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The White House is warning that catastrophe will strike if Congress fails to raise the limit on the national debt: With too little cash to pay creditors, the U.S. government would default. Interest rates would skyrocket. And the economic recovery would collapse.

But behind the scenes, Treasury Secretary Timothy F. Geithner has already begun juggling the books to conserve cash, draining a special account at the Federal Reserve. And with the debt forecast to hit the legal limit of $14.3 trillion in just a few weeks, he has a range of tools at his disposal, including borrowing money from a pension fund for federal workers.

Geithner also has authority to pay investors first for interest they’re owed on the debt, according to a decades-old legal opinion. A growing number of conservatives argue that by making interest payments first, the government could avoid default and the Obama administration’s predictions of economic Armageddon.

But the nation could pay a substantial price in the form of higher interest rates if it relied for long on such evasive maneuvers, the Government Accountability Office said in a recent study. And financial analysts say market confidence could be shattered if Geithner had to cut off pay to combat troops or stop writing Social Security checks — even if he never missed an interest payment.

“I think the failure to meet any commitment would be viewed by the markets as default and would be deeply unnerving,” said Robert Rubin, who, as Treasury secretary in the mid-1990s, prevented the debt from breaching the limit during the longest battle over the issue on record.

“We don’t know” what would happen in the event of default, Rubin said. “But I think it is totally irresponsible to take the risk of trying to find out.”

Markets are already uneasy about the looming battle over the debt ceiling, which promises to consume Congress when lawmakers return next week from their Easter break. Republican leaders are demanding strict controls on spending as a condition for raising the ceiling; Demo­cratic leaders want a deficit-reduction trigger, which would automatically cut outlays and raise taxes if certain budget goals aren’t met.

The debt is forecast to hit the limit in mid-May. Geithner has said he can keep the wolf from the door until early July.

So far, the Treasury has nearly drained a $200 billion cash-management account at the Fed, providing a cushion of money to pay bills without new borrowing. Next, Geithner is likely to take a series of “extraordinary actions,” such as suspending the issuance of special securities that help state and local governments manage their own finances. Once the debt hits the limit, Geithner may declare a “debt issuance suspension period,” permitting him to borrow from the pension fund for federal workers.

Rubin pioneered these strategies in 1995, at the start of the budget battles between President Bill Clinton and Republicans led by House Speaker Newt Gingrich (R-Ga.). As the fight dragged on through two government shutdowns, Rubin had to juggle the nation’s bills for 135 days. Finally, Clinton threatened to delay Social Security checks, spurring Congress to approve more borrowing to make sure the checks went out on time.

Then, as now, a new GOP House majority was pressing a Democratic president to shrink the government. Congress grudgingly raised the debt limit six times between 1995 and the loss of GOP control in 2007, while the Treasury repeatedly resorted to extraordinary measures.

Geithner can use the same tactics, Rubin said, but “the trouble is the numbers are much bigger this time.” In November 1995, the debt stood just under $5 trillion, and the government was spending less than half what it does today. The measures Rubin used to stay under the debt limit for more than four months would now last “a few days to a few weeks,” according to GAO auditors.

The Treasury also has on occasion curbed borrowing to stay under the debt limit, postponing scheduled auctions of government bonds and trimming the total value sold.

The GAO found that “general uncertainty” forced the Treasury to pay millions of dollars in higher interest rates in the months leading up to debt-limit increases in the early 2000s and again last year.

As Geithner readies his cash-management tools, some Republicans are pressing him to prepare for a lengthy battle that could force Treasury for the first time since the debt limit was established in 1917 to stop borrowing and make do with tax revenue. The government is forecast to collect $2.2 trillion in taxes this year and obligated to spend $3.7 trillion. That means Geithner could cover about 60 percent of the bills.

Last month, all 47 Senate Republicans voted for a measure sponsored by Sen. Patrick J. Toomey (R-Pa.) that would require Geithner to pay interest on the debt first. At $225 billion this year, the payments would be easily affordable, said Toomey, a former bond trader who headed the anti-tax Club for Growth until his election last year. While it would be “traumatic” to slash other obligations, Toomey said, keeping interest payments current would avoid default and preserve the nation’s sterling credit rating.

“The administration has been exaggerating the consequences of all this,” Toomey said in an interview. “If we didn’t raise the debt limit when we reached it, we’d have the equivalent of a partial government shutdown, and the market knows very well that furloughing workers and suspending purchases of materials are not the same thing as defaulting on our bonds.”

During a 1985 debt-limit fight, the GAO concluded that the Treasury secretary “does have the authority to choose the order in which to pay obligations of the United States.” But Treasury officials, who declined to comment on the record for this story, have discouraged talk about prioritizing the nation’s expenses.

In addition to being politically risky, the task presents huge logistical challenges. The Treasury makes hundreds of thousands of payments each day, most processed automatically by the Federal Reserve. Interrupting payments to manage daily cash flow would be far more complex than simply cutting off, say, payments to education programs.

More to the point, Treasury officials say, prioritizing payments would not avoid default. In a January blog post, Deputy Treasury Secretary Neal S. Wolin argued that failing to meet any obligation — whether interest payments or Medicare bills — would trigger a loss of market confidence. “Adopting a policy that payments to investors should take precedence over other U.S. legal obligations would merely be default by another name,” Wolin wrote.

What are the consequences of default? There’s disagreement about that, too.

