Ben Bernanke

The Key to Economic Growth: Productivity

The Key to Economic Growth: Productivity

Forget job creation, tax cuts and returning any sector back to its glory days. After running into (read: stalking) former Federal Reserve Chair Ben S. Bernanke in the CBS This Morning Green Room last week, he reminded me that the REAL key to boosting economic growth and more importantly, your living standard, is labor productivity. The reason is easy to understand: “In the long run, what we can consume as a nation is closely tied to how much we can produce,” wrote Bernanke more than a decade ago. 

First Fed Meeting of Janet Yellen Era


All eyes will be on the Federal Reserve this week, when the central bank concludes its first two-day policy meeting of the Janet Yellen era. Despite the recent turmoil in some emerging markets, the slowdown in Chinese activity, the events in Ukraine and weaker, weather-related US economic data, the Fed will likely announce another $10 billion dollar cut at this meeting, reducing monthly bond purchases to $55 billion dollars. The two looming risks are China and Ukraine, but neither situation is likely to deter the Fed from acting at the upcoming FOMC meeting. While China appears to be slowing, it is important to note the context: the much larger size of the Chinese economy today, versus double-digit growth in the past, means that 7 percent increases are potentially just as big as those in the 2000’s. Additionally, the Chinese government is actually engineering the slower rate, which means that if growth slows down too much, the government can easily push policy levers in the opposite direction.

With regard to Ukraine, if the situation results in a prolonged diplomatic stalemate, markets are likely to remain subdued. But if there were worsening violence or an escalation to a full-blown trade war, the impact would be more severe.

Regardless of events in China and Ukraine, there is some anticipation that the Fed will discuss the conditions under which it would finally raise interest rates, which have been at 0 – 0.25 percent since December of 2008 (pity the beleaguered savers!) The so-called “forward guidance” is meant to provide investors with a clear understanding of the Fed’s next steps, but one economist’s clarity is another’s murkiness.

The central bank is expected to abandon the quantitative approach that Ben Bernanke first mentioned in 2012. At the time, the then Fed Chief said that when the nation’s unemployment rate dropped below 6.5 percent, it would be a trigger for increasing short-term interest rates. But since that time, the unemployment rate has fallen faster than expected and has now come to be seen as a red herring for the recovery.

At the January FOMC meeting, officials said that they would not raise rates until the unemployment rate has fallen “well past” 6.5 percent, but there is a possibility that the Fed may adopt and communicate a qualitative approach, which would include a wider range of labor market indicators without any set numerical targets. The net effect for all of those savers: Be prepared for rock-bottom rates for at least another year.

This Fed meeting will also feature Federal Reserve projections about economic growth and unemployment, as well as Janet Yellen’s first press conference as head of the central bank.

MARKETS: Further evidence of a slowdown in China, combined with anxiety over Ukraine, pushed down stock indexes on the week.

  • DJIA: 16,065, down 2.4% on week, down 3.1% YTD (biggest weekly loss since Jan. 24)
  • S&P 500: 1841, down 2% on week, down 0.4% YTD
  • NASDAQ: 4245, down 2.1% on week, up 1.6% YTD
  • 10-Year Treasury yield: 2.65% (from 2.79% a week ago)
  • April Crude Oil: $98.89, down 3.6% on week
  • April Gold: 1379, up 3% on week (6th straight weekly rise)
  • AAA Nat'l average price for gallon of regular Gas: $3.52 (from $3.70 a year ago)

THE WEEK AHEAD: Aside from the Fed, regional readings on manufacturing and a national report on industrial production are expected to show a modest increase in activity, after much of the severe weather has passed.

Mon 3/17:

8:30 Empire State Manufacturing

9:15 Industrial Production/Capacity Utilization

10:00 NAHB Home Builder Confidence

Tues 3/18:

FOMC begins 2-day policy meeting

8:30 CPI

8:30 Housing Starts

Weds 3/19:

2:00 FOMC announcement/economic projections

2:30 Janet Yellen Press Conference

Thurs 3/20:

8:30 Weekly Jobless Claims

8:30 Q4 GDP (final estimate)

10:00 Philadelphia Fed Survey

10:00 Existing Home Sales

10:00 Leading Indicators

Results of Fed stress tests released

Fri 3/21:

Quadruple witching (simultaneous expiration of stock, stock-index options, stock-index and single-stock futures, which can ramp up trading volume and volatility as investors and dealers scramble to open and close positions.)

