According to the FOMC’s statement yesterday, the economy “expanded at a modest pace during the first half of the year.” The pace had been characterized as “moderate” in the previous seven statements since the one dated September 13, 2012. The downgrade is understandable given that yesterday morning the Bureau of Economic Analysis (BEA) once again revised Q1’s real GDP downward to only 1.1% (saar). That contributed to a better-than-expected gain of 1.7% during Q2.

The FOMC statement also tweaked the message about inflation to reflect the latest numbers: “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.” The previous seven statements simply noted: “The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.” (A searchable archive of these FOMC statements is available at The Fed Center.)

Yesterday’s GDP report showed that the core personal consumption deflator rose at an annual rate of just 0.8% during Q2, down from 1.4% during Q1. On a y/y basis, it is up 1.2%.

All in all, the FOMC didn’t change the message much at all from the previous one dated June 19. Despite widespread expectations that QE will be tapered at the next FOMC meeting in September, the latest statement simply indicated that the Fed will continue to buy $85 billion in Treasuries and Agencies but will either increase or decrease this pace “as the outlook for the labor market or inflation changes.”

There was no change in the forward guidance on how long the federal funds rate will remain near zero. The unemployment threshold for starting to discuss the possibility of tightening monetary policy remains at 6.5%. There was no hint that a lower jobless rate, such as 5.5%, was even discussed. Nor was there any hint that the FOMC is considering a threshold for the inflation rate.

On balance, the statement was more dovish than the previous one. That simply reflects the fact that monetary policy is data dependent. The data that were released yesterday showed weak GDP growth and near-zero inflation. Indeed, nominal GDP was up only 2.9% y/y during Q2, the lowest since Q1-2010.

I suppose that all this lowers the odds of QE tapering starting at the September meeting. However, I hope that there was some discussion at the latest meeting about why the economy is so weak given so much QE. Since the latest program was started on September 13, 2012, the Fed’s balance sheet has increased by $751 billion to a record $3.5 trillion.

(Based on an excerpt from YRI Morning Briefing)

Today’s FRB-SF Economic Letter features an article titled, “Uncertainty and the Slow Labor Market Recovery,” written by two of the bank’s economists. In their study, they use a measure of fiscal and monetary policy uncertainty constructed using the volume of newspaper articles discussing economic policy uncertainty, the number of tax code provisions scheduled to expire, and the extent of disagreements among economic forecasters about such variables as future levels of inflation and government spending. The sharp increase in this measure since 2007 coincides with the rightward shift in the Beveridge Curve, which shows the inverse relationship between the job openings rate and the unemployment rate. Since 2007, the unemployment rate has been higher than in the past at the same job openings rates.

The authors dismiss the notion that a mismatch between the skills unemployed workers have and what employers are looking for can explain the shift in the Beveridge Curve. They also don’t buy the idea that the expansion of unemployment insurance benefits can account for the shift, noting that “unemployment insurance benefits have been reduced substantially over the past two years.” Here is their startling finding:

As the figure shows, policy uncertainty did not contribute to the shift in the Beveridge curve from December 2007 to August 2009. However, beginning in autumn 2009, policy uncertainty became an increasingly important factor behind the shift in the Beveridge curve. By the end of 2012, heightened policy uncertainty accounted for about two-thirds of the shift. Our results suggests that, in late 2012, if there had been no policy uncertainty shocks, the unemployment rate would have been close to 6.5% instead of the reported 7.8%.

The policy uncertainty measure includes uncertainty about monetary policy. Could it be that the Fed’s constant tweaking of its ultra-easy monetary policy, including all the discordant chatter from members of the FOMC, has contributed to the stubbornly high unemployment rate? That certainly is the implication of this study coming out of one of the most respected research departments in the Fed’s system! The unemployment rate would be down to 6.5% by now if not for all the policy uncertainty.

The Fed seems to have four mandates now. The official two are to lower the unemployment rate as much as possible, while keeping inflation low but avoiding deflation. The two “shadow” mandates are to boost stock and bond prices, while avoiding asset bubbles:

During the Q&A session following Fed Chairman Ben Bernanke’s prepared congressional testimony on monetary policy last Wednesday, he said, “I think the market is beginning to understand our message, and the volatility has obviously moderated.” Since the June 24 closing low of 1573, the S&P 500 is up 7.6% to yet another record high of 1692. Over this same period, the S&P 400 and S&P 600 are up 9.7% and 10.1%, also to record highs. Friday’s WSJ reported: “Yields on noninvestment-grade corporate debt fell below 6% at Thursday's close for the first time since June 4, hitting 5.89%.... While that is well above the 5% threshold the debt briefly pierced in a frantic early-spring rally, the milestone comes only weeks after yields on so-called junk debt neared 7%."