Last week, in a paper titled “The Case for Default,” a Bank of America-Merrill Lynch analyst argued that hitting the debt limit might actually be a good thing, especially if the suspension of borrowing were brief and the political battle produced a plan to balance the nation’s books.

But most analysts take a darker view. Bill Gross, who runs Pimco, the world’s biggest bond fund, said in an e-mail that failure to raise the debt ceiling would be “catastrophic — global investors would move money at the margin to countries which have their act together, interest rates might rise by 50 basis points overnight, the stock market would plunge.”

Already, some traders have begun hoarding Treasury bills and other short-term assets in case the government stops issuing new debt. For now, such “disruptions” are minor but noticeable, said Karen Shaw Petrou, managing partner of the research firm Federal Financial Analytics.

“It’s like before a thunderstorm,” she said. “The birds are quiet in the trees, and there’s a very weird mood in the market. But it hasn’t yet started to rain.”
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Source: The Washington Post

The Federal Reserve should review the current stimulus effort and consider whether to end it early, said James Bullard, president of the St. Louis Fed. The effort, a second round of so-called quantitative easing, in which the government buys Treasury securities to put downward pressure on long-term interest rates, was announced in November and is scheduled to end in June.

“The economy is looking pretty good,” Mr. Bullard told reporters in Marseille, France, on Saturday. “It is still reasonable to review Q.E. 2 in the coming meetings, especially this April meeting, and see if we want to decide to finish the program or to stop a little bit short.”

He said that although the economy was clearly stronger than last summer and fall, uncertainties remained, including the effects of the nuclear crisis in Japan, the unrest in the Middle East and the European sovereign debt crisis. Surging oil prices pushed by turmoil in the Middle East may erode consumers’ purchasing power, and supply constraints caused by the Japan earthquake may slow the pace of the recovery this quarter.

“We have to weigh those in the decision” on whether to stop the stimulus effort earlier than planned, Mr. Bullard said.

“The oil price increases so far is not enough to derail the U.S. recovery at this level,” Mr. Bullard said. “If oil prices stabilize where they are, we’ll be fine.”

At a meeting in January, the Federal Open Market Committee of the Fed voted unanimously to continue the $600 billion stimulus plan.
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Source: The New York Times

Fewer people applied for unemployment benefits last week, providing support for the view that there will be stronger job growth this year.

Applications fell to a seasonally adjusted 385,000 last week, marking the third decline in the past four weeks, the Labor Department reported Thursday.

The four-week average for claims dropped to 386,250. That was the lowest level since July 2008, providing evidence that the job market is on a more solid footing.

Benefit applications below 425,000 signal modest job growth. But the level of applications needs to fall below 375,000 to be seen as a sign of sustained declines in the unemployment rate. Benefit applications peaked at 651,000 during the recession.

Analysts were encouraged by last week’s decline in benefit applications which came after applications had risen to 401,000 in the previous week.

“The downward trend in initial jobless claims is undeniable,” said Joshua Shapiro, chief U.S. economist at MFR Inc. Shapiro said it provided “strong evidence that the labor market recovery is for real” and he predicted it would continue in coming months.

Companies are finally hiring more after months of sluggish job creation. Employers added 192,000 jobs in February, the biggest gain in nearly a year. The unemployment rate dropped to 8.9 percent, the lowest point since April 2009.

Stronger job growth was a major reason the Federal Reserve this week offerred its most optimistic assessment of the economy since the recession ended. Fed policymakers said the recovery was on “firmer footing” and the jobs market was improving gradually.

At their previous meeting on Jan. 26, the Fed had said that the progress in lowering the unemployment rate had been “disappointingly slow,” a phrase it dropped in the statement summing up Tuesday’s meeting.

While private economists also believe the economy is gaining momentum, they worry about a number of downside risks. Those range from a surge in oil prices caused by political turmoil in oil exporting countries to a devastating earthquake and ongoing nuclear crisis in Japan, the world’s third larest economy.

The benefits report showed that the number of people receiving regular unemployment benefits fell by 80,000 to 3.71 million. That was the lowest level since the week of Sept. 27, 2008.

An additional 4.36 million unemployed workers received benefits under the extended programs during the week of Feb. 26, an increase of 53,000 from the previous week. In total, 8.95 million people were on the benefit rolls during the last week in February.
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Source: The Washington Post

The Federal Reserve revealed Wednesday that its policy makers had substantially upgraded their forecasts for how much the United States economy will grow this year, though they expect unemployment to remain painfully high for some time.

Top Fed officials now expect the output of goods and services to grow by 3.4 percent to 3.9 percent this year, up from the previous forecast, released in November, of 3 percent to 3.6 percent. But their grim outlook for the job market was largely unchanged: 8.8 percent to 9 percent unemployment this year, only one-tenth of a percentage point lower than in the November forecast.

Growth expectations were lifted by an improvement in consumer spending in the fourth quarter, though Fed officials were uncertain how long that would last, according to minutes released on Wednesday of the Fed’s policy meeting in late January.

“On the one hand, the additional spending could reflect pent-up demand following the downturn, or greater confidence on the part of households about the future, in which case it might be expected to continue,” the minutes noted. “On the other hand, the additional spending could prove short-lived, given that a good portion of it appeared to have occurred in relatively volatile categories such as autos.”

