San Francisco Fed President says it will take the US Fed six years to reduce its bloated balance sheet.

It will take the U.S. central bank at least six years to reduce its bloated balance sheet back to more a normal size, San Francisco Federal Reserve Bank President John Williams said.

“Our plan is to shrink the balance sheet ‘organically,’ if you will, through the maturation of the assets,” Williams said in the text of remarks Friday in Santa Barbara, California. “It’s likely going to take at least six years to get the balance sheet back to normal, which is in keeping with the overall approach to removing accommodation gradually.”

The Federal Reserve is slowly weaning the economy off of ultra-easy monetary policy that saw it hold interest rates near zero for seven years and balloon the balance sheet to around $4.5 trillion through three rounds of buying mainly Treasuries and mortgage-backed securities. Officials took a major step in December, raising interest rates for the first time since 2006, and said they’ll wait until the process of policy normalization is well under way before beginning to allow excess balance-sheet holdings to roll off.

 “The Fed has started the process of raising interest rates, but the path to normal will be gradual,” Williams said Friday.

He said the economy “still has a good head of steam,” that he expected would help keep the unemployment rate on track to decline to around 4.5 percent by mid-year.

“Looking forward, I see a labor market that’s growing ever stronger and will reach maximum employment on a broad set of measures very soon,” he said.

Even so, Williams argued that the economy still needed support from Fed policy to help it overcome headwinds from slower growth abroad and the fallout from a stronger dollar, which was why officials expect a gradual pace of rate hikes.

Even at their peak, rates are likely to be low by historical standards — perhaps just 3 percent or 3.5 percent, compared to the 4 percent to 4.5 percent that was historically normal, Williams said.

 

Participation Rate

The labor force participation rate, which has plummeted and is near its lowest level since the 1970’s, is also unlikely to rebound to a more normal level, Williams said. He attributed the change to the aging of the U.S. population, the fact that younger people aren’t working as much as they used to, and the fact that people are increasingly deciding to have single-income families.

“Overall, the evidence suggests that, even with a quite strong economy, we aren’t likely to see a significant number of people come back into the fold,” Williams said today.

Despite such changes, he said the economy has made significant progress, noting that the U.S. has added more than 13 million jobs since 2009, “virtually all of them full-time.”

Even as full employment draws near, inflation remains far below the Fed’s 2 percent target, rising just 0.4 percent in November from a year earlier. Still, Williams says he expects that inflation will be at or near target by the end of next year.

“There are reasons for the low level of inflation, in particular the rise in the dollar and the fall in oil prices,” Williams said. “Those effects should peter out, but they’ve had a downward influence on inflation at a time we’ve needed it to rise.”

Bloomberg reports:  Saudi Arabia, one of the most tradition-bound societies on the planet, where family structure and tribal patriarchy differ little from a century ago, is suddenly in a hurry.

Over eight days, it has executed dozens of militants, severed ties with Iran and announced numerous steps for a radical rollback of the state that may include privatizing oil giant Saudi Aramco, among the world’s largest companies.
The flurry of action, a result of tumbling oil prices, shifting U.S. interests and regional turmoil threatening rulers across the Middle East, appears to be the largely the work of Prince Mohammed bin Salman, the 30-something son of King Salman, in office less than a year. And while his ambition to modernize has drawn praise, some fear he is in over his head.

“The Saudis had a reputation of being kind of cautious, secretive,” said Eckart Woertz, a senior researcher at Barcelona Centre for International Affairs. “Right now there are some concerns about rash decisions.”

Prince Mohammed’s announced that an initial public offering in Saudi Aramco may form part of the kingdom’s privatization plans. He called his plans a Thatcherite revolution, like the overhaul of the U.K. economy in the 1980s, saying private investors will be invited to play a bigger role in health care, education and some defense industries; state land will be sold off; and sales taxes introduced on consumer goods.

The new government is rapidly abandoning its old slow style,.The government announced and implemented a cut in fuel subsidies, sending drivers speeding to gas stations and spurring a spate of company statements on how the change would affect them. In November, an annual fee on undeveloped urban land intended to transform the kingdom’s property market was approved by the cabinet after years of talks.

Some of the reforms “bode well for the long-term health of Saudi Arabia, in the sense that they have shown a willingness to cut subsidies, to implement taxes, to cut spending,” said Allison Wood, Middle East and North Africa analyst at Control Risks in Dubai. “But on the other hand, these do increase risks for investors in the sense that they’re often unpredictable and implemented, as we saw, overnight.”

Pressure for change is coming from a budget deficit that reached 15 percent of economic output last year, as oil fell by about two-thirds from mid-2014 levels. Saudi Arabia has dipped into its savings to cover the shortfall — reserves declined for 10 straight months through November, sometimes at an unprecedented pace.

Prince Mohammed came to power with little experience, yet has titles that put him in control of the army, the oil industry and most other areas of the economy.  Opening up the economy in the ways proposed by the young prince may be anathema to Saudi conservatives. The kingdom’s clerics enjoy an exalted status in return for their backing against radical Islamists such as al-Qaeda who have challenged the Al Saud family’s legitimacy.

Christine Lagarde, the managing director of the International Monetary Fund (IMF), is on a four-day official visit in Nigeria, where she is holding meetings with President Muhammadu Buhari, stakeholders and policy makers.

