'Twas The Week Before Christmas
'Twas the week before Christmas and all through Wall Street
Many creatures were stirring – they had deadlines to meet . . . .
Poor Clement Moore. We won't mangle his fine text anymore. But in fact, for the week before Christmas, there's lots going on – on Wall Street and especially in Washington. Nobody has "settled [their] brains for a long winter's nap". Normally by this time, Congress is long gone, the rest of the federal government is pretty still, and Wall Street is busy, but with Christmas partying more than trading. Not so this year.
That Tax Bill
Let us hit a couple of the high spots. Congress finally passed a tax bill last Thursday evening. The basic feature of this bill – extension of the current income tax rate structure for two more years – is easy to misinterpret, so we will try to describe it in a gingerly fashion. Notice that we didn't use the term "tax cuts". After as many as nine years, these tax rates hardly seem like a tax "cut" any longer and certainly allowing the rates to go up would hit just like a tax "increase", even if it isn't formally called by that name.
Extending the current rates for middle income taxpayers was never much disputed. Contention focused on those in upper income brackets. Many of us perhaps thought that these well-to-do people are quite comfortable and wouldn't miss the 5% or so more of their income that they'd be paying to Uncle Sam. Maybe. But some research we did several months ago for a different need taught us something about who those upper-income people are. According to the Federal Reserve's Survey of Consumer Finances, the largest asset of the top 10% of wealth-holders is equity in a business. Not a portfolio of shares of stock, but ownership interest in their own company. So this group encompasses proprietors of the country's small businesses. It's not as if they were settled back in their palatial mansions, collecting their dividends and interest; for the most part, they're out there in the mix, working hard – and employing well more than half the country's workforce. We'll talk about this issue and these people more in a subsequent article, probably during the upcoming tax season. For now, it's clearly advantageous to the economy and to the rest of us that we didn't hike their taxes in the face of the fragile recovery we're experiencing.
An addition to the bill will actually put cash in everyone's hands beginning in January: a one-year reduction of two percentage points in the social security payroll tax. As you may recall from our article on social security in late summer, this action of reducing social security funds' receipts is not particularly good for the financial condition of that system. But it will lift everyone's take-home pay in the short run, providing cash for stepped-up spending or for paying down on credit-card and other debt. For a year, that may well be a beneficial trade-off. We will need the discipline this time next year to let it expire, however.
Latest Wrinkles in Federal Reserve Policy
What is the Federal Reserve up to these days? Why was the Fed Chairman Ben Bernanke on the 60 Minutes CBS-TV program a couple of weeks ago?
The Fed has two main functions, banking regulation and lending, and economic stabilization through monetary policy. The monetary policy role has a two-pronged goal mandated by federal law: maintaining stable inflation and minimizing unemployment. At present, inflation is low and unemployment is high. The economic recovery doesn't seem strong enough on its own to improve the unemployment situation, as Mr. Bernanke explained on 60 Minutes, so the Fed is more or less required to at least try some action toward that end. This is not straightforward, though, since the Fed's key policy interest rate, the so-called federal funds rate, is virtually at 0 percent; so they can't pursue the usual course of lowering that short-term interest rate. The Fed is taking a different tack, which Mr. Bernanke also tried to help us understand through his TV appearance. Business investment and home mortgage lending really involve longer-term financial commitments. The Fed is trying to facilitate a decline in longer-term interest rates by buying Treasury bonds, $600 billion worth by next May, about $75 billion a month.
So far, long-term rates have risen, which is not exactly the desired result. Ten-year Treasury yields traded at 2.57% in the early November week when the Fed announced its bond-buying approach, and last week, they averaged 3.41%, an increase of 0.84%. We can guess that the bond markets are concerned about the Government's budget, and that overshadowed the Federal Reserve's added demand for the government bonds. Still, these interest rates may have increased more without the Fed's buying.
Separately, the Federal Reserve is also supplying funds to central banks in Europe. As government debt strains hurt financial conditions in various countries – Ireland's credit rating was slashed five notches on the widely followed Moody's scale last Friday – the Fed has been lending in currency markets through a "swap" arrangement. Today, in an indication that those policymakers haven't gone on Christmas break yet either, they announced the extension of these arrangements until next August. The central banks borrowing dollars in these transactions lend them on to banks in their own countries, suggesting that the Federal Reserve is serving as an indirect lender to financial institutions in a number of other countries as well as the United States.
Private Economy Might Be Picking Up
At the same time, in the private sector, some economic indicators are showing signs of improvement. U.S. consumers appear to be doing what they usually do just before Christmas: shop. Weekly chain store reports issued today for last week show some encouraging vigor on top of a sizable increase in overall retail sales for the month of November. Industrial production also increased last month. And perhaps most notable, the latest available figures show a decline in the number of people filing claims for unemployment insurance benefits. A four-week average of these initial claims was 423,000 in the week ended December 11, the smallest number since August of 2008, just as the financial panic was really setting in.
So, as the year closes out, in the midst of our caution, we're seeing some better signs: perhaps consumer spending is picking up and both fiscal and monetary policies in the U.S. are supportive of growth. There's even an early hint in that unemployment insurance data that labor market conditions might be getting more heartening.
Maybe Congress can get out of Washington soon, now, and leave the skies to Santa Claus!
Many creatures were stirring – they had deadlines to meet . . . .
Poor Clement Moore. We won't mangle his fine text anymore. But in fact, for the week before Christmas, there's lots going on – on Wall Street and especially in Washington. Nobody has "settled [their] brains for a long winter's nap". Normally by this time, Congress is long gone, the rest of the federal government is pretty still, and Wall Street is busy, but with Christmas partying more than trading. Not so this year.