At the meeting, the Federal Open Market Committee, the Fed’s main policy arm, voted unanimously to continue a plan announced in November to purchase $600 billion in Treasury securities, the second round of a strategy that is intended to push down long-term interest rates and lift share prices. The strategy, known as quantitative easing, has been controversial — critics say it could set the stage for future inflation and asset bubbles — but the Fed has been fairly unified behind it.

The minutes indicated that Fed officials saw a diminishing risk of deflation, a protracted fall in prices of the sort that has afflicted Japan for more than two decades. That fear of deflation was a principal factor behind the decision in August to set the stage for the bond purchases.

Other economic reports issued on Wednesday supported the Fed’s view of an economy starting to gather some steam. The Commerce Department reported that new home construction rose by the largest amount in 20 months, and the Labor Department reported that wholesale prices rose sharply in January, driven up by gasoline and pharmaceuticals. Excluding the volatile food and energy categories, the index rose by the most in more than two years.

The Federal Reserve’s own report on industrial production in January was more mixed. Factory output rose for the fifth straight month, spurred by strong car and struck sales, but utility and mine output fell, leaving the overall level of production lower, the first month-to-month decline in 19 months.

For their part, investors have been bidding up stock prices steadily since late November. In midafternoon trading, the S. & P. 500 index was about 0.6 percent higher for the day and 6.2 percent higher for the year.

The minutes painted a picture of a committee that was not quite certain about how long and painful the recovery would take from the 2007-9 recession — the longest downturn since the Depression.

“On the downside, participants remained worried about the possible effects of spillovers from the banking and fiscal strains in peripheral Europe, the ongoing fiscal adjustments by U.S. state and local governments, and the continued weakness in the housing market,” the minutes stated. “On the upside, the recent strength in household spending raised the possibility that domestic final demand could snap back more rapidly than anticipated. If so, a considerably stronger recovery could take hold, more in line with the sorts of recoveries seen following deep economic recessions in the past.”

Although food and energy prices have increased recently, especially in fast-growing emerging markets, the committee did not have a consensus on whether that development would lead to higher inflation in the United States, noting that the factors affecting businesses’ ability to pass higher costs through to their consumers were “complex and hard to monitor in real time.”

The minutes noted that most Fed officials viewed the large slack in the economy — that is, the economy’s underperformance relative to its potential — as “likely to remain a force restraining inflation,” and believed that while price declines were unlikely, inflation was likely to remain below its desired level (2 percent or slightly below) “for some time.”

Some participants also said that if the public doubted the Fed’s willingness to reduce its huge balance sheet — by selling the financial assets it acquired as a response to the crisis — when the time comes to do so, “the result could be upward pressure on inflation expectations and so on actual inflation.”

In recent months, the Fed chairman, Ben S. Bernanke, has been adamant in saying that the Fed was ready and willing to curb inflation — and could even raise interest rates at a moment’s notice if it needed to.

The committee’s unanimous vote in January to consider the $600 billion bond-buying program, which is to continue until the end of June, surprised some observers, because a small but vocal minority on the committee had questioned the need for the program. But the minutes revealed that for now, the committee was unified on continuing the purchases, viewing the risks to doing so as manageable.

“A few members noted that additional data pointing to a sufficiently strong recovery could make it appropriate to consider reducing the pace or overall size of the purchase program,” the minutes stated. “However, others pointed out that it was unlikely that the outlook would change by enough to substantiate any adjustments to the program before its completion.”
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Source: The New York Times

President Obama went to a busy window-manufacturing plant near here on Friday to promote his economic policies and his new team of advisers as the monthly jobs report reflected only modest employment growth.

“We will not rest until we have fully recovered from this recession,” the president told workers.

Only hours earlier, the chairman of the Federal Reserve told Congress that while he expected the economy to be “moderately stronger” this year, it would be several years before the jobless rate fell to more normal levels.

That suggests that Mr. Obama is likely to face relatively high unemployment rates for the rest of his term. In responding, the president and his economic advisers will focus on getting the most bang for the buck from existing stimulus measures. New initiatives will tend not to carry a big price tag that adds to the growing national debt, officials say.

For example, aides say, Mr. Obama is exploring whether to seek an overhaul of the corporate tax system by closing myriad tax breaks and using the savings to cut business taxes. That could spur investment and jobs.

After two years of responding to the economic crisis he inherited, Mr. Obama starts the second half of his term managing the slow recovery and building on what he calls a “foundation” for growth. In his view, this includes the two-year stimulus package with its increases for education, research and work-training programs; stronger financial industry regulations; the overhaul of the health care system; and, most recently, the tax cuts that Mr. Obama and Republican leaders agreed to last month.

Yet Mr. Obama will have to defend his foundation even as he seeks to solidify it: Newly empowered Republican lawmakers have taken office this week with an economic agenda that calls for tearing down the stimulus spending initiatives, the health care law and the financial regulations, as well as any new administration regulations.

Last month’s enactment of the bipartisan package of business and individual tax cuts, which few had expected before the lame-duck Congress met, helps explain the relative scarcity of new administration ideas, officials say.

“We accomplished what were our main ideas for bipartisan agreement going forward,” said one official, who spoke on the condition of anonymity.

Chief among those ideas was a cut of two percentage points in workers’ payroll taxes for Social Security, a reduction that has begun showing up in paychecks this week. Mr. Obama alluded to that fact in his remarks to employees at the Thompson Creek Window Company in Landover, Md.

