Wonkbook: Will the Fed get back in the game?

July 25, 2012

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RCP Obama vs. RomneyObama +1.8%; 7-day change: Obama -0.2%.

RCP Obama approval47.0%; 7-day change: -0.2%.

Top story: Summertime and the Fed might be easing

The Fed is moving closer to action. "Federal Reserve officials, impatient with the economy's sluggish growth and high unemployment, are moving closer to taking new steps to spur activity and hiring. Since their June policy meeting, officials have made clear--in interviews, speeches and testimony to Congress--that they find the current state of the economy unacceptable. Many officials appear increasingly inclined to move unless they see evidence soon that activity is picking up on its own. Amid the recent wave of disappointing economic news, conversation inside the Fed has turned more intensely toward the questions of how and when to move. Central bank officials could take new steps at their meeting next week, July 31 and Aug. 1, though they might wait until their September meeting to accumulate more information on the pace of growth and job gains before deciding whether to act." Jon Hilsenrath in The Wall Street Journal.

@jamespoulos: QE3 QED

@ryanavent: Is this really the best the Fed can do? This is absurdly lame.

Why the Fed might act (in one chart): http://wapo.st/PZNqZH.

Treasury investors cut bets on inflation to the least in six months. "Treasury investors cut bets on inflation to the least in six months and yields reached record lows as Bill Gross, who runs the world’s biggest bond fund, warned the U.S. economy may stop growing. The difference between the rate on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, narrowed to 2 percentage points. It was the least since Jan. 4 and compares with an average of 2.15 over the past decade. The U.S. plans to sell $35 billion of five-year debt today, as slowing growth and Europe’s debt crisis fuel demand for the relative safety of Treasuries. 'The market is implying that there is deflation in the economy, that the U.S. economy will get weaker,' said Kevin Yang, head of bond investment in Taipei at Hontai Life Insurance Co., which has $6 billion in assets." Wes Goodman and Kristine Aquino in Bloomberg.

An audit the Fed bill is expected to pass the House today. "Several senior House Democrats warned that passing a bill from Rep. Ron Paul (R-Texas) requiring a full audit of the Federal Reserve Board's monetary policy decisions will allow Congress greater leverage to put political pressure on these decisions, which they said would cause serious problems in the U.S. and global financial markets. The Federal Reserve Transparency Act, H.R. 459, was expected to come up for a vote Wednesday, and seemed poised for passage given its 270 co-sponsors, including nearly four dozen Democrats. Nonetheless, many Democrats used the Tuesday floor debate to warn about the chances that Congress might use the audit to politicize monetary policy decisions." Pete Kasperowicz in The Hill.

@dwreilly2: So, wait. Will the "Audit the Fed" bill tell us where Roger gets those classy knit sweaters he rocks after a match?

MALLABY: The Fed should raise its inflation target. "The Fed faces a dilemma. With inflation below target and unemployment far above the neutral rate, there is a clear case for stimulus. But the familiar tools of stimulus seem unlikely to work. So the markets expect next week’s Fed policy meeting to produce more equivocation. The better way forward would be to come up with new tools...The Fed could couple more quantitative easing with a formal announcement of a higher inflation target. Some Fed leaders are open to this. Charles Evans, the Chicago Fed president, has floated the idea of a 3 per cent target, effective until unemployment falls below 7 per cent. A higher inflation target would lead markets to understand the Fed is committed to quantitative easing of game-changing magnitude, inducing the behavioural shifts needed to make the policy succeed." Sebastian Mallaby in The Financial Times.

@mattyglesias: Let's hope Ben Bernanke reads Sebastian Mallaby

Inflation would be at 4.2% if it was as far from target as unemployment: http://on.wsj.com/OYU3Kv.

CROOK: Elected government inaction has forced central banks to step up. "The defining feature of policy since the Great Recession began has been a fundamental shift in what we ask of elected governments on one side and unelected central banks on the other. Governments have failed, and are still failing, to get fiscal policy right. So, with varying degrees of reluctance, central banks have had to step in with quasi-fiscal measures, such as buying long-term government debt or absorbing risks previously borne by the private sector. This reassignment of duties is no mere technicality. It’s a momentous and troubling development. To be clear, central banks have good reason to engage in fiscal policy in today’s extraordinary circumstances...The longer-term implications of this reversal, though, aren’t good." Clive Crook in Bloomberg.

