2 replies on “US Monetary Policy in the Near- and Medium-Terms”
William Dudley’s remarks last night are well worth reading
Authoritative, comprehensive and accessible (to be differentiated from some of the noise that surrounds the regional governors)
=> Not much hope of a robust US recovery, with all the attendant implications for public finances over the next 1-2 years in the US and Europe.
The SF research article echoes Dudley’s themes by emphasising how the Fed can improve its credibility.
.
If not much patience to read Dudley (though not long) in full, here are the highlights:
.
“In summary, I believe the current balance of risks around the inflation outlook lie to the DOWNSIDE […]. This balance of risks is PROBLEMATIC because the current level of inflation is already SO LOW-the core PCE deflator has increased only 1.3 percent over the past 12 months. Thus, WE WOULD NOT NEED MUCH of a decline in inflation to RUN THE RISK of an OUTRIGHT DEFLATION. Outright deflation, in turn, would be a dangerous development because it would drive up real debt burdens and make it much more difficult for households and businesses to deleverage.”
“the unemployment rate is much too high and it seems likely that the recovery will be less robust than desired. This means that the economy has significant excess slack and implies that we face meaningful downside risks to inflation over the next year or two.”
“the recovery will turn out to be moderate by historical standards. This is a disappointing outcome in that growth will likely not be strong enough to bring the unemployment rate—currently 9.8 percent —down quickly.”
“I see three major forces restraining the pace of this recovery. First, households are unlikely to have fully adjusted to the net wealth shock that has been generated by the housing price decline and the weakness in share prices. …”
“The second force that could restrain the recovery is the fiscal outlook. The fiscal stimulus that is currently providing support to economic activity is temporary rather than permanent.”
“The third, and perhaps most important factor, is that the banking system has still not fully recovered. Bank credit losses lag the business cycle and are still climbing.”
“The commercial real estate sector is under particular pressure because the fundamentals of the sector have deteriorated sharply and because the sector is highly dependent upon bank lending.”
“The decline in commercial real estate valuations has created a significant amount of “rollover risk” when commercial real estate loans and mortgages mature and need to be refinanced.”
“For small business borrowers, there are three problems. First, the fundamentals of their businesses have often deteriorated…. Second, some sources of funding for small businesses—credit card borrowing and home equity loans—have dried up…. Third, small businesses have few alternative sources of funds.”
“it seems likely that some workers will respond to the wealth shock by postponing their retirement. This suggests that the labor force participation rate may rise once labor market conditions improve. This would tend to push up the unemployment rate, all else being equal.”
“All of these factors will tend to inhibit the pace of the economic recovery. Given that the recovery is starting with an abnormally large amount of slack, and the pace of recovery is not likely to be robust, this means the economy is likely to have significant excess resources for some time to come. As a result, the balance of risks to inflation lies on the downside, not the upside, at least for the next year or two.”
Monetary policy is all fine and dandy, but there are basic things that threaten America’s future, even before you get to monetary policy. I have linked two Larry Fish videos where he gives talks at MIT to students. The guy interviewing Larry in the second video is a bit of a prat, but Larry himself seems to have his head screwed on correctly.
You will notice in the second video, he is basically talking to the youngsters doing business at the MIT Sloan school of management and asking them to show some sort of morals in their careers.
The thing you will also notice, is how pathetic Larry Fish thinks this focus on Tier One ‘risk-based’ capital is. He makes the important point that all banks should hold minimum of 5% equity based capital, and that perhaps lending in the future should be more equity based. As in venture capital for instance, where the VC’s actually give a damn who they are lending money to. As opposed to working off a percentage commission etc. That is coming from a guy who spent 40 years of his life working in banking in the USA.
Fish seemed very keen that the US would hold onto its jobs in the financial services industry. He was basically spelling it out for the kids at MIT, keep going like this and we will not have those jobs anymore, because financial services will become over-regulated in the US, and other countries will have an advantage in that industry, like they already do in manufacturing and just about everything else by now.