Another was a proposal to allow businesses to write off the full cost of some equipment and other capital investments in 2011, as Thompson Creek’s owners plan to do in expanding its factory and work force this year.

Mr. Obama, in his appearance alongside four of his newly named economic advisers, made clear that his emphasis would be on promoting the measures already on the books. “Part of this team’s mission in the months ahead will be to maximize the steps we’ve taken to spur the economy,” he said.

He also spoke as if to a national audience, salesman-style, through the nearby television cameras.

“Companies who are listening out there: If you are planning or thinking about making investments sometime in the future, make those investments now and you’re going to save money,” he said. “And that will help us grow the economy ”

Mr. Obama introduced Gene B. Sperling as his new director of the National Economic Council, charged with coordinating policies and brokering differences within the administration. Mr. Sperling held the same job under President Bill Clinton; he replaces Lawrence H. Summers, who returned to Harvard University.

“One of the reasons I’ve selected Gene is he’s done this before,” Mr. Obama said. During the Clinton administration, Mr. Obama added, “He helped formulate the policies that contributed to turning deficits to surpluses and a time of prosperity and progress for American families.”

With the elevation of Mr. Sperling, who has been a counselor to the Treasury secretary, Timothy F. Geithner, Mr. Obama has replaced three of the four principals of his original team. When he took office he chose people with experience in global economics and financial crises, including Mr. Summers and Mr. Geithner, the only remaining member of the original group.

Now Mr. Obama has turned to pragmatic liberals with experience in the policy-making bureaucracy — and negotiating with Republicans in Congress.

He previously chose Jacob J. Lew as budget director — the same job Mr. Lew had under Mr. Clinton — to succeed Peter R. Orszag, who has taken a job with Citigroup. And last summer Mr. Obama promoted Austan Goolsbee, a former campaign adviser, as chairman of his Council of Economic Advisers after Christina D. Romer returned to the University of California, Berkeley.

Also on Friday, Mr. Obama promoted Jason Furman, who remains as deputy director of the National Economic Council but with a higher rank. He nominated Katharine G. Abraham to take the third seat on the Council of Economic Advisers, which opened when Mr. Goolsbee became chairman, and Heather Higginbottom, a White House domestic policy adviser, to be Mr. Lew’s deputy budget director.

Source:  The New York Times

Criticism of the Federal Reserve intensified on Tuesday as conservative Republican lawmakers called for limiting the central bank’s mandate to keeping inflation low. They said that the Fed should stop trying to pursue the twin goals of balancing inflation and unemployment, as it has been required to do since 1977.

The Republican proposal was the latest example of the increasingly partisan antipathy toward the Fed’s decision on Nov. 3 to inject $600 billion into the economy in an effort to lower long-term interest rates.

The legislation would be anathema to most Democrats, who say they believe that low inflation and low unemployment should be given equal weight. The latest proposal appears to be gathering support among Republicans, who will control the House starting in January, but is all but certain to be blocked by Democrats if it reaches the Senate.

The Fed is rare among central banks in having a dual mandate. Under federal law, it has two equal objectives — maintaining price stability and maximizing employment — although those two goals have at times been difficult to reconcile.

“It is time to return the Federal Reserve to the singular mission of protecting the fundamental strength and integrity of the American dollar,” said Representative Mike Pence of Indiana, a Republican and chief sponsor of the proposal.

In a statement, the Fed was cool to the idea of narrowing its mission.

“The Federal Reserve is not seeking a change to its statutory mandate,” a Fed spokeswoman, Michelle A. Smith, said in a statement. “The dual mandate is appropriate.”

But at a press conference, Mr. Pence said the Fed’s latest bond-buying action, known as quantitative easing, “will do nothing more than dilute the value of the dollar and further disrupt the global financial system.”

He suggested that the Fed was using monetary policy to usurp the proper role of fiscal policy. “I believe that the onus for growing jobs in this country should not fall on the Fed, it should fall on policy makers in this administration and in this, and the coming, Congress,” he said.

Mr. Pence, a favorite of the Tea Party movement, helps coordinate legislation as chairman of the House Republican Conference, but plans to step down from that role. Mr. Pence said the Fed’s previous round of quantitative easing — $1.7 trillion worth of purchases of mortgage-related securities and government debt from January 2009 to March 2010 — failed to reduce unemployment. Most economists, however, believe that effort was successful at stimulating growth and supporting home prices.

The Fed hopes the new round of monetary easing will lower long-term interest rates, lift stock prices and speed the recovery of the labor market, but critics say that the policy will weaken the dollar and possibly lead to inflation.

The Fed chairman, Ben S. Bernanke, has been careful to couch the Fed’s latest action in terms on both sides of the mandate, arguing in an Oct. 15 speech that inflation was “too low” and unemployment “clearly too high.”

Senator Bob Corker, a Tennessee Republican who joined Mr. Pence at the press conference, refrained from attacking the Fed’s latest policy decision, but said that he supported ending the dual mandate.

Mr. Corker, who sits on the Senate Banking Committee, which oversees the Fed, said the two goals amounted to a “bipolar mandate” that caused confusion for policy makers and the public.

“I don’t look at this in any way as something undermining the Fed,” he said. “I look at this as something that strengthens their understanding of what it is their mandate is.”

