Wonkbook: Fed to keep interest rates near zero through 2014

at 07:18 AM ET, 01/26/2012

Ezra is on vacation today.

Top stories

1) The Fed announced plans to keep interest rates near zero through 2014, reports Zachary Goldfarb:"The Federal Reserve said Wednesday that unemployment will remain so high over the next three years that the central bank will probably keep interest rates near zero for that period, more than a year longer than previously indicated. The announcement significantly extends the Fed’s commitment to taking steps to help drive economic growth. The Fed did not meet the demands of economists who say it should be taking immediate and dramatic action to try to reduce joblessness. But the Fed made clear that remains an option if economic growth doesn’t speed up soon...In its policy statement, the Fed said that the economy has been growing 'moderately' but warned that the depressed housing market and the economic downturn abroad presented significant head winds. As a result, the Fed strongly suggested that it was not worried that excessive action would overstimulate the economy and send the prices of goods and services soaring."


Ben S. Bernanke, chairman of the Federal Reserve, speaks during a news conference following a Federal Open Market Committee meeting in Washington on Jan. 25. (Joshua Roberts - BLOOMBERG)
@BCAppelbaum: So even the Fed, eternally optimistic, concedes that the economy is still going to suck three years from now. Happy Wednesday.

2) They also set a 2% target for inflation, reports Jonathan Spicer: "The Federal Reserve took the historic step on Wednesday of setting an inflation target, a victory for Chairman Ben Bernanke that brings the Fed in line with many of the world's other major central banks. The U.S. central bank, in its first ever 'longer-run goals and policy strategy' statement, said an inflation rate of 2 percent best aligned with its congressionally mandated goals of price stability and full employment. However, it said it was not appropriate to adopt a fixed goal for employment because the level of unemployment that can be achieved without sparking inflation is not largely determined by monetary factors. The inflation target is at the high end of what was traditionally seen as an informal target range of roughly 1.7 percent to 2 percent. It caps a long crusade by Bernanke to open a window onto what for years had been the Fed's purposefully opaque and secretive deliberations."

@DukeStJournal: Again, with Fed's inflation target at the highest end of the projected range, they can be as accomidative as they want to expand employment.

3) Proposals to tax the rich are unlikely to pass in the near future, report Jonathan Weisman and Annie Lowrey: "President Obama’s call for 'tax fairness' and Mitt Romney’s tax returns have catapulted the debate over tax increases on the rich to the top of the political agenda. But with even some top Democrats hesitant, the prospects of a so-called Buffett tax on high-earning households remain uncertain, if not remote, for the immediate future. What is left may be only politics, at least until after the November elections...After the election, changes will be coming, regardless of the occupant of the White House. If nothing is done, the tax code put in place by Congress and President George W. Bush through successive tax cuts in 2001 and 2003 expires Jan. 1. At that point, the capital gains tax rate would rise to 20 percent from 15 percent. Dividends would once again be taxed as ordinary income, meaning for the rich, rates on dividends would jump to 39.6 percent from 15 percent."

4) Corporate tax reform also faces hurdles, report Damian Paletta and Laura Meckler: "Despite broad agreement that the corporate tax code is a flawed mélange, election-year skepticism from Republicans and strained relations between the White House and the business community complicate the Obama administration's plans to overhaul it. The Treasury Department plans next month to outline new elements of a corporate-tax code designed to reward companies for bringing jobs and profits back to the U.S. and punish, through harsher tax treatment, firms that export jobs or retain earnings overseas. Among other things, the plan calls for a minimum tax on the foreign profits U.S corporations earn and includes bigger tax deductions for domestic manufacturers...The administration is keeping many details of its proposal secret until February. For example, it isn't revealing the proposed minimum tax rate to be levied against overseas profits."

5) The Pentagon will roll out its budget today, report Adam Entous, Julian Barnes, and Siobhan Gorman:"The Pentagon plans to expand its global network of drones and special-operations bases in a fundamental realignment meant to project U.S. power even as it cuts back conventional forces. The plan, to be unveiled by Defense Secretary Leon Panetta on Thursday and in budget documents next month, calls for a 30% increase in the U.S. fleet of armed unmanned aircraft in the coming years, defense officials said. It also foresees the deployment of more special-operations teams at a growing number of small 'lily pad' bases across the globe where they can mentor local allies and launch missions...Defense officials said the U.S. Army plans to eliminate at least eight brigades while reducing the size of the active duty Army from 570,000 to 490,000, cuts that are likely to hit armored and heavy infantry units the hardest. But drone and special-operations deployments would continue to grow as they have in recent years."