Week Ahead: Fed Proclaims “Let the Good Times Roll!”


For the first time in five years, the Fed shifted policy and guess what? The world kept spinning! In fact, stocks soared on the news that the central bank would reduce its monthly bond purchases by $10 billion to $75 billion and keep short-term interest rates at rock-bottom levels. I guessed last week, that “Given what the Fed has told us, now would seem to be the right time to start unwinding the policy. If there is a change to policy, it’s not likely to be anything to dramatic-probably a reduction of $10 to 15 billion per month, evenly split between treasury securities and mortgage-backed securities.” What I did not anticipate was a central bank Christmas bonus: not only would the pull-back in bond buying occur slowly, but the Fed plans to keep short-term interest rates at near zero, even after the unemployment rate dropped below 6.5 percent, which likely means that rates will stay low at least for another year.

Put a different way, it’s like your parents announcing that they will reduce the proof of the punch bowl booze from 85 to 75 AND the party will continue right through next year! Sure, the festivities may not be quite as much fun in six months from, when the proof drops to 45, but for now, let the good times roll (h/t The Cars)!

MARKETS: Finally, a REAL milestone. The Dow hit a new inflation-adjusted high on Friday. The blue chip index had to reach 16,186.39 to have the same buying power (based on CPI) it had when it was worth 11,722.98 on January 14, 2000, according to the WSJ.

  • DJIA: 16,221 up 3% on week, up 23.8% on year
  • S&P 500: 1818, up 2.4% on week, up 27.5% on year (best week since July, on track for best year since 1997)
  • NASDAQ: 4104, up 2.6% on week, up 36% on year (18% below 3/00 all-time high of 5,048)
  • 10-Year Treasury yield: 2.89% (from 2.87% a week ago)
  • Jan Crude Oil: $99.32, up 2.5% on week
  • Feb Gold: $1203.70, down 2.5% on week, down 28% on year (on track for first annual decline in 13 years)
  • AAA Nat'l average price for gallon of regular Gas: $3.24

THE WEEK AHEAD: Take a load off…it should be a quiet, holiday-shortened week!

Mon 12/23:

8:30 Personal Income and Spending

8:30 Chicago Fed National Activity

9:55 Consumer Sentiment

Tues 12/24:

8:30 Durable Goods Orders

9:00 FHFA Home Price Index

10:00 New Home Sales

1:00 Markets close early Christmas Eve


Thurs 12/26:

8:30 Weekly Jobless Claims

Fri 12/27:

Sat 12/28:

Long-term unemployment benefits expire for 1.3 million Americans

Week Ahead: Federal Reserve Nerve


Will they have the nerve to do it or won’t they? For the last time in 2013, investors and economists are wondering whether or not the Federal Reserve will finally pull the trigger and announce a reduction in its monthly bond purchases (aka “Quantitative Easing” or “QE3”). According to my non-scientific poll, odds are running at about 50-50. Those who say that the Fed will act, point to the September FOMC meeting rationale that Ben Bernanke laid out for why the central bankers maintained the status quo. At the time, he cited three concerns that put taper talk on hold: (1) the labor market was still weak (2) the recent rise in interest rates could slow down the economy and (3) lawmakers in DC could throw everything for a loop.

In the subsequent three months, there has been positive movement on all fronts.

  1. Employment: Job growth has accelerated, boosting the average monthly gain to over 200,000 for the past three months. Additionally, the unemployment rate has dropped to 7 percent. Way back in June, Bernanke said that an unemployment rate of 7 percent could be a trigger for pulling back on the Fed’s stimulus.
  2. Economic slowdown: Despite higher interest rates, the economy is picking up steam. Q3 GDP was revised higher to an annualized pace of 3.6 percent; November retail sales were stronger than expected; and the increase in home and stock prices are combining to increase the so-called “wealth effect,” which should encourage more consumer spending.
  3. DC Drama Queens: It may have been a small budget deal, but it was a deal. Congress agreed to increase spending by $63 billion over two years, with the caveat that there will be more than $22 billion in deficit reduction over the next decade. While lawmakers reserve the right to screw things up over the long-term, the short-term pressure is off.

Despite the progress, doubters note that the Fed is still worried that the labor market is not sufficiently healed and that the drop in rate is occurring not just because employment is rising, but also because people are leaving the labor force. Additionally, there is lingering concern that the low level of inflation is causing anxiety among some central bankers. Then there’s the theory that the Fed may wait until Janet Yellen takes over as Chairman in January, before retreating from five consecutive years of aggressive action. (The Senate is expected to vote on Yellen’s nomination this week.)

