Federal Reserve

That's up from 9.9% in May and 7.1% in April from the monthly Cleveland Fed analysis of yield curve spreads.  It also projects 1.0% real GDP growth over the next year, much less than the consensus forecasts of just under 3%.   An inverted yield curve has preceded each of the last seven recessions by about a year, but there have been two false positives, in 1995 and in 1998.  How much predictive power yield curve analysis has is in dispute among economists, as the Cleveland Fed notes here. 

Before every major Hill hearing, staff prepare a briefing book for the Chair with simulated Q&A and background information. I imagine the following for next Wednesday morning's Humphrey-Hawkins hearing with Fed Chair Ben Bernanke.

 Q. from Chair Barney Frank: "Mr. Bernanke, where are the jobs?"

Ed and Bruce raise some interesting questions regarding the Bernanke nomination.  I'm in the camp of those, like Brad DeLong, who think his nomination should be confirmed.  As Ed suggested, if it doesn't happen, it will be mostly because of the perceived political need to throw someone or someones under the bus.

But I disagree with Bruce, who said "...there is no obvious replacement for Bernanke who could get confirmed any more easily than him."

The key qualifications would be someone who:

Could the Democratic debacle in Massachusetts derail Ben Bernanke’s Senate confirmation to a second four-year term as Fed chairman?

I wouldn’t bet on it, but I didn't think the Dems would lose Teddy Kennedy's senate seat either.   And  there is strong smell of panic among Democrats and a growing push to assuage popular fury on the right and the left.

With the Huffpost cheering them on, two more Democrats announced that they would vote against Bernanke.   Barbara Boxer of California and Russell Feingold of Wisconsin added their names to the official NO column. Senator Bernie Sanders, independent of Vermont, announced more than a month ago he would not only oppose Bernanke but put a hold on the vote.   By the end of the day on Friday, a spokesman for Harry Reid, the Senate majority leader, was saying Reid didn’t know if he could round up 60 votes to clear a filibuster and hadn’t himself decided whether to support him.

       Let's stipulate right up front: it's silly to infer much from one month of job-creation numbers.  The numbers bounce erratically, they are often revised dramatically one month later and they routinely  defy the consenus forecasts by a wide margin. 

      Last month, forecasters were surprised and the media were elated when the Labor Department reported that job losses dwindled to just 11,000 in November -- much lower than expected (and revised today to a net gain of 4,000).  The newly exhuberant forecasters were surprised again on Friday, when the estimated job losses in December jumped back up to 85,000.  

       "U.S. Job Losses Dim Hopes for Quick Upswing," declared a headline in The New York Times.  I'm not sure how much hope there was for a quick upswing, but I'm even less convinced that the new job numbers change the picture all that much. 

      But here's what's interesting: the Fed's policy under Ben Bernanke seems intentionally geared to high unemployment for the next several years.

The Fed wasn’t to blame for the financial crisis Ben Bernanke told the American Economics Association in Atlanta yesterday. The Fed Chair’s address presented a lot of careful research by Fed economists showing that a simple Taylor Rule analysis using CPI headline inflation would indicate Fed monetary policy was much too easy from 2003 into 2006, but if real time forecast PCE inflation is used, Fed monetary policy was reasonable. This is an important point – many policy decisions look bad in hindsight, but if you examine them in terms of what information was available when they had to be made and in terms of what forecasts were used, they look much better. Bernanke didn’t use these words, but I will: if Monday morning quarterbacks are so smart, why aren’t they rich?

Yesterday, Senator Jim Bunning (R-KY) released 34 pages of written responses Fed Chair Ben Bernanke sent him with answers to 70 questions on everything from demands for records, to explanations of bailout decisions, to whether he had made commitments to the White House or Treasury to secure renomination, to broad policy questions ranging from gold to quantitative easing to dealing with asset bubbles.  This is the most wide ranging set of responses from the Federal Reserve on the financial crisis to date.  Bernanke's answers were judicious, but obviously didn't go far enough to appease Bunning, who has been an implacable foe of Fed intervention in financial markets.  Bunning and a few supporters will attempt to use the Bernanke nomination debate to curtail Fed powers, but, in my opinion, Senate Banking will recommend Bernanke's confirmation tomorrow morning, and the Senate will confirm him by late January.

Take a look at this new website just launched by the Federal Reserve Bank of San Francisco called "the Economy: Crisis & Response," and then admit to yourself that the world has changed in ways that were unimaginable not that long ago. (The images below are from the site.)

At least some of the many part of the Federal Reserve system -- the Board of Governors and the regional banks -- have obviously realized that they are going to have to communicate differently than they have in the past.  Not only are the system's actions being being scrutinized and criticized more often by a wider group of people than perhaps at any other time in its history, but the board and banks may well be given much broader roles in the new financial regulatory scheme being developed that will require them to talk more often to different audiences than they have ever talked to before.

Remember the movie "Being There"?  This 1979 film was Peter Sellers' last next to last.  The role he played  -- Chauncey Gardiner -- was also the one he said was among his hardest because the character had no real personality.  He delivery had to be flat and virtually emotionless.

The key thing about Chauncey Gardiner was that everyone who talked with him heard him say what they wanted to hear.  Although he spoke in broad generalities, people heard specifics about exactly what they were talking about.