@LarryKorb: Obama's plan to reduce defense budget by 8% in real terms. Reagan cut by 10% in second term to address deficit.

Top op-eds

1) The differences in the presidential election are less dramatic than they seem, writes Ezra Klein: "To listen to the candidates, the 2012 election is an epochal clash between irreconcilable worldviews. It is the Alliance against the Empire, the elves versus the orcs, the forces of capitalism battling the forces of compassion. They’re right about one thing: The 2012 election matters. A lot. The winning party will probably reap long-term political benefits from holding office during an economic recovery. As for the ideological showdown of the century stuff? It’s overblown. The two likely presidential nominees would, if elected, pursue very different economic philosophies and domestic policies. But not nearly as different as they would have you believe...If anything is truly on trial in 2012, it is not free enterprise, which is firmly supported on both sides of the aisle, or even the social safety net, which isn’t going anywhere. It’s a political system where you win elections by denying areas of ideological agreement and refusing to participate in cooperative governance."

2) Obama's tax plan would make things worse, writes Howard Gleckman: "For a while there, I thought President Obama was going to embrace tax reform in his State of the Union address. Instead, following the lead of his predecessors, he offered a laundry list of new tax subsidies, bragged about some old ones, and said almost nothing about a top-to-bottom rewrite of the Tax Code...Obama’s embrace of the tax code as a vehicle to pick winners and losers sounded more than a little discordant in a speech whose theme was 'everyone gets a fair shot and plays by the same set of rules.'...I suppose it is inevitable that a president beginning his fourth year in office and facing a deeply divided Congress would go small-bore. After all, there will be no fundamental tax reform in the current environment and even proposing such a step would only open him to criticism from the usual suspects in housing, non-profits, finance and other industries that are very happy with the system as it is. Still, it is a shame that, instead, Obama would make things worse."

3) The high school dropout rate imposes a big cost on the whole economy, write Henry Levin and Cecilia Rouse: "The proposal President Obama announced on Tuesday night in his State of the Union address — to make such attendance compulsory in every state — is a step in the right direction, but it would not go far enough to reduce a dropout rate that imposes a heavy cost on the entire economy, not just on those who fail to obtain a diploma...If we could reduce the current number of dropouts by just half, we would yield almost 700,000 new graduates a year, and it would more than pay for itself. Studies show that the typical high school graduate will obtain higher employment and earnings — an astonishing 50 percent to 100 percent increase in lifetime income — and will be less likely to draw on public money for health care and welfare and less likely to be involved in the criminal justice system. Further, because of the increased income, the typical graduate will contribute more in tax revenues over his lifetime than if he’d dropped out."

4) Obama's State of the Union showcased a new vision for reindustrialization, writes Harold Meyerson: "So much for post-industrial America. After decades of our leaders and sages assuring us that the United States would thrive as we moved beyond manufacturing, President Obama used his State of the Union address to officially declare post-industrial America an unqualified bust...Remarkably, at a time when the two parties can’t agree that the sun rises in the east, the Republican candidates for president concur with some of Obama’s new emphasis on reindustrialization. Rick Santorum has called for eliminating the taxes on domestic manufacturers. Mitt Romney has called for retaliatory tariffs on Chinese imports if the Chinese continue low-balling their currency. A neo-Hamiltonian perspective on the importance of bolstering our manufacturing is abruptly all the rage. Obama has discovered his inner economic nationalist, just in time for the election."

5) It also showed he isn't serious about eliminating subsidies, writes Timothy Carney: "When President Obama promised 'no more bailouts, no more handouts' in his State of the Union address, and declared 'it's time to apply the same rules from top to bottom,' he was either prescribing a total reversal of his current industrial policy, or he was once again using words to mean something they've never meant before...To believe Obama wants 'fairness' you have to pack that word with all the subjective judgments Obama makes about who deserves what. To believe Obama wants to end 'handouts' and 'bailouts,' you must redefine the words to exclude Obama's favorite subsidies and to include some profits made through free enterprise."

'90s rock interlude: Neutral Milk Hotel plays "In the Aeroplane Over the Sea" live.

