May 4th, 2011 12:36:12 GMT.

ForexLive payrolls contest open for business


Enter your guess for the non-farm payrolls as published by the Bureau of Labor Statistics at 12:30 GMT/8:30 Washington time Friday to the nearest thousand. First one to use a number has ownership of that spot. Duplicate entries will be disqualified. Enter your guess in the comments following this post. Good luck!

Winner receives a coveted ForexLive tee-shirt.


May 4th, 2011 12:24:41 GMT.

EUR/USD tests 1.4900 area again after weaker ADP


Weaker ADP and dovish comments from the Boston Fed’s Rosengren perpetuate the notion that the Fed will stay lower for longer on rates.

IF we’re unable to hold the 1.4900 area this time, we may get another round of profit-taking from entrenched longs, fearful the trend is losing a little of its upward momentum. 1.4750 remains crucial resistance on pullbacks.


May 4th, 2011 12:15:25 GMT.

Fed’s Rosengren: Food/Fuel Infl to Have Only Modest Effect-3


BOSTON (MNI) – The following is the third and final section of text
of the remarks of Boston Federal Reserve Bank President Eric Rosengren
prepared Wednesday for the Massachusetts Chapter of NAIOP, the
Commercial Real Estate Development Association:

Figure 12 shows the U.S. share of world oil consumption (in blue)
ticking down, but also clearly shows (in red) the steady climb in the
share consumed by three of the so-called emergingmarket economies –
China, India, and Brazil. Figure 13 shows the growth in oil consumption
in those three countries, in the upper three lines. Both charts depict
quite strikingly the heightened demand for oil emanating from emerging

Returning to the U.S. and inflation concerns, Figure 14 shows that
the growth rate of employee compensation has generally been declining
over the past two decades. With compensation slowing and productivity
increasing, many firms have been profitable and able to withstand
increases in commodity prices without passing such costs on to final
prices. This fits with the observation that higher food and energy
prices have not tended to have much of an impact on prices in situations
where food and energy are not direct costs of doing business. Figure 15
shows two measures of inflation expectations, plotted alongside oil
price movements. The red line shows what professional forecasters
expected inflation to average over the next 10 years, at various points
in time. Their expectations have declined somewhat over the past 20
years, but what is striking is the relative stability of their inflation
expectations. In addition, there was no significant reaction to the oil
price shock that we experienced in 2008. The chart also shows a second
measure of inflation expectations – the University of Michigan Survey
(the green line), which asks respondents about their expectations for
inflation over the next 5 to 10 years6. Again these expectations are not
very responsive to movements in oil prices, and have remained quite
stable over the past two decades.

It is worth noting that countries can be affected quite differently
by supply shocks. As Figure 16 shows, the importance of food in the
“basket” of goods purchased by consumers can vary greatly by country. In
less developed countries, food is a very significant component of
overall purchases by consumers. In a developed country such as the
United States, food is a much smaller share of overall purchases. Thus
the impact of a food-supply shock on the overall inflation rate and on
other important economic variables such as wages and total imports can
vary widely by country. Given the different impacts of supply shocks, it
is not surprising that monetary policy is likely to react differently to
a supply shock such as food, depending on the unique characteristics of
the particular country.

Figure 17 shows that in the United States, the importance of food
as a component of inflation measures has been declining over time. And,
despite improvements in energy conservation that have lowered the per
capita consumption of oil, higher energy prices have contributed to
recent increases in the importance of energy in the consumer price
index. The fact that food and energy prices have been quite volatile
recently, but remain a relatively small part of the entire basket of
goods, helps to explain why core inflation rates have not been
particularly responsive to food and energy shocks.

Concluding Observations

In conclusion, I recognize that recent supply shocks have caused
pressures on many household budgets, and have led some analysts and
observers to become concerned about potential long-term inflationary
impacts. However, I think the evidence shows that over the past 25 years
most supply shocks have been transitory – and have had no long-lasting
imprint on longer term inflation, or on inflation expectations.

