United States' money supply.
The Fed is about to release the latest statement from the Federal Open Markets Committee (FOMC), which sets interest rates and makes decisions about theThere has been a lot for the committee to digest since their last statement in April when Fed chairman Ben Bernanke and his crew last outlined their views on the US economy. Europe's economic woes have entered a darker phase, there are worries about Spain's position in the union now that dwarf earlier concerns about Greece. Closer to home the recovery in the US jobs market has slowed dramatically.
None of this is good news and investors are betting the Fed will act. Earlier this month Bernanke told Congress: "The situation in Europe poses significant risks to the US financial system and economy and must be monitored closely." He said there was scope for the Fed to act if necessary.
Most economists are betting on a plan called Operation Twist, which the Fed tried last summer. Operation Twist is a Fed bond-buying programme that aims to lower rates on mortgages and other loans and was first tried in the '60s and named after the Chubby Checker song.
Wall Street expectations are high that the Fed will act, if it doesn't then expect a sell-off.
"Come on let's twist again like we did last summer. Yea, let's twist again, twistin' time is here," as Chubby Checker put it.
As had been expected, the Fed has extended Operation Twist. The committee expressed heightened worried about the economy and said they were "prepared to take further action" if needed.
The committee "anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook."
So, pretty miserable then.
Eleven out of 12 Fed officials voted to keep the central bank's easy-money policies in place. Short-term interest rates will be kept at "exceptionally low levels" at least through late 2014.
![Live blog - market down](https://webarchive.library.unt.edu/web/20120620223406im_/http://static.guim.co.uk/sys-images/Business/Pix/pictures/2010/05/21/Markedown.gif)
The Dow is now negative. But the real action is likely to come later after Bernanke gives his press conference at 2:15pm ET.
Oil prices are falling – crude oil futures are down 3.14% to $81.39 a barrel. That suggests traders are betting on lower demand for oil, as you would expect if the economy slows further. Better news at the pumps, worse news at the mall.
Gus Faucher, macro-economist at PNC Bank, gave a cautious welcome to the move, which was slightly larger than he'd been expecting.
"The last twist was about $400bn, and we were thinking this one would be about $200bn, so that [the $267bn announced by the Fed] is a plus. This will help to keep pressure on 10-year rates, and it shows the Fed is still on the case."
Faucher said he was keen to hear more details on the plan and for Bernanke to give more details of what data in particular had let to the committee sounding more gloomy about the economy.
![Live blog - market up](https://webarchive.library.unt.edu/web/20120620223406im_/http://static.guim.co.uk/sys-images/Business/Pix/pictures/2010/05/21/Marketup.gif)
The initial selloff on Wall Street has reversed and the Dow is now up, slightly.
The Fed is a cautious beast, and the changes in its statement are so subtle they can be easy to miss.
The Wall Street Journal has done a great job of parsing FOMC statements past and present.
The key to today's tonal shift is in the excising of "Labor market conditions have improved" from April's statement to "growth in employment has slowed."
The jobs market will recover "only slowly" to acceptable levels according to this month's statement whereas in April it was "gradually" improving.
The FOMC's comments on the job market are not surprising. Bernanke was the first to warn that this winter's strong growth in the jobs market might be illusory – at it proved to be. So it will be interesting to hear what he has to say about the employment situation today.
The next set of jobs figures – the non-farm payroll numbers – are out on July 6. They have become a political football as we head into the election, so anything Bernanke says on the subject will be closely watched.
The other key issue for the US economy is the housing market. For some reason Bernanke rarely gets asked about it at the press conference, maybe those journos are all renters. Analysts had been expecting the Fed to say that the latest operation twist would buy mortgage backed securities – a move to keep mortgage rates down and perhaps even, gulp, encourage buyers. So far we have heard nothing about that, so expect questions.
Studies of the impact of the last Operation Twist suggest that it reduced the cost of borrowing only marginally, about 0.15% to 0.2%. And on top of that lenders are still fighting shy of making new loans after the credit crisis. If the Fed had not acted, the old Operation Twist would have expired next month. This extension suggests Helicopter Ben is still too worried about the recovery to let it go play on its own. So – and how depressing is this – Operation Twist isn't so much a stimulus as a backstop to make sure things didn't get worse. "Round and round and up and down we go again," indeed.
This will be the last but one Bernanke press conference before the election in November. The next FOMC meeting is July 31-August ,1 but there is no presser after that and you'll have to wait until September 13 to see Bernanke in action again.
With the economy the central battleground for Obama and Romney, anything Bernanke says can and will be used in evidence. Sadly for Romney in particular Bernanke has shown an amazing ability to survive even the most fractious questioning without passing on a single memorable phrase. No "irrational exuberance" for Ben.
He will be up momentarily. He's probably in the back getting camera-ready, giving his beard a final trim. Want to make a bet on tie/shirt combo? I'm going for white shirt and green tie.