Given what the Fed has told us, now would seem to be the right time to start unwinding the policy. If there is a change, it’s not likely to be anything to dramatic-probably a reduction of $10 to 15 billion per month, evenly split between treasury securities and mortgage-backed securities.

Aside from the Fed meeting, there will also be news from the real estate market. Analysts say that the housing recovery is entering a new phase. The recent rapid rise in prices, which was driven by strong investment buying and tight supply conditions, will soon start to moderate as higher mortgage interest rates and increased inventory slow down progress. The recovery may take a breather, but it is likely to remain intact.

MARKETS: Boo-hoo…two consecutive weeks of losses is nothing compared to the massive year-to-date gains of 20 to 30 percent for stocks. As a reminder, the current bull market began in March 2009 and the S&P 500 is up 162 percent since then.

  • DJIA: 15,755 down 1.7% on week, up 20.2% on year
  • S&P 500: 1775, down 1.7% on week, up 24.5% on year
  • NASDAQ: 4001, down 1.5% on week, up 32.5% on year
  • 10-Year Treasury yield: 2.87% (from 2.88% a week ago)
  • Nov Crude Oil: $96.60, down 1.1% on week
  • Feb Gold: $1234.60, up 0.4% on week
  • AAA Nat'l average price for gallon of regular Gas: $3.24


Mon 12/16:

8:30 Q3 Productivity

8:30 Empire State Manufacturing Index

9:15 Industrial Production

Tues 12/17:

FOMC begins

8:30 CPI

10:00 Housing Market Index

Weds 12/18:

8:30 Housing Starts

2:00 FOMC Policy Announcement & economic projections

2:30 Bernanke Press Conference

Thurs 12/19:

8:30 Weekly Jobless Claims

10:00 Existing Home Sales

10:00 Philadelphia Fed

Fri 12/20:

8:30 Q3 GDP – final reading (2nd estimate=3.6%)

8:30 Corporate Profits

Week Ahead: Strong Jobs Report leaves Fed in a Pickle


The stronger than expected jobs report leaves the Fed in a pickle. The economy added 203,000 jobs in November and the unemployment rate decreased to a five-year low of 7 percent from 7.3 percent. You may recall that soon-to-be-departed Fed Chairman Ben Bernanke said that when the data indicated that the economy in general – and the labor specifically – was showing progress, the Fed would take its pedal off the gas and reduce its monthly bond purchases, known as Quantitative Easing or “QE3”. The Fed launched QE3 in September 2012. Since then, the unemployment rate has dropped from 8.1 percent to 7 percent and the economy has added over 2.8 million jobs, or an average of nearly 190,000 per month. That sounds pretty good, except when you consider that it’s only about 10,000 per month more than before the introduction of the program.

Still, there is evidence that the pace of job creation is picking up. Over the past four months, the average monthly gain has been over 200,000 after a late spring/summer slow down. Additionally, the November jobs report showed broad-based gains in a variety of sectors, with manufacturing, construction, education, health and retail all demonstrating improvement. Independent research firm Capital Economics believes that the Fed has “all the evidence it needs to begin tapering its asset purchases at the next FOMC meeting later this month.”

Not so fast, says Jon Hilsenrath in the Wall Street Journal. He notes that the drop in rate was driven by a reversal of some of the shutdown-related increase the month before. “A meager 83,000 people became employed between September and November, while the number not in the labor force during that stretch rose by 664,000. The jobless rate fell…because people stopped looking for jobs and removed themselves from the ranks of people counted as unemployed.”

Indeed, the labor force participation rate (the number of people employed or actively seeking a job) remains at near 36-year lows. Oh, and there are still 10.9 million Americans are out of work, of which more than 4 million have been unemployed for more than six months; total payroll employment (136.8 million) is still short of the January 2008 peak of 138.1 million workers; and while an unemployment rate of 7 percent seems good compared to the recession high of 10 percent, it seems miles away from the 4.7 percent rate seen six years ago in November 2007, the month before the recession officially started.

In other words, if the Fed wants to punt on unwinding QE3 at the December 17-18 policy meeting, it could easily find a way to do so. With unemployment still a good distance above the Fed’s 6.5 percent threshold, it is unlikely to raise short-term interest rates until next year.

