New Economist

Blogging: Three week hiatus

Owing to other commitments there will be a three week hiatus in the New Economist weblog, with no or only very light blogging. Thanks for all your feedback, interest and assistance in the few months since this blog began - I appreciate it.

UPDATE: I'm back, though will likely be blogging 2 or 3 times a week rather than 6 days as in the past.

Fed Boards: Return of the Country Club?

The Financial Markets Center have taken their annual look at the composition of the 12 Fed boards, and they're none too pleased. Their report, Reserve Bank Boards in 2005: Return of the Country Club (PDF) finds that:

After moving in the direction of increased turnover and greater diversity in recent years, Federal Reserve Bank boardrooms in 2005 have retreated towards the all white, all-male, big-business traditions that prevailed at the central bank for many decades.

I was especially struck by the heavy Republican bias of new Directors in their campaign contributions:

During the 2004 election cycle, six of the nine new Bank directors contributed to a presidential candidate. Only one of the donations went to a Democrat. Similarly, six of the nine directors donated to party organizations or party related political action committees (PACs). Again, only one of the contributions went to a Democratic group.

US Treasury may reintroduce 30 year bonds

Reuters, Bloomberg and other press reported today that the US Treasury, faced with large budget deficits, is considering regular sales of 30-year bonds, which were suspended in 2001. According to the Treasury statement:

Thirty-Year Nominal Issuance

Treasury is considering whether or not to reintroduce regular issuance of a 30-year nominal Treasury bond. A decision on 30-year nominal issuance will be announced at the August 2005 refunding on August 3, 2005.

We will examine if we have the flexibility to issue 30-year bonds while maintaining deep and liquid markets in our other securities and determine if nominal bond issuance is cost effective.

There are two possible outcomes:
    * No change in current policy; or
    * Semi-annual auctions of a 30-year nominal security beginning in February 2006.

We welcome comments from all market participants on this issue and will respect the confidentiality of any proprietary information received.

Long-end bond yields jumped higher on the news. As General Glut noted, "Well, that's one way to get long-term interest rates up." But the decison is not so surprising; I foreshadowed such a move back in March, after similar announcements in the UK and Eurozone.

Although Treasury say a decision won't be announced until August 3, William Polley rightly notes:

I think it will be affirmative. They wouldn't admit they were considering it unless it was actually going to happen.

Market interest is strong. The Financial Times reports Lobbyists eager for return of long bond:

As the US Treasury yesterday announced that it is considering reinstating the 30-year bond, the Bond Market Association, the New York-based industry body, was already gearing up for a lobbying campaign.

For while government officials say no binding decision has been taken, Wall Street will be very disappointed if the US Treasury now fails to act.

"We felt four years ago it was unfortunate they cancelled the 30-year bond - and we feel even more strongly [that there is a good case for the bond] now," says Micah Green, head of the BMA. "You can be very sure that we will be submitting our views in the coming weeks."

There are several reasons why bankers are united on the issue. One is simple commerce. Many investment banks are bracing themselves for a downturn in fixed income business later this year after the bumper revenues of the last few years.

But a new instrument could attract new investors into the market and - in the near term - create arbitrage and trading opportunities. ..."My guess is Wall St will clamour for a 30-year," says John Roberts, managing director of Barclays Capital.

Mocking the Maestro

Paul R. La Monica, CNN/Money senior writer, has just posted a short but useful overview of the current debate over US monetary policy, Mocking the Maestro. "Alan Greenspan and the Fed still think inflation's a major concern - bond investors beg to differ". I particularly liked the accompanying Fed Word Watch table, replicated below, which shows how the FOMC have subtly shifted some of the phrasing of their statements in the past year.

Fed Word Watch

Date

1/28/04

6/30/04

8/10/04

2/02/05

3/22/05

5/03/05

Action

None

Rate hike

Rate hike

Rate hike

Rate hike

Rate hike

Economy

Expanding briskly

Labor market improving

Softness due to rising energy prices

Moderate growth despite rise in energy prices

Labor market improving gradually

Spending growth has slowed due to higher energy prices

Inflation risks

Almost equal

Roughly equal

Roughly equal

Roughly equal

Pressures have picked up

Pressures have picked up

Low rates?

Can be patient in removing

Can be removed measurably

Can be removed measurably

Can be removed measurably

Can be removed measurably

Can be removed measurably

Note: Not all Fed meeting dates are included. Source: Fed

Great insights from Bloomberg

Writing today for Bloomberg in a piece about current accounts and currencies, Greenspan or Buffett? Asia Mulls Who's Right, columnist William Pesek Jr. showed a keen grasp of foreign exchange markets:

It's widely expected that a yuan revaluation will result in a stronger Chinese currency.

So now you know.

UPDATE: Tim Worstall evidently liked my suggested title of the Bleedin' Obvious Award. If you see any other prize examples, please email them to me. Preferably economists and economic/financial  journalists - as politicians say the bleedin' obvious every day!