Lagarde is also to visit Cameroon, where she will meet President Paul Biya and his economic team. She will also hold meetings with the finance ministers of the Central Africa Economic and Monetary Community (Cemac).  Lagarde speech in Nigeria

Eurozone inflation remained lower than expected in December, official data said on Tuesday, adding pressure on the European Central Bank to once again ramp up its efforts to boost the economy in Europe. ECB president Mario Draghi disappointed markets last month with a limited bid to revive the struggling eurozone given near-zero inflation levels across the 19 countries that share the euro..

Srimoyee Pandit writes:  The ECB has pledged to do all it can to pull inflation up “as quickly as possible”. The central bank on December 3rd decided to slash deposit rate by 10 basis points.

The ECB also extended its quantitative easing program (QE) to March 2017. The central bank not only decided to include euro-denominated regional and local debt in its QE program but said it will reinvest the principal payments on the securities purchased to support liquidity conditions.  Draghi has noted “our asset purchase program is flexible. It can always be adjusted. We decided the extension of our horizon and especially the re-investment of principal would be sufficient”.

The ECB Chief Mario Draghi, in an effort to assure markets that the central bank would do all that it takes to push up price pressures in the euro zone, stated on 14th December that there was no limit to the tools that it can opt for to raise inflation to target. He reassured that inflation target would be reached “without undue delay”. “After the recalculation of our tools carried out by the Governing Council earlier this month, we expect inflation to reach our target without undue delay,” Draghi said. He also said that the use of instruments can also be intensified further to achieve price stability in the bloc. With inflation hovering just above zero, the ECB is aware that further delays in achieving its inflation target of just below 2 per cent could damage its credibility.

The risks to the world economy and to the inflation outlook remain skewed to the downside. GDP is expected to grow 1.5 per cent in 2015, 1.6 per cent and 1.7 per cent in 2017. Economic activity will likely continue to be supported by sustained monetary stimulus, neutral fiscal stance and lower oil prices. However, high private indebtedness will remain a drag on consumption and investment in many countries of the bloc.

The ECB expects inflation to come in at 1 per cent in 2016. Inflation forecast has been estimated at 1.6 per cent for 2017 as against 1.7 per cent estimated earlier. The central bank believes low oil price will support household disposable income thereby supporting private consumption.

The labour force is expected to expand only moderately in the next fiscal hindered by impact of still high unemployment in some countries of the bloc and adverse demographics in others. The unemployment rate edged down to 11.1% 

Draghi is aware that lower interest rates, though can ensure price stability, cannot guarantee lasting prosperity. He thus stressed on the need for “structural recovery” to lift potential growth in the euro zone. Draghi has called for increase in investment. He feels weak demand dynamics, the still-high private debt overhang and fragile private sector confidence have weighed on investment in the bloc. He has also urged countries to facilitate a “work-out” of toxic loans to facilitate recovery in credit and lending.

If and only when relevant fiscal policies go hand in hand with expansionary monetary policy the bloc will attain the much needed boost to overcome disinflation and grow. Absolute reliance on monetary policy will not be able to help recovery. On the contrary, it will sow the seeds for the next financial crisis. 

Schumpeter has an interesting discussion in the Economist about businesses that pride themselves on contributing to the common good and yet work hard to avoid taxes. He writes; Pfizer has always prided itself on its commitment to corporate social responsibility (CSR). It is particularly proud of the work that it does with NGOs and “other global health stakeholders” to strengthen and improve health-care systems.

This has not deterred it from seeking a gargantuan “tax inversion”. The company intends, as part of a $160 billion takeover of Allergan, to shift its tax domicile from America to Ireland, where Allergan is domiciled, and where corporate-income taxes are considerably lower. Pfizer’s shareholders no doubt rejoiced: in 2014 the company would have saved $1 billion of the $3.1 billion it paid to the US Treasury.

A paper in the January issue of the Accounting Review suggests that Pfizer is far from unusual in trying to perform this pro-CSR, anti-tax straddle. David Guenther of the University of Oregon’s Lundquist College of Business and his co-authors compared the effective tax rates paid by a sample of American firms between 2002 and 2011 with a measure of those companies’ CSR programmes compiled by MSCI, an index provider. It found that the companies which do the most CSR also make the most strenuous efforts to avoid paying tax—and that those with a high CSR score also spend more lobbying on tax.

Surely CSR depends on the idea that firms have an obligation to society, not just to shareholders? And surely the most basic obligation to society is to pay the taxes that support the poor and vulnerable?

Mr Guenther and his colleagues suggest two more intriguing explanations. The first is that companies intentionally embrace CSR for exactly the same reason they try to reduce their taxes—to maximize their profits.  Starbucks recognised how much damage its British operation had done to its reputation when the extent of its tax planning was exposed in 2012, and promised to pay around £10m (then $16m) a year in each of the following two years.

The second possible explanation is that companies regard CSR and taxes as substitutes for each other: the less you pay in taxes, the more you have left over for good works.

Rival theories reflect conflicting ideas on what counts as a socially responsible company. The view put forward by various international bodies that seek to set standards for corporate behaviour, and accepted by many big European firms, is that responsible firms should pay a fair share of taxes while privately sponsoring some do-gooding on top of this.

Many CEOs, particularly in America, say the best way for companies to contribute to the common good is to succeed as businesses. Furthermore, they argue, the more money they can keep from the government’s clutches, the more they can invest in new plants (which create jobs in the short term) or research (which creates jobs in the longer term). And the more money they will have left over for good causes as well.

The CEO school of corporate responsibility has something going for it. Such bosses are right to argue that a business’s main contribution to society is to provide jobs and income. They are also right to argue for tax harmonisation: America has only itself to blame if firms revolt against its high corporate-tax rate.