2 replies on “US Monetary Policy in the Near- and Medium-Terms”
William Dudley’s remarks last night are well worth reading
Authoritative, comprehensive and accessible (to be differentiated from some of the noise that surrounds the regional governors)
=> Not much hope of a robust US recovery, with all the attendant implications for public finances over the next 1-2 years in the US and Europe.
The SF research article echoes Dudley’s themes by emphasising how the Fed can improve its credibility.
.
If not much patience to read Dudley (though not long) in full, here are the highlights:
.
“In summary, I believe the current balance of risks around the inflation outlook lie to the DOWNSIDE […]. This balance of risks is PROBLEMATIC because the current level of inflation is already SO LOW-the core PCE deflator has increased only 1.3 percent over the past 12 months. Thus, WE WOULD NOT NEED MUCH of a decline in inflation to RUN THE RISK of an OUTRIGHT DEFLATION. Outright deflation, in turn, would be a dangerous development because it would drive up real debt burdens and make it much more difficult for households and businesses to deleverage.”
“the unemployment rate is much too high and it seems likely that the recovery will be less robust than desired. This means that the economy has significant excess slack and implies that we face meaningful downside risks to inflation over the next year or two.”
“the recovery will turn out to be moderate by historical standards. This is a disappointing outcome in that growth will likely not be strong enough to bring the unemployment rate—currently 9.8 percent —down quickly.”
“I see three major forces restraining the pace of this recovery. First, households are unlikely to have fully adjusted to the net wealth shock that has been generated by the housing price decline and the weakness in share prices. …”
“The second force that could restrain the recovery is the fiscal outlook. The fiscal stimulus that is currently providing support to economic activity is temporary rather than permanent.”
“The third, and perhaps most important factor, is that the banking system has still not fully recovered. Bank credit losses lag the business cycle and are still climbing.”
“The commercial real estate sector is under particular pressure because the fundamentals of the sector have deteriorated sharply and because the sector is highly dependent upon bank lending.”
“The decline in commercial real estate valuations has created a significant amount of “rollover risk” when commercial real estate loans and mortgages mature and need to be refinanced.”
“For small business borrowers, there are three problems. First, the fundamentals of their businesses have often deteriorated…. Second, some sources of funding for small businesses—credit card borrowing and home equity loans—have dried up…. Third, small businesses have few alternative sources of funds.”
“it seems likely that some workers will respond to the wealth shock by postponing their retirement. This suggests that the labor force participation rate may rise once labor market conditions improve. This would tend to push up the unemployment rate, all else being equal.”
“All of these factors will tend to inhibit the pace of the economic recovery. Given that the recovery is starting with an abnormally large amount of slack, and the pace of recovery is not likely to be robust, this means the economy is likely to have significant excess resources for some time to come. As a result, the balance of risks to inflation lies on the downside, not the upside, at least for the next year or two.”
Monetary policy is all fine and dandy, but there are basic things that threaten America’s future, even before you get to monetary policy. I have linked two Larry Fish videos where he gives talks at MIT to students. The guy interviewing Larry in the second video is a bit of a prat, but Larry himself seems to have his head screwed on correctly.
http://mitworld.mit.edu/video/344
http://mitworld.mit.edu/video/706
You will notice in the second video, he is basically talking to the youngsters doing business at the MIT Sloan school of management and asking them to show some sort of morals in their careers.
The thing you will also notice, is how pathetic Larry Fish thinks this focus on Tier One ‘risk-based’ capital is. He makes the important point that all banks should hold minimum of 5% equity based capital, and that perhaps lending in the future should be more equity based. As in venture capital for instance, where the VC’s actually give a damn who they are lending money to. As opposed to working off a percentage commission etc. That is coming from a guy who spent 40 years of his life working in banking in the USA.
Fish seemed very keen that the US would hold onto its jobs in the financial services industry. He was basically spelling it out for the kids at MIT, keep going like this and we will not have those jobs anymore, because financial services will become over-regulated in the US, and other countries will have an advantage in that industry, like they already do in manufacturing and just about everything else by now.