1. The following note was sent to clients on November 15, 2011.

    The Wall Street Journal reported that President Obama is considering nominating Jerome (Jay) Powell and Jeremy Stein for the Federal Reserve Board. Both would be outstanding choices, but their eventual appointments would not change monetary policy outcomes.
    • The nominations have been held up because of the need to have a “package deal,” with one candidate acceptable to Republicans and one to Democrats.
    • We give the President an A+ for his reported choices. These appointments would materially strengthen deliberations around the FOMC table. They would be active participants and highly respected by their colleagues.
    • Both potential nominees are well versed in finance and financial markets and would bring to the FOMC expertise in areas that it has rarely had.
    Jay Powell has an impressive background in financial markets and macro policy.
    • He is a visiting scholar at the Bipartisan Policy Center (BPC), where he has focused on state and local fiscal issues. Before working at the BPC, he practiced law and worked both in investment banking and private equity.
    • He served as Under Secretary of the Treasury for Domestic Finance under President George H.W. Bush.
    Jeremy Stein is a distinguished economics professor at Harvard with a worldwide reputation and a record of public service.
    • He has also taught at MIT and at the Harvard Business School. His specialties include finance, monetary policy, risk management, and banking.
    • He served earlier in the Obama Administration as a senior advisor to the Treasury Secretary and was on the staff of the National Economic Council.

    If nominated and confirmed, how would they change the dynamics of the FOMC?
    • The FOMC would gain two outstanding people whose areas of expertise would complement those of other Board and FOMC members.
    • Nonetheless, other than through their interaction with the Chairman, which we shouldn’t discount, Jay Powell and Jeremy Stein would not affect policy outcomes. The Chairman is and will continue to be the dominant force on the Committee.


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    Posted by Unknown
    Labels: Antulio Bomfim Ben Bernanke Bernanke confirmation Larry Meyer Laurence Meyer monetary policy MPI

  2. Under the Comprehensive Capital Analysis and Review for 2012 (CCAR) and Capital Plan Review (CapPR), banks with assets over $50 billion are required to conduct capital stress tests as outlined by the Federal Reserve to assess whether they would have sufficient capital to continue operations and to lend to households and businesses, even under adverse conditions. The Federal Reserve has published two scenarios; a Supervisory Baseline Scenario and a Supervisory Stress Scenario, which banks are required to use to test their capital adequacy. However, the scenarios published only include a very limited number of economic variables, leaving banks to read between the lines on exactly how these scenarios would affect their portfolios. In addition, banks are required to come up with their own baseline scenario, and their own stressed scenario. These are supposed to represent scenarios which the bank sees as the “most likely” economic scenario and the “most likely” adverse scenario.

    Macroeconomic Advisers’ Macroprudential Scenarios Service provides banks with over 400 economic variables that are consistent with the scenarios set forth by the Federal Reserve. In addition, MA provides the same details for the second set of scenarios developed by MA specifically for this purpose. This arms banks with model-based, internally consistent detailed data upon which to base their stress tests. Macroeconomic Advisers is known for its short-term forecasting and commentary on the Fed and markets. But, it is our disciplined, model-based approach which makes us well-equipped to assist clients in analyzing various scenarios that can be used to judge asset adequacy.

    Clients will receive four excel files (one for each scenario) with all variables included in our macroeconomic model. They will also receive related documentation, including a brief overview of our proprietary macroeconometric model, used for these scenarios, and brief descriptions of each of the scenarios. Forecasts for these scenarios extend three years. Scenarios are updated in December and June.

    For additional information please contact:

    Sales:

    Lisa Guirl, Director of Product Development
    lguirl@macroadvisers.com
    314-721-4747

    Technical information:

    Chris Varvares, Senior Managing Director and Co-Founder
    varvares@macroadvisers.com
    314-721-4747


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  3. Monthly GDP surged 1.3% higher in October, following two months of small declines. The sharp October gain was largely accounted for by a sharp increase in inventory investment, but domestic final sales and net exports posted decent gains, too. The level of GDP in October was 5.0% above the third-quarter average at an annual rate. Our latest tracking forecast of 3.7% GDP growth in the fourth quarter assumes that half of the increase in Monthly GDP in October is reversed in November, with that decline more than accounted for by an assumed decline in inventory investment.





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    Posted by Unknown
    Labels: monthly GDP



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    Labels: Ben Bernanke discount rate employment FOMC FOMC Chatter inflation Larry Meyer Laurence Meyer monetary policy MPI Treasuries

  5. The FOMC is seeking to become more transparent about both its policy objectives and its strategy for achieving those objectives. The Chairman has emphasized that this is an ongoing process.

    This is from a commentary that was published on December 5, 2011.



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    Labels: Antulio Bomfim Ben Bernanke FOMC Larry Meyer monetary policy MPI

  6. Today, the most important assumption we have to make in our forecast is about the euro crisis. We tie this to the ECB because we believe it must be a player in any resolution.

    This is from a commentary that was published on December 2, 2011.


