Janet Yellen, President of the Federal Reserve Bank of San Francisco, took a shot tonight at inflation hawks who worry that the Fed’s easy money policies are going to send consumer prices soaring.  

The hawks, she notes, worry that the Fed has pumped too much money into the economy and won’t be able to withdraw it in time to forestall inflation. She says the Fed has the tools it needs to withdraw the money when needed – it can sell the mortgage and Treasury bonds it has accumulated if needed and some of its emergency programs are already tapering off.

Another risk she tries to shoot down is a replay of the 1970s. Back then, the Fed thought that high unemployment meant the economy was burdened with lots of slack that would keep inflation under control. It responded with low interest rates. It turned out there wasn’t as much slack as thought (the nation’s productivity was falling rapidly) and the low rates indeed fed inflation. This time, Ms. Yellen says, the slack is for real. “We are far from the kinds of unemployment rates that would make inflation a danger,” she said.

“The very weak economy is, if anything, putting downward pressure on wages and prices,” she says, offering a bleak view on the outlook for recovery. On her long list of worries are the following points: consumers are likely to continue to retrench after getting too heavily indebted, banks will keep credit tight, global growth will be slow, and the financial system is burdened by new pockets of weakness like commercial real estate.

Ms. Yellen adds that the Fed itself is constrained in its ability to power a strong recovery. Its novel credit programs, she says, are no replacement for old-fashioned interest rate cuts, which the Fed can’t do any more because the Fed’s target rate is already at zero. Here’s her money quote:

“In past deep recessions, the Fed was able to step on the accelerator by cutting the federal funds rate sharply, causing the economy to. This time, we already have our foot planted firmly on the floor. We can’t take the federal funds rate any lower than zero. I believe that the Fed’s novel programs are stimulating the flow of credit, but they simply aren’t as powerful levers as large rate cuts, so this time monetary policy alone can’t power a rapid recovery.”

All in all, it’s a pretty bleak view of growth, and one of the strongest cases a policy maker has made yet against inflation.

Trickle-down economics, a centerpiece of conservative economic thinking for many decades, failed to deliver its promise of distributing wealth across the economy, a new paper from Harvard University’s Kennedy School of Government says.

According to this theory, when government policies favor the wealthy — for example, via tax cuts for upper-income classes — the increase in wealth flows down to those with lower incomes. That’s because the rich are more likely to spend the additional income, creating more economic activity, which in turn generates jobs and eventually, better paychecks for the less well-off.

It’s a school of thought that is closely linked to former President Ronald Reagan, and is frequently referred to as “Reaganomics.”

The idea has had enough power to be used as part of a long process to lower tax rates on the wealthiest Americans. According to the Tax Policy Center, the top marginal tax rate in the U.S. stood at 70% when Reagan was elected in 1980, falling steadily to 28% by 1989, before it began to rise modestly. The top marginal rate now stands at 35% against a peak of 94% in 1945.

Trickle-down economics prevailed in a period in which a smaller portion of the U.S. gained an increasing share of the most important measures of economic vigor. Be it total wealth or net income, the top gained a greater share of the pie at the expense of the less-well-off.

The paper does not argue that trickle-down economics is without merit. It’s just that it doesn’t appear to generate enough bang for the buck. It was written by Harvard’s Dan Andrews and Christopher Jencks, and Australia National University’s Andrew Leigh.

“Increases in inequality lead to more growth,” the paper’s authors wrote. “There appears to be some trickle-down effect in the long run, but since the impact of a change in inequality on economic growth is quite small, it is difficult to be sure from our estimates whether the bottom 90% will really be better off or not.”

In an interview, Jencks said it’s a real challenge to gather the information needed to determine whether trickle-down economics works as its advocates believe.

But he concludes the evidence shows “it certainly didn’t deliver as much as many said” and to the degree it did work, “the effects are really small.”

The paper’s findings were based on data from 12 developed nations, observed over most of the last century into the current century.

Trickle-down economics’ day is probably done, for now at least. The financial crisis will bring not just stricter regulation and tighter oversight for many markets. The massive budget deficits that the U.S. will be left with as a consequence of the bailouts and economic stimulus spending will require tax hikes that are likely to reach beyond the rich.

