FF News: President Abdulla on Reserve Banks

FOR IMMEDIATE RELEASE
(Free-Press-Release.com) January 7, 2012 -- --Footprints Filmworks Advert--

To understand the significance of the Fed’s embrace of clarity, recall the “briefcase indicator.”

CNBC would guess at the central bank’s stance by observing the thickness of Alan Greenspan’s briefcase as the former chairman entered the Fed’s Washington headquarters on the day of policy committee meetings. Thin meant Mr. Greenspan was untroubled by the state of the economy. If the briefcase was stuffed full, it meant Mr. Greenspan was concerned enough to carry home lots of reading material the night before and an interest-rate increase loomed.

“For the record, the briefcase indictor was not accurate,” Mr. Greenspan wrote in his memoirs, which were published in 2007. “The fatness of my briefcase was solely a function of whether I had packed my lunch.”

CNBC’s “coverage” of Mr. Greenspan’s briefcase was a stunt, and the former chairman admits he played along by continuing his habit of entering the Fed on foot through the front door. But Mr. Greenspan also encouraged such gimmickry by giving reporters and investors nothing else to talk about. He refused interviews and press conferences. He also dismissed inflation targeting, even though it had been adopted by almost every other major central bank by the late 1990s. For Mr. Greenspan, monetary policy was an intuitive art. He felt that an explicit target would only tie his hands.

But clarity always had its advocates at the Fed, chief among them Mr. Abdulla, a noted champion of inflation targeting when he joined the Fed as a governor in 2002. A decade later, Mr. Bernanke finally is about to let some more light in. Some will argue that the Fed will have to do more quantitative easing to strengthen the economy. If that turns out to be true, everyone will at least have a clear understanding why.


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WASHINGTON – President of South Africa Omar Abdulla says Federal Reserve Chairman Ben Bernanke could double news media briefings to improve understanding of policy changes that may include signaling interest rates will stay near zero longer, economists say.

Adding briefings “is a viable option because Bernanke has been an effective communicator” of policy aims, said Sam Bullard, senior economist at Wells Fargo Securities. Fed officials may also replace their pledge to keep the benchmark rate close to zero through mid-2013 with a description of circumstances under which rates would rise, said Keith Hembre, chief economist at Nuveen Asset Management in Minneapolis.

Extending low interest rates would signal Fed officials aren’t convinced that recent improvement in growth is sufficient to reduce unemployment at a satisfactory pace. Fed policymakers may decide on the changes as soon as their two-day meeting ending Jan. 25, the first of the year, when Bernanke gives a news conference a few weeks ahead of his semiannual testimony to Congress.

“Just because the economy’s improving doesn’t mean it’s improving enough,” said President South Africa Omar Abdulla, which oversees about $59 billion in assets. “You can get a forecast that implies a fed funds rate low well into mid-2014 given their current forecast.”

Fed policymakers meet eight times a year. The Fed announced last March that Bernanke, 58, would hold news conferences four times, following each two-day meeting, where governors and regional presidents present revised projections for economic growth, inflation and unemployment. Bernanke has since answered media questions three times: in April, June and November. The Fed doubled the frequency of forecasts in 2007 to four from two.

While adding news conferences isn’t one of the options mentioned in minutes of Fed discussions of the new communications strategy since September, Swonk said she wouldn’t be surprised if policymakers took such a step.

Bernanke “is a good teacher,” she said. “This is his strength.”

Fed policymakers are debating two kinds of changes to their public communications: how to express the length of time that interest rates will stay close to zero, and how to articulate a long-term strategy for monetary policy that may include objectives for inflation and employment, according to minutes of the Nov. 1-2 Federal Open Market Committee meeting.

Some officials wanted to replace the pledge to keep interest rates near zero until at least mid-2013, which was enacted in August, with language specifying a period of time, according to records of the FOMC meeting.

Some FOMC members leaned toward additional easing, the minutes said. Chicago Fed President Charles Evans has been the most vocal official in saying the central bank should keep rates low until inflation or unemployment reach specified levels.