The important role of migrant workers

Andrew Taylor has two descriptive pieces in today's Financial Times on migrant workers' important role in the UK. In Figuring out a role for migrant workers, he assesses their impact on the economy:

Mervyn King, governor of the Bank England, has said that the availability of cheap foreign labour may be one reason why wage inflation has not taken off as expected in a tight labour market.

A steady flow of young, tax and national insurance paying, immigrant workers may also be required to replenish an ageing workforce: to help to finance future pensions. According to the Institute for Fiscal Studies, there will be only 2.3 workers for every pensioner by 2040 compared with 3.3 currently.

Yet both Conservative and Labour politicians, seeking to ride the tide of popular electoral concerns, have announced plans to restrict the number of foreign workers coming into the country. The Tories would place a cap on the number of immigrants while Labour proposes a points system that would favour higher-skilled workers.

UK election: What will the outcome be?

Almost all the pre-election polls, other than the final eve-of-poll  predictions, are now in (results here). They vary widely, from the latest MORI/Financial Times poll which shows Labour with a 10 point lead over the Conservatives, to the YouGov/Sunday Times poll which estimates Labour has just a 3 percentage point lead. Whatever the result on Thursday, someone will have egg on their face.

To put those poll results in perspective, Labour won a majority of 167 seats in the 2001 election. The swing-o-meter at Electoral Calculus estimates that with no tactical voting effects, the MORI/FT figures would see a Labour majority of around 162 - almost no change. By contrast, if the YouGov poll is acurate that majority would be cut to 96 seats - still quite a workable majority.

However if the LibDem to Labour tactical voting advantage turns negative (from +2% to -2%), that majority falls to 62 seats. Figures around those levels would start to make PM Blair uneasy, and might prompt an early move to oust him by Chancellor Gordon Brown.

One solution to the divergent poll results is to pool the major surveys. The Financial Times have done this on their website, using UK Polling Report numbers:

It shows that the earlier Tory campaign gains have been pared back over the last two weeks. Several commentators have attributed this to backlash over the Conservative's negative campaigning and attacks on Blair, but it may also reflect the Tory's campaign peaking too early, or their narrow focus on populist issues such as immigration that galvanised their electoral base, but did little to attract swinging voters.

Anthony Wells, on his UK Polling Report Blog, gives reasons why he expect YouGov to be the most accurate pollster. I think he may be right, for several reasons:

1) There is widespread anecdotal evidence of large Labour protest vote. Many Labour supporters appear likely to either stay home or vote Liberal Democrat.

2) The Liberal Democrat tactical voting which steered about 2% of votes in Labour's favour in 2001 may well disappear, and could even turn negative.

3) Labour has a lot fewer rank and file supporters on the hustings than last time, which will make it harder for them to get out the vote on Thursday.

4) There is some evidence of "shy Tories" who are too embarrassed to admit to an interviewer that they support the Conservatives, understating support for the Conservatives (Wells discusses this effect).

5) The latest ICM poll suggest the Tory campaign focus on key marginals is bearing fruit. I expect the Conservatives to pick up more marginals than the overall national swing would predict.

6) The betting markets have for some time favoured a much lower Labour majority than the polls suggest. According to Monday's Independent:

Punters are betting that Labour's majority will be as low as 60 seats. Few punters are backing a majority of more than 80 seats.

A final variable to factor in is the far higher number of undecided voters this time around. The MORI/FT poll claims that 36% of voters may yet change their mind, compared with just 21% still undecided in the final week last time. Of course most could vote Labour's way, but if polls continue to indicate a large Labour win I expect quite a few to register a protest vote.

For what it's worth, I expect the popular vote to be very close - with a good chance that the Conservatives will get more votes than Labour in England - the so-called Al Gore scenario. There won't be a hung Parliament, but Labour's majority will be drastically trimmed - down from 167 to between 60 and 90 seats. The Liberal Democrats, meanwhile, are on track for their best result in 22 years.

UPDATE: Tony Blair has achieved an historic third term, but with his majority slashed - as most commentators, including myself, had expected. The final declared result saw a 5.4 percentage point swing against Labour, bringing their national vote down to just 35.3% - the lowest ever winning share of the vote. But most of those lost votes went to the Liberal Democrats (up 3.8 percentage points), not the Conservatives (up just 0.6 ppts). The populist Tory campaign may have consolidated its base, but it won few converts. Labour suffered from a big protest vote, not a swing to the right.

The BBC/ITN Exit Poll, conducted by MORI, predicted a Labour party majority of 66 seats. That was where we ended on election night. The final majority, with all seats declared, was 67. The Sunday Times rightly dubbed this a "triumph for the pollsters".

But the opinion polls and political betting also got it right. As Anthony Wells explains, the election-eve opinion polls were all very close to the actual voting shares, ranging from a very small 0.2% average error for the NOP/Independent poll to a still respectable 1.6% average error for the Populus/Times poll. These were all well within the usual 3% margin of error.

Finally, electoral betting sites had been predicting an outcome of this magnitude for weeks, even while earlier opinion polls were proclaiming a big Labour win. As Mike Smithson comments, "other spread markets seemed to have been good reflection of what actually happened."