The Federal Reserve’s June policy meeting is now a week in the past, and Fed officials are starting to emerge to explain the central bank’s decision-making in more detail.

James Bullard, president of the St. Louis Fed, was up today with a talk to Philadelphia’s Global Interdependence Center. Departing from the standard practice of Fed officials who like to read from prepared texts, Mr. Bullard gave a college-style lecture with a power point presentation. He also followed up with discussions with reporters. We’ll follow his lead and offer our take — in power point form — of three important messages:

• The Fed’s benchmark interest rate — the federal funds rate — is going to stay near zero for the “foreseeable future,” given the weak economy and low inflation. That ought to reinforce to investors who were expecting rate hikes by year end that it isn’t likely. Still, Mr. Bullard is wary of counting too much on the “slack” argument. This argument holds that high unemployment and excess manufacturing capacity push inflation rates down. While there is lots of slack in the economy, he says, inflation might not fall as much as some models suggest. Indeed, inflation expectations, what he considers a better inflation indicator, have bounced back from depressed levels earlier this year to modest levels around the Fed’s rough goal of 2%.
• The Fed’s ‘liquidity programs,” such as efforts to support the commercial paper market or money market mutual funds, are on track to end next year “if financial conditions continue to improve.” The Fed signaled this on Thursday when it said the liquidity programs would run out on Feb. 1, 2010.
• The central bank effectively punted on the third prong of its efforts to revive the economy — its purchases of mortgage backed securities, Fannie Mae and Freddie Mac debt and U.S. Treasury bonds. Some investors expected the Fed to make changes in the program to buy $1.75 trillion worth of this debt when it met last week. The Fed took no action. But that doesn’t mean it won’t decide to take new steps with the programs when officials meet again in August. “Let’s see how the data come in over the summer and then we’ll evaluate,” Mr. Bullard said in response to a reporter’s question. Treasury purchases are on track to run their course by late August. Mortgage-debt purchases are set to run their course by year-end. Fed officials could let these purchases run out, decide to stretch them out over a longer period of time, or even increase them, depending on how the economy looks.

Mr. Bullard is not a voting member of the Fed’s policy-making Federal Open Market Committee.

A Federal Reserve official warned Tuesday that that the rising level of “populism” seen in Congress and in the public may become “counterproductive” if the Fed is seen as losing its independence.

“Anything that erodes the independence of the Fed is going to feed that kind of expectation and will drive yields higher,” said James Bullard, president of the Federal Reserve Bank of St. Louis at a presentation in Philadelphia. “So I think we’re really in a delicate situation with regards to the independence of the Fed and that is an important consideration going forward.”

Bullard was answering audience questions after discussing quantitative easing exit strategies for the Federal Reserve at a presentation held by the Global Interdependence Center at the Federal Reserve Bank of Philadelphia.

While he doesn’t think anyone wants to strip the Fed of its independence, that impression may be raised and affect investors, particularly foreign investors, who may not “understand the subtleties” of American politics, Bullard later said to reporters.

The Treasury Department sent 152 pages of legislation to Capitol Hill on Tuesday that spells out in detail its plan for the creation of a new Consumer Financial Protection Agency. The banking industry is already mobilizing to fight the proposal but Democrats are pushing for it aggressively.

According to the draft legislation, Treasury’s plan would:

• 1) Give the agency broad authority to write rules about services or products including:
  a. Deposit-taking activities
  b. Extending credit and servicing loans (this could include mortgages, credit cards, etc.)
  c. Check-guaranty services
  d. Collecting, providing, or analyzing consumer report information
  e. Providing real estate settlement services, including title insurance
  f. Leasing personal or real property
  g. Investment advisers that aren’t already regulated by the CFTC or SEC
  h. Processing financial data
  i. Sale or issuance of stored value cards
  j. Acting as a money service business
  k. And any other activity the agency defines as a rule, except for most types of insurance, which are exempt.
• 2) Give the agency five board members, four of whom would be appointed by the President and confirmed by the Senate and the fifth would be the head of the regulator overseeing national banks.
• 3) Appropriate money to run the agency while also allowing the agency to collect annual fees or assessments from companies it supervises. The bill would also establish a victim’s relief fund for penalties collected by the agency.
• 4) The agency’s objectives would be to make sure consumers can make informed decisions about financial products and services, protect them from abuse, make sure markets operate fairly and efficiently, and ensure that all consumers have access to financial services.
• 5) Permit the new agency to prohibit or place conditions on mandatory pre-dispute arbitration agreements between consumers and firms such as credit card companies “if doing so is in the public interest and for the protection of consumers.”
• 6) Ensure that any rule adopted by the new agency would new preempt state law “if State law provides greater protection for consumers.”
• 7) Allow state attorneys general would be allowed to bring law suits for violations of new federal rules.
• Allow the new agency to file subpoenas to collect information for the companies they oversee.