The Fed's new projections are now out and they have downgraded their forecasts for growth and inflation over the next three years. The jobless rate is projected at 8% to 8.2% at the end of this year compared with the projection of 7.8% to 8% from the April forecast. That suggest the Fed is not expecting the monthly jobs numbers to rise dramatically any time soon.
Bernanke is in the house. White shirt and yellow tie – perhaps you could even call it gold. I lose.
![Fed chairman Ben Bernanke](https://webarchive.library.unt.edu/web/20120620223406im_/http://static.guim.co.uk/sys-images/Guardian/Pix/audio/video/2012/6/20/1340219587167/Fed-chairman-Ben-Bernanke-008.jpg)
He is reading the statement from earlier today. The Dow is flat at the moment at 12828.17, so let's see what the stock markets make of his comments. The real meat will come in the Q&A.
So far the questions seem to be about Ben's modesty. "Given this weaker outlook, why such a modest programme?" he is asked.
There's been a lot of economic news since the last meeting, not least from Europe. "The step we took … is a substantive step," he says. He says additional steps could be taken if necessary.
"Modest Ben" – I think that should be his new nickname.
Mitt Romney said QE2 had little effect on the economy, says a man whose name I missed but whose chubby cheeks and curly head of hair will live on in my mind. Not really, says Ben, refusing to get dragged into a political debate.
Now we are on to jobs. Given that today's predictions see unemployment going on at these rates untill 2014, how long can this go on? Is it like the Great Depression?
"People are finding jobs, just not at the rate we would like to see," says Bernanke. The Fed is prepared to do more if it thinks necessary. But those actions have consequences, and "I don't think they should be launched lightly," he says.
And now to the Euro-zone. What can/should the Fed be doing. "We try to provide any support and help we can," says Ben. "We are prepared to work together if that can be done constructively." But its for the Europeans to make their own moves, says Modest Ben.
And now the Fiscal Cliff. No easy questions for Ben. The Fiscal Cliff Cliff Notes: On December 31 the Bush era tax cuts will expire and massive spending cuts will be imposed unless the Dems and Republicans can reach an agreement. Odds on that before an election? Slim.
It's not a can that can be kicked down the road, says Ben. Markets don't like uncertainty "particularly uncertainty of this magnitude".
You clearly seem to be waiting on the labour market. What exactly are you looking for? What's the "gestalt" he's asked. Nice word.
Sadly Ben isn't going to give us a figure or his opinion of gestalt theory. "It's not a month-to-month proposition," he says. We've had good months (in the winter) and bad months (in the spring). "The question is is the improvement sustainable."
Here's one from PIMCO, the world's biggest bond investors.
The Twitter feedback seems to be: here's a man who wants to do more.Bernanke masterfully avoids mentioning the name JP Morgan while be asked about the Volcker rule. He is asked: should regulators move more quickly given what happened at JP Morgan? The "event you are referring to" he calls it, before offering: "It's been a very difficult process with the amount of work that has to be done, the amount of coordination that has to be done."
That's a full sentence that means absolutely nothing. A genius at work.
Federal Reserve isn't going to be buying European sovereign debt."
Europe again. There have been rumors that the Fed could buy European countries' debt. Are there any countries that the Fed would not buy? Nice try, but this is Ben. "TheBernanke has left the building. The Dow is down a bit but not much (0.53%) so it doesn't look like Ben has scared the markets. Surprising really, given that the Fed is clearly more gloomy on the economy and hasn't given them all that much more in the way of stimulus.
In summary:
• The jobs market is worse than we thought. Unemployment will be about 8%-8.2% at the end of the year, about what it is now. That's bad news for Obama.
• Europe is a big worry.
• Washington needs to get its act together before we all plunge off the Fiscal Cliff.
• The Fed is ready to act should the situation deteriorate further.
• Once again nobody asked a good question about the housing market.
Comments
20 June 2012 5:42PM
Here is an article that shows how multiple rounds of QE has led to dangerous growth in the size of central bank balance sheets, an issue that has led to one of the world’s largest central banks owning one-third of that country’s debt:
http://viableopposition.blogspot.ca/2012/06/worlds-central-banks-to-rescueor-not.html
We can quite clearly see that despite taking these dangerous measures, that the world’s fiscal situation has not improved.
20 June 2012 6:00PM
The Feds monetary actions will have little or no practicle effect on the economy. There is no shortage of cash in the economy. The problem is that investors are sitting on their cash assets becasue they are concerned about risks and uncertainty; about $2 trillion held by U.S. companies alone.
Because inflation rates and interest rates are so low, they don't loose much by just sitting on the money. Adding liquidity to the economy will have little effect on economic growth. Adding liquidity will continue to suppress interest rates and remove any incentive to invest in the real economy and stop hoarding cash.
