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Monthly GDP was essentially unchanged in October. This mainly reflected gains in PCE and net exports that were essentially offset by declines in spending on capital goods and inventory investment. The flat reading for monthly GDP in October followed large swings in previous months, but left the level of monthly GDP 1.3% above the third-quarter average at an annual rate. Average monthly increases of 0.4% per month in November and December would support our latest tracking forecast of 3.0% annualized GDP growth in the fourth quarter.
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As we expected, the only material change in the statement was in the growth paragraph. That change was consistent with our expectations, but certainly left room for diverging interpretations.
This is from a longer commentary, published on December 14, 2010, that is part of MA's Monetary Policy Insights Service.
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We do not expect any action or material change in the FOMC statement at this meeting.
This is from a longer commentary, published on December 10, 2010, that is part of MA's Monetary Policy Insights Service.
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The wide–ranging compromise between the Administration and congressional Republicans announced on December 6 includes significant temporary tax cuts relative to current law and extends emergency unemployment benefits. The framework, if adopted, would:
• Extend for two years essentially all Bush-era tax cuts.
• Extend emergency unemployment benefits through the end of 2011.
• Provide for new business investment incentives in the form of 100% expensing of most types of capital equipment in 2011, and 50% bonus depreciation in 2012.
• Provide during 2011 for a one-year payroll tax reduction for employees of two percentage points.
• Provide for a two-year fix of the alternative minimum tax (AMT).
• Provide for the two-year extension of a variety of American Recovery and Reinvestment Act (ARRA) and other stimulus-related business and individual tax provisions.
• The net budgetary effect relative to current law is estimated to be roughly $900 billion.
These tax law and unemployment benefit changes can be expected to have significant positive, if temporary, macroeconomic effects.
• Many of the provisions included in the compromise were already incorporated in the base forecast that we published at the end of November. Thus, here we report the macro effects of four major elements that we did not include in that forecast, determined by a simulation of our macroeconometric model.
• The provisions we simulated included the extension of emergency unemployment benefits, the new business investment incentives, the one-year payroll tax reduction for employees, and the removal of the previously assumed extension of the Making Work Pay (MWP) refundable tax credit.
• We estimate that implementation of these four alternative assumptions would raise GDP growth in 2011 by 0.6 percentage point, from 3.7% in our base forecast to 4.3%.
• In 2012, the payroll tax reduction and emergency unemployment benefits end and, the business investment incentives become less generous. This contributes to a reduction in GDP growth that year by 0.3 percentage point.
• There is a corresponding 0.4 percentage-point reduction in the unemployment rate by the fourth quarter of 2011, but by the end of 2013 we find no difference in the unemployment rate from our base forecast.
Since it is far from certain that this compromise will be enacted, it is too early to change our monetary policy call. However, if the agreement is implemented it would reduce the need to expand LSAPs beyond the initial $600 billion and could suggest an exit from zero interest rate policy before June 2012, as we otherwise would anticipate.
You may obtain the full report by following this link: The Tax Compromise: It’s Complicated
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Late yesterday afternoon, President Obama announced a wide-ranging compromise with Republican congressional leaders that would extend for two years essentially all the Bush-era tax cuts in exchange for an extension of emergency unemployment benefits through the end of 2011. Other key elements of the so-called “framework for a bipartisan agreement” include a one-year payroll tax reduction for employees of two percentage points, business expensing of capital expenditures for 2011 followed by 50% bonus depreciation in 2012, a two-year fix of the AMT and two-year extensions of a variety of ARRA and other stimulus-related tax breaks for individuals and businesses. In total the plan would add roughly $900 billion to the deficit.
In our just published economic forecast we had already assumed many of the elements of this compromise would be enacted. However, there are three major components that we had not assumed, and that would, in fact, together significantly impact the economic outlook over the next few years. First is the extension of emergency unemployment compensation through December 2011. In total this would add roughly $56 billion to personal disposable income through early 2012. Second is the one-year, two-percentage-point payroll tax reduction for employees that would add approximately $120 billion to disposable income in 2011. It should be noted, however, that the administration dropped its proposal that the Making Work Pay refundable tax credit be extended permanently, something we had also assumed in our forecast. Therefore, the net effect on disposable income in 2011 is only roughly $60 billion, relative to our forecast. Third is the new expensing and bonus depreciation through 2012 that would reduce corporate taxes by roughly $170 billion through 2012, with roughly $140 billion of that subsequently recaptured by the federal government because of smaller depreciation deductions in later years.
Based upon what is currently known of these three key proposals, our preliminary analysis suggests that GDP growth in 2011 would be boosted by roughly ½ to ¾ percentage point. This is on top of the 3.7% growth of GDP anticipated for 2011 in our recently published forecast. Growth in 2012 could also be expected to be several tenths of a percentage point higher, with modest drag on growth in 2013, as the temporary provisions expire. This analysis assumed that interest rates were unchanged from the baseline.
We will refine this analysis as additional details become known and provide additional details on the effects of the individual components of the compromise in a subsequent report.
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Don't you just love to stick it to your critics!
- Of course, we especially loved his response to his EM (Emerging Market) critics, perhaps because he seemed to be following our script!
- Unfortunately, he let European (and other) finance ministers off without a well-deserved slap on their wrists. Too bad!
- The Chairman responded more gently to his domestic critics, and he let Congress off the hook too easily.
- While he mentioned China directly only in passing, he was talking directly to China all morning.
The Chairman struck back directly at EM countries (read, especially China) that have accused advanced economies (read, the Fed) of exposing them to adverse spillovers from their "irresponsible" monetary policies.
- EM governments have loudly complained about how Fed's monetary policy is encouraging excessive capital inflows, unwelcome upward pressure on exchange rates, and asset bubbles.
- The Chairman explained that these tensions reflect "return differentials" that favor EM economies, that are driven by different policy settings, that, in turn, reflect the "bi-furcated" nature of the global recovery (the "two-speed" global recovery).
- The Chairman hit back: These woes are all due to EM countries today fixing their exchange rates or intervening to prevent or slow currency appreciation. Before you vent, look in the mirror!
- > The solution is not for the U.S. to alter its monetary policy to suit the interests of the EM countries, but for the EM countries to allow their exchange rates to be more flexible (read, appreciate).
- The EM countries need to give their central banks greater independence (read, be more like us) so they can use their own monetary policies to prevent over-heating and inflation, and lean against asset bubbles.
- The verdict: The U.S.: Not guilty as charged.
Perhaps the most important message that needed to be hammered home is that inflation is too low, and that the Committee is aiming to raise inflation to its mandate-consistent level, but not beyond.
- We have emphasized the importance of driving home this messages. He gave it a good try, but it is frustratingly hard to get this message across, and he could have done better!
- He did say that inflation today is 1%, well below the 2% (or a little lower) rate that most FOMC members judge as being consistent with its price stability mandate. However, he made this point much more forcefully in his Boston Fed conference speech.
- But he failed once again to be consistent in hammering home how unacceptable this situation is. He did so in his Boston Fed conference talk, where he said that inflation was "too low." Neither he nor the Committee has repeated this message since. Indeed, now we are back to only "subdued," even backing away from "somewhat low." Showing further diversity, he called inflation "quite" low during the following panel discussion.
- The Chairman did say explicitly, as we expected, that the Committee has an "unwavering" commitment to price stability. The message here is that the Committee is not trying to raise inflation to "fix" the economy, as has been so widely said. It is aiming to raise inflation to its mandate-consistent inflation objective (2%) and absolutely not beyond.
This is from a longer commentary, published on November 19, 2010, that is part of MA's Monetary Policy Insights Service.
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