Both Mr. Pence and Mr. Corker said they wished to preserve the independence of the central bank. And Mr. Corker said he “wouldn’t be surprised if over the course of the next several weeks some of the Fed governors themselves came out and embraced this.”

Panel Backs Diamond

Peter A. Diamond, the Nobel Prize-winning economist whose nomination to the Federal Reserve Board has been held up by Republican lawmakers, won approval from the Senate Banking Committee for a second time.

The panel voted, 16-7, on Tuesday to recommend him to the full Senate. The vote overcame an objection by Senator Richard C. Shelby of Alabama, the committee’s senior Republican, that Mr. Diamond’s nomination violates a law saying that no two Fed governors can be from the same region. All opposition came from Republicans.

Lawmakers must now confirm Mr. Diamond during a lame-duck session or his nomination will expire, forcing the White House to consider a third try with a slimmed-down Democratic majority in the Senate.

Janet Yellen, now the Fed’s vice chairman, and Sarah Bloom Raskin were confirmed by the Senate on Sept. 29 and sworn in Oct. 4. If approved, Mr. Diamond would fill the last vacancy and give the central bank a full slate of members for the first time since 2006.

Source:  The New York Times

A weakening currency traditionally helps a country raise its exports and create more jobs for its workers. But the declining value of the dollar may not help the United States increase economic growth as much as it might have in the past.

Though a weakened dollar would help exports to some degree, business executives and economists said that because of the ways American multinational companies operated, it was uncertain whether it would cause much of an increase in hiring.

The issue is crucial for President Obama, who made economic growth and job creation the main themes of his recent 10-day trip to Asia. He has also held out the prospect that a surge in exports would reduce the nation’s stubborn unemployment rate, currently 9.6 percent.

Other world leaders have complained that American policies, especially the monetary easing the Federal Reserve announced this month, will depress the dollar and give American exporters an unfair advantage.

Mr. Obama and Treasury Secretary Timothy F. Geithner have repeatedly defended the central bank’s action as a move designed to encourage American businesses to borrow, invest and hire rather than one specifically aimed at lowering the value of the dollar.

But even if the Fed’s action does end up weakening the dollar, American workers may not benefit much. For one, many big American manufacturers, from General Motors to General Electric, often make goods in the countries where they are sold rather than shipping the products abroad. This effectively takes exchange rates out of the equation, since they are using only one currency.

What’s more, companies that do send goods to other countries often buy components from abroad, so the advantage of a weaker dollar in selling is offset by the higher cost of buying.

“There are very few corporations that would see this just in one way,” said Martin Regalia, chief economist at the United States Chamber of Commerce. “It cuts across a whole bunch of lines.”

Even when a company enjoys a relative surge in foreign sales, it won’t necessarily lead to a hiring spree. That’s because the largest proportion of American exports are still manufactured goods, which are no longer so labor-intensive.

And many of the companies that still manufacture in this country are businesses that have not gone offshore because they are too small to justify setting up overseas operations. A weak dollar can help their businesses, but it may not prompt a wave of hiring.

“The net export effect is going to be positive, but it won’t be the driver of jobs,” said Daniel J. Meckstroth, chief economist of the Manufacturers Alliance, a trade group, adding: “You can replace people with machines.”

According to Nigel Gault, chief United States economist at IHS Global Insight, the dollar fell by 31 percent against a basket of major currencies since 2001, as American exports increased by 45 percent. But manufacturing employment dropped by nearly a third in that time, to 11.7 million workers from 16.4 million.

The dollar has already fallen by about 10 percent against a range of currencies since the beginning of June, and government figures show that American exports rose in September by $500 million, or 0.3 percent, to their highest level in two years.

Despite the outcry from other world leaders after the Federal Reserve’s decision to inject $600 billion into the economy, the dollar strengthened slightly last week. But even if it does start drifting down again, most economists do not expect the devaluation to be steep. Some argue that most of the weakening has already happened because traders have anticipated the Fed’s action for some time.

Gary C. Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington, said he expected the dollar to fall another 10 percent in coming months, based on a basket of currencies from countries that trade with the United States.

He estimates that such a decline would lead to about a $100 billion increase in American exports over the next two years, which he believes could translate into about 500,000 jobs. Although Mr. Hufbauer said that number was “not bad,” he noted that it would not put much of a dent in the nearly 15 million people who are still out of work.

Another reason increased sales abroad might not translate into American jobs is that American companies have moved steadily overseas in recent decades. The number of workers employed by American companies abroad more than doubled from 1989 to 2008, to 10.5 million, according to the United States Bureau of Economic Analysis. Companies mostly wanted to open up foreign markets, and in some cases take advantage of cheaper labor, studies show, but less vulnerability to currency movements was an important fringe benefit.

With more companies building local factories, exchange rates matter less. General Motors and Volkswagen compete fiercely for business in China, a crucial market where both automakers build almost all their cars locally rather than ship units in from their home countries.

Because the Chinese renminbi tracks the dollar — meaning that products from the United States should be cheaper than imports from Europe — G.M. would seem to be at an advantage.

While G.M. has been gaining market share in China, “it has nothing to do with currencies,” said Ferdinand Dudenhöffer, director of the Center Automotive Research at the University of Duisburg-Essen in Duisburg, Germany. Rather, he attributes G.M.’s gains to cars like the Chevrolet Sail that have found favor with local consumers.

“The dollar is not a problem for VW or G.M.,” Mr. Dudenhöffer said.

