Shares have surged in Asia and Europe following the new round of quantitative easing announced by the Federal Reserve last night.
Markets fixated on what Federal Reserve chair Ben Bernanke will say, while European unemployment set to rise
Minutes from Fed meeting show growing support for action as US recovery remains weak ahead of November election
The Federal Reserve is prepared to act “fairly soon” unless the economy shows substantially stronger growth, according to minutes of the Fed’s last meeting.
With the US recovery still looking fragile, the Federal Open Market Committee (FOMC) minutes, released after the customary three-week lag, show growing support for action.
“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” according to the minutes.
At their previous meeting in June, only “a few members” thought further stimulus would likely be needed.
Bernanke may give more details when he speaks on 31 August. His speech at an economics summit in Jackson Hole, Wyoming, will come a week before the latest non-farm jobs report is issued, a statistic that has become a barometer of President Barack Obama’s political health in the 2012 election cycle.
The minutes follow on from the Fed’s statement at the start of the month when officials said the economy had “decelerated somewhat” over the first half of the year. In July the commerce department announced that US gross domestic product (GDP) – the broadest measure of an economy’s health – grew at 1.5% in the second quarter, down from 2% in the prior three months, and 4.1% in the fourth quarter of 2011.
Many economists predict that the Fed is likely to announce any action after its September meeting. With the economy still the central battleground of the election, Fed action is likely to trigger a political backlash. Republicans have already pressed Fed chairman Ben Bernanke to refrain from further action.
“The truth is the Federal Reserve cannot rescue Americans from the consequences of failed economic and regulatory policies passed by Congress and signed by the president,” said the House financial services committee chairman representative Spencer Bachus, told Bernanke last month at a congressional hearing.
The US economy appears to be in a tepid recovery with slowly improving jobs numbers and improvements in its devastated housing market. But since its June meeting, Fed officials noted, economic activity had slowed. Most policymakers agreed that “economic growth was likely to remain moderate over coming quarters and then pick up gradually” and that the unemployment rate would decline only slowly.
With interest rates still close to all time lows, Fed officials are likely to choose a third massive round of bond buying – known as quantitative easing – in order to stimulate the economy.
“Many participants expected that such a program could provide additional support for the economic recovery both by putting downward pressure on longer-term interest rates and by contributing to easier financial conditions more broadly,” the minutes stated.
Dissent remains, however, with some FOMC members questioning the “possible efficacy of such a program under present circumstances” and concerned about its impact on the Fed’s balance sheet.
The minutes came after the Congressional Budget Office said the US was facing a budget deficit of over $1tn for the fifth straight year. The CBO also warned, as has Bernanke, that political squabbling over so-called “fiscal cliff”, the expiration of year end tax breaks and imposition of draconian spending cuts, could push the economy back into a “significant recession” unless a resolution is found.
David Semmens, senior US economist at Standard Chartered, said the minutes “paint a picture of a committee more open to easing than the market was anticipating”. But he said the minutes were a snapshot and that economic data had improved since they were taken.
Washington politicians considering asking former Barclays chief executive to testify as Libor-fixing controversy crosses to US
US politicians are considering summoning Barclays’ former boss Bob Diamond to Washington to answer questions about the Libor-fixing scandal, in a sign that the controversy is becoming an ever hotter issue in the US.
Two high powered committees, the Senate banking committee and the House financial services committee, are both believed to be considering calling Diamond to testify. Sources close to both committees said they were in the early stages of gathering information and were almost certain to call the former Barclays chief executive after the summer recess.
Senator Tim Johnson, chairman of the banking committee, said on Tuesday that his panel would quiz Federal Reserve chairman Ben Bernanke and Treasury secretary Timothy Geithner on the scandal at hearings scheduled before the August break.
“I am concerned by the growing allegations of potential widespread manipulation of Libor and similar interbank rates by some financial firms,” said Johnson.
A spokesman for the Senate banking committee would not confirm plans to call Diamond. He said: “No decisions have been made beyond plans already outlined.” A spokesman for Diamond declined to comment.
The US justice department is already investigating the scandal, and several cities and state pension funds have launched legal action, claiming that their investments suffered as a result of the manipulation of Libor rates.
Barclays is the first high-profile settlement with regulators, and last month was fined £290m ($450m) by regulators in the UK and US over allegations that it attempted to manipulated Libor. But more than a dozen other banks including Citigroup, HSBC and JP Morgan Chase are being investigated for their roles in setting Libor rates.
White collar crime expert William Black, professor of economics and law at University of Missouri Kansas City, said US action would soon escalate the scandal. “We have very tough disclosure laws. We already seen how horrific these people’s emails can be, there’s going to be a lot more where that came from,” he said.
In emails already disclosed, Barclays traders referred to Libor “fixings” and appear to have colluded in manipulating the exchange rate. “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger,” wrote one trader after a colleague helped him out.