Volcker Rule: On Tuesday, regulators are expected to approve the "Volcker Rule," named after former Fed Chairman Paul Volcker. The rule is one of the most controversial parts of the 2010 Dodd-Frank financial overhaul because it seeks to stop banks with federally insured deposits from making trades and putting their own capital at risk, in pursuit of speculative trading profits. But as noted in the Financial Times, “after three years of lobbying, wrangling and debating over the rule, there is the potential for a depressingly messy execution…The desire for a rule specific enough to turn grey into black and white risks turning Volcker into a 1,000-page horror.”

MARKETS: Good news was finally good news on Friday, which saved stock investors from steeper losses. Still, it was the first losing weekly decline in nine weeks for the Dow and S&P 500. According to John Linehan, Head of U.S. Equity at T. Rowe Price, this bull market has lasted for 57 months so far, which is the average length of bull markets since 1930.

  • DJIA: 16,020, down 0.4% on week, up 22.2% on year
  • S&P 500: 1805, down 0.04% on week, up 26.5% on year
  • NASDAQ: 4,062, up 0.06% on week, up 34.5% on year
  • 10-Year Treasury yield: 2.88% (from 2.75% a week ago)
  • Jan Crude Oil: $97.65, up 5.3% on week
  • Feb Gold: $1229, down 1.6% on week (5-month low)
  • AAA Nat'l average price for gallon of regular Gas: $3.26


Mon 12/9:

Tues 12/10:

7:30 NFIB Small Bus Confidence

10:00 Job Openings and Labor Turnover (JOLTS)

10:00 Wholesale Trade

Volcker Rule vote

Weds 12/11:

Thurs 12/12:

8:30 Jobless Claims

8:30 Nov Retail Sales

10:00 Business Inventories

Fri 12/13

8:30 PPI

Week Ahead: 2 Important Days for the Economy Remain in 2013


Good news: you only have to pay attention to the economy, and by extension, the markets for two days this month! The first one comes this week, on Friday December 6th, when the November employment report will be released and the second occurs 10 days later on Wednesday December 18th, when the Federal Reserve concludes it’s final policy meeting of the year. That’s it – really! Sure there will be other stuff in between, like car and retail sales, some manufacturing and housing data, but let’s be honest: there’s a limited amount of attention anyone can direct to the economy and markets during the holiday season, so let’s focus on the important issues at hand.

For the November jobs report, investors are hoping to build on the better than expected October numbers, when the economy added 204,000 non-farm positions. The results, along with the positive revisions to the previous two months, brought the three-month average of job creation to a respectable 202,000. The consensus for November job creation is 185,000 and the unemployment rate is expected to edge down to 7.2 percent.

If job creation is stronger than expected, then the pressure will be on for the second (and last!) important date of the month, December 18th. On that day, the Federal Reserve will conclude it’s two-day policy meeting, distribute its economic projections and Ben Bernanke will preside over his last press conference as Chairman of the central bank. If the employment situation improves dramatically, it might prompt the Fed to reduce its monthly bond purchases.

But if the jobs report is disappointing, there is unlikely to be any change in policy and you can basically tune out for the rest of the month, with one caveat: Congress is due to return by December 9, and if the debate over the nation’s budget and debt gets contentious, all best are off!

MARKETS: It has been an amazing year for stocks and according to economist at JP Morgan, history suggests an 80 percent chance for a higher market in December.

  • DJIA: 16,086, up 0.1% on week, up 3.5% on month, up 22.8% on year (12 closing records during the month)
  • S&P 500: 1805, up 0.1% on week, up 2.8% on month, up 26.6% on year (8th straight week of gains, the longest stretch of weekly advances in a decade)
  • NASDAQ: 4,056, up 1.7% on week, up 3.6% on month, up 34.5% on year
  • 10-Year Treasury yield: 2.75% (from 2.75% a week ago)
  • Jan Crude Oil: $92.72, down 1.3% on week
  • Feb Gold: $1250.40, down 2.9% on week, down 5.5% on month, the worst November since 1978
  • AAA Nat'l average price for gallon of regular Gas: $3.27


Mon 12/2:

Cyber Monday - last year, sales totaled $1.46B

10:00 ISM Manufacturing Index

10:00 Construction Spending

Tues 12/3:

Motor Vehicle Sales

Weds 12/4:

8:15 ADP Private Sector Jobs

8:30 International Trade

10:00 New Home Sales

10:00 ISM Non-Manufacturing

2:00 Fed Beige Book

Thurs 12/5:

7:30 Challenger Job Cuts

8:30 Jobless Claims

8:30 Q3 GDP – 2nd estimate (1st estimate=2.8%)

10:00 Factory Orders

Fri 12/6

8:30 November Jobs Report

9:55 Consumer Sentiment

3:00 Consumer Credit

Week ahead: Will Yellen Pump or Pop Bubbles?