That Tax Bill
Let us hit a couple of the high spots. Congress finally passed a tax bill last Thursday evening. The basic feature of this bill – extension of the current income tax rate structure for two more years – is easy to misinterpret, so we will try to describe it in a gingerly fashion. Notice that we didn't use the term "tax cuts". After as many as nine years, these tax rates hardly seem like a tax "cut" any longer and certainly allowing the rates to go up would hit just like a tax "increase", even if it isn't formally called by that name.
Extending the current rates for middle income taxpayers was never much disputed. Contention focused on those in upper income brackets. Many of us perhaps thought that these well-to-do people are quite comfortable and wouldn't miss the 5% or so more of their income that they'd be paying to Uncle Sam. Maybe. But some research we did several months ago for a different need taught us something about who those upper-income people are. According to the Federal Reserve's Survey of Consumer Finances, the largest asset of the top 10% of wealth-holders is equity in a business. Not a portfolio of shares of stock, but ownership interest in their own company. So this group encompasses proprietors of the country's small businesses. It's not as if they were settled back in their palatial mansions, collecting their dividends and interest; for the most part, they're out there in the mix, working hard – and employing well more than half the country's workforce. We'll talk about this issue and these people more in a subsequent article, probably during the upcoming tax season. For now, it's clearly advantageous to the economy and to the rest of us that we didn't hike their taxes in the face of the fragile recovery we're experiencing.
An addition to the bill will actually put cash in everyone's hands beginning in January: a one-year reduction of two percentage points in the social security payroll tax. As you may recall from our article on social security in late summer, this action of reducing social security funds' receipts is not particularly good for the financial condition of that system. But it will lift everyone's take-home pay in the short run, providing cash for stepped-up spending or for paying down on credit-card and other debt. For a year, that may well be a beneficial trade-off. We will need the discipline this time next year to let it expire, however.
Latest Wrinkles in Federal Reserve Policy
What is the Federal Reserve up to these days? Why was the Fed Chairman Ben Bernanke on the 60 Minutes CBS-TV program a couple of weeks ago?
The Fed has two main functions, banking regulation and lending, and economic stabilization through monetary policy. The monetary policy role has a two-pronged goal mandated by federal law: maintaining stable inflation and minimizing unemployment. At present, inflation is low and unemployment is high. The economic recovery doesn't seem strong enough on its own to improve the unemployment situation, as Mr. Bernanke explained on 60 Minutes, so the Fed is more or less required to at least try some action toward that end. This is not straightforward, though, since the Fed's key policy interest rate, the so-called federal funds rate, is virtually at 0 percent; so they can't pursue the usual course of lowering that short-term interest rate. The Fed is taking a different tack, which Mr. Bernanke also tried to help us understand through his TV appearance. Business investment and home mortgage lending really involve longer-term financial commitments. The Fed is trying to facilitate a decline in longer-term interest rates by buying Treasury bonds, $600 billion worth by next May, about $75 billion a month.
So far, long-term rates have risen, which is not exactly the desired result. Ten-year Treasury yields traded at 2.57% in the early November week when the Fed announced its bond-buying approach, and last week, they averaged 3.41%, an increase of 0.84%. We can guess that the bond markets are concerned about the Government's budget, and that overshadowed the Federal Reserve's added demand for the government bonds. Still, these interest rates may have increased more without the Fed's buying.
Separately, the Federal Reserve is also supplying funds to central banks in Europe. As government debt strains hurt financial conditions in various countries – Ireland's credit rating was slashed five notches on the widely followed Moody's scale last Friday – the Fed has been lending in currency markets through a "swap" arrangement. Today, in an indication that those policymakers haven't gone on Christmas break yet either, they announced the extension of these arrangements until next August. The central banks borrowing dollars in these transactions lend them on to banks in their own countries, suggesting that the Federal Reserve is serving as an indirect lender to financial institutions in a number of other countries as well as the United States.
Private Economy Might Be Picking Up
At the same time, in the private sector, some economic indicators are showing signs of improvement. U.S. consumers appear to be doing what they usually do just before Christmas: shop. Weekly chain store reports issued today for last week show some encouraging vigor on top of a sizable increase in overall retail sales for the month of November. Industrial production also increased last month. And perhaps most notable, the latest available figures show a decline in the number of people filing claims for unemployment insurance benefits. A four-week average of these initial claims was 423,000 in the week ended December 11, the smallest number since August of 2008, just as the financial panic was really setting in.
So, as the year closes out, in the midst of our caution, we're seeing some better signs: perhaps consumer spending is picking up and both fiscal and monetary policies in the U.S. are supportive of growth. There's even an early hint in that unemployment insurance data that labor market conditions might be getting more heartening.
Maybe Congress can get out of Washington soon, now, and leave the skies to Santa Claus!
Merry Christmas!
Labels: Economy, Financial Markets, Government Policies
posted by Carol S. | 12/21/2010 05:26:00 PM
2 Comments:
I do have one concern about the temporary reduction of the payroll tax: next year, will its reintroduction be spun as a HIKE in the payroll tax, giving impetus to Congress to extend it again? I'm afraid we will see some congresspersons letting this happen and then hasten the destruction of Social Security.
Indeed. My final statement on the payroll tax reduction is perhaps too obscure: "we'll need the discipline next December to let it expire". The Commenter above says this more directly -- and I share their concern -- that the return of the payroll tax to its full rate will be seen as an increase that will hurt the economy then. We have to be careful with that. None of this is easy, is it?
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