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Still to come: Geithner won't be back for a second term; nutrition rules get their first update in over a decade; Obama wades into the debate over dropouts; a clean energy standard could make a difference; and a dormouse snores.

Economy

Timothy Geithner won't stay for a second term, report Ian Katz and Trish Regan: "Treasury Secretary Timothy F. Geithner, the last member of the Obama administration’s original economic team, said he doesn’t expect to remain in office if the president is re-elected. 'He’s not going to ask me to stay on, I’m pretty confident,' Geithner said in an interview with Bloomberg Television yesterday in Charlotte, North Carolina. 'I’m confident he’ll be president. But I’m also confident he’s going to have the privilege of having another secretary of the Treasury.' Geithner, 50, has led President Barack Obama’s efforts to pull the U.S. economy out of the worst recession since World War II, including overseeing bailouts of automakers General Motors Co. (GM) and Chrysler Group LLC, which have since emerged from bankruptcy. Before joining the administration in 2009, Geithner was president of the Federal Reserve Bank of New York, playing a key role in the government’s rescue packages for banks such as Citigroup Inc. (C) and Bank of America Corp. (BAC)"

WONKBLOG FLASHBACK: Who will be the next Treasury secretary? @ezraklein: If I were writing that post today, I'd give more consideration to Lael Brainard, and might downgrade Erskine Bowles to "possible."

@MattZeitlin: Spitballing for Treasury...I'd say Mary Miller, Lael Brainard, Sperling w/Furman heading NEC. Bowles if Obama wants to see heads explode

A new push to tackle financial industry crime faces challenges, report Evan Perez and Jean Eaglesham: "The Justice Department's plan to create a new mortgage-crime unit in tandem with state authorities, announced by President Barack Obama in his State of the Union address, represents the latest move in an effort that so far has led to few prosecutions of bankers. The new unit may help push forward a broad settlement under which banks would pay billions of dollars to resolve charges about 'robo-signing' documents and other alleged mortgage abuses. But when it comes to bringing criminal charges against individual executives, the unit is likely to face the same kind of difficulties earlier task forces have encountered. Most of the investigations into alleged wrongdoing behind the 2008 financial crisis have gone nowhere—in part, Mr. Obama has said, because conduct may have been reckless but not illegal."

The White House added details to its push for manufacturing tax breaks, reports Erik Wasson: "The White House on Wednesday fleshed out the details on new tax breaks for manufacturing that President Obama called for in his State of the Union address. The package consists of six new tax provisions, which the White House wants enacted immediately, as well as a promise to propose more detailed corporate tax reforms in the coming weeks...The first change would remove tax deductions for moving costs associated with relocating abroad. The money saved from this change would be used to provide a 20 percent income tax credit for the expenses of moving operations back to the United States."

The World Bank moved to help developing nations hit by the eurozone crisis, reports Howard Schneider: "The World Bank is moving to shore up economies in eastern Europe and central Asia as fear intensifies that problems in the euro area have begun spilling over to other parts of the world. The bank announced onWednesday it would commit $27 billion to protect developing nations in the region from a western European crisis that has begun to undercut trade and investment. The move is reminiscent of steps taken by the bank in response to the 2008 world financial meltdown, and reflects a rising anxiety among policymakers that the euro zone’s troubles are beginning to reverberate outside the region...The amount of money made available by the World Bank is small in comparison with the multi-trillion-dollar war chest many think is needed to fight the crisis globally. But it becomes part of a divisive debate about how to spread the costs associated with the euro’s rescue."

Time lapse interlude: A concert hall is prepared for a rehearsal of Mahler's Symphony No. 8

Health Care

New nutrition rules will boost healthy meals, reports Dina ElBoghdady: "School cafeterias will be serving more-nutritious meals with twice as many fruits and vegetables, more whole grains and less sodium and fat under new guidelines that will revamp the federally backed school meals program for the first time in 15 years...Under the guidelines, which cover breakfast and lunch, schools that participate in the federal program must offer a mix of fruits and vegetables daily and offer double as much as currently required. In return, the schools get a federal subsidy on the cost of the food. Schools also must offer only fat-free and low-fat milk, limit calories based on the age group served, gradually lower the amount of sodium in meals, and stop serving foods or ingredients that have trans fat."

