Fed Officials Voice Doubt on Inflation as Tool to Boost Growth

Two Federal Reserve policy makers voiced wariness about the idea of spurring growth by letting inflation accelerate as they reiterated support for the central bank’s unprecedented monetary easing.

Fed Governor Sarah Bloom Raskin said the central bank’s use of tools has been “completely appropriate” and that she would be “quite leery” of allowing higher inflation or price expectations in an attempt to lower real interest rates. St. Louis Fed President James Bullard said faster inflation won’t reduce the housing glut. He also said “monetary policy is ultra-loose right now, and appropriately so.”

Fed Chairman Ben S. Bernanke and colleagues have discussed adopting specific levels of inflation and unemployment as conditions for keeping interest rates near zero. Only Chicago Fed President Charles Evans has public supported the idea of allowing price increases faster than 2 percent annually as a way to lower unemployment.

“One of the explicit mandates of Congress is price stability, and keeping inflationary expectations anchored is, in my mind, extremely important,” Raskin, 50, said in response to an audience question yesterday in Washington after a speech to the University of Maryland’s Robert H. Smith School of Business.

The Federal Open Market Committee said Sept. 21 it will buy $400 billion of Treasury securities with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less.

Policy Tools

It was the second straight expansion of unconventional monetary tools, following the August decision to say the benchmark interest rate will stay close to zero until at least mid-2013 instead of the previous, less-specific “extended period” language that had been in place since March 2009.

Raskin indicated she might support unspecified further stimulus. While the effects of Fed actions have been “somewhat more muted than I might have expected,” she said, that shouldn’t imply that additional easing “would be unhelpful.”

“Indeed, the opposite conclusion might well be the case -- namely, that additional policy accommodation is warranted under present circumstances,” she said in a speech, her first devoted to monetary policy since the former Maryland chief financial regulator joined the Fed almost a year ago.

The FOMC at its Aug. 9 meeting considered conditioning its pledge to keep interest rates at record lows “on explicit numerical values for the unemployment rate or the inflation rate,” according to minutes released Aug. 30.

More Clarity

“Some members argued that doing so would establish greater clarity regarding the committee’s intentions and its likely reaction to future economic developments, while others raised questions about how an appropriate numerical value might be chosen,” the minutes said.

The commitment should be contingent on joblessness falling to around 7 percent or 7.5 percent as long as inflation stays below 3 percent in the medium term, Evans said Sept. 7. Fed policy makers aim for long-run inflation of about 1.7 percent to 2 percent.

Bullard, 50, referring to unsold homes, said yesterday that “I’m not sure inflation is really going to help you work that off.”
Keeping prices stable “is the way to go here,” Bullard, who doesn’t vote on monetary policy this year, said at a forum in New York hosted by Medley Global Advisors and the Financial Times. “I don’t think high inflation is a very good solution to this problem.”

Economic Changes

Bullard repeated that he favored a “meeting-by-meeting approach” to setting the size of asset purchases so a program’s size responds to changes in the economy.
U.S. stocks rose, with the Standard & Poor’s 500 Index increasing 2.3 percent to 1,162.95 in New York trading, as European officials discussed ways to tame the region’s debt crisis. Yields on 10-year Treasury notes rose seven basis points, or 0.07 percentage point, to 1.9 percent as of 5:50 p.m. in New York.

One drawback to the commitment to keep the benchmark rate near zero is that it “may encourage a Japanese-style outcome in which the policy rate simply remains near zero and markets come to expect a mild rate of deflation,” Bullard said in his presentation yesterday.

The so-called Operation Twist announced last week “should exert downward pressure on longer-term interest rates and help make broader financial conditions more accommodative, thereby supporting a stronger economic recovery,” Raskin said, reiterating a point from the FOMC’s statement. The FOMC cited “significant downside risks to the economic outlook, including strains in global financial markets.”

The Fed also agreed to switch the reinvestment of its holdings of maturing housing debt to mortgage-backed securities from Treasuries.

