Wonkbook: The Fed sticks with the status quo

August 2, 2012

Karl Singer is writing Wonkbook this week while Ezra is on vacation.

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Top story: The Fed sticks with the status quo

The Fed sees a slowing economy but won't act now. "The Federal Reserve took no new steps to support the economy Wednesday, but it said in a statement that it was ready to act if job growth did not improve. The statement, released after a meeting of the Fed’s policy-making committee, said that the rate of economic growth had slowed in recent months and was likely to remain 'moderate over coming quarters.' As a result, the Fed said it expected the unemployment rate to decline 'only slowly.' But the central bank deferred any effort to improve the situation at least until the committee’s next scheduled meeting in mid-September...The absence of action appeared to disappoint some equity investors. The Standard & Poor’s 500-stock index fell 4 points, or 0.29 percent, Wednesday, to 1,375.32. The Dow Jones industrial average dropped sharply after the Fed’s announcement, and then traded erratically before closing near its session low. It fell 37.62 points, also 0.29 percent, to 12,971.06." Binyamin Appelbaum in The New York Times.

READ: The Federal Open Market Committee's statement.

@Neil_Irwin: Mike Feroli's research note on FOMC is titled "Delay and Pray," which sums things up pretty well.

How the statement changed: "The biggest change is the Fed saying it 'will provide additional accommodation as needed' compared to earlier saying it was 'prepared' to take further action. The Fed altered its overall assessment of the economy. It now says that the economy 'decelerated somewhat' compared with last month’s 'expanding moderately.' The small change shifts focus from growth to concerns about slowing. The Fed also removes 'appears' from its assessment of slowing household spending, taking a firmer stance. Meanwhile, in the same section the central bank notes that inflation hasn’t been a worry 'since earlier this year,' indicating that rising prices shouldn’t hold it back." Phil Izzo in The Wall Street Journal.

Action is expected at the Fed's September meeting unless the economy strengthens. "The Federal Reserve moved a step closer to pumping more stimulus into an economy plagued by weakening growth and a jobless rate that has stayed at 8 percent or higher for more than three years. Central bankers led by Ben S. Bernanke concluded their two- day meeting Wednesday saying they 'will provide additional accommodation as needed' to bolster the expansion. The Federal Open Market Committee also said it will 'closely monitor' economic data and financial developments, suggesting it is focused on the economy’s near-term performance. 'The default is further easing,' said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. 'Unless things improve significantly, they’re going to move' at their Sept. 12-13 meeting, he said." Craig Torres in Bloomberg.

Meanwhile, more inflation measures are slowing: http://on.wsj.com/N0wTat.

O'BRIEN: Doves at the Fed should dissent. "This just isn't good enough. Long-term unemployment is still at previously unthinkable highs. Inflation is still below 2 percent, and is expected to stay below 2 percent for the next five years. It's well past time for the Fed to do more. Something like Chicago Fed president Charles Evan's plan to keep rates at zero until inflation is above 3 percent or unemployment is below 7 percent would be a good start. Or San Francisco Fed president John William's idea about open-ended quantitative easing -- basically, printing money until the economy hits some target. Or combine them! If the Fed won't do more, so-called doves like Williams should start dissenting from the committee's do-nothingism -- something none of them did in August, but Charles Evans did last year when he had a vote." Matthew O'Brien in The Atlantic.

@binarybits: Probably the most depressing thing about today's Fed news is there were no dovish dissenters. No one on the FOMC thinks easing is needed.

@rortybomb: After Evans' dove dissented last Nov, Jan FOMC extended low rates language from mid '13 to late '14. Did we need dissent now to get action?

LIPSCHUTZ: The Fed should act, not communicate. "It isn’t just that actions (mortgage-backed or Treasury securities purchases) would speak a lot louder than words, even though the real-world impact of any further Fed action is highly debatable. It is mainly that these particular words would encourage the exact clinging to the sidelines by economic decision makers that now so imperils the economy...If the Fed tells the world short rates will hang near zero for a near economic eternity, it removes the urgency from action, the urgency from borrowing while rates are historically low. At this rate, they may be historically low for the course of a working lifetime. And if economic conditions are generally unsettled (which they certainly are), why rush?" Neal Lipschutz in The Wall Street Journal.