Nonetheless, recent historical trends do not always continue, so it
is important to monitor inflation dynamics very closely to make sure
that this pattern is continuing in the incoming data. In particular, I
will look intently at whether there is any evidence that the
expectations of underlying inflation have changed. To date, expectations
seem quite stable and show no evidence of diverging from the recent
past. I am committed to responding decisively, and as forcefully as
necessary, to ensure that long-term inflation expectations remain stable
and that food and energy price increases are not passing through to
other prices.7

Given the important role of labor costs in a developed,
services-focused economy such as the United States, it is important to
closely monitor trends in labor markets. Currently, wages and salaries
are reflecting heightened unemployment, and show no evidence that
potential inflation concerns are placing upward pressure on wages and

Core inflation rates tend to be a reasonable predictor of inflation
in the intermediate term. Core inflation remains well below my long-run
target for inflation. This gives us flexibility to focus on
accommodative monetary policy doing what it can to promote more rapid
growth in the economy. As Figure 18 illustrates, the percent of the
adult population that is employed now is quite low in relation to recent
history, and has shown only a slight improvement over the course of the

So with significant slack in labor markets, stable inflation
expectations, and core inflation well below our longer run target, there
is currently no reason to slow the economy down with tighter monetary
policy. Until we make more progress on both elements of the Federal
Reserve’s mandate – employment and inflation – the current,
accommodative stance of monetary policy is appropriate. Thank you.


1 My colleague Geoffrey Tootell, Director of Research at the Boston
Fed, has prepared an illuminating public policy brief that investigates
whether commodity price spikes cause long-term inflation. The brief,
which will be available at
http://www.bostonfed.org/economic/ppb/2011/ppb111.htm, examines the
relationship between trend inflation and commodity price increases and
finds that evidence from recent decades supports the notion that
commodity price changes do not affect the long-run inflation rate.
Evidence from earlier decades suggests that effects on inflation
expectations and wages played a key role in whether commodity price
movements altered trend inflation.

2 Readers may be interested in “Oil and the Macroeconomy in a
Changing World,” the proceedings of a 2010 symposium held at the Boston
Fed to explore the interactions between energy prices, growth, and
inflation – the determinants of oil prices and about the effect that oil
prices have on the world economy. The proceedings are available at


3 Even future purchases can be affected, if saving for them is

4 The Fed’s Large-Scale Asset Purchases have partly, but not
completely, substituted for the constraint imposed by the zero lower
bound on policy easing. With all the excess capacity – a reflection of
our inability to be as accommodative as we might have liked, given the
zero bound – it seems unlikely that supply shocks will turn into
increased inflation expectations that will affect wages and non-oil,
non-food prices. 5 Vice Chair Yellen notes that “a key lesson from the
experience of the late 1960s and 1970s is that the stability of
longer-run inflation expectations cannot be taken for granted. At that
time, the Federal Reserve’s monetary policy framework was opaque, its
measures of resource utilization were flawed, and its policy actions
generally followed a stop-start pattern that undermined public
confidence in the Federal Reserve’s commitment to keep inflation under
control. Consequently, longer-term inflation expectations became
unmoored, and nominal wages and prices spiraled upward as workers sought
compensation for past price increases and as firms responded to
accelerating labor costs with further increases in prices. That
wage-price spiral was eventually arrested by the Federal Reserve under
Chairman Paul Volcker, but only at the cost of a severe recession in the
early 1980s. Since then the Federal Reserve has remained determined to
avoid these mistakes and to keep inflation low and stable.”

6 The average annual expected price change they expect over the
next 5 to 10 years

7 See for example the comments on commodity price pressures and
monetary policy by my colleague William Dudley, president of the New
York Federal Reserve Bank and Vice Chair of the Federal Open Market
Committee: “Inflation expectations are well-anchored today and we intend
to keep it that way. A sustained rise in medium-term inflation
expectations would represent a threat to our price stability mandate and
would not be tolerated.”

(3 of 3)

** Market News International **



May 4th, 2011 12:15:18 GMT.

Fed’s Rosengren: Food/Fuel Infl to Have Only Modest Effect -2


BOSTON (MNI) – The following is the second section of the text of
the remarks of Boston Federal Reserve Bank President Eric Rosengren
prepared Wednesday for the Massachusetts Chapter of NAIOP, the
Commercial Real Estate Development Association:

Some softness in measures of consumer confidence suggests that
consumers tend to be less confident about the future when oil prices
rise. If consumers pull back spending as a result of a supply shock, it
has the potential to be a drag on the economy. The Boston Fed’s
statistical modeling suggests that a $20 increase in the price of a
barrel of oil will shave roughly four-tenths of a percentage point off
the rate of economic growth over two years, and cause the unemployment
rate to be roughly two-tenths of a percentage point higher than it would
be absent the oil shock. While this is certainly not enough to
completely stop the recovery, it does imply a slowing down of its pace.