“Our announcement appears to have been successful in narrowing the spread between rates on agency MBS and Treasury securities of comparable maturity,” which had “widened substantially since earlier this year,” threatening to raise home-loan costs, Raskin said yesterday, referring to mortgage- backed securities.(Bloomberg)

Malaysia August inflation level eases to 3.3pc

KUALA LUMPUR: The inflation level, as measured by the Consumer Price Index (CPI), eased to 3.3 per cent in August from 3.4 per cent in July.
 
According to the Statistics Department, the index for food and non-alcoholic beverages and non-food for the month of August 2011 showed increases of 4.6 per cent and 2.7 per cent, respectively, as compared to the same month in 2010.

The CPI rose by 3.1 per cent for the first eight months of the year to 102.8 compared with 99.7 in the same period. Compared to July, it rose by 0.2 per cent.

Commenting on the data, Bank of America Merrill Lynch economist Dr Chua Hak Bin said food prices have been kept in check by price controls.

Food accounts for a 28.9 per cent weight in the CPI basket.

During the recent Hari Raya Puasa festive season, the government put 20 food items under price control - including chicken, eggs, beef, coconut, red chillis and garlic.

Chua also expects the government to introduce measures in the upcoming 2012 Budget to help mitigate higher costs coming from food supply, housing and public transport.

He also expects Bank Negara Malaysia (BNM) to hold the Overnight Policy Rate at 3 per cent for the November monetary policy meeting, given "increased downside risks to the domestic economy".

Industrial production contracted 0.6 per cent in July, while inflation pressures are retreating.

"We are not ruling out a surprise 25 basis points policy rate cut at the November meeting if the US and or the European Union slips into recession, or Europe's sovereign debt crisis worsens."

He said the bank's US team said there is a 40 per cent chance of a US recession in the next 12 months.

"We find that Malaysia's inflation falls in past recession episodes to varying degrees, falling by 0.6 per cent point from peak-to-trough for the milder 2001 technical recession to 1.5 per cent point for 2008 global financial crisis (and to 4.5 per cent for Asian financial crisis."

Credit Suisse also expects BNM to be in no hurry to adjust the policy rate in a sluggish global growth scenario.

Economist Wu Kun Lung said the ringgit has also depreciated by over 5 per cent against the US dollar since early September.

"Although most of this reflected a flight to safety to the US dollar, even on a trade-weighted basis, we estimate that the ringgit depreciated by about 2.8 per cent in the past three weeks."

Wu said it remains to be seen whether the currency will continue to depreciate.

"History suggests that it takes much bigger forex moves than we have seen so far to have a meaningful impact on Malaysian inflation," he said when commenting on the ringgit's impact on inflation levels. (Business Times)

Singapore’s unemployment rate climbs as economic growth slows

Singapore’s unemployment rate increased last quarter as the economy slowed and the global recovery weakened.

 

The seasonally adjusted unemployment rate rose to 2.1% in the three months through June from 1.9% the previous quarter, the Ministry of Manpower said in a statement today. The median estimate of four economists surveyed by Bloomberg News was for a rate of 2.2%. The economy added 24,800 jobs last quarter, compared with an earlier estimate of 22,800, it said.

 

Singapore, ranked by the World Bank as the easiest place to do business, has cut taxes in recent years to encourage investment in the island nation, prompting companies to hire hundreds of thousands of foreigners. Last month, the government further tightened curbs on foreign labor after a backlash on the influx of workers from overseas led to record opposition gains in the May elections.

 

“The labor market remains tight,” Kun Lung Wu, a Singapore-based analyst at Credit Suisse group AG, said before the report. “Although we think a wage-price spiral is unlikely to happen when the global growth outlook is bleak, inflation and wage pressure could pick up quickly if and when growth prospects improve.”

 

The services industry added 20,200 jobs last quarter, while manufacturing companies increased payrolls by 800, the report showed. Construction employment rose by 3,600 in the three months through June, the government said.

 

 

PRODUCTIVITY SLIDE

Productivity slipped 2.5% last quarter, the ministry said. Average wages before adjusting for inflation rose 6% in the second quarter from a year earlier.

 

Singapore’s unemployment rate may be 2.2% by the end of this quarter and remain at that level at the end of the year, according to the median estimate in a survey of 20 economists by the Monetary Authority of Singapore released last week.