KALETSKY: The next round of QE should go to the public. "Instead of giving newly created money to bond traders, central banks could distribute it directly to the public. Technically such cash handouts could be described as tax rebates or citizens’ dividends, and they would contribute to government deficits in national accounting. But these accounting deficits would not increase national debt burdens, since they would be financed by issuing new money, at zero cost to government or to future generations, instead of selling interest-bearing government bonds. Giving away free money may sound too good to be true or wildly irresponsible, but it is exactly what the Fed and the BoE have been doing for bond traders and bankers since 2009. Directing QE to the general public would not only be much fairer but also more effective." Anatole Kaletsky in Reuters.

Peter Coy profiles Ben Bernanke and his choice:"Bernanke, 58, was George W. Bush’s chief economic adviser in 2006 when he was appointed to head the Fed. The mild-mannered economist suddenly had immense power. President Barack Obama and House Speaker John Boehner (R-Ohio) are constrained by comparison because they can’t do anything without each other. Bernanke doesn’t need either to act. He has far more control over the Fed than Chief Justice John Roberts does over the Supreme Court. Unlike Roberts, a Fed chairman never votes on the losing side. The vote on Aug. 1 was 11-1, the only dissent coming from the hawkish Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, who objects to the Fed’s continuing intent to keep rates low through 2014."

@ryanavent: Covering the Fed is like rooting for a team that draws or loses, but never wins.

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Top op-eds

1) ANTILLA: The benefits of financial regulations matter, too. "To get an idea of who has the upper hand in this fight, consider what it entails to be the chump who has to explain the 'benefits' side of financial regulation. Costs can be easy to figure out. Say there’s a regulation that requires new compliance officers. Tally up the salaries. If there’s an assortment of new software you need to comply with Dodd-Frank’s reporting requirements, you call the computer vendors and get the numbers. But how do you measure benefits, like the frauds that never happen because stricter rules are in place? Is there a dollar figure we can put on credit markets that don’t collapse? Or the elderly who don’t lose their life savings because regulators have cracked down on rip-off artists who troll retirement villages? Those are important questions, but they aren’t the ones being asked." Susan Antilla in Bloomberg.

2) STUTZMAN AND NEEDHAM: Food stamps shouldn't be part of the farm bill. "For decades, an unholy Washington alliance--between rural lawmakers and their urban and suburban colleagues--has caused exponential growth in spending by combining farm policy and food stamps in one huge legislative package...Instead of combining farm policy, food stamps, telecommunications, energy, forestry and conservation into a single legislative vehicle, we must begin advancing one issue at a time. Even Americans with differing views on the role of the federal government in U.S. agriculture should agree that any farm bill passed by Congress be a farm-only bill...From its name, you'd never know that 80% of the Federal Agriculture Reform and Risk Management Act goes toward the Supplemental Nutrition Assistance Program (SNAP), commonly referred to as food stamps. But it does" Marlin Stutzman and Michael Needham in The Wall Street Journal.

3) SAMUELSON: High-tech health costs can be curbed. "From 2000 to 2005, CT and MRI use among Medicare recipients grew 14 percent annually. Now, growth of both Medicare and non-Medicare spending has slowed to estimated annual rates of 1 percent to 3 percent, the study says...The slowing growth of medical imaging might reflect a natural saturation: Scans are being used in most plausible clinical situations. But the new study, posted on the Web site of the journal Health Affairs, disputes this. It argues that rapid growth was driven partly by powerful non-medical forces: Demanding patients insisted on scans; doctors feared malpractice suits if they refused; and doctors and hospitals wanted to maximize revenues. What explains slower growth is that these incentives weakened, contend economists Frank Levy of the Massachusetts Institute of Technology and David Lee of General Electric." Robert Samuelson in The Washington Post.

4) ORSZAG: Progress needs to continue on healthcare costs. "The proposals put forward by the experts assembled by the Center for American Progress include multiple steps to eliminate both artificially high prices and unnecessary procedures. For example, rather than have Medicare set prices for lab tests and medical devices, we should put all such purchases out for competitive bidding. In 2011, bidding reduced Medicare spending on wheelchairs and other equipment by more than 40 percent. Another suggestion is to require that all health-care prices be fully transparent to consumers. Other proposals are aimed at the intensity of medical care rather than its price. The faster we can move away from fee-for- service payments, which encourage additional care even if it isn’t helpful, the more value we can get from our health-care system." Peter Orszag in Bloomberg.