Oil is not the only commodity to experience price increases of
late. A variety of agricultural prices have also increased. For example,
Figure 3 shows the movement of wheat prices over the last decade.
Droughts in Russia, flooding in Australia, and increased demand in
emerging markets have all placed upward pressure on wheat prices.

As with oil prices, higher food prices appear to be responding to
supply and demand features of this market – and these types of price
changes cannot be offset by monetary policy. It goes without saying that
monetary policy cannot alter the supply of oil from volatile parts of
the world, nor weather conditions in countries that are major exporters
of agricultural products. Monetary policy can have a role in insuring
that relative price changes do not alter inflation expectations. Rising
inflation expectations could make it difficult to achieve a moderate and
acceptable inflation rate over the medium term.

Historical Experience with Supply Shocks

Supply shocks are not unique to this period. However, the evidence
shows that the economic impact of supply shocks on inflation has changed
over time – actually quite dramatically. Figure 4 shows the inflation
rate (total inflation and core, which again excludes food and energy)
since 1970. What is striking is the way the behavior of the two series
differed in the 1970 to 1985 period versus the period from 1986 to the
present. The interplay of core and total inflation is very, very
different in the more recent period than it was in the former. I realize
that delving into topics like total and core inflation can seem a bit
abstract. So let me bring in something a bit straightforward – energy
prices and inflation. Figure 5 shows the profound effect that energy
prices had in the 1970s on core inflation. In the 1970s the lines move
up and down together as core inflation increased with energy prices.
That is why my earlier chart shows core and total inflation moving so
closely in that era. But since 1986, dramatic movements in energy prices
have not affected core prices.

My next two figures look at each period separately. Figure 6 shows
that for much of that earlier period, inflation rates were much higher
than they are currently. From 1970 to 1985, inflation was quite volatile
– with total inflation (measured by the all-items Consumer Price Index
or CPI) peaking at almost 15 percent, in 1980. The key observation is
that during this period, increases in core inflation tended to follow
increases in total inflation (which includes food and energy). The oil
and food price increases “pulled” core inflation.

In contrast, Figure 7 shows the total and core inflation rates
since 1986. During this period, inflation has been lower and less
volatile. And unlike in the earlier period, core inflation does not
follow or gravitate to the level of total inflation. Total inflation
jumps up and down as food and energy prices live up to their reputation
for volatility. The spikes are tough on households, to be sure. But
importantly, total inflation eventually gravitates to the core measure
that excludes food and energy. Core inflation stays “moored.”

Figure 8 represents another way to use the available data to
explore this relationship. It too shows that the increases in total
inflation in recent years have generally been temporary. For each
quarter from 1998 to 2010, the figure plots the difference between total
inflation and core inflation at the time, and the total inflation rate
two years later. What it shows is that when there is a supply shock such
that total inflation (including food and energy) exceeds core inflation,
two years later total inflation tends to be lower – when supply shocks
such as oil prices drive up total inflation relative to core, the total
tends to come back down toward the core inflation rate.

Figure 9 performs similar analysis but focuses on the future core
inflation rate, instead of the total. It shows no strong relationship.
When total and core inflation diverge, core inflation tends to stay put.
In other words, in recent years, when something like an oil shock causes
total inflation to diverge from core, there was no consistent
implication for the future core inflation rate. The shock to total
inflation did not become embedded in core inflation.

Why is all this important? If supply shocks tend to have a
transitory impact on headline inflation, and do not pass through to any
meaningful extent into core inflation, then monetary policy need not
respond to the price increases caused by the supply shock. Currently, we
have experienced sharply higher food and energy prices. If the
relationship we document over the last 13 years continues, we should
expect the impact on inflation to be transitory – and that total
inflation will converge back to core inflation, which remains well below
2 percent.

To digress, it is likely the case that supply shocks have become
transitory because of the way in which monetary policy has tended to
respond. So, as long as monetary policy behaves about as it has in
recent years, then there is no reason to expect supply shocks to have
lasting effects.