 

The government will raise salary thresholds and require better educational qualifications for some foreign workers, Prime Minister Lee Hsien Loong said last month. More than a third of Singapore’s 5.1 million population is made up of foreigners and permanent residents.(The Edge Singapore)

 

Thai Cabinet approves budget deficit, new policies

BANGKOK: Thailand’s Cabinet approved a raft of policies yesterday from tax breaks for first-time car buyers to a guarantee on rice prices aimed at lifting the incomes of poorer Thais whose votes swept the new government to power.
Prime Minister Yingluck Shinawatra has said her priority was to stabilise the economy and boost incomes with policies ranging from corporate tax cuts to debt relief for farmers, village development funds and lower fuel prices.
The Cabinet pushed those policies forward yesterday. It also approved a budget deficit of 350 billion baht (US$11.6bil), or 3% of gross domestic product, for the next fiscal year from Oct 1, capped at the same level as that of the previous administration.
“The government is trying to keep the budget deficit at 350 billion baht, the same level as this year’s,” Finance Minister Thirachai Phuvanatnara-nubala told reporters.
The budget projects spending of 2.33 trillion baht (US$77.3bil) and revenue of 1.98 trillion baht (US$65.7bil), higher than previously expected. It assumes economic growth of 4.5%-5.5% and inflation of 3%-4%.
On spending plans, about 384 billion baht, or 16.5% of the total, will be for investment. – Reuters

Franc, Yen Rise as Economists Say U.S. job Growth Slowed, Stocks Decline

The Swiss franc and the yen strengthened before a report that economists said will show U.S. job growth slowed last month and as a slide in stocks boosted demand for the relative safety of the two currencies.

The franc extended its biggest weekly gain versus the euro since the shared currency’s introduction in 1999 ahead of a German report next week forecast to show factory orders fell in July. The yen appreciated versus 15 of its 16 major counterparts after the New York Times said the U.S. may sue companies including Bank of America Corp. for misrepresenting the quality of securities backed by home loans.


The franc advanced 1.7 percent to 1.11547 per euro at 9:50 a.m. in London after rising to 1.11210, the strongest since Aug. 15, taking its gain this week to a euro-era record of 4.8 percent. The Swiss currency gained 1.6 percent to 78.29 centimes per dollar. The yen climbed 0.3 percent to 109.42 per euro, after appreciating to 109.13, the strongest since Aug. 19.

The euro fell 0.1 percent to $1.4246, a fourth day of declines that extended its loss this week to 1.8 percent.

Franc’s Surge

The franc has surged more than 16 percent against the euro over the past year as the euro-area’s worsening debt crisis and signs of slowing economic growth in the region boosted demand for the currency as a hedge against financial losses.

The Swiss government this week pledged 870 million francs ($1.1 billion) as part of an economic stimulus package to help counter the impact of franc strength. The central bank also lowered borrowing costs to zero last month and boosted liquidity to the money market to protect exports.

Stock Losses

The MSCI Asia Pacific Index of shares retreated 1.1 percent, snapping a six-day gain. Europe’s Stoxx 600 Index fell for the first time in five days, losing 1.9 percent. Futures on the Standard & Poor’s 500 Index slipped 0.8 percent.

U.S. payrolls rose by 68,000 in August, down from a 117,000 increase in July, according to economist estimates before today’s Labor Department report. The unemployment rate probably held at 9.1 percent, marking 26 out of the last 28 months where it has been at or above 9 percent.

The franc and yen tend to strengthen during periods of financial turmoil because their export-reliant economies don’t need foreign capital to balance current accounts -- the broadest measure of trade.

According to a Bloomberg News survey, factory orders in Germany, Europe’s biggest economy, decreased 1 percent in July from the prior month, the first drop since March. The Economy Ministry will report the data on Sept. 6.

The euro has lost 1.2 percent over the past 12 months against a basket of its nine major peers tracked by Bloomberg Correlation-Weighted Currency Indexes. The dollar has weakened 12 percent, the worst performer ranked by the gauge. The franc has risen 17 percent. (Bloomberg)