"We expect the euro area economy to grow moderately, subject to particularly high uncertainty and intensified downside risks," President Jean-Claude Trichet told a news conference after the ECB left rates at 1.5 percent, following hikes in April and June.
"ECB staff cut their growth forecasts to a range of 1.4-1.8 percent this year from the 1.5-2.3 percent seen in June. Next year, growth is expected to be between 0.4 and 2.2 percent, down from 0.6 to 2.8 percent previously."
"Inflation is now predicted to fall back to between 1.2 and 2.2 percent next year, for a midpoint of 1.7 percent, which would be below the central bank's target of close to but below two percent."
Next year's expected growth rate is down to 0.4 to 2.2% from a previous estimate of 0.6 to 2.8%?
Clearly they has been much more uncertain about 2012 than 2011 which now has just a .4 % range in its estimate. I mean for 2012 they are basically saying they just don't know other than there will be some growth no matter how meager.
In early breaking economic news, jobless claims ticked up slightly from-an upwardly revised) 412,000 claims for the week ending August 27-to 414,000 for last week(ending Sept 4), Wall Street analysts had been looking for a dip to 405,000.
There was some good news however
"But in a respite from the negative news, the trade gap shrank to $44.8 billion in July, Commerce Department data showed, down sharply from June's $53.1 billion deficit and much lower than forecasts around $51 billion.
The 13.1 percent decline was the biggest month-to-month percentage drop in the deficit since February 2009. "
So this drop is pretty impressive, though of course, it is far too premature to declare that this is the start of some earth shaking trend towards increased U.S. imports and manufacturing(even though there has been sustained, if not enough, manufacturing).
The futures initially dropped on the news but the market has pared it's losses and is currently fight to go green as the NASDAQ briefly was. Again makes me wonder what would have been had I stayed in BAC $8 calls...
Beyond this we are waiting for the speeches of first Bernanke then Obama. Bernanke is considering 3 possible unusual steps. As John Williams, president of the Federal Reserve Bank of San Francisco Reserve Bank said Wednesday, "The real threat is an economy that is at risk of stalling and the prospect of many years of very high unemployment...
"protection against further deterioration in the patent's condition and perhaps help him get back on his feet."
Front page of today's WSJ (pg. A1'.; Thursday September 8, 2011)
The most likely first step would be for the Fed to swap shorter maturity Treasury holdings for longer ones-known famously as "Operation Twist" which is meant to further push down long-term interest rates and then encourage economic activity. The program actually draws it's name from a similar effort in the 1960s by the U.S. Treasury and Fed to "twist' rates so that long-term interest rates were shorter than short-term.
Anticipation of the move has helped push yields on 10-year treasury notes, above 3% in late July, to around 2%. (WSJ pg. A4)
A second step under consideration is to eliminate or reduce the 0.25% interest rate the Fed currently is paying banks that keep cash on reserve with the central bank. The 0.25% payment is greater than the 0.196% rate an investor can get on a two-year Treasury. some officials believe the Fed shouldn't reward for holding cash instead of making loans. Charles Evans, president of the Reserve Bank of Chicago voices the sentiment behind this: that cutting rates may give banks more incentive to lend and would further signal the Fed's determination to get the economy going.
A third idea would be for Fed officials to use their words to make their eeconomic objectives and plans for interest rates more clear. This move towards transparency from opacity has been a signature project of Bernanke's for awhile. What is revealing is what is absent: talk of QE3.
Then we come to the President's speech which I must admit I have been in some anticipation of. The total proposal is reported to cost $300 billion. The proposals are expected to include extension of unemployment benefits, extension of payroll tax holiday, infrastructure, aid to states to prevent teacher layoffs, tax breaks for businesses-in the form of a payroll tax holiday for them too, maybe targeting it only to firms that hire unemployed workers, job training programs for the long-term unemployed-defined as at least 6 months. Finally help for struggling homeowners-it has been suggested Obama might sign an executive order if he can't get the GOP to play ball.
Of these proposals some are intriguing and promising. Certainly any infrastructure spending is welcome, and while the GOP carps that the 2009 stimulus "didn't work" they have show some openness to some kind of infrastructure spending-the form they offer may not be too exciting though. Infrastructure spending is popular enough with the public, however, that they can't simply refuse to discuss it.
The job training-it would be conducted at businesses at government cost-is intriguing, and the GOP House as expressed interest in this.
The tax credits for businesses are debatable. It could be argued that it mostly goes to businesses who were already going to hire workers though maybe the encouragement that they hire unemployed workers could be helpful.
The help for homeowners-potentially refinancing millions of mortgages-is very promising, though there are reservations that if it is not done right we could see a further acceleration in deflation of housing prices.
The payroll tax extension I must admit to having some reservations on. For one thing this could conceivably be a way to cut Social Security through the back door, what more perfect guise than through payroll taxes ostensibly to help struggling wage earners.
Yet my main reservation is it seems like a pretty feeble fiscal stimulant. It is arguable how beneficial this sort of short-term stimulus is.
Any way will make for an interesting day. Hopefully a day that will actually lead to some positive developments.
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