Past experience suggests that currency movements alone are unlikely to correct trade imbalances or lift exports. A decline in the value of the dollar against the yen did little to correct the United States trade deficit with Japan during the 1980s, according to a study released last week by HSBC.

Indeed, some American companies report that a weakening dollar does not enhance export volumes. Roger Sustar, president of Fredon Corporation, a Cleveland-based manufacturer of parts for the aerospace, defense, rail and medical industries, said that although the dollar had weakened against the British pound over the last two years, the company had not increased sales in Britain.

Rather, Mr. Sustar said, existing clients “haven’t been beating the beejeebers out of us to lower our prices.”

Some economists argue that if the dollar weakness lasts long enough it will have some effect on unemployment in the United States. A sustained increase in exports would create jobs throughout the economy as businesses that supported the firms selling abroad also started hiring. “There’s a multiplier effect,” said Steve Blitz, a senior economist for ITG Investment Research.

Mr. Blitz said that, in fact, the United States economy should rely more heavily on export businesses to create jobs, rather than predominantly depending on American consumers, who account for an estimated 60 percent of the country’s economic activity. “The model of the last 30 years can no longer continue,” Mr. Blitz said. “The job creation has to come from the export sector.”

Another potential for jobs will come from foreign companies who build operations in the United States, in part to avoid currency fluctuations going the other way. BMW, for example, broke ground on its first plant in South Carolina in 1992, and in September opened a second factory in Spartanburg, where it had already hired 1,000 workers, with plans to hire 600 more. “Currency hedging is definitely one piece” of the company’s rationale for building the plants in the United States, said Thomas Kowaleski, a spokesman for BMW North America.

Currency fluctuations are just one part of what makes an American good or service more attractive to foreign buyers. Typically, a weaker dollar has provided a lift to American hotels and tourism destinations, as travelers from Europe and Asia suddenly find their money goes further at Disneyland or Bloomingdale’s.

But these days, tourism officials say, travelers have so many locales around the world to choose from that currency moves don’t necessarily translate into travel booms.

“Nowadays in the travel world, it’s such a competitive market to try and get people to come to your destination,” said Carol Martinez, a spokeswoman for the Los Angeles Convention and Visitors Bureau. “The value is a factor but there are many other factors, too.”

Source:  The New York Times

Two years have passed since the worst financial crisis since the 1930s dealt a body blow to the world economy. Working with policymakers at home and abroad, the Federal Reserve responded with strong and creative measures to help stabilize the financial system and the economy. Among the Fed’s responses was a dramatic easing of monetary policy - reducing short-term interest rates nearly to zero. The Fed also purchased more than a trillion dollars’ worth of Treasury securities and U.S.-backed mortgage-related securities, which helped reduce longer-term interest rates, such as those for mortgages and corporate bonds. These steps helped end the economic free fall and set the stage for a resumption of economic growth in mid-2009.

Notwithstanding the progress that has been made, when the Fed’s monetary policymaking committee - the Federal Open Market Committee (FOMC) - met this week to review the economic situation, we could hardly be satisfied. The Federal Reserve’s objectives - its dual mandate, set by Congress - are to promote a high level of employment and low, stable inflation. Unfortunately, the job market remains quite weak; the national unemployment rate is nearly 10 percent, a large number of people can find only part-time work, and a substantial fraction of the unemployed have been out of work six months or longer. The heavy costs of unemployment include intense strains on family finances, more foreclosures and the loss of job skills.

Today, most measures of underlying inflation are running somewhat below 2 percent, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run. Although low inflation is generally good, inflation that is too low can pose risks to the economy - especially when the economy is struggling. In the most extreme case, very low inflation can morph into deflation (falling prices and wages), which can contribute to long periods of economic stagnation.

Even absent such risks, low and falling inflation indicate that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating. The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed. With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

While they have been used successfully in the United States and elsewhere, purchases of longer-term securities are a less familiar monetary policy tool than cutting short-term interest rates. That is one reason the FOMC has been cautious, balancing the costs and benefits before acting. We will review the purchase program regularly to ensure it is working as intended and to assess whether adjustments are needed as economic conditions change.

Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated. Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation.

Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable.

The Federal Reserve cannot solve all the economy’s problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector. But the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation.

Source:  The Washington Post

As many households and small businesses are being turned away by bank loan officers, large corporations are borrowing vast sums of money for next to nothing — simply because they can.

Companies like Microsoft are raising billions of dollars by issuing bonds at ultra-low interest rates, but few of them are actually spending the money on new factories, equipment or jobs. Instead, they are stockpiling the cash until the economy improves.

The development presents something of a chicken-and-egg situation: Corporations keep saving, waiting for the economy to perk up — but the economy is unlikely to perk up if corporations keep saving.

This situation underscores the limits of Washington policy makers’ power to stimulate the economy. The Federal Reserve has held official interest rates near zero for almost two years, which allows corporations to sell bonds with only slightly higher returns — even below 1 percent. But most companies are not doing what the easy monetary policy was intended to get them to do: invest and create jobs.

The Fed’s low rates have in fact hurt many Americans, especially retirees whose incomes from savings have fallen substantially. Big companies like Johnson & Johnson, PepsiCo and I.B.M. seem to have been among the major beneficiaries.

“They are benefiting themselves by borrowing and keeping this cash, but it is not benefiting the economy yet,” said Dana Saporta, an economist at Credit Suisse in New York.