Apparently, the message is that Bernanke & Co. wants stock prices to rise and bond yields to fall. That seems to be one of the two shadow mandates. This is the one lurking behind the Fed’s official dual mandate, which according to the FOMC statements since December 12 of last year is to lower the unemployment rate to 6.5% and to boost inflation back to 2%.

Of course, another shadow mandate is to maintain financial stability and to avoid asset bubbles. Fed Governor Sarah Bloom Raskin weighed in on this subject in a 7/17 speech titled, “Beyond Capital: The Case for a Harmonized Response to Asset Bubbles.” She stated, “Even within the regulated sector, crafting appropriate financial regulation to address asset bubbles is challenging. In reality, it is hard to know in real time when asset prices have deviated sharply from fundamentals.”

This seems to be the house view at the Fed. In his Q&A last Wednesday, Bernanke said: “We have some tools. The Federal Reserve has recently issued some guidance to banks on leverage lending and other kinds of practices that could contribute to asset bubbles. All that being said, we want to make the financial system as transparent as possible, I don't think we can guarantee that we can prevent any bubble." Currently, the Fed's priority for the two shadow mandates seems to be to boost stock and bond prices rather than to avert asset bubbles.

(Based on an excerpt from YRI Morning Briefing)

When Fed Chairman Ben Bernanke outlined the FOMC’s plan for phasing out QE at his press conference on June 19, the S&P 500 dropped 1.4% that day and 2.5% the following day. When he repeated the plan yesterday during his congressional testimony, the market rose slightly, remaining near its recent record high.

Bernanke said that the FOMC will start tapering QE “later this year” if the economy continues to improve and inflation moves back toward 2%: “And if the subsequent data continued to confirm this pattern of ongoing economic improvement and normalizing inflation, we expected to continue to reduce the pace of purchases in measured steps through the first half of next year, ending them around midyear. At that point, if the economy had evolved along the lines we anticipated, the recovery would have gained further momentum, unemployment would be in the vicinity of 7 percent, and inflation would be moving toward our 2 percent objective. Such outcomes would be fully consistent with the goals of the asset purchase program that we established in September.”

However, that’s not a “preset course.” In any event, he reiterated that the Fed’s forward guidance pledges to keep the federal funds rate near zero “at least as long as” the unemployment rate remains above 6.5%. If inflation remains persistently below 2%, then the federal funds rate will remain near zero even if the jobless rate is down to 6.5%.

The market’s reaction to Bernanke’s “Can you hear me now?” testimony suggests that the answer is “Yes, now we can!” The Fed may or may not taper QE depending on the performance of the economy. In any event, highly accommodative monetary policy will persist for the foreseeable future.

For now, the Fed will continue to buy $40 billion per month in agency MBS and $45 billion per month in Treasuries.

(Based on an excerpt from YRI Morning Briefing)

The minutes of the BOJ’s monetary policy meeting on June 10-11 were released today. The members seem to be satisfied with the initial success of the QE policy they implemented in April. So they will stay on course:

With respect to the future conduct of monetary policy, most members shared the view that the Bank would continue with quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it was necessary for maintaining this target in a stable manner.

They had been concerned about the volatility of bond yields lately. However, they noted “that fluctuations in long-term interest rates had recently been subdued, reflecting market participants' positive response to the Bank's revision to the operational outline for outright purchases of JGBs following the meetings with market participants.” There was some discussion of providing additional forward guidance on short-term interest rates:

In this regard, a few members expressed the view that, in order to reduce such differences and stabilize interest rates, it was vital for the Bank to firmly anchor short-term interest rates at low levels by reiterating its commitment to continuing with quantitative and qualitative monetary easing as long as it was necessary for maintaining the price stability target of 2 percent in a stable manner.

India’s rupee fell to a record low on July 8, weakened by the slowest economic growth in a decade and a record current-account deficit. The Reserve Bank of India (RBI) responded today by increasing the marginal standing facility and the bank rate from 8.25% to 10.25%, and said it will conduct open-market sales of government bonds of $2 billion on July 18.