5) HUBBARD: Romney's economic plan would lead to 12 million jobs. "In contrast to the sclerosis and joblessness of the past three years, the Romney plan offers an economic U-turn in ideas and choices. When bolstered by sound trade, education, energy and monetary policy, the Romney reform program is expected by the governor's economic advisers to increase GDP growth by between 0.5% and 1% per year over the next decade. It should also speed up the current recovery, enabling the private sector to create 200,000 to 300,000 jobs per month, or about 12 million new jobs in a Romney first term, and millions more after that due to the plan's long-run growth effects." Glenn Hubbard in The Wall Street Journal.

Music festival interlude: The Dismemberment Plan play "The City" live at the Pitchfork Music Festival.

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

Still to come:The House likes the Bush tax cuts; managed care is back; cybersecurity legislation is set to die in the Senate; oil reserves see a big jump; and a crow makes a human friend.

Economy

A tax plan like Romney's would increase taxes on middle- and lower-income households while cutting taxes for the rich. "A tax system overhaul along the lines that Mitt Romney has proposed would give big tax cuts to high-income households and increase the tax burden on middle- and lower-income households, according to an analysis from economists at the Tax Policy Center...Even if all possible loopholes for households earning more than $200,000 were eliminated, this group would still be a net gainer under Mr. Romney’s plan, since the marginal tax rate decreases and other changes lop off much of its tax burden. As a result, middle- and lower-income households -- the 95 percent of the population earning less than about $200,000 annually -- would have to make up the difference, according to the review by the center, which is affiliated with the Brookings Institution." Catherine Rampell in The New York Times.

@jimtankersley: Easy way for Romney to refute brutal tax plan analysis: Show us his math. What loopholes does he close? What growth rate does he assume?

@tylercowen: The proposed Romney fiscal policy just doesn't make any sense.

The six-month continuing resolution threatens some programs. "Indeed, the government won’t shut down, but a big part of governing will. The lost cyber funds are just one casualty in a long list affecting public housing, federal prisons, student financial aid, nuclear weapons modernization. Even a polar icebreaker for the Coast Guard is caught in the same Washington ice. Continuing resolutions do only one thing well: 'continue.' They don’t allow for new starts and typically set funding at the current rate enjoyed by an agency -- with no room for new ideas. The money will flow -- sometimes in wasteful directions that no one wants. And Congress diminishes itself by ceding more decisions to the executive branch." David Rogers in Politico.

The House voted to extend all of the Bush tax cuts. "The Republican-led House voted Wednesday to extend an array of expiring tax cuts for households at all income levels through 2013, a pre-election statement of unyielding opposition to higher taxes for any American. The 256 to 171 vote to preserve tax cuts enacted during the George W. Bush administration fell largely along party lines. It came after the House rejected a Democratic alternative, on a similarly partisan 257 to 170 vote, that would have allowed the cuts to expire on taxable income over $200,000 for individuals and $250,000 for couples filing jointly. Nineteen Democrats joined Republicans in voting to extend the cuts for all income levels; one Republican -- retiring Rep. Timothy V. Johnson (Ill.) -- was opposed." Rosalind Helderman and Lori Montgomery in The Washington Post.

The factory sector shrank again. "The U.S. factory sector shrank in July for the second straight month, and gauges of future activity suggest weakness will continue into the fall...In the U.S., the Institute for Supply Management's index of manufacturing activity barely inched up to 49.8 from June's reading of 49.7--which was the first contraction in the factory sector since July 2009, the beginning of the economic recovery. Readings under 50 indicate activity is shrinking instead of growing. Details of the ISM report suggested more sluggishness ahead. Order backlogs fell and businesses' inventories surged, while a measure of new orders--an important gauge of future activity--rose only to 48 from 47.8, suggesting firms are dispatching old orders but not getting many new ones." Neil Shah in The Wall Street Journal.

Senators struck a deal to extend most tax extenders. "Top Democrats and Republicans on the Senate Finance Committee have struck a deal to extend billions of dollars in business and personal tax breaks in a sign that members from both parties can still cut deals when popular items are on the line. The deal announced just after midnight Wednesday by Senate Finance Committee Chairman Max Baucus (D-Mont.) and Sen. Orrin Hatch (R-Utah) extends long-standing provisions of the so-called tax extenders package like the research and development tax credit, which has been in place off and on for decades. To strike a deal, however, committee leaders agreed to let 25 percent of current tax breaks expire in order to appease Republicans who warned that the overall cost of the package had to be kept in check. " Steven Sloan in Politico.