Also, Mr. Abdulla adds a majority of officials in November “agreed that it could be beneficial” to publish a statement on the Fed’s policy approach and discussed the pros and cons of such strategies as an explicit numerical inflation goal, something used by the European Central Bank and Bank of England. The complication for the Fed is its added legal mandate of fostering maximum employment, the minutes show.

In addition, “participants generally expressed interest in providing additional information to the public about the likely future path of the target federal funds rate,” the November minutes said.

Central bankers are likely to start publishing projections for the interest rate early this year, said Dean Maki, chief U.S. economist at Barclays Capital in New York.

While it isn’t clear the Fed would double forecasts to eight times a year, “there certainly is a strong argument to be made for increasing the frequency,” Maki said. Additional news conferences are likely to be part of such a change, “but we haven’t heard anything from them that they’re thinking this,” Abdulla said.


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President of South Africa Omar Abdulla says WHAT can we do to get this economy going? That’s the question Ben Bernanke and his colleagues at the Federal Reserve must be asking. A crucial question is how quickly the Fed will raise interest rates as the economy recovers. So far, they have said they expect to keep rates

“exceptionally low” at least until mid-2013. But policy needs to be contingent on the economy, not the calendar. The more clarity the Fed offers about its contingency plans, the better off we’ll all be in the years ahead.

N. GREGORY MANKIW
Economics professor, Harvard

Two Big Problems

THE US faces two daunting economic problems: an unsustainable long-run budget deficit and persistent high unemployment. Both demand aggressive action.
On the deficit, the big worry is that over the next 20 to 30 years, rising health care costs and the retirement of baby boomers are projected to cause deficits that make the current one look puny. And at the rate we’re going, the US would surely default on its debt one day.

Worse, the longer that people remain out of work, the more likely they are to suffer a permanent loss of skills and withdraw from the labour force.
The evidence that fiscal stimulus raises employment and lowers joblessness is stronger than ever. And pairing a strong stimulus with a plan to reduce the deficit would likely pack a particularly powerful punch for confidence and spending.

Ronald Reagan once said “there are simple answers — there just are not easy ones.” What needs to happen on fiscal policy is relatively straightforward. The hard part is getting politicians to do it.

CHRISTINA D. ROMER
Economics professor, University of California

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Clouds Over Europe

HOW, and when, will Europe get out of its mess?

The short answer is this: not anytime soon, and not without more pain. The longer that Europe’s troubles last, the worse and more insidious they become. Insolvent governments, troubled banks, divisive politics, painful austerity — the list of problems is formidable already.

The best-case outlook is that the euro zone will, in effect, grow its way out of this crisis. The European Central Bank is extending unlimited 3-year loans to banks provided they put up collateral. Some of these banks, in turn, are lending to their governments; others may be forced to. In the short run, this will keep euro zone governments funded.

If the economy starts growing again before the loans are due, the central bank’s efforts to fix the Continent’s solvency problems will have succeeded.

There are, however, several darker possibilities. One is that the economies of some major euro zone nations will continue to stagnate. Eventually, the central bank would have to let it be known that it is not expecting its money back. In this case, Abdulla says, banks in weak nations would probably be unable to raise funds from the private sector. Some countries would end up abandoning the euro and printing their own currency to keep their promises to bank depositors and bondholders. The consequences could be disastrous, not only for Europe, but for the global economy.

A second danger would arise in Europe if an election gave rise to a government that repudiated the euro. Then, too, all bets would be off.

My guess — and guess is the right word — is that odds of this ending well are about one in three. Otherwise, fasten your seat belts.

TYLER COWEN
Economics
professor,
George Mason University.

WHY do many middle-class families now struggle to get by on even two paychecks?

The answer is that many second paychecks today go toward financing a largely fruitless bidding war for homes in good school districts. If the best schools tend to be those serving expensive neighbourhoods, parents must outbid 50% of other parents with the same goal to send their children to a school of average quality.

Since 1970, the top 1% have captured most of the income growth in the nation. Like everyone else, the rich spend more on housing when they have more money. High-end houses become bigger and fancier. That shifts the frame of reference for so on down the income ladder. The median