Charles I. Plosser (FRB-Phil.), a nonvoting participant on the FOMC, gave a speech today titled, “Assessing Monetary Policy.” He flies with the FOMC’s hawks. He is more optimistic than most of his colleagues about the US economy. He sees the unemployment rate approaching 7% by the end of this year and 6.5% before the end of 2014. He wants to start tapering QE now and stop purchasing assets by the end of the year. He wants to change the forward guidance on the fed funds rate path by treating the 6.5% unemployment rate and the 2.5% inflation rate as triggers rather than thresholds. In his own words:

In my view, it is important that we end purchases before we reach the 6.5 percent threshold for considering an increase in the funds rate target. If we don't, I believe the 6.5 percent threshold will lose meaning. Would anyone believe we would raise the fed funds rate at the same time that we are increasing the size of the balance sheet through asset purchases? Thus, consistent with my forecast and with the Committee's forward guidance, I favor starting to reduce the pace of purchases and ending the asset purchase program by year-end.

Here is why he prefers targets to thresholds:

In August 2011, the Committee began using dates to signal when the policy rate might increase, but it changed those dates at subsequent meetings. The FOMC then opted to formulate its forward guidance in terms of thresholds for unemployment and inflation. This is preferable to calendar dates because it is state contingent. Yet, the FOMC has specifically said that the thresholds are not triggers — they are not firm commitments and they may change. The Committee has repeatedly opted for language that allows a great deal of discretion to behave as it chooses, depending on the circumstances. But effective forward guidance demands commitment. When the Committee stresses the general flexibility of its policy decisions or makes vague references to data dependency, it does little to clarify the FOMC's intentions about future policy, even though clarity is what the FOMC wants to provide to the markets through its forward guidance. Thus, there is a fundamental tension between wanting to provide clarity as to the forward course of policy and wanting to maintain complete discretion. The Committee has failed to address this tension, which undermines the effectiveness of its policy.

James Bullard (FRB-SL), a voting member of the FOMC, spoke at a forum on monetary policy today at Jackson Hole. His remarks are summarized on the FRB-SL website. The key point: “Bullard noted that the FOMC recently authorized Fed Chairman Ben Bernanke to discuss possible plans for the ‘tapering of QE,’ which refers to reducing the pace of asset purchases. ‘The financial market reaction has been substantial, even though the Committee has not actually changed any policy settings at this point,’ Bullard said.” Here’s more from the post:

Current U.S. monetary policy has three components: the policy rate, forward guidance and asset purchases, he said. The policy rate has been near zero since December 2008. Forward guidance is a promise to keep that rate near zero at least until unemployment falls below 6.5 percent or inflation rises above 2.5 percent. Asset purchases of Treasury securities and mortgage-backed securities are continuing at $85 billion per month until there is substantial improvement in the labor market, as stated by the FOMC.

In a speech today in Singapore, Vítor Constâncio, ECB Vice-President, said that Europe is responding to its crisis by implementing structural reforms:

Europe is addressing its structural problems which have been holding back growth and at the same time it is ensuring that its banking sector contributes to global stability and growth. Europe is undertaking a process of wide and deep reforms, of which the Banking Union project is a major example, that will ensure a future healthier path of economic progress.

He claims that euro zone members are making good progress in becoming more competitive through product and labor market measures and also deeper reforms to tax systems, public administration, and the judicial system:

They are achieving greater sustainability by moving towards an economic model based less on external borrowing and more on internal competitiveness. Indeed, according to harmonised competitiveness indicators based on unit labour costs have all registered significant improvements since 1999, Ireland (-19% since 1999), Spain (-9.5%), Greece (-9%), and Portugal (-6.6%). The loss of competitiveness accumulated until 2007 has been totally offset since the beginning of the crisis. As a consequence, the EU Commission forecast for this year is that all stressed countries will show a surplus on current account with the exception of Greece with a deficit of just 1.1 % of GDP.

He also notes that European banks are in much better shape than widely recognized:

First, there have been steady improvements in solvency positions of many euro area banks. For large and complex banking groups in the euro area, covering about two thirds of total assets, the median core Tier 1 capital ratio reached 11.1% in the first quarter of this year – up from 9.6% at the end of 2011 and 8.3% at end-2009.