So is Fed policy behaving as it has since the mid 1980s?
Interestingly, although Fed policy is perceived as exceptionally
accommodative, because of hitting the zero lower bound the federal funds
rate is actually higher – has come down less – than would be expected if
the Fed behaved as it has over the last 25 years. The current level of
the funds rate suggest that we have been less accommodative in recent
years given that interest-rate reductions (policy easing) ran into at
the zero lower bound.4

Why the Different Reaction to Supply Shocks Over Time? But how
confident should we be that the relationship we have experienced over
the past 25 years – little response in medium term inflation rates to
supply shocks – will continue? The answer is rooted in why we are seeing
different reactions to supply shocks – in other words a different
interplay of total and core inflation – now versus in the past.

There are a variety of reasons why medium-term inflation has not
been significantly influenced by short-run supply shocks in recent
years. In my view the reasons include the increased role of services in
the economy, the importance of labor costs in such an economy, the
reduced share of oil consumption relative to GDP, and as I mentioned
earlier the improved conduct of monetary policy versus the 1960s and

Figure 10 shows that the service sector has grown from a little
over 60 percent of private sector employment in 1970 to a little over 80
percent in 2010. As the economy has come to emphasize services versus
manufacturing, it may be that commodities (and thus their prices) have
become somewhat less important to the production of goods and services.
And goods prices are more volatile than services prices, and more likely
to be priced like commodities. Figure 11 shows the per capita
consumption of oil declining in the United States. Conservation measures
by consumers and businesses have made the economy less dependent on oil
than in the 1970s. While oil remains a very important commodity, the
trend towards reducing dependence on oil provides greater insulation
from oil-induced supply shocks.

-more- (2 of 3)

** Market News International **



May 4th, 2011 12:15:16 GMT.

Fed’s Rosengren: Food/Fuel Infl to Have Only Modest Effect


–Until More Progress on Dual Mandate, Accommodative Police Appropriate

BOSTON (MNI) – The following is the text of the remarks of Boston
Federal Reserve Bank President Eric Rosengren prepared Wednesday for the
Massachusetts Chapter of NAIOP, the Commercial Real Estate Development

A Look Inside a Key Economic Debate: How Should Monetary Policy
Respond to Price Increases Driven by Supply Shocks?

I would like to thank David Begelfer and his colleagues at NAIOP
Massachusetts for inviting me to join you today to discuss the economy
and monetary policy.

I am happy that financial markets and the economy have made
significant progress since the depths of the financial crisis, but I am
far less happy that the recovery to date has been so undesirably slow
and anemic. In my reading of economic history this is, unfortunately,
typical of economic downturns that are accompanied by severe financial

The debate I’d like to focus on today is the one over the likely
impact of recent increases in the prices of food and energy, and how
monetary policy should respond. The Fed’s policy stance, as you know,
is currently very accommodative – a stance that I believe is appropriate
given the tentative recovery and still-high unemployment. But with food
and energy prices rising, some observers think the Fed should shift its
stance to less accommodation – slowing economic growth now to ensure we
don’t have undesirably high inflation in the future – even though
current measures of core inflation (that is, inflation omitting volatile
food and energy prices) remain low by historical standards.

As the recovery continues – albeit slowly – several events have
occurred that further complicate the outlook for inflation and real
economic activity. Political upheaval in the Middle East has contributed
to sharply higher oil prices. Severe weather has reduced harvests from
Russia to Australia, causing higher prices for many agricultural
products. And Japan’s tragic earthquake and tsunami caused not only
terrible loss of life, but also disruption to a supply chain that is
increasingly global.

So today I would like to discuss how monetary policy should react
when the economy is buffeted by a series of these so-called “supply
shocks.” I’d like to just highlight my major points before getting into
the data and analysis that underpin my perspective.

First, I want to explain that while I will be making distinctions
in this talk between socalled “core” and overall or total measures of
inflation, we at the Federal Reserve look at all prices, including food
and energy prices, when developing U.S. monetary policy. While we often
use core measures as a guide to where overall inflation is most likely
to go, our goal is to stabilize overall inflation.

Allow me to preview one of my conclusions. Because my analysis
suggests that recent food and oil price increases have their roots in
concerns about wheat harvests in Russia and oil production in Libya and
the like, I do not believe that monetary policy is the appropriate tool
to respond to these disruptions. While many observers see food and
energy prices rising and assume the Fed should tighten policy – raise
the cost of money and credit