Is Janet Yellen a bubble pumper or bubble popper? That’s what some lawmakers wanted to know when the presumptive heir to the Fed Chairmanship appeared before the Senate Finance Committee last week. Considering that the S&P 500 is up 166 percent from the March 2009 lows, some are worried that the Fed’s aggressive monetary policies are far more responsible for boosting stocks than the recovering economy and improving corporate profits. To her credit, instead of pulling out the Greenspan/Bernanke mantra of “we can’t identify bubbles, but we will clean up after they burst,” Yellen said that nobody, including any of the fed officials, wants to go through another 2008 again. While she does not currently see evidence of a bubble-like environment “that threatens financial stability…I think it is important for the Fed, hard as it is, to attempt to detect asset bubbles when they are forming.”

Senator Bob Corker (R-TN), who is no fan of the Fed, Bernanke or the current central bank policies, asked Yellen whether she would have the guts to prick a bubble. Yellen said that the central bank could let the air out of the bubble by employing regulatory measures, like restricting leverage, and, if necessary, it could raise interest rates. Corker interrupted her and asked the money question: With a bull market raging, would you have the mettle to use these unpopular measures? “I believe that I would,” Yellen said. “I believe that is the most important lesson learned from the crisis.”

Bubble popper it is!

The rest of the Senate appearance was pretty much what you would expect: a defense of the monetary policy that Yellen helped create. She said that the Fed’s bond buying program had “made a meaningful contribution to economic growth and improving the outlook” and said that when there has been progress in labor market, the Fed would reduce its purchases.

As the confirmation process continues, investor attention will shift to the current chair, Ben Bernanke this week. He will deliver a major speech on Tuesday night, which along with the release of the minutes from the last policy meeting could contain clues about future central bank actions. Specifically, everyone wants to know whether there are specific metrics that would lead to a change in policy.

While the central bank maintains that the current game plan is necessary, there are risks to the strategy. At every meeting, Fed officials weigh the benefits of quantitative easing (QE) versus the costs, which include managing a ballooning balance sheet and the threat of higher inflation in the future. The Fed’s purchase of mortgage-backed and treasury securities, has so far left the central bank holding $3.86 trillion in assets. Defenders of the policy say that the Fed can simply sell those assets in the future, but doing so could mean absorbing significant losses, since the Fed would likely be selling as bond prices were falling. In theory, the Fed has other policy options, but they have never been tested, which makes economists a bit nervous about their efficacy.

One group not showing signs of nerves is investors. All of the sudden, Mom and Pop are getting back in the game. According to Strategic Insight, inflows into stock mutual funds and Exchange-traded funds are on track for a total of $450 billion for 2013, which would be more than the last four years’ inflows. Of course, the idea that regular people are jumping back in after 56-month, 166 percent bull-run may mean that the market could be setting everyone up for a correction (a pull-back of more than 10 percent). Then again, the technology bull market lasted from October 11, 1990 until March 24 2000, resulting in a 417 percent gain, so maybe the bull has more upside.

MARKETS: For the sixth consecutive week, the Dow and S&P 500 closed higher and at new all-time nominal high levels.

  • DJIA: 15,961, up 1.3% on week, up 21.8% on year
  • S&P 500: 1798, up 1.6% on week, up 26% on year
  • NASDAQ: 3986, up 1.7% on week, up 32% on year (briefly touched 4,000 for the first time since Sep 2000)
  • 10-Year Treasury yield: 2.71% (from 2.75% a week ago)
  • Dec Crude Oil: $93.84, down 0.8% on week (6th consecutive losing week)
  • Dec Gold: $1287.40, up 0.2% on week
  • AAA Nat'l average price for gallon of regular Gas: $3.21


Mon 11/18:

10:00 NAHB Builder Index

Tues 11/19:

7:00pm Bernanke speech to NABE

Weds 11/20:

8:30 Retail Sales

8:30 CPI

10:00 Existing Home Sales

10:00 Business Inventories

2:00 FOMC Minutes

Thurs 11/21:

8:30 Jobless claims

8:30 PPI

10:00 Philadelphia Fed Survey

Fri 11/22:

10:00 Job Openings and Labor Turnover (JOLTS)