I. Consumer prices unchanged in November
Yet U.S. core CPI rate rises to highest 12-month pace since 2008
WASHINGTON (MarketWatch) — The prices paid by consumers for a broad range of goods and services were unchanged in November, mainly because of declining energy costs, government data showed Friday.
The Labor Department said the consumer price index was flat last month on a seasonally adjusted basis, matching the forecast of economists surveyed by MarketWatch.
After spiking earlier in 2011, overall inflation has begun to moderate in conjunction with declining prices of key commodities such as oil that play a significant role in the cost of consumer goods and services. While consumer prices are still 3.4% higher compared to 12 months ago, that’s down from a recent annualized high rate of 3.9% seen in June.
Some economists say softer inflation could give the Fed the necessary leeway to buy more debt — a controversial tactic known as quantitative easing — as a means to lower interest rates and spur faster growth.
Yet lower inflation, combined with a slew of reports showing the economy gaining some momentum, could also allow the U.S. central bank to stand pat. Some critics argue that the Fed’s previous debt-buying policies contributed to higher inflation.
The moderation in consumer prices appears to be one of several major factors contributing to an improved U.S. economy since an early-summer lull. Lower inflation means Americans can buy more with the same amount of money, thereby improving living standards. And since consumer spending accounts for as much as 70% of U.S. growth, the economy could grow faster and adds jobs more rapidly.
That wasn’t the case earlier in the year, and inflation will have to ease further to reduce the financial strain millions have been experiencing. Higher consumer prices have easily outstripped inflation-adjusted wage increases over the past 12 months, so Americans have had to make do with less.
In November, for example, average hourly wages fell 0.1% to $10.22, adjusted for inflation. Real wages have fallen 1.5% since November 2010.
The spike in inflation since the fall of 2010 was largely driven by higher energy prices, but those costs continue to come down. Last month, the energy index fell 1.6%, following on a 2.0% drop in October, as lower gasoline prices accounted for most of the decline.
The price of energy, however, is still 12.4% higher compared to one year ago. Food prices, meanwhile, rose 0.1% last month, largely because of higher prices for cereal, baked goods and non-alcoholic drinks. The cost of vegetables, fruit, dairy, meat, poultry and fish all declined.
Over the past 12 months, food prices are up 4.6%. The government’s “food at home” index, which excludes takeout orders and restaurant purchases, fell last month for the first time since June 2010. The index is still up 5.9% over the past 12 months, however.
More worrisome, the cost of shelter, medical care and clothing continued their steady march higher. Shelter costs are up 1.8% over the past 12 months, while medical costs have risen 3.4%.
The clothing index, for its part, has jumped 4.8% in the past 12 months to its highest year-over-year level since 1991.
II. New York Federal Reserve President William Dudley will tell lawmakers Friday that he doesn’t expect the Fed to take further steps to lessen the impact of Europe’s debt crisis on the U.S. economy.
In prepared remarks due for delivery at the House of Representatives on Friday, Dudley will say that a program under which the Fed lends emergency U.S. dollars to foreign central banks, including Europe’s, also helps the U.S. economy because of its strong links with the euro-zone economy.
“At this time, although I do not anticipate further efforts by the Federal Reserve to address the potential spillover effects of Europe on the United States, we will continue to monitor the situation closely,”
III. Fed should take a few chances: Evans
WASHINGTON (MarketWatch) — The Federal Reserve should step outside its comfort zone and take a few chances to try to bring down the stubbornly-high unemployment rate, said Charles Evans, the president of the Chicago regional Fed bank on Tuesday.
“I just think this is the time to stretch the boundaries a little bit more and take a few chances,” Evans said during a lengthy interview on CNBC. Evans laid out his preferred more-aggressive approach: first, the Fed should tie its promise to keep rates low until the unemployment rate falls to 7%. “We’re pretty far from that now,” Evans said.
Then, the Fed would engineer some form of asset purchases to boost growth to attempt to reach the unemployment goal. All of these actions would go forward as long as longer-run inflation stayed below 3%, he said. Evans said he didn’t think inflation would get close to a 3% ceiling under this program.
Asked about the stronger economic data in recent weeks, Evans said the normal flow of monthly data is not as important as it usually might be. Looking at the longer view, the economy will only grow 2.5% in 2012 and 3% in 2013, too slow to make much of a dent in the 9% unemployment rate, he said.
Evans defended this approach from analysts who think the Fed has already gone way too far in buying over $2 trillion of assets to support growth. Evans was the lone dissenter from the Fed’s decision earlier this month to adopt a wait-and-see approach to monetary policyEarlier Tuesday, two other Fed officials gave Evans some support.
John Williams, the president of the San Francisco Fed, in a speech in Phoenix, said that the outlook suggests that further action by the Fed might be needed. The economy is likely to grow only modestly, with “persistently high” unemployment” and “undesirably low” inflation, Williams said. “Under these circumstances, it’s vital that the Fed use a full range of tools to achieve its mandated employment and price stability goals,” Williams said. In a separate speech, St. Louis Fed President James Bullard said asset purchases remain a “potent tool” but must be employed carefully because they entail inflation risk.
But Bullard said he would oppose tying a promise of near-zero policy rates to the unemployment rate.
“Unfortunately, unemployment rates have a checkered history in advanced economies over the last several decades,” he said, noting that in Europe, unemployment went up and simply stayed high for 30 years.
“If such an outcome happened in the U.S. and monetary policy was tied to a numerical unemployment outcome, monetary policy could be pulled off course for a generation,” Bullard said.
In a speech later Tuesday, RIchard Fisher, the president of the Dallas Federal Reserve Bank, said regulators must consider radical surgery to downsize too-big-to-fail banks into institutions that can be regulated and managed. Too-big-to-fail banks are “too dangerous to permit,” Fisher said.