The Treasury Department sent 152 pages of legislation to Capitol Hill on Tuesday that spells out in detail its plan for the creation of a new Consumer Financial Protection Agency. The banking industry is already mobilizing to fight the proposal but Democrats are pushing for it aggressively.

According to the draft legislation, Treasury’s plan would:

• 1) Give the agency broad authority to write rules about services or products including:
  a. Deposit-taking activities
  b. Extending credit and servicing loans (this could include mortgages, credit cards, etc.)
  c. Check-guaranty services
  d. Collecting, providing, or analyzing consumer report information
  e. Providing real estate settlement services, including title insurance
  f. Leasing personal or real property
  g. Investment advisers that aren’t already regulated by the CFTC or SEC
  h. Processing financial data
  i. Sale or issuance of stored value cards
  j. Acting as a money service business
  k. And any other activity the agency defines as a rule, except for most types of insurance, which are exempt.
• 2) Give the agency five board members, four of whom would be appointed by the President and confirmed by the Senate and the fifth would be the head of the regulator overseeing national banks.
• 3) Appropriate money to run the agency while also allowing the agency to collect annual fees or assessments from companies it supervises. The bill would also establish a victim’s relief fund for penalties collected by the agency.
• 4) The agency’s objectives would be to make sure consumers can make informed decisions about financial products and services, protect them from abuse, make sure markets operate fairly and efficiently, and ensure that all consumers have access to financial services.
• 5) Permit the new agency to prohibit or place conditions on mandatory pre-dispute arbitration agreements between consumers and firms such as credit card companies “if doing so is in the public interest and for the protection of consumers.”
• 6) Ensure that any rule adopted by the new agency would new preempt state law “if State law provides greater protection for consumers.”
• 7) Allow state attorneys general would be allowed to bring law suits for violations of new federal rules.
• Allow the new agency to file subpoenas to collect information for the companies they oversee.

The pace of home price declines tracked by the S&P Case-Shiller home-price index slowed for the third straight month in April. But the bloodletting may not be over.

Here’s why: If price declines accelerate for the mid-to-upper end of the housing market, then that could generate enough large declines in values—even among a small segment of the overall housing market—to push the index lower still.

Prices at the mid-to-high end are falling as job loss and the worsening economy have iced demand for higher-priced “move-up” homes. Also, tougher financing conditions have made it harder to get mortgages for “jumbo” loans on more expensive homes, and delinquencies are rising among jumbo borrowers, which could lead to an even greater oversupply of homes.

Independent housing analyst Ivy Zelman notes that such a “double dip” in the index in the second half of 2009 could materialize because the Case-Shiller index is value-weighted, which means that repeat sales of higher priced homes figure have an outsized impact.

The Case-Shiller index for the top 20 cities registered an 18.1% decline year-over-year in April. The markets that have fallen the furthest include Phoenix (35%), Las Vegas (32%) and San Francisco (28%). Denver and Dallas have held up the best, posting just a 5% year-over-year decline.

So far, prices have fallen from their 2006 peak by 33% at the middle of the market, compared to 44% at the low end and 27% at the high end, according to Ms. Zelman.

Mid-to-high end home price declines could generate some mixed signals over the coming months. If prices fall low enough to attract new buyers, that could generate more sales of higher-priced homes that lead to increases in median prices. But those median price gains won’t necessarily mean that housing is out of the woods.

The pace of home price declines tracked by the S&P Case-Shiller home-price index slowed for the third straight month in April. But the bloodletting may not be over.