Momentum is gathering for paying for the doc fix with war savings, reports Sahil Kapur: "House Republicans are coming around to the Democrats’ plan for permanently ending the Medicare 'doc fix' problem — a $300 billion and growing albatross around the nation’s neck that virtually everybody believes needs to be fixed. The option is now on the table, key Republicans tell TPM, just one month after some of those same lawmakers dismissed it as a senseless Washington gimmick. Last fall Democrats began pushing the idea to pay for a full repeal of the Sustainable Growth Rate (SGR) formula with war savings from troop drawdowns in Iraq and Afghanistan. Republicans didn’t much care for it, but Senate Minority Whip Jon Kyl (R-AZ) hopped on board during the Super Committee negotiations, and has since been working behind the scenes to win GOP support...The OCO fund is estimated to be between $600 to $800 billion in the upcoming budget estimate, a senior White House official told TPM. President Obama wants to use as much as half of that to fund new infrastructure projects, which would leave enough money to take SGR off the books."

House Republicans are preparing a health reform replacement plan, reports Jennifer Haberkorn: "A top House Republican on Wednesday said GOP lawmakers will put forward an alternative to the health care reform law after the Supreme Court rules on the constitutionality of the law. 'We will be ready to respond to the Supreme Court decision, which is expected in June, with a replacement package,' House Energy and Commerce health subcommittee chairman Joe Pitts (R-Pa.) told a small group of reporters in the Capitol on Wednesday...Pitts pointed to several health policy ideas that Republicans have routinely supported that are likely to be in the plan, such as giving the tax break for health insurance to the employee instead of the employer, medical liability reform, creating high-risk medical 'pools' and allowing insurers to sell their products across state lines."

Health care cannot be ignored, write Aaron Carroll and Austin Frakt: "If you weren’t paying close attention to the State of the Union speech, you might have missed the parts about health care. In almost 7000 words of text, a total of 44 words were spent on the topic, a mere 0.6% for a subject accounting for more than one-sixth of the US economy. Medicare and Medicaid received 1 mention each, in the same sentence. Health care deserves greater attention from the president in his most prominent speech of the year. Surprisingly, the Republican response wasn’t much different. Although cries for repeal of the Affordable Care Act (ACA) garner cheers from some quarters on the campaign trail, no such calls were uttered by Indiana Governor Mitch Daniels. In fact, just as in the State of the Union, the ACA received almost no mention at all...The president chose to ignore these topics in his address. Governor Daniels did as well in his response. However, the American people are not going to ignore them in the upcoming year."

Domestic Policy

Obama has jumped into the debate over raising the dropout age, reports Tamar Lewin: "President Obama’s State of the Union call for every state to require students to stay in school until they turn 18 is Washington’s first direct involvement in an issue that many governors and state legislators have found tough to address. While state legislative efforts to raise the dropout age to 18 have spread in recent years, many have had trouble winning passage. Last year, for example, such legislation was considered in Alaska, Illinois, Kentucky, Maryland and Rhode Island — but only Rhode Island actually changed its law...The dropout age, historically set at 16 in most of the nation, has been edging up. Currently, 21 states and the District of Columbia have compulsory attendance until 18, and 11 others require attendance until age 17."

The Indiana House passed right to work legislation, reports Monica Davey: "The Republican-held Indiana House of Representatives passed legislation on Wednesday barring union contracts from requiring nonunion members to pay fees for representation, ending weeks of partisan battling and all but assuring that the state will become the first in the Midwestern manufacturing belt deemed a 'right to work' state. Even as the lawmakers in Indianapolis voted 54 to 44, mostly along partisan lines, to approve the measure, legislators and union leaders in other states said they were preparing for similar fights ahead. In some states, Republican supporters of 'right to work' provisions said Indiana’s move — the first state to take such a course in more than a decade — had added a sense of urgency to their own efforts."

Animal sounds interlude: A dormouse snores.

Energy

A clean energy standard could make a big impact, reports Brad Plumer: "In his State of the Union address, President Obama noted that a climate bill can’t pass Congress: 'The differences in this chamber may be too deep right now.' But he did ask lawmakers for 'a clean energy standard that creates a market for innovation.' Is that a close substitute? And could it pass? Various proposals for a clean energy standard (PDF) have been knocking around the Senate for years. Early versions required electric utilities to get a certain portion of their power solely from renewable sources like wind or solar (something that 24 states currently do). More recent versions have expanded the list of options to things like nuclear power or natural gas. But a large standard could do a lot to reshape the nation’s electricity supply."

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.

 
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