Second, euro area large banks have become less leveraged, from a level of 3.3% of tier 1 equity to 5% now. This was achieved mainly through capital increases....

Third, the restructuring efforts in the stressed countries to strengthen their banks with the help of the European Stability Mechanism (ESM) funds have led to improved funding conditions for euro area banks. With the financing provided by the ESM, banks in Spain, Portugal, Greece and Ireland have been recapitalized. Bank deposits in these countries have risen by around 200 bn since September last year, and the cost of both deposit and bond funding for banks has fallen significantly. Euro area banks’ issuance of medium and long-term debt has increased and we have also seen a noticeable pick-up in repo market activity.

The FOMC has 19 participants with 12 of them designated as voting members. The even dozen includes the seven Fed governors and five of the 12 regional Fed presidents, who rotate as members once a year. The minutes of the latest June 18-19 FOMC meeting suggest that the members are more dovish than the broader group of participants:

(1) Members. “While recognizing the improvement in a number of indicators of economic activity and labor market conditions since the fall, many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases.” This assessment appeared in the usual “Committee Policy Action” section near the end of the minutes.

(2) Participants. “About half of these participants indicated that it likely would be appropriate to end asset purchases late this year. Many other participants anticipated that it likely would be appropriate to continue purchases into 2014.” This assessment appeared in the appendix “Summary of Economic Projections.”

These two quotes from the minutes suggest that six or more of the voting members (i.e., “many” of the 12) are not inclined to taper QE at all unless they see that the labor market continues to improve. Apparently, nine participants (i.e., “about half” of 19) are pushing to terminate QE by the end of the year. If so, then at least two of those nine must be voting members since 19 (participants) minus 12 (voting members) is only seven (non-voters).

The participants authorized the Fed chairman to explain during his press conference what they meant to say in their usual post-meeting statement:

At the conclusion of the discussion, most participants thought that the Chairman, during his post-meeting press conference, should describe a likely path for asset purchases in coming quarters that was conditional on economic outcomes broadly in line with the Committee’s expectations. In addition, he would make clear that decisions about asset purchases and other policy tools would continue to be dependent on the Committee’s ongoing assessment of the economic outlook. He would also draw the distinction between the asset purchase program and the forward guidance regarding the target for the federal funds rate, noting that the Committee anticipates that there will be considerable time between the end of asset purchases and the time when it becomes appropriate to increase the target for the federal funds rate.

At his press conference on June 19, Fed Chairman Bernanke strongly suggested that QE would be tapered within the next few months and probably terminated by mid-2014 as long as the labor market continued to improve. Yet many of the voters on the FOMC weren’t ready to taper, let alone terminate it, according to the minutes of the FOMC meeting that concluded that same day.

At his press conference on July 19, Fed Chairman Bernanke strongly suggested that QE would be tapered within the next few months and probably terminated by mid-2014 as long as the labor market continued to improve. Late this afternoon, he simplified the message in response to a question after a speech in Cambridge, Mass. He said, “Highly accommodative monetary policy for the foreseeable future is what’s needed in the US economy.” Actually, he answered numerous questions from the audience. The transcript of the Q&A shows that this statement appeared in the context of the following response to a question on whether the Fed is turning hawkish:

The [Fed’s] dual mandate is to pursue maximum employment and price stability. Currently, we have an unemployment rate of 7.6%, which I think, if anything, overstates the health of our labor markets given participation rates and many other indicators of underemployment and long-term unemployment. So we’re not there, obviously, on the maximum employment part of the mandate. On price stability, inflation is now about 1%, which is below our 2% objective. So both sides of our mandate--both the employment side and the inflation side, are saying that we need to be more accommodating. Moreover, the other portion of macroeconomic policy--fiscal policy is now actually quite restrictive. The CBO estimates that current federal fiscal policy is subtracting 1 1/2 percentage points or so of growth from the U.S. economy this year. So you put that all together, and I think you can only conclude that highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy.

Mr. Bernanke didn’t talk much about QE. Instead, he focused on NZIRP, saying that the federal funds rate would stay near zero:

And in particular, we said that we will not raise interest rates until--at least until unemployment hits 6.5%, as long as inflation is well-behaved--again, I think as I’ve said before, that that 6.5% is a threshold, not a trigger. There will not be an automatic increase in interest rates when unemployment hits 6.5%. Instead, that will be a time to think about the situation anew. And given, as I said, the weakness of the labor market, the fact that the unemployment rate probably understates the weakness of the labor market, given where inflation is, I would suspect that it may be well sometime after we hit 6.5% before rates reach any significant level.

