Tuesday, May 20, 2014

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis


Debate Over Fed's Exit Strategy Continues: Bernanke vs. Dudley vs. Yellen

Posted: 20 May 2014 01:54 PM PDT

Yesterday, former fed chair Ben Bernanke said "No Need for Fed to Shrink Balance Sheet".
The Federal Reserve does not need to shrink its $4 trillion-plus balance sheet by even "a dime" for it to normalize monetary policy when the time comes, former Fed Chair Ben Bernanke said on Monday.

"The Fed has worked very carefully to figure out how to raise rates at the appropriate time," Bernanke told a monetary policy conference. "That will eventually happen - we hope it happens because that means the economy is going back to normal."

When the Fed does tighten, he said, "you can have some bumpiness" as markets potentially react to the changes. But in all, he said, "it will be a fairly normal process."
Bernanke 2010 Flashback

In 2010, Bernanke told Congress Fed is Receptive to Selling Security Holdings.
The Federal Reserve is open to selling some of the securities now on its books as part of its withdrawal from its unconventional efforts to prop up the economy, Chairman Ben S. Bernanke said Thursday, in a change of tone on how the Fed will execute its exit strategy from crisis-era interventions.

 Bernanke, testifying Thursday before the House Financial Services Committee, said that "if necessary," the Fed "has the option of redeeming or selling securities" bought during the crisis. In written testimony to the same committee on Feb. 10, he was more ambiguous, stating that he did not "anticipate that the Federal Reserve will sell any of its security holdings in the near term," at least until after the Fed had begun raising interest rates and the economy had clearly begun a sustainable recovery.

Similarly, Bernanke said Thursday that "restoring the size and composition of the balance sheet to a more normal configuration is a longer-term objective of our policies."
Dudley Proposes Exit Change Strategy

Today, the Financial Times reports NY Fed President Floats Change to Exit Strategy
One of the US Federal Reserve's most influential officials has called for a change to its exit strategy from easy monetary policy.

William Dudley, president of the New York Fed, said the central bank should keep reinvesting in its mortgage portfolio until after it raises interest rates. The current exit strategy calls for stopping reinvestment before rates go up.

The call for the Fed to keep its mortgage portfolio larger for longer signals how exit strategy is now the most active policy debate at the central bank as the US economy gets closer to full employment. The possibility of more sustained Fed demand may boost markets for mortgage-backed securities.

Mr Dudley said that raising interest rates would give the Fed the flexibility to cut them again if the economy gets into trouble, so it is more important than reducing the MBS portfolio.

"Delaying the end of reinvestment puts the emphasis where it needs to be – getting off the zero lower bound for interest rates," said Mr Dudley in a speech to the New York Association for Business Economics on Tuesday.

"In my opinion, this is far more important than the consequences of the balance sheet being a little larger for a little longer."
In the near-term, Janet Yellen is the chair and she will get her way.

Dudley's idea of hiking now so there is room to lower rates later is not going to happen. Bernanke is out of the picture.

If housing continues to crumble with employment reasonable, perhaps the Fed tapers at the existing pace, with all or most of the tapering in treasuries, with little or no tapering in mortgage-backed-securities. To appease Dudley, a change of that nature is a reasonable bet.

Mid-term, if employment growth stalls, tapering will slow or halt.

Long-term, hikes are longer off than most realize. Also, the Fed will never sell anything. Assets will be held to term.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Jobs Recovery at the Periphery, Not the Core: April 2012 vs. April 2014

Posted: 20 May 2014 11:11 AM PDT

Here is a second set of charts from reader Tim Wallace on labor force, population, and employment. The first set was a look at Labor Force, Employment, and Population April 2008 vs. April 2014.

This set compares the last two years, April 2012 vs. April 2104. Click on any chart to see a sharper image.

Age 16-24 Stats



Since April 2012 the number of people in age group 16-24 dropped insignificantly as did the number of people in the labor force. The latter is down by 101,000. However, there has been a 3.6% upswing in employment of 634,000.

Age 25-54 Stats



Age group 25-54 population is up slightly since 2012 but the labor force is down 0.5%. Employment is up 1.2% by 1,114,000. However, this is essentially a rise from the abyss. The first set of charts shows employment in this age group is down 4,614,000 from April 2008. Accounting for the decline in population in this group since 2008, employment is down 3,561,000 from where it should be, even with the 1,114,000 increase in the last two years.

Age 55-64 Stats



Population in age group 55-64 is up by 1,422,000 and employment is up by 1,211,000. Percentage-wise population is up by 3.7%, while employment is up 5.2%. This is a huge difference compared to stats for the core age group 25-54. We would need a finer breakdown to see if retirement is pushed back in the 62-64 age group but other evidence, notably the 65+ age group strongly suggests just that.

Age 65+ Stats



The age 65+ chart shows the increased tendency for people to work past retirement age, especially in percentage terms. The overall effect on employment has not been that great, at least in absolute number terms. The age 65+ population is up by 3,157,000 but employment is only up 813,000.

Synopsis

The first set of charts shows a rather dim view of the recovery since the start of the recession.

This set of charts shows the uneven nature of the recovery in the last two years. Percentage-wise, the worst performance is in the core 25-54 age group.

Let's take a closer look at the curious set of numbers for the last two years.

Age GroupPopulation Increase Labor Force Increase Employment Increase
16-2419,000101,000634,000
25-5496,000-546,0001,114,000
55-641,422,000844,0001,211,000
65+3,157,000743,000813,000

Age GroupPopulation Increase% Labor Force Increase% Employment Increase%
16-240.00.53.6
25-540.1-0.51.2
55-643.73.45.2
65+7.69.711.2

In percentage terms, there has been a decent recovery at the periphery, but not the core.

The decline in the labor force in age group 25-54 stands alone. Even in the last two years, things have not been normal.

Nonetheless, strong percentage hiring at the periphery coupled with the fact that employment is rising faster than the labor force in every demographic, explains the drop in the unemployment rate.

I will take one more look at this data in regards to retirement and the unemployment rate in a third post.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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