HILTZIK: Inflation can be our friend. "Wars and other crises have a way of remaking your oldest enemies into your best friends (and vice versa -- just look at the history of U.S.-Soviet relations from 1939 to 1945). Given the depth and persistence of the financial crisis here and in Europe, isn't it time to embrace one of our oldest economic foes, inflation?...Inflation hasn't always been regarded as the fearsome gargoyle it is now. In fact, it's more commonly been treated as a useful policymaker's tool in times of economic crisis...Stable prices, it was understood then, benefited bondholders and other creditors by maintaining the value of their claims at the expense of debtors and the working class. That's still true." Michael Hiltzik in The Los Angeles Times.

The academic literature on quantitative easing: http://on.ft.com/LMN8Zb.

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Top op-eds

1) GORDON AND WEST: Don't worry about the fiscal cliff. "Why do pundits and politicians continue to act as if the U.S. is a risky sovereign like Greece, in desperate need of a fiscal plan and in constant search of pliant lenders lest it face a crisis? Such dire prognostications are way off base -- and the so- called fiscal cliff is perhaps the biggest red herring...Officials in Washington must resolve a fiscal drag equal to 5 percent of gross domestic product. In an emerging market -- or Europe, for that matter -- this would be a recipe for disaster: a sharply divided legislature would need to choose between reneging on fiscal promises designed to placate lenders or brokering a politically treacherous substitute deal in a condensed time frame. But policy makers have an easy way out because the U.S. will not be subject to such financial pressures. U.S. haven status all but guarantees that the lame-duck Congress and Obama will agree to forgo the austerity that makes up the fiscal cliff, and they won’t suffer for doing so." David Gordon and Sean West in Bloomberg.

2) FRUM: Republicans should reform, not repeal, Obamacare. "'Repeal and replace' has been the Republican slogan against the giant Democratic health reform enacted in 2010. But replace with what? The reform, for all its many, many faults, did one important thing: extend health insurance coverage to almost all Americans. A Republican alternative should aspire to do the same. That statement is controversial in today’s GOP. It should not be. Universal coverage need not mean higher costs, nor more statism. But how to get there while meeting Republican concerns?...Obamacare leaves Medicare, the scheme for the elderly, almost untouched. This reliance on existing programmes has dangerous effects...The exchanges offered an alternative vision: a marketplace operated by the states in which providers would compete to offer programmes to ensure their clients’ health and wellbeing. Individuals would choose from a regulated menu of such programmes. This managed competition model should be extended rather than eliminated." David Frum in The Financial Times.

3) HAY: It's not the time to raise taxes on investment income. "If Congress fails to act, tax rates for investment income will soar beginning Jan. 1, 2013. The top tax rate on capital gains will jump to 23.8% from 15% and the top rate on dividends will nearly triple to 43.4% from 15%. The House of Representatives is considering legislation to extend the current 15% tax rate on investment income for one year. But the Senate plan, scheduled for a vote this Wednesday, would raise the top tax rate on capital gains and dividend income to 23.8% for individuals making more than $200,000 per year and joint filers earning more than $250,000. Now is not the time to raise tax rates on investment income--even if limited to upper-income taxpayers. Raising taxes on dividends and capital gains will have a devastating, domino-like effect that would hurt the economic security of millions of Americans at every income level." Lewis Hay II in The Wall Street Journal.

4) ORSZAG: Congress should privatize the Postal Service. "Those who believe in the usefulness of government must be vigilant about making sure all its activities are vital ones, since the unnecessary ones undermine public confidence. With this in mind, Congress should now privatize the U.S. Postal Service. Further evidence for why this should happen came last week, when the Postal Service announced that it would be unable to meet billions of dollars in payments that are coming due in August and September for future retiree health benefits. Privatization is not always the best way to improve efficiency, but the problems facing the Postal Service will be difficult to address if it remains within the government, and there is no longer any sound reason for it not to go private." Peter Orszag in Bloomberg.