IV. WASHINGTON (MarketWatch) — Large-scale bond purchases made by the U.S. Federal Reserve and the Bank of England made big impacts on the market, a study released by the Bank for International Settlements on Sunday found.
The U.S. Federal Reserve has purchased $2.3 trillion worth of securities under the programs widely known as QE1 and QE2, and the Bank of England has set out to buy 275 billion pounds worth of bonds.
The study by Jack Meaning of the University of Kent and Feng Zhu of the BIS found that the announcements of the purchases had a strong and immediate impact on government bond yields, with five- and ten-year yields falling the most.
The initial programs had a greater market impact than the second programs, the study found, and also the impact extended beyond the assets purchases. For example, corporate bond yields rated Triple-B fell by 63 basis points in one day and nearly 100 in two days after the Fed’s first announcement of quantitative easing.
The first Bank of England announcement prompted declines in U.K. corporates with Triple-B ratings of 56 basis points the first day and 98 basis points in two days.
The first announcements also had big impacts on the U.S. dollar — down 7.7% over two days — and the British pound — down 3.7% after the first BoE announcement, and stock market volatility fell after the first U.S. action and the second (but not first) Bank of England move.
One finding by the authors is that the average and maximum yield effects of both QE1 and the Bank of England’s first bond buys were of roughly similar magnitude. But given that the Bank of England purchase represented 29% of the total number of U.K. government bonds, or gilts, and that the U.S. purchase was 4.7%, the Fed’s first bond buy was more effective.
The authors also estimate that the Fed’s current Operation Twist program of selling $400 billion of longer-dated maturities it holds and replacing the securities with shorter maturities may have an impact of 22 basis points for maturities over eight years but lift three-month to three-year maturities by around 60 basis points.
They point out the Fed isn’t expecting a big impact on short-term yields from the Twist program, which the authors conclude is a product of the central bank’s pledge to keep rates at exceptionally low levels through the middle of 2013.
The authors point out limitations to further quantitative easing programs: one, that government bond yields are already very low; two, that the surprise element is lacking; and three, that the programs risk impacting inflation expectations.
The Federal Reserve meets Tuesday to determine interest rates and decide whether to continue the Twist program.
V. Jobless claims fall to lowest level since 2008
Requests for U.S. unemployment benefits drop 19,000 to 366,000
WASHINGTON (MarketWatch) — The number of Americans who filed requests for jobless benefits fell sharply last week to the lowest level since May 2008, indicating that a fragile U.S. labor market continues to heal.
First-time applications for unemployment compensation declined by 19,000 to a seasonally adjusted 366,000, putting claims at the lowest level since the middle of the 2007-2009 recession. Economists surveyed by MarketWatch had projected that claims would rise to a seasonally adjusted 390,000 in the week ended Dec. 10. Claims from two weeks ago were revised up to 385,000 from 381,000.
“You have to be careful about reading too much into any one week of data, but it’s very encouraging,” said economist Andrew Grantham at CIBC World Markets. “Companies are pushing off concerns about the rest of the world and are more confident about their own prospects.” The drop in claims, combined with favorable reports on U.S. foreign trade and manufacturing in the New York region, gave a boost to Wall Street in premarket trades. Jobless claims have declined gradually from a 2011 peak of 478,000 in late April. And claims have fallen below 400,000 — a level historically associated with an improving labor market — in five of the past six weeks.
The average of new claims over the past month, meanwhile, fell by 6,500 to 387,750, the lowest level since July 2008. The monthly average is seen as a more accurate gauge of labor trends because it reduces volatility in the week-to-week data. Yet claims reflects only the number of people who lose jobs, not those who finds one, so it’s an imprecise gauge of hiring trends. What’s more, economists caution that the end-of-the-year holiday period tends to skew claims because of seasonal factors that are difficult to account for.
Still, the steady decline in claims is sure to soothe the concerns of investors and the Federal Reserve, which is still considering additional moves to boost the economy. Other data on job creation, mainly the monthly employment report, show that companies are adding workers at a modest rate. The economy has gained an average of 143,000 jobs over the past three months after hiring nearly ground to a halt in early summer.
At that rate of hiring, the economy is more than able to absorb the natural increase in the labor force as former students and immigrants seek jobs and mothers reenter the workplace. Yet the U.S. will need to gain an average of about 250,000 jobs each month over several years to slash the unemployment rate to precession levels, economists estimate.
The official jobless rate stood at 8.6% in November, but it’s closer to 16% when including people who can only find part-time work as well as discouraged job seekers who’ve recently stopped looking. The Labor Department said continuing claims, or the number of people who continue to receive benefits, rose by 4,000 to a seasonally adjusted 3.60 million in the week ended Dec. 3. Continuing claims are reported with a one-week lag.
About 7.45 million people received some kind of state or federal benefit in the week ended Nov. 26, up 874,670 from the prior week. Total claims are reported with a two-week lag. The federal government offers extended compensation to millions of Americans whose state benefits have already expired. Extra benefits were first authorized after the 2007 recession struck.
Also on Thursday, the New York Federal Reserve said its Empire State manufacturing gauge rose in December to its highest level in seven months. And the Commerce Department said the U.S. current account deficit fell to the lowest level in almost two years. The current account measures the inflow and outflow of trade and money between the U.S. and the rest of the world.
VI. WASHINGTON (MarketWatch) -- Foreign banks tapped the Federal Reserve's dollar-swap facility for $54 billion worth of loans in the week ending Dec. 14, the Federal Reserve said Thursday. That's considerably up from the $2.3 billion borrowed in the week ending Dec. 7. Last month, the Fed made it cheaper for foreign banks to borrow from the Fed through their own central banks.