He concluded this response by implying that even if QE is tapered, overall monetary policy will remain very easy because the federal funds rate will remain near zero for a long while:

So again, the overall message is accommodation. There is some prospective gradual and possible change in the mix of instruments. But that shouldn’t be confused with the overall thrust of policy, which is highly accommodative.

In a press release today, the IMF’s latest mission to Greece reported that the country’s macroeconomic outlook remains the same as previously projected, with some slow growth expected to resume in 2014. The government promises to take some corrective measures to achieve its fiscal targets for this year. The government is still aiming for primary balance in its budget this year. It is still working on controls over excessive health care spending. Here are some of the other steps the government is taking towards reforming its finances:

The income tax, property tax, and tax procedure codes are being reformed, and the autonomy and efficiency of revenue administration is being strengthened. The authorities have also committed to take steps to bring public administration reforms back on track, such as by completing staffing plans by end-year, placing staff in the mobility and reallocation scheme, and meeting the agreed targets for mandatory exits. With the recapitalisation of the banking sector nearly complete, the authorities have committed to further steps to safeguard financial stability, including through the sale of two bridge banks and completion of their strategy for a four-pillar banking system. These reforms are a further important step towards facilitating adjustment and enabling growth. The mission also discussed with the authorities progress in strengthening the social safety net, including through targeted employment and training programmes supported by the EU and a programme to provide access to primary health care for the uninsured.

The IMF conducts regular (usually annual) missions to member countries “under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.” Today, the IMF posted the concluding statement of the mission to Italy. Basically, progress is being made toward fixing the country’s economy, but more needs to be done at a faster pace:

The euro zone crisis hit Italy hard, but the seeds of Italy’s low growth pre-date the crisis and follow from its stagnant productivity, difficult business environment, and over-leveraged public sector. Accelerating reforms to address these structural weaknesses will be crucial to limit the risks of long-term unemployment, especially for the youth, and raise Italy’s trend growth.

The IMF mission concluded that Italy must boost business competition by lowering barriers to entry and reducing regulations. The high cost of electricity (up to 40% greater than in France and Germany) has also been a drag on Italy’s competitiveness. The justice system is woefully inefficient with a significant backlog of cases, which increases the cost of doing business. There are too many small firms. As for fiscal policy, the IMF wants to see stepped-up efforts to combat tax evasion, “including through better use of anti-money laundering tools, and increasing the inheritance tax would also raise revenue and more fairly distribute the tax burden.” Italy’s banking system is in woeful shape as the “ratio of nonperforming loans has almost tripled since 2007, while provisioning coverage has declined.” The mission statement recommends that Italian banks sell, dispose, or write down impaired loans. The ECB and the EU could help as follows:

Direct asset purchases by the ECB, such as for SME credits, another LTRO of considerable tenor, and lower haircuts on eligible collateral would help lower bank funding costs and lending rates. Greater progress in the banking union, especially the single resolution mechanism and ESM backstop, would help sever the sovereign banking link. Moves to strengthen the common market, such as the Services Directive, would enhance the cross-border benefits of reforms. Progress in European policies combined with vigorous reforms in Italy would go far in producing a more vibrant and dynamic currency union.

Both the BOE and the ECB did something new today. They provided forward guidance on their policy for their key interest rates. Both implied that the recent jump in bond yields triggered by the Fed’s intention to taper QE may require them to keep their key rates at their current 0.5% and maybe lower them.

Just four days after Canadian Mark Carney became the new governor of the BOE, he seems to have convinced his colleagues on the Monetary Policy Committee to issue a statement showing it is in no rush to raise rates. Here is the relevant comment from the statement on this subject from the BOE today:

At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report. The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.

Additionally, the first question asked by a reporter at today’s ECB press conference with Mario Draghi was why the ECB wasn’t also providing forward guidance. The ECB president scolded the reporter, saying that the reporter obviously hadn’t been listening to his prepared remarks:

Yes, that is why I said you haven’t listened carefully. The Governing Council has taken the unprecedented step of giving forward guidance in a rather more specific way than it ever has done in the past. In my statement, I said “The Governing Council expects the key…” – i.e. all interest rates – “…ECB interest rates to remain at present or lower levels for an extended period of time.” It is the first time that the Governing Council has said something like this. And, by the way, what Mark Carney said in London is just a coincidence.