5) FELDSTEIN: The declining value of the euro is the key to its survival. "The last eurozone summit ended with an optimistic communiqué but nothing of substance. Meanwhile, financial markets may already be in the process of forcing a solution upon Brussels policy makers. The declining value of the euro holds the key to the eurozone’s survival...A lower value of the euro would reduce the prices of eurozone exports and raise the cost of imports, reducing or eliminating the current account deficits of the peripheral European countries, since about half of their trade is with countries outside the eurozone...The decline of the euro can therefore occur without specific action by the European Central Bank. But a further shift by the ECB toward a looser monetary policy would speed the euro’s decline." Martin Feldstein in The Financial Times.

@BCAppelbaum: Trying to remember what we all did for entertainment back before the Euro crisis.

Chan Marshall interlude: Cat Power plays Love and Communication at Rolling Stone.

Got tips, additions, or comments? E-mail me.

Still to come:NY Fed was quiet on Libor; a new CBO score for Obamacare; cybersecurity is scaled back; historic thaw for the Greenland ice sheet; and a dog gives a cat a piggyback ride.

Economy

The New York Fed was quiet on Barclays’ admission of rigging Libor. "Treasury Secretary Timothy F. Geithner has said that he sounded the alarm four years ago to regulators about problems with the benchmark interest rate known as Libor. But Geithner, who was then head of the Federal Reserve Bank of New York, did not communicate in key meetings with top regulators that British bank Barclays had admitted to Fed staffers that it was rigging Libor, according to people familiar with the matter. Instead, regulators at the Commodity Futures Trading Commission and the Justice Department worked largely without the Fed’s help to build a case against Barclays. That work has culminated in a massive scandal rocking the banking industry on both sides of the Atlantic." Jia Lynn Yang and Danielle Douglas in The Washington Post.

Congressional Republicans doubt Romney's plan to repeal Dodd-Frank. "Mitt Romney says President Barack Obama’s financial reform is strangling the economy - and he’s pledging to repeal it once he’s in office. The problem: Republicans in Congress say that’s impossible. The Dodd-Frank law celebrated its second anniversary this month, and its critics concede it’s just too far along to fully repeal it. That leaves Romney’s campaign rhetoric as just that - words that sound good on the stump, but don’t offer Republicans in Congress much guidance on what their Wall Street agenda should look like, even if they had a fellow GOPer in the White House." Patrick Reis and MJ Lee in Politico.

The Senate votes today on tax cuts. "The legislative battle set for Wednesday is largely meaningless. Neither side has the 60 votes necessary to overcome a filibuster and push its preferred tax package to final passage. Leaders in both parties acknowledge that the issue of what to do about the expiring tax cuts enacted during the George W. Bush administration will be resolved only after the November elections. For now, Senate Democrats hope to muster 50 votes for their $250 billion proposal to extend the middle-class tax cuts through 2013, an outcome that would permit them at least to claim majority support and press the argument that Republicans are holding the middle class hostage...The Republican-controlled House, meanwhile, was laying plans to vote next week on a $400 billion one-year extension of the tax cuts virtually identical to the one proposed by Senate Republicans." Lori Montgomery in The Washington Post.

Congress split over online sales taxes. "A move to make all online retailers levy sales tax continues to face resistance from some legislators in the US Congress even as it is backed by Amazon, which wants to avoid being singled out by individual states that are forcing it to collect. Laws that let internet sellers avoid collecting the tax from customers are the most incendiary political issue in US retailing, the source of rifts between online and bricks-and-mortar stores and between big businesses and small rivals." Barney Jopson in The Financial Times.

Musical history interlude: The history of whistling.

Health Care

The CBO says the SCOTUS' ruling will make Obamacare cost less and cover fewer. "In its June 28 ruling, the court upheld the bulk of the Affordable Care Act, but struck down a plan to require states to expand their Medicaid programs to cover residents who earn as much as 138 percent of the federal poverty level. As a result, analysts at the nonpartisan Congressional Budget Office expect that some states will refuse to expand their Medicaid programs or will delay expansion until after 2014, when most other provisions of the law are scheduled to take effect. In those states, people who earn between 100 percent and 138 percent of the poverty level will have the option to receive government subsidies to help them buy private insurance on newly created exchanges. But those who earn less than the full poverty level could be left out, the CBO said." Lori Montgomery in The Washington Post.

@sarahkliff: Kind of weird to see some Dems celebrating the CBO report. Get that it estimates savings - but only because states will thwart the law!