In the first signs of the reputational fall-out of the crisis, which has left Barclays searching for a new chief executive and chairman, Barclays was dropped from a bond issue for Japan Bank for International Cooperation, because of its involvement in the attempts to fix Libor.
Barclays refused to comment on its role in the bond issue, although City sources noted it had been active in other bond issues in recent days, including for other Japanese issues such as Sumitomo and NTT.
Wayne State University law professor Peter Henning said the scandal had the potential to become “the signature financial fraud of the meltdown.” He said the trigger point was likely to come if and when a US bank is fined.
Henning pointed out that the Justice Department’s fraud division was looking after the case, not the anti-trust division.
“They are looking at this as a fraud case. That’s much more serious for any individual involved. Given the amounts of money we are discussing, there could be serious jail time if anyone is convicted,” he said.
Henning said he expected the scandal to become an increasingly hot political topic. Analysts in the City are attempting to calculate the potential cost of any litigation. Cormac Leech, an analyst at Liberum Capital, calculated that bailed out Lloyds Banking Group could face a bill of £1.5bn – 7% of its stock market value – in the eventual fallout from the affair.
About 45% of US mortgages are tied to Libor rates, and cities including Baltimore are claiming they have had to cut essential services as a result of losing money on investments tied to Libor.
“They are never going to say this, but the Obama administration would like nothing more than to charge a big banker ahead of the election,” said Henning.
John Coffee, a Columbia Law School professor, said the scandal was proving as damaging for regulators as bankers.
The fallout from the scandal is already hitting Obama’s team. Geithner was president of the Federal Reserve bank of New York when the alleged manipulations took place and was aware of some of the issues. Geithner held a meeting on April 28 2008 titled “Fixing Libor” and communicated his concerns to the UK authorities but no further action appears to have been taken.He also regularly spoke to senior figures at Barclays, including Diamond.
“If the Federal Reserve knew that Libor was being manipulated and sat there and tolerated it, it suggests they were more interested in their relationships with the banks than with consumers,” said Coffee.
“When Republicans are being hammered for being too close to big business, what could be better than pointing fingers at Geithner?” said Black.
Tepid US economy adds a disappointing 80,000 new jobs in June – live coverage of the market and political reaction
Could the latest employment data encourage the Federal Reserve to take further action to stimulate the economy? Possibly not – and that’s also possibly bad news for the Obama campaign.
Paradoxically, the 80,000 jobs growth in June may not be bad enough for the Fed to take action, given that it has already downgraded its economic forecast for 2012. It predicts growth of just 1.9% to 2.4% for the year and little change in the unemployment rate – and this jobs report may not be enough to shift its current stance.
Delving deeper into the June jobs report – while the headline number of 80,000 is on the dismal side, some of the other data is more mixed.
For the April to June quarter in total, the US economy added just 75,000 jobs – far below the 226,000 a month added in the first quarter of the year. There were job losses in retailing, transportation and government sectors.
The good news was that average hours worked grew to 34.5 hours from 34.4 in May – suggesting that there was some higher demand in the pipeline. At the same time, average hourly wages rose six cents to $23.50. That means hourly pay has increased 2% in the last 12 months.
Meanwhile there were signs of improvement elsewhere. The manufacturing sector added 11,000 jobs, its ninth straight month of growth. The healthcare industry added 13,000 jobs, and banking and financial services added 5,000.
New York Times’s quick take on the June jobs report, describing the labour market as “tepid”:Here’s the
The nation’s employers created more jobs in June, but not enough to significantly reduce the backlog of nearly 13 million unemployed workers.
The economy added 80,000 jobs last month, the Labor Department reported Friday, after a revised increase of 77,000 in May. The unemployment rate remained at 8.2%.
Economists are expecting similarly tepid job growth of around 130,000 a month — just enough to keep up with the growth in the working-age population — for the rest of the year.
Initial reaction to the June jobs report: standing still rather than getting better or worse. While job growth is slow, job losses aren’t as big a factor than they have been.
But it’s not good news for the White House or the Obama campaign – and obviously better news for the Romney campaign, on the headline at least, being lower than expectations.
There are also some backward revisions for April and May but they are basically a wash – a net loss of just 1,000 jobs so little change there.
Breaking down the numbers – the private sector payrolls rose by 84,000 and the total non-farm payrolls rose by 80,000 – meaning that government job losses remain a small drag on the employment market.
Manufacturing created 11,000 jobs.
Obviously this is bad news for the Obama administration – that makes the second quarter of this year the weakest quarter in terms of jobs growth since the height of the recession.
And here we go: the US economy added just 80,000 new jobs in June, and the unemployment rate stays unchanged at 8.2%.
While we are waiting for the jobs report, here’s a 2006 clip of Mitt Romney talking about creating jobs as giovernor of Massachusetts.
In it, Romney says it’s “silly” to suggest job growth happened from the day he became governor. He doesn’t take that view these days.