American corporations have been saving more money since the financial collapse of 2008. But a recent rush of blue-chip bond offerings — including a $4.75 billion deal last month by Microsoft, one of the richest companies in the world — has put even more money in their coffers.

Corporations now sit atop a combined $1.6 trillion of cash, a figure equal to slightly more than 6 percent of their total assets. In the first quarter of this year it was 6.2 percent of assets, the highest level since 1964, when it was 6.4 percent.

When will they start spending that money — in particular, by hiring?

That is part of what has become the great question of this long, jobless recovery: When will corporate America start to feel confident enough to put its cash to work, building factories and putting some of the nation’s 14.9 million unemployed to work?

Businesses are holding on to their protective cash cushions, worried perhaps that the economy could slip back into recession or at least grow too lethargically to make an investment worthwhile.

The nation’s corporations will be strong, well capitalized and ready to act aggressively when executives finally decide it is time to expand their businesses.

After running up sharply every quarter since mid-2008, the ratio of cash holdings to assets by corporations fell slightly for the first time in the second quarter of this year.

Although investment in factories and plants still languishes, companies have spent some money on investment in new equipment and software. That spending grew at an annualized rate of more than 20 percent in the first two quarters of this year.

But economists say that such investment is still below its peak before the financial crisis.

In addition, many of the new machines and computers may be replacing older machines companies put off retiring in the recession. Businesses are playing catch-up, and little expansion is occurring.

“They may actually be using this new investment to be more efficient and cut jobs,” said Michael Gapen, an economist at Barclays Capital. “The mix of signals right now is still telling corporations to sit tight and wait.”

Mr. Gapen said those signals included the direction of the housing market, the outcome of midterm election, the effects on the economy as the fiscal stimulus wears off and any changes in tax policy.

They are deciding, “Why don’t we just wait until the first quarter of next year?” he said.

The cheap money may be having yet another effect unintended by policy makers eager to cut the nation’s 9.6 percent unemployment rate. Several of the corporations borrowing billions on bond markets are using the money to put their own financial house in order rather than to create jobs.

Microsoft said it was using some of its money to buy back shares, other companies are locking in longer-term borrowing, and some of the new borrowing is financing an increase in mergers and acquisitions.

All of this may enrich the corporations’ shareholders and cut company costs in the long run, but it does not necessarily lead to more jobs and it does not represent the big investments in growth that could fuel a sharp economic recovery for everyone.

“They are still holding on to more cash in the same way that Noah built the ark,” said David Rosenberg, chief economist at Gluskin Sheff & Associates in Toronto. “It is very telling.”

In the case of Microsoft’s bond offering, one factor might have been avoiding a big tax bill, said Richard J. Lane, who analyzes Microsoft for Moody’s. If Microsoft had needed cash, it could have pulled some from its operations abroad, but “borrowing new money on the debt markets is now cheaper than bringing its own money back from overseas,” Mr. Lane said.

Microsoft’s offering was only its second; its first was last year. The second offering included three-year debt at an interest rate of 0.875, among the lowest on record for that type of borrowing.

According to the financial data provider Dealogic, United States companies have borrowed $488 billion on the American high-yield and investment grade bond markets so far this year, 7 percent more than businesses borrowed during all of 2009, and on track to at least match the $589 billion borrowed in the boom year in 2007, which was the highest on record.

Smaller companies continue to have trouble borrowing, and most of the new financing is limited to bigger corporations.

Their borrowing spree is in contrast to America’s households, which continue to cut their debt and consumption. Perhaps unsure of the recovery, like the corporations hoarding cash, Americans are saving far more than they have in years, and some economists fear that consumers’ frugality will further hobble growth.

One of the biggest corporations to borrow recently, the DuPont Company, said it was using the cheaper money to lock in borrowing over a longer period.

“The current low interest rate environment provides DuPont a great opportunity to refinance our long-term debt at lower rates,” it said in a statement.

Conditions have become so good that some companies are borrowing money they will not have to repay until the next century. In August, the railroad Norfolk Southern Corporation borrowed $250 million in 100-year bonds at an annual rate of 5.95 percent.

Robin Chapman, a spokesman, said, “Opportunistic borrowing is a good way to characterize this.” He said that the company was seeing a “slow and steady pickup” in rail traffic but that any hiring the company was doing was to replace workers lost through attrition.

Other companies are borrowing to finance acquisitions. PepsiCo borrowed recently to help pay for the takeover of two bottling plants. Hertz borrowed $300 million for its bid to buy a rival car rental company, Dollar Thrifty.

Economists say it is rational for companies to seize the opportunity to borrow at low interest rates and to buy back shares. But Guy LeBas, a fixed income strategist at Janney Montgomery Scott in Chicago, said, “It is not particularly beneficial for economic conditions.”
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Source: The New York Times

Federal Reserve officials, acknowledging that their confidence in the recovery had dimmed, moved again on Tuesday to keep interest rates low and encourage economic growth. They also signaled that more aggressive measures could follow if the job market and other indicators continued to weaken.

With short-term interest rates already close to zero, the Fed’s policy makers have relatively few tools available to encourage consumer and corporate spending. So they now plan to use the proceeds from the Fed’s huge mortgage-bond portfolio to buy long-term government debt.