A proposed definition of 'affordable' may leave some children out. "While most uninsured children will qualify for coverage under the federal health law, a small percentage -- 6.6 percent of the total, or at least 460,000 -- may be shut out because of how the government proposes to define 'affordable' coverage, says a report from the U.S. Government Accountability Office. The proposed Treasury Department rule says workers and their families are ineligible for federal subsidies for coverage if an employer offers them affordable coverage at work. An employer’s offer is considered affordable if the worker’s share is less than 9.5 percent of household income. But the rule bases affordability on what a worker would have to pay to cover himself or herself, not on the cost of covering the entire family, which is generally higher." Julie Appleby in Kaiser Health News.

Domestic Policy

The cybersecurity bill has been greatly scaled back. "A cybersecurity bill likely to reach the Senate floor this week greatly scales back an earlier White House-backed proposal to require power grids, air-traffic-control systems and other critical networks to bolster their protections...The bill's sponsors--Sens. Joseph I. Lieberman (I., Conn.), Susan Collins (R., Maine) and several Democrats--are seeking to break a logjam on cybersecurity legislation. Earlier versions of the bill stalled largely over Republican objections to the security requirements for critical infrastructure, which they said amounted to new regulations. The latest proposal drops the mandatory protection standards, in a major shift in approach. Adherence to new standards would be voluntary, with participating companies given liability protections under the law." Siobhan Gorman in The Wall Street Journal.

Reliance on imports leaves the U.S. vulnerable to disasters. "An increasing reliance on imports, combined with the fraying of the nation’s power grid, highways and rail lines, leaves the United States more vulnerable to the damage of natural disasters and terrorist attacks, according to a report to be released Wednesday by former homeland security secretary Tom Ridge. The report, which Ridge shared with homeland security officials Tuesday morning, warns that the offshoring of U.S. factories means that rebounding from a catastrophe will be more difficult because so many critical supplies would have to come from overseas." Peter Whoriskey in The Washington Post.

Congress will investigate data sellers. "In a move that could lay bare the inner workings of the consumer data industry, eight members of Congress have opened a sweeping investigation into data brokers -- companies that collect, collate, analyze and sell billions of details annually about consumers’ offline, online and mobile activities for marketing and other purposes. Representative Edward J. Markey, Democrat of Massachusetts, and Representative Joe L. Barton, Republican of Texas, co-chairmen of the Bipartisan Congressional Privacy Caucus, along with six other lawmakers, sent letters of inquiry on Tuesday afternoon to nine leading industry players. In the letters, the legislators requested extensive information about how the companies amass, refine, sell and share consumer data...The Congressional inquiry heightens the scrutiny of a largely unregulated industry whose companies sell their services to third parties, rarely interacting directly with consumers." Natasha Singer in The New York Times.

Interspecies friendship interlude: A small dog gives a cat a piggyback.

Energy

The Greenland ice sheet saw its biggest thaw since 1973 this month. "Greenland’s surface ice cover experienced a broader thaw during a three-day period this month than in nearly four decades of satellite record-keeping, according to three independent satellite measurements analyzed by NASA and university scientists. About half of the surface of Greenland’s ice sheet melts on average each summer. But between July 11 and 13, roughly 97 percent of the the sheet -- from its coastal edges to its 2-mile-thick center -- experienced some thawing. The unusual amount of melt -- coming on the heels of the Petermann glacier’s loss of ice last week -- has highlighted the extent to which warming temperatures are affecting the Arctic. There has been an unusually strong ridge of warm air, or a heat dome, over Greenland." Juliet Eilperin in The Washington Post.

The House will vote on a GOP drilling plan today. "Members of the House debated legislation on Tuesday that would replace President Obama's five-year plan for offshore oil and gas lease sale plan with a Republican plan that would expand lease sales in an effort to increase domestic oil and gas production. The GOP bill, H.R. 6082, would replace the Obama administration's plan to keep some offshore areas off limits for lease sales, and also require additional lease sales off Alaska's coast. Obama's five-year plan was put forward in late June, and Republicans said they are compelled to try to replace it with a more aggressive plan for developing domestic energy...Hastings also announced that Republicans would set up two main votes on Wednesday -- one on the GOP bill, and another on a bill that reflects Obama's five-year plan." Pete Kasperowicz in The Hill.

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

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