The Treasury will offer floating-rate securities. "The U.S. Treasury Department plans to offer floating-rate securities, its first new product in 15 years, as it attempts to maintain surging investor demand for government bonds. Unlike traditional government securities that pay a fixed rate of interest to investors, the payments on these new notes would periodically reset to match prevailing market rates, as measured by a market index. The private-sector advisory committee that offers guidance to the Treasury suggested that the notes initially have a maturity of as long as two years. The new product won't be sold for at least a year, Treasury officials said Wednesday, reflecting the time needed to change auction systems, determine an index for the note and work out other details." Matt Phillips and Jeffrey Sparshott in The Wall Street Journal.

Construction toy interlude: A K'NEX Skeeball Machine.

Health Care

Managed care is coming back. "Under pressure to squeeze out costs, some of the U.S.'s biggest health insurers are quietly erecting more hurdles for patients seeking medical care. The companies are in many cases reaching back to the 1990s and boosting the use of techniques that antagonized patients and doctors alike. Today's approaches are tweaked, but may feel familiar to many: Insurers are rolling out plans with more restricted choices of doctors and hospitals, and weighing new requirements for referrals before patients can see specialists. UnitedHealth Group Inc., Cigna Corp. and others are increasingly requiring doctors to get prior authorization before patients can get certain care such as spinal surgeries. Earlier versions of these practices were closely identified with the managed-care era of the 90s. They later receded in many parts of the country, as employers switched away from restrictive health-maintenance organizations, and insurers backed off some limits." Anna Wilde Mathews in The Wall Street Journal.

Domestic Policy

The cybersecurity bill is expected to fail in the Senate today. "The Senate’s cybersecurity bill is likely to go down in defeat on Thursday, ending any hope of passing a measure by the end of the year to protect America’s networks. Unless members strike a last-minute deal, the Cybersecurity Act from Sen. Joe Lieberman (I-Conn.) is expected to fall short of the 60 votes needed to end debate. That would be a defeat for the White House, which made an all-hands-on-deck push to get the bill through Congress. Members were working feverishly Wednesday to try to salvage the bill before the August recess." Jennifer Martinez in The Hill.

TIGER grants are at a turning point. "TIGER grants launched with a roar three years ago, heralded as a clever way to dole out money to states and cities with innovative infrastructure plans. But now, the program, which delivered $3.1 billion nationwide in four rounds of funding, has hit a turning point. Republicans want to kill the grants, which they say have been overly politicized by the Obama administration. The House voted to nix future funding earlier this year. And a six-month extension of current spending laws means it won’t become clear until after the election whether TIGER will survive. The idea was novel when the Transportation Investment Generating Economic Recovery grants came about: Competition would ensure the most beneficial transportation projects won. But someone still has to pick the winners." Jessica Meyers in Politico.

Interspecies friendship interlude: A crow and a human are friends.

Energy

Disaster aid will now be voted on under normal procedures. "Taking no more chances, the House Republican leadership put a little of its muscle to work Wednesday evening to ensure smooth sailing for a livestock disaster aid package before members go home for the August recess. The $383 million bill had been slated to come to the floor Thursday under expedited procedures requiring a two-thirds majority. But rather than risk falling short, the House Rules Committee - an arm of Speaker John Boehner (R-Ohio) - was called back into session to effectively lower the threshold to a simple majority. The bill will come up now Thursday with a conventional rule, approved by the Rules Committee quickly, allowing one hour of debate and no amendments." David Rogers in Politico.

Oil and natural gas reserves jumped by the highest margin in three decades. "U.S. energy officials estimate that oil and natural-gas reserves jumped in 2010 by the highest margin in at least three decades, lending weight to the idea that the U.S. can meet more of its own energy demand. The Energy Information Administration said in its annual report that proven reserves of crude oil jumped by 13%, with the highest increases seen in Texas, North Dakota and the Gulf of Mexico. Proven reserves of natural gas rose by 12%. The increases were the highest recorded by EIA since it began publishing the estimates in 1977...The EIA estimates show 25.2 billion barrels of oil could be recovered in the U.S., up from the previous estimate of 22.3 billion barrels. Current U.S. petroleum consumption is about seven billion barrels annually. Natural-gas reserves are estimated at 318 trillion cubic feet, up from the previous estimate of 284 trillion cubic feet. Annual U.S. natural-gas consumption is about 24 trillion cubic feet." Tennille Tracy in The Wall Street Journal.

@drgrist: U.S. energy-related CO2 emissions in early 2012 lowest since 1992 http://bit.ly/McJ1Bh

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

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