That action may put downward pressure on long-term interest rates and stimulate borrowing. For consumers, it means mortgage rates are likely to remain at record lows for some time.

Though the immediate impact is likely to be modest, the decision is a turnabout from only a few months ago, when officials were discussing when and how to begin to raise interest rates and gradually shrink the $2.3 trillion balance sheet amassed through the Fed’s response to the 2008 financial crisis.

In buying at least $10 billion a month in new Treasury securities — a small fraction of the roughly $700 billion in Treasury debt the Fed holds — the central bank is trying to help keep money readily available in the financial markets.

With Congress seemingly unable to agree on substantial new stimulus spending, the Fed could face a far tougher decision later this year: whether to take more drastic steps to pump money into the economy and make credit even cheaper.

“We’re in a lousy middle between the economy picking up on its own and falling off a cliff,” said Cathy E. Minehan, a former president of the Federal Reserve Bank of Boston. “And that makes policy-setting really hard.”

The announcement on Tuesday, after the scheduled meeting of the Fed committee that sets interest rates and monetary policy, confirmed what had been widely discussed among economists and business leaders in recent days: the Fed would move more decisively if the economic picture darkened.

The Fed, led by Ben S. Bernanke, its chairman, has shifted away from its more optimistic outlook earlier this year. “The pace of recovery in output and employment has slowed in recent months,” said the Federal Open Market Committee. The statement added that the nation’s economic recovery was “likely to be more modest in the near term than had been anticipated.”

Yields on 10-year Treasury securities, a benchmark for home mortgages and corporate loans, tumbled to their lowest level in more than a year on Tuesday. Rates on 30-year Treasuries briefly fell below 4 percent. The yield on a 10-year Treasury note dipped to 2.765 percent from 2.83 before the announcement.

Stocks regained some of their losses from earlier in the day. At its close, the Dow Jones industrial average was down 54.5 points, or 0.51 percent, to 10,644.25.

From January 2009 to March 2010, the Fed bought $1.25 trillion in mortgage-backed securities and about $175 billion in debt owed by government agencies, primarily the housing finance entities Fannie Mae and Freddie Mac. The Fed had planned to allow the size of that portfolio to shrink gradually as the securities matured or the debts were prepaid.

Instead, the Fed will now reinvest those principal payments in longer-term Treasury securities. (The central bank said it would continue to roll over its holdings of other Treasury securities as they mature.)

The money involved is unclear. In March, the Federal Reserve Bank of New York estimated that at least $200 billion of the mortgage-related securities and debt would mature or be prepaid by the end of 2011.

But mortgage rates have dropped since then, giving borrowers an incentive to refinance and pay off existing mortgages, so the actual figure could be substantially larger.

By not allowing its debt holdings to decline below the level of $2.054 trillion at which they stood on Aug. 4, the Fed is preventing what economists have called the passive tightening of monetary policy. The Fed still has the option, if conditions warrant, of increasing its debt purchases.

Some analysts believe that if the economy worsens, the Fed might begin a new round of quantitative easing — the strategy of buying financial assets to increase the money supply.

In its statement, the committee said that while household spending was gradually increasing, high unemployment, modest income growth, a drop in household wealth and tight credit continued to hamper growth.

The committee said it still expected a “gradual return” to normal economic conditions, although the recovery was less robust than expected at this point.

Ethan S. Harris, an economist at Bank of America, said he was “mildly surprised” by the Fed’s action — “not that they did it but rather how quickly they decided.” He added, “My expectation had been that the Fed would take a little more time to switch gears and prep the market.”

The decision not to let the balance sheet shrink was a relatively easy one, Mr. Harris added. “To go back to big asset purchases is a much bigger step, and it would require clear signs that the economy is heading toward a double-dip recession.”

Economists who work in the markets had a mix of reactions.

Bruce McCain, the chief investment strategist at Key Private Bank, said the Fed “steered the middle ground.”

“Given the uncertainty, hopefully the middle ground calms nerves and keeps people confident enough to go ahead and spend the money that they have in productive ways,” he added.

But a former New York Fed economist, John Ryding of RDQ Economics, said the announcement suggested “a bit of a feeling of panic by the Fed.” And Joshua Shapiro, an economist at MFR Inc., said the Fed’s announcement “appears to mainly be designed to provide itself with political cover against a backdrop of a gut-wrenching economic correction that shows no sign of ending anytime soon.”

Along with additional quantitative easing, another option available to the Fed is to lower the interest rate (now 0.25 percent) it pays on the roughly $1 trillion in reserves that banks hold at the Fed.

While that action could be helpful, it carries some risk, said Christopher L. House, an economics professor at the University of Michigan.

“If they were to simultaneously lower the rate to zero while leaving $1 trillion in reserves in the banking system, they would have a lot of reason to worry about inflation,” he said.

In its announcement, the Fed also left unchanged its benchmark short-term interest rate — the federal funds rate, the rate at which banks borrow from one another overnight — at zero to 0.25 percent, its level since December 2008. And it maintained that the rate would remain “exceptionally low” for “an extended period,” the language it has been using since March 2009.

The Federal Open Market Committee’s vote on Tuesday was 9 to 1. The dissenter was Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City.

Mr. Hoenig, who is known for his focus on inflation, the Fed’s traditional enemy, dissented for the fifth consecutive meeting, both on the extended-period language and on the decision to reinvest the mortgage-bond proceeds.
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Source: The New York Times