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    Labels: Antulio Bomfim euro crisis forecast Larry Meyer monetary policy


    • Failure of the “Super Committee” to reach agreement on cutting deficits by at least $1.2 trillion through 2021 now appears all but certain.
    • Our recent forecasts have assumed agreement on $1.5 trillion of deficit reduction, with two-fifths in revenue increases and three-fifths in spending cuts, and with the fiscal contraction back-loaded.
    • The Budget Control Act (BCA) requires automatic sequestration to save $1.2 trillion spread equally over 2013-2021. This would imply significantly more drag in 2013 than assumed in our forecast (see chart).
    • However, there would remain nearly a year to come to some agreement that could alter the path of fiscal contraction and still meet longer-term deficit reduction goals. Thus, we will not alter our fiscal assumptions based on the failure of the Super Committee to satisfy the requirements of the BCA. We already had assumed no extension of the payroll tax holiday or emergency extended unemployment benefits.
    • The biggest risk to the economy in the near term is posed by the reaction of financial markets. Stock prices are falling sharply as we pen this note. Increased macroeconomic uncertainty from failure of the Super Committee to meet its mandate may yet further roil credit markets, including a possible further downgrade of U.S. debt, and contribute to a weaker near-term outlook.
    • We continue to believe long-term deficit reduction is absolutely critical for the long-term health of the U.S. economy. However, if it is too front-loaded, coming at a time when the Federal Reserve is unable to effectively cushion the economy from the effects of fiscal contraction, it would do unnecessary harm and slow the decline in what is already a painfully slow fall in the unemployment rate.

    The press is reporting that the bi-partisan Congressional “Super Committee” charged with finding a minimum of $1.2 trillion in debt reduction over the next decade today will announce its failure to report a set of recommendations. Apparently neither side was willing to soften their positions on the mix of spending cuts and revenue increases sufficiently to forge an acceptable compromise. On paper, the Committee’s failure will, effective 2013, result in automatic spending cuts (or a “sequester”) totaling $1.2 trillion through 2021. These will be split evenly between “security” and “non-security” outlays and, by our reading of the BCA, be spread evenly over the 9 years.

    Our recent forecasts have assumed that the Super Committee succeeds in finding $1.5 trillion in debt reduction—actually more than required by the BCA—but the savings we’ve assumed are back-loaded and divided roughly into two-fifths tax increases, which have a relatively small impact on aggregate demand, and three-fifths spending cuts. Hence, relative to our current forecast a “sequester” implies twice as much fiscal drag in 2013 as shown in our current forecast. The alternative calculations for static fiscal drag are shown in the chart on the next page.

    The Committee’s failure has the potential to alter our forecast in two ways. First, the particular paths for spending and tax rates assumed for 2013 and beyond do have a direct bearing on our projections for aggregate demand after next year. If we were certain the sequester will now occur, we would mark down our forecast for 2013 but mark up our forecasts for the subsequent years. However, it is too early to know what really will happen: there is still over a year to go! Some Republicans already are preparing to undo the “automatic” cuts in defense spending. Considering all the possibilities, the result of the Committee’s failure could be more, not less, direct stimulus in 2013 than shown in our current forecast. So, until this situation becomes clearer, we will not change our fiscal assumptions for 2013.

    Second, the immediate reaction of financial markets to the failure might lead us to change our forecast even before 2013. As of this writing, stock prices are falling sharply, and at least some of that decline is likely due to the market’s disappointment over the failure of the Super Committee and, by extension, Congress to “govern.” If the slump in stock prices sticks, and to the extent investor, business and consumer confidence slump with the failure in governance, the economy could weaken in the near term. We’ll have to wait to gauge market reactions to the Committee’s failure. Surely, however, some significant probability of the Committee’s failure has been “priced in” all along.

    It now seems likely that major progress on the deficit reduction will not occur until after the upcoming presidential election, with both parties viewing the election as a referendum on the mix of taxes and spending. In the meantime, if the automatic spending cuts are undone before 2013, Congress will have revealed the folly of a Balanced Budget Amendment (BBA), which would require cuts far larger than those debated by the Committee and so likely would be somehow circumvented the first time that adhering to the BBA required a painful fiscal contraction.


    This is from a commentary that was published on November 21, 2011.

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    Posted by Unknown
    Labels: budget Chris Varvares debt ceiling fiscal policy fiscal stimulus forecast GDP government shutdown Joel Prakken Macro Focus Macro Musing taxes

  8. We took a detailed look at the Fed's portfolio to determine the potential scope for additional purchases of Treasury securities, beyond purchases already planned under Operation Twist. We examined the evolution of the portfolio under alternative scenarios for QE3.

    This is from a commentary that was published on November 10, 2011.

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  9. As there was essentially no new information in the prepared remarks, we will jump right into the Q&A. Among other things, the Chairman indicated that there was robust discussion of communication options within the "existing framework" for communicating and thinking about the dual mandate, but no decisions were made at the November FOMC meeting.

    This is from a commentary that was published on November 2, 2011.

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    Posted by Unknown
    Labels: Antulio Bomfim Ben Bernanke FOMC FOMC Chatter Larry Meyer Laurence Meyer monetary policy MPI

  10. FOMC participants downgraded their growth forecasts appreciably, relative to June, reflecting much gloomier data since then. But the gloomier data were already factored into the August and September decision: Today's forecasts provide no new hints about future policy.

    This is from a commentary that was published on November 2, 2011.

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    Posted by Unknown
    Labels: Antulio Bomfim FOMC forecast Larry Meyer Laurence Meyer monetary policy MPI
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