Nate Silver has an interesting thought about how the expectations for today’s jobs report will affect the political climate. “It seems as though we’re at something of an inflection point in terms of the prevailing sentiment about the state of the race,” writes Silver:The New York Times’s statistical blogger
If the economy is found to have added 150,000 to 200,000 jobs last month, you may begin to hear talk about how President Obama is on a winning streak. Nobody, I hope, will suggest that Mitt Romney faces insurmountable odds of winning the White House, but the notion that he is at least a moderate underdog may begin to sink in.
A downside miss, however, would mean that hardly any jobs were created in June. That would very probably shift the conversation away from the relatively favorable news stories, like the Supreme Court’s ruling on health care, that Mr. Obama has had over the past few weeks. The election might again come to be viewed as more of a tossup.
So what can we expect from today’s jobs report? The latest microeconomic data hints June’s jobs total may be better than expected. Weekly unemployment benefit applications dropped by 14,000 to a seasonally-adjusted 374,000, the fewest since mid- May. And private sector payroll provider ADP said businesses added 176,000 jobs last month – an improvement on the revised 136,000 jobs it reported for May.
Goldman Sachs reacted to the latest data by sharply raising its forecast to a gain of 125,000 jobs for last month, well above its previous forecast of just 75,000. And a more recent CNN survey of economists put the addition at 90,000.
Barack Obama and Mitt Romney will be anxiously awaiting the June jobs report unveiled this morning by the Bureau of Labor Statistics – and another pivotal moment in the 2012 US presidential election campaign.
With the BLS announcement set for 8.30am ET this morning, a survey of economists forecasts that 90,000 new jobs were added to the economy last month. That’s an improvement on the 73,000 added in each of April and May but well below the pace of growth set during the first quarter of the year, when 226,000 new jobs were added each month.
With the 2012 presidential election just four months away, time is running out for the Obama administration to convince voters that it is turning the economy around and making a dent in the 8.2% unemployment rate.
For Mitt Romney’s campaign, any figure below 100,000 bolsters its message that the Obama administration has failed, and that Romney’s successful business background makes him a better bet to put more Americans back to work.
While the Obama campaign has been chipping away at Romney’s business credentials as a corporate financier – labeling him a “pioneer of outsourcing,” as Obama did yesterday – another month of weak job growth puts it back on the defensive and vulnerable to GOP attacks on the White House’s record.
The latest labor market report comes as the Romney campaign has been suffering from stinging criticism of its strategy from Rupert Murdoch and the Wall Street Journal. Romney himself appeared uncertain how to respond to the supreme court’s dramatic decision last week to uphold Obama’s signature healthcare reforms.
We’ll be live-blogging all the latest reaction from economists on Wall Street and politicians in Washington once the numbers are made public.
• Fed hopes move will calm jittery investors
• Manufacturing sector expands at fastest rate in six months
In an effort to calm jittery stock market investors, US Federal Reserve officials will for the first time made public their own forecasts for the federal funds rate at the end of the month.
The Fed’s move towards greater transparency was included in newly released minutes from its December meeting, which paint a cautiously optimistic picture of the US economy – despite recent ructions in Europe.
The minutes come as figures show the US manufacturing sector continued to expand in December, and at a quicker pace than analysts had expected.
The Fed meeting concluded that economic activity expanded at a “moderate rate, notwithstanding some apparent slowing in global economic growth.”
Still, despite an uptick in consumer spending, unemployment remained “elevated”, even though it had fallen below 9%. Business investment appeared to be decelerating, the minutes acknowledged, and home sales and construction remained at very low levels.
As a result, interest rates remained unchanged.
In a move that appears to be aimed at wary investors, Fed officials will begin giving regular guidance on when they expect short-term interest rates to rise from near zero, and more information on the underlying economic data that helped shape their decision.
“An accompanying narrative will describe the key factors underlying those assessments, as well as qualitative information regarding participants’ expectations for the Federal Reserve balance sheet”, the minutes of the Fed meeting revealed. The first update is expected after the next meeting of the Fed board on January 24-25.
Figures from the Institute for Supply Management showed that in December the US manufacturing sector expanded at its fastest pace in six months.
The ISM’s closely watched purchasing managers’ index rose to 53.9 – the highest reading since April – from 52.7 in November. Readings above 50 indicate expansion.
The index has now reversed almost all of the fall seen last summer, when high oil prices and the disruptions caused by the tsunami and earthquake in Japan were taking their toll on US manufacturers.
The Fed’s statement and ISM’s figures will be more good news for president Barack Obama in an election year.
But Paul Dales, senior US economist at Capital Economics, warned that the ISM figures are far from a ringing endorsement of the US recovery.
“It is hard to see the economy strengthening further,” he wrote in a note to investors.
“The ISM noted that some of the recent strength is due to the effects of the accelerated investment depreciation tax allowance, which expired at the end of last year. More significantly, the US will surely struggle when the eurozone is on the cusp of a severe recession and when growth in Asia is set to slow.
“2012 should therefore still be a challenging year for the US economy, perhaps resulting in growth of no more than 1.5%.”