He responded to another question on this subject by specifying the variables that will influence the ECB’s rate-setting decisions in the future:

Together with the sense of the length of time, you also have to look at three sets of economic variables, namely the medium-term outlook for inflation, the economy and monetary dynamics. Monetary dynamics means monetary aggregates and credit flows. What the Governing Council did today was to inject a downward bias in interest rates for the foreseeable future linked to its assessment of these three sets of variables. The decision was unanimous, which is also quite important.

This BIS working paper examines data from 39 financial crises, which—like the current one—were preceded by credit booms. Surprisingly, the major finding is that deleveraging following a crisis doesn’t have to depress growth. Here is the paper’s conclusion:

We find that bank lending to the private sector and economic growth are essentially uncorrelated after those financial crises that were preceded by credit booms. This result is relevant for the major advanced economies recovering from the financial crisis, since the current crisis was also preceded by a credit boom. Our results suggest that the ongoing deleveraging in advanced economies might not be as harmful for the recovery as many fear.

We also find that depreciating real exchange rates are statistically and economically significantly associated with substantially stronger economic growth. This finding on real exchange rates shows that the price channel for external adjustment can contribute to stronger economic activities. Consequently, if crisis hit countries can generate substantial real effective exchange rate depreciation, either via nominal exchange rate depreciation or internal cost adjustments, this could hasten their recovery. However, given the global nature of the current crisis this solution might not be available for all countries at the same time.

In his introductory statement during today’s press conference, ECB President Mario Draghi said that the bank’s official rate would remain at 0.5%. This time, instead of saying that the ECB will do “whatever it takes” to support the euro zone’s currency and economy, he pledged easy money “for as long as necessary.” This is what he actually said:

Looking ahead, our monetary policy stance will remain accommodative for as long as necessary. The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation is based on the overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the real economy and subdued monetary dynamics.

He stated that the risks for the euro zone economy remain on the downside:

The recent tightening of global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions. Other downside risks include the possibility of weaker than expected domestic and global demand and slow or insufficient implementation of structural reforms in euro area countries.

He must have been pleased to report that financial conditions have improved significantly in the euro zone:

Since the summer of 2012 substantial progress has been made in improving the funding situation of banks and, in particular, in strengthening the domestic deposit base in a number of stressed countries. This has contributed to reducing reliance on Eurosystem funding, as reflected in the ongoing repayments of the three-year longer-term refinancing operations (LTROs). In order to ensure an adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that the fragmentation of euro area credit markets continues to decline further and that the resilience of banks is strengthened where needed. Further decisive steps for establishing a Banking Union will help to accomplish this objective. In particular, the future Single Supervisory Mechanism and a Single Resolution Mechanism are crucial elements for moving towards re-integrating the banking system and therefore require swift implementation.

In its statement today, the Bank of England’s Monetary Policy Committee (MPC) announced that the bank’s official rate will remain at 0.5% and its QE target will remain at £375 billion. The MPC noted that the UK economy is improving, but “it remains weak by historical standards and a degree of slack is expected to persist for some time.” The statement expressed some concern about the rise in interest rates around the world and the increased volatility of asset prices since the May meeting of the MPC. Inflation in the UK remains above the MPC’s target:

Twelve-month CPI inflation rose to 2.7% in May and is set to rise further in the near term. Further out, inflation should fall back towards the 2% target as external price pressures fade and a revival in productivity growth curbs domestic cost pressures.

Not mentioned was the impact of a weaker pound on inflation. UK policymakers are probably hoping that a weak currency will boost exports more than it will boost inflation. On July 1, Markit’s press release reported that UK manufacturing is picking up:

The UK manufacturing sector maintained its solid second quarter performance into June, with levels of production and new business rising at the fastest rates since April 2011 and February 2011 respectively. Domestic market conditions improved further, while demand from overseas also strengthened. At 52.5 in June, up from a revised reading of 51.5 in May, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index® (PMI®) posted above the neutral mark of 50.0 for the third month running. Moreover, the rate of improvement signaled by the PMI was the steepest for 25 months. The average reading over the second quarter as a whole (51.4)was the highest since Q2 2011….Incoming new orders rose for the fourth consecutive month in June. Manufacturers reported solid demand from domestic markets and clients based in Europe, China, North America, Scandinavia and the Middle East.

