It Isn't Easy to Decide Whether to Ease
12:00 AM, Aug 25, 2012 • By IRWIN M. STELZER
Federal Reserve Board chairman Ben Bernanke now has two reasons to disappoint those who are hoping he will use his speech next week at the conclave of central bankers in Jackson Hole, Wyoming, to launch the good ship QE3. The first is that the economy continues to move ahead, albeit at a slower rate than is needed to bring the unemployment rate down significantly. Retail sales have been reasonably good; share prices, with the notable exception of Facebook, are matching (well, almost) the dreams of avarice of those traders operating in this low-volume, summer market; and the economy is growing, perhaps at an annual rate in excess of 2 percent.
The much watched housing sector also seems on a steady path to recovery. Sales of existing homes rose by 2.3 percent in July from June, and by 10.4 percent from last year. The average price of previously owned homes, $187,300, is now 9.4 percent higher than last year, the biggest jump since January 2006. Better still, the supply overhang of existing homes is at its lowest level relative to sales since February 2006.
Sales of newly built homes also picked up in July, by 3.6 percent, and applications for building permits rose 6.8 percent, to their highest level in four years, reflecting rising homebuilder confidence. Toll Brothers, which caters to buyers with annual incomes in excess of $100,000 and who can put up a 30 percent percent down payment (equity), is “enjoying the most sustained demand we’ve experienced in over five years,” according to CEO Douglas Yearley. Deliveries of newly built Toll Brothers homes rose 39 percent in the current quarter, with prices averaging $576,000. “It feels good to be making money again,” Martin Connor, Toll’s chief financial officer told analysts in a conference call. Indeed.
There are some signs that the recovery of the housing sector is being translated into jobs: the areas that suffered most in the housing bust are seeing a relatively rapid decline in their unemployment rates. Goldman Sachs’s numbers crunchers report that nonfarm payrolls grew over 2 percent in the past year in “the housing bust states,” but only 1.2 percent in the rest of the country.
The second reason that Bernanke might decide to stay his hand is what might be a signal that he should not plan to return to Princeton University when his term expires on January 31, 2014. Mitt Romney’s chief economic adviser, Glenn Hubbard, dean of the business school at Columbia University, told an interviewer, “Ben is a model technocrat … [who should] get every consideration” to stay on for another term. Of course, such “consideration” would be more likely if Bernanke left QE3 in dry dock since, according to the Romney team (assuming there is a position that can be so attributed), another round of easing would have little effect on interest rates or economic growth, and might prove inflationary. “I don’t think that’s [QE3] what the doctor ordered for the recovery,” said Hubbard.
It doesn’t take a Ph.D. to connect the dots—another term might be yours if you resist pressure for another round of quantitative easing. Of course, Bernanke might want to let that cup pass. On the one hand, he must be tired of being a piñata for snarly congressmen who confront him with hostile statements their staffs reckon will garner a bit of television coverage. On the other, the role of powerless academic scribbler, even supplemented with lucrative consultancies, can’t be much to look forward to after being fawned on by the press, praised and scorned—but never ignored—by congressmen, and respectfully consulted by the world’s central bankers posing problems so difficult that, to quote Tevye, the milkman in Fiddler on the Roof, they “would cross a Rabbi’s eyes.”
With Romney telling Fox News that he prefers a new man at the Fed, all of this might be just the sort of diverting nonsense in which Washington gossips specialize. Then again, Romney has not been famous for consistency, and a case can be made that continuity at the Fed would provide a bit of certainty in a highly uncertain world.
Whatever his future, Bernanke must live in the here and now, and with the fact that many members of his monetary policy committee can no longer be counted on to back him should he decide against further easing. Recently released minutes of the July 31-August 1 meeting of the committee include this widely noted tidbit, “Many [how many?] members judged that additional monetary accommodation would likely be warranted fairly soon [when?] unless incoming information [which data?] pointed to a substantial and sustainable strengthening in the pace of the economic recovery." Of course, a “substantial and sustainable strengthening” of the recovery is in the eye of the beholder. The fog of Fed speak remains impenetrable.
Much will depend on the next jobs report, due on September 7, a week after Bernanke’s speech at Jackson Hole, timing that gives the chairman both an incentive and a reason to stall. If the jobs market remains weak, with job creation substantially less than 100,000 in August, Bernanke is likely to find some method of easing further next month, although how such a move can accelerate growth is unclear.
It can’t much lower interest rates; besides, the barrier to a faster housing recovery is not mortgage rates, which are low, but lending standards, which are tight. It can’t reduce the drag from the eurozone’s problems or China’s slowdown. It probably can’t even do much to boost asset prices: “Given the strength of the summer rally in equity and commodity prices, QE3 may already be priced in,” say economists at Capital Economics. Nor can it slow the dash to the fiscal cliff—only a deal between Republicans who oppose any tax increases and Democrats who oppose any cuts in social spending can do that, and neither has indicated willingness to compromise.
A new report by the Congressional Budget Office estimates that failure to prevent the expiration of the Bush tax cuts and activation of mandated spending cuts would drive the unemployment rate from its current 8.3 percent to 9.1 percent by the end of next year. Extension of the status quo would postpone that plunge into recession, but the resultant deficits would drive debt held by the public to 90 percent of GDP, a level most economists say would usher in an extended period of subpar growth.
If the Fed does ease, billionaire John Paulson and his investors will be among the winners. Paulson, who anticipated the mortgage bust, has been stocking up on gold—so, too, George Soros and bond giant PIMCO—and is benefiting from the recent almost 5 percent uptick in gold prices in response to turmoil in Europe and fear that more easing in the U.S. and elsewhere will trigger inflation. House prices and rents are rising, petrol prices are again spiking, the drought is driving food prices up by 5-10 percent, and health care costs continue to rise. A sprinkling of Fed easing on these smoldering embers might, only might, lead to a good old-fashioned inflationary conflagration.
Come to think of it, Princeton might be an attractive haven at which Professor Bernanke could launch, not a new QE, but a leisurely addition to his substantial scholarly oeuvre.