasury bonds to widen, albeit modestly. If, as some recent data from Beijing indicate, China’s landing proves to be more of a brief layover, and should concern over a full-blown Euro implosion continue its recent ebbing, then the U.S. may learn a truth diners at complimentary buffets generally discover: sooner or later, gorging on a seemingly free lunch is paid for with inflation, be it in your waistline or your currency. But for a Fed faced with the alternative of stalled growth, increased inflation risk may be, as the old saying goes, just the price of rice, converted or not.