The Fed. needs to stimulate lending to consumers and businesses to generate consumer demand. The ridiculously high credit card interest rates are strangling consumer demand.
20 June 2012 6:02PM
The myth of Sisyphus re-enacted.
Keep pushing - we're nearly there ...........(repeat ad nauseum)
20 June 2012 6:10PM
It is the stupendous amount of sovereign debt being held by european retail banks is what is triggering the financial crisis in the E.U.. As the governments are forced to pay higher and higher interest rates to sell additional bonds, the older lower interest bonds decline in value. This decline is undermining the banks' capital; at the same time E.U. bank regulators are pushing the banks to raise capital standards. These two forces combine to whipsaw the banks and restrict lending. Reduced lending to businesses and consumers is causing economic stagnation, recession, and unemplyment.
This is forming a self reinforcing cycle of economic decline that is the force behind the accelerating downward spiral of the E.U. economies.
20 June 2012 6:17PM
Exactly. You can't push on a rope.
The problem is not a shortage of liquidity so central bank actions to increase liquidity have little or no effect.
The Fed. and Treasury need to work to lower consumer interest rates; credit card rates. Consumer demand revereses the action of the liquidity in the economy. Consmer demand is needed to revive the economy. CONSUMERS WILL PULL ON THE ROPE. There is a lot of pent-up consumer demand.
20 June 2012 7:06PM
You are joking about credit card interest?
The guy who invented them did so as a facility not a borrwoing tool. He never thought anyone would be that stupid.
Be better to make them like Amex and paid in full at billing.
One of the biggest issue is personal debt, any stimulus just means they deleverage
20 June 2012 7:52PM
$267bn more, that is a lot of creamed pants for The Chosen Few.
Now tell me that the last 4 years hasn't seen the largest creation of wealth in history, likely ever.
Something to be mighty proud of, but what happens when they take it all back? Or will they ever?
20 June 2012 7:59PM
American consumers have used a lot of their disposable income paying down debts; because of the high compound interest rates and the destruction of their wealth by the collapse in home values.Paradox of thrift
Removing consumers' easy and rapid access credit would just reduce spending and cause continued economic slowdown.
20 June 2012 8:05PM
UNCLE BEN STRIKES AGAIN.
I like his rice.
But, I hate watching him dumping money into the wrong hands. Helicopter drop economics.
20 June 2012 9:01PM
Reduced lending to businesses and consumers is causing economic stagnation, recession, and unemplyment.
Who in his right mind wants to borrow more than he has to, when he is likely to get laid off from his job at any moment ?
What is needed is higher wages at the expense of corporate profits, which have never been higher.
20 June 2012 9:33PM
Think I'll put that in as a definition of short termism. Get in debt borrow more and eventually day of reckoning must arrive.
20 June 2012 9:40PM
For the last time QE and twist are zero sums. They are selling one end of the curve and buying at the other end. The bogey banks of yours that sell had to pay for the bonds in the first place so they just get their money back.
20 June 2012 11:05PM
Artificially raising wages just makes your businesses less competitve in the global economy unless you can get China and the other BRIC countries to go along with the plan; highly unlikely. Ultimately, something is worth only as much as someone else is willing to offer in exchange; whether it is apples, or automobiles, or houses, or labor.
The people in Europe and North America have enjoyed decades of living with standards of living; by maintaining colonial-like relationships with most of the rest of the world. The development of the global economy and global finance is eroding the advantages they once enjoyed.
It's what we call a double whammy, cheap foreign labor provides certain goods at a lower cost so more people can afford them. But it also causes pressure to reduce wages so less people can afford them.
If you target certain companies whose profits will be cut, you give an advantage to others who will attract investors and who will get lower cost financing. You'd be shooting yourself in the foot.
20 June 2012 11:07PM
It's odd that this gets announced and shares go down slightly.
It's been roughly 70-100% gains on any US shares over the last 2-3 years irrespective of the Euro Crisis, yet this is announced and things tail off.
I wonder if people are cashing in chips to buy Gold ?
20 June 2012 11:11PM
If you bought a single share in Apple when they first released the iPad, then the increase in price would buy you each new version of the iPad as it came out without spending a bean.
The Chosen Few are only there because some idiots put them there.
20 June 2012 11:15PM
This is true when you look at it from the perspective of capital accounts. But, when you analyze the effect on cash flows, financial mechanisms like Operation Twist reduce the governments debt payments by strecthing out the term period and lowering the interest expense. Like the arrangement between Greece and the Troika where short term Greek bonds with high interest rates were exchanged for longer term bonds with lower yields.
But, no matter how you look at it, the effect on the economy is minimal.
20 June 2012 11:20PM
They also got there because of some talent and opportunity.
My father always said there were two types of people in the world, the Quick and the Hungry.
I'd add another two types of people, those that Take and those that get Taken.