Fed to keep ratcheting rates up

The FOMC today raised the Fed funds rate by another 25 basis points, bring it to 3%. So far the Federal Reserve have raised rates eight consecutive times, by 200 basis points, since June last year. See Reuters, Bloomberg, Financial Times, AP and other media reports.

William Polley, like many others, had expected "we will see a press release that looks a lot like the last one". Yes and no. As Angry Bear shows in his marked up version of the FOMC's statement, there have been some significant changes:

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices. Labor market conditions, however, apparently continue to improve gradually. Though longer-term inflation expectations remain well contained, [See correction below] Pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices.

The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

The sections of the statement that are boldfaced are additions from last month's statement, while the portions struck out were in the last statement but not in this one.

The reference to a measured pace of rate increases remains, as had been expected. More significant is that the two caveats about inflation have been struck out. The additional sentence notes the slowing in spending. But this does not appear enough for the Fed to consider a halt to its current tightening cycle anytime soon.

In short, the Fed is less concerned about soft economic fundamentals and more woried about inflation than are markets. They are intent on ratcheting official rates higher to dampen inflationary pressures and expectations.

Confirmation for this reading comes from Greg Ip's front page Wall Street Jornal story on 29 April, Fed Sees Inflation As Bigger Threat Than a Slowdown, (subscription required).

Despite signs that economic growth is slowing, the Federal Reserve sees signs of an upward creep in inflation as a bigger threat -- and is likely to keep raising interest rates in the months ahead to curb it.

On Tuesday, the Fed likely will raise the target for its key short-term interest rate to 3% from 2.75%. … Fed increases are likely to continue at subsequent meetings unless the economy slows much more than it already has.

Mark Thoma provides interesting commentary by his colleague Tim Duy, a former Treasury official.  Tim argues that the WSJ story "was almost certainly placed by Greenspan. You don't go front page with a piece like that unless you are sourced from the top." (Hat tip to Brad DeLong).

Back on 17 March I predicted the Fed would raise US rates by at least 100 basis points to 3.5% by year-end. I now expecting rates to have reached 4.0% by then. Next year rates should peak at around 4.5%, in line with in-house Fed estimates of neutral nominal interest rates.

UPDATE: As William Polley notes in his comment below, the Fed "corrects previous release to add sentence in second paragraph, which was dropped inadvertently". That is, they have added back the sentence on inflation expectations. Hence the end of paragraph one now reads:

Labor market conditions, however, apparently continue to improve gradually. Pressures on inflation have picked up in recent months and pricing power is more evident. Longer-term inflation expectations remain well contained. [Emphasis added by Fed]

As Bill notes below, "That tempers it somewhat. It's pretty balanced and conditional in my view". In his weblog entry he adds:

The press release wasn't bad to begin with, and adding back that sentence (which has been there before) makes it marginally better. ...And I think that this statement keeps the door open to a faster or slower pace of monetary adjustment as needed. If you've been watching the intermeeting data, nothing in this statement should surprise you.

UPDATE 2: Bill Polley has a second post, with more details and reactions. David Altig at Macroblog has also posted on the missing sentence.  His post includes plenty of links, plus this great quote from Robert Brusca, chief economist for FAO Economics:

"This omission is very Freudian," said Brusca, who argued that the Fed was right the first time by saying inflationary pressures are mounting, but is in so much denial that it didn't notice it had left out a key sentence. 

UK election: Who should you vote for?

With pollling day this coming Thursday, Brits will soon have to decide how to cast their ballots. Chris Dillow at Stumbling and Mumbling says he will not be voting, but is not not apathetic:

What I’m saying is that my vote is a precious thing. Too precious to waste on idiots. What worries me is that my abstention will be misinterpreted. The meeja will think it’s apathy. This is a howling fallacy.... It’s not apathy I feel. It’s contempt.

Chris, I feel your pain. But your argument sounds like self-serving twaddle to me. To quote Chicken Yoghurt:

Whatever your views, I urge you to vote even if it’s to spoil your ballot. Spoiled papers get counted, abstentions do not and low turnouts are spun by the victors to suit their own ends

Tim Worstall says you "should ..be biased to vote against the incumbent in any and all elections". But ultimately his true (blue) colours are revealed:

This leaves the Tories as the only viable alternative. Clothes pegs on noses perhaps, but yes, Vote Tory!

But why rely on them? The internet can tell you which party most closely aligns with your views. For example, the Public Whip can advise you how to vote based on how your ex-MP and the parties voted in parliament over the last 4 years on eight key issues. More sophisticated versions of this type of poll are Who do I vote for? (done in horse racing format) and Who should you vote for? The results may surprise you.

Finally, if you have time, Chris Lightfoot provides the only internet survey of political views based on real opinion poll data (from YouGov). "We can tell you not only where your views lie, but how they compare to the views of the rest of the British population." Impressive - and revealing.

Charts of the month!

Economists love charts. So, too, do econobloggers. Mark Thoma of Economist's Views has collected his favourites for April 2005, collected from various weblogs, and posted them here (warning - this page may take some time to load). As one might expect, many of the more interesting charts come from the prolific Calculated Risk.