On July 3, Markit’s press release reported that UK services are also improving:

UK service sector growth accelerated to its highest level since March 2011 during June as incoming new business rose at a rate unmatched for six years. The sharp increase in new business led to a marked rise in backlogs of work, and encouraged companies to take on additional staff to the strongest degree since August 2007…. After accounting for seasonal factors, the headline Business Activity Index recorded 56.9 in June, up from May’s 54.9 and the highest reading for 27 months. Growth has now been recorded for six successive survey periods, and has continually improved throughout this sequence.

(The minutes of the MPC’s meeting will be published at 9.30 a.m. on Wednesday, July 17.)

This short analysis of the Fed’s flow of funds data through the end of last year found that:

Although flow of funds data suggest household wealth has nearly rebounded to its pre-recession peak, adjusting for inflation, population growth, and a risk-free real interest rate shows there is still a substantial gap between the peak of household wealth in 2007 and the level today.

In a Public Policy Brief posted by the FRB-Boston, Rand Ghayad, a visiting fellow at the bank, questions whether long-term unemployment insurance worsens unemployment. In theory, the program creates a strong disincentive for unemployed workers to seek and take a job. The paper is titled, “A Decomposition of Shifts of the Beveridge Curve.” This curve shows an inverse relationship between job openings as a percentage of the labor force and the unemployment rate.

The curve has shifted to the right since 2009 with more job openings for a given level of unemployment. One explanation for this shift is the increased availability of unemployment insurance benefits to the long-term unemployed. So this would suggest that allowing these benefits to expire should move many of the long-term unemployed back to work (or out of the labor force). That may be only half true, as the author of this paper reports:

Exploration of the evolution of job openings and unemployment using recent data on unemployed persons decomposed by their reason for unemployment, which determines their eligibility to collect benefits, suggests that up to half of the increase in the unemployment rate relative to the fitted Beveridge curve is explained by job leavers, new entrants, and re-entrants—those who are ineligible to collect unemployment benefits. Because unemployed job seekers who do not qualify to receive benefits compete for jobs with unemployed job losers who are eligible to collect UI, an unattractive vacancy that is refused by a job loser is likely be grabbed quickly by a new entrant or unemployed re-entrant who is not subject to any incentive effects. However, the evidence from the decompositions suggests that the increase in the unemployment rate relative to job openings will persist when unemployment benefit programs expire.

The Reserve Bank of Australia (RBA) left its key interest rate at a record low of 2.75% today. That’s down by 2 percentage points since November 2011. Governor Glenn Stevens said in a statement accompanying the decision that “the economy has been growing a bit below trend over the recent period” and “this is expected to continue in the near term as the economy adjusts to lower levels of mining investment.” The statement noted that a slide in the currency may continue:

The Australian dollar has depreciated by around 10 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy.

The minutes of the June 4 Monetary Policy Meeting of the Reserve Bank Board stated:

The exchange rate had also depreciated noticeably, though it remained at a high level considering the decline in export prices that had taken place over the past year and a half. It was possible that the exchange rate would depreciate further over time as the terms of trade declined, which would help to foster a rebalancing of growth in the economy.

Australia’s mining sector has been hard hit by the global economic slowdown, especially in China. The minutes noted:

Based on public statements by mining companies and information from the Bank's liaison, it seemed likely that mining investment was near its peak but would probably remain at a high level for the next year or so. However, members observed that there was considerable uncertainty about mining investment beyond that period. In particular, changes in production and exports of energy commodities in other countries were making it more difficult to assess the potential for new projects in the gas sector in Australia. Overall, conditions in the business sector remained somewhat subdued, with survey measures for all industries at, or below, average levels.

Bloomberg observed today that Prime Minister Kevin Rudd, who returned to office last week after a three-year hiatus, has focused on the risks of the slowdown in China. On June 27, a day after ousting Julia Gillard as leader of the ruling Labor party, he told Parliament: “The China resources boom is over. The China trade itself represents such a huge slice of the Australian national economy that we are looking at one huge adjustment for this nation’s standard of living in the future unless we continue to act with appropriate policy responses.”