Here’s why: If price declines accelerate for the mid-to-upper end of the housing market, then that could generate enough large declines in values—even among a small segment of the overall housing market—to push the index lower still.

Prices at the mid-to-high end are falling as job loss and the worsening economy have iced demand for higher-priced “move-up” homes. Also, tougher financing conditions have made it harder to get mortgages for “jumbo” loans on more expensive homes, and delinquencies are rising among jumbo borrowers, which could lead to an even greater oversupply of homes.

Independent housing analyst Ivy Zelman notes that such a “double dip” in the index in the second half of 2009 could materialize because the Case-Shiller index is value-weighted, which means that repeat sales of higher priced homes figure have an outsized impact.

The Case-Shiller index for the top 20 cities registered an 18.1% decline year-over-year in April. The markets that have fallen the furthest include Phoenix (35%), Las Vegas (32%) and San Francisco (28%). Denver and Dallas have held up the best, posting just a 5% year-over-year decline.

So far, prices have fallen from their 2006 peak by 33% at the middle of the market, compared to 44% at the low end and 27% at the high end, according to Ms. Zelman.

Mid-to-high end home price declines could generate some mixed signals over the coming months. If prices fall low enough to attract new buyers, that could generate more sales of higher-priced homes that lead to increases in median prices. But those median price gains won’t necessarily mean that housing is out of the woods.

Unemployment rates in every metropolitan are were higher in May from a year earlier, the fifth consecutive time that has happened, the Labor Department reported.

Almost a third of the metropolitan areas have a jobless rate over 10%, up from just six regions in May 2008. 15 cities have rates over 15%.

Of the 49 metropolitan areas with a 2000 census population of one million or more, Detroit-Warren-Livonia, Mich., reported the highest unemployment rate in May, 14.9%. That area has been hit hard by automobile industry troubles. Riverside-San Bernardino-Ontario, Calif., struggling amid the housing bust, was second worst with a 13% rate. On the East Coast, the Providence, R.I. and Charlotte, N.C. regions were the hardest hit large areas, each with a 12% unemployment rate.

The large areas with the lowest jobless rates in May were Oklahoma City, Okla., and San Antonio, Texas, with rates of 5.7% and 5.8%, respectively.

The following chart is sortable by metro area, state, May 2009 unemployment rate and the change from a year earlier.

Unemployment Rate, by Metro Area

 

Source: Labor Department

The S&P/Case-Shiller home-price index, a closely watched gauge of U.S. home prices, continued to post declines in April.

In the 20-city index, no area experienced year-over-year price gains, the thirteenth straight month that has happened. However, nine cities managed to avoid month-to-month declines, up from just three last month. Dallas, Denver and Cleveland posted increases greater than 1%, while Washington, San Francisco, Boston, Atlanta and Seattle posted moderate rises. Prices in Chicago were flat.

Las Vegas and Phoenix posted the largest monthly and annual declines. Phoenix is down 54% from its peak in June 2006. Charlotte, Chicago, Cleveland, New York, Portland and Seattle posted record annual declines in April.

“It is important to understand that these indices are constructed using non-seasonally adjusted sales prices, and therefore when housing activity perks up seasonally in the spring and summer months, any effect on selling prices would not be adjusted out of these data,” said economist Joshua Shapiro at MFR, Inc. “In fact, in 2008, after dropping by an average of 2.4% per month in the first quarter, the composite 20 city index than registered average month-to-month declines of 0.9% during the prime spring and summer selling season before reaccelerating to post an average 2.2% monthly decline in the final four months of the year. We continue to believe that it is unlikely that we are near a bottom in nationwide home prices.”

• See the full S&P/Case-Shiller report.
• Read full story: Home Prices Drop at Slower Pace

Below, see data from the 20 metro areas Case-Shiller tracks, sortable by name, level, and year-over-year change — just click the column headers to re-sort.

(About the numbers: The Case Shiller indices have a base value of 100 in January 2000. So a current index value of 150 translates to a 50% appreciation rate since January 2000 for a typical home located within the metro market.)

Home Prices, by Metro Area

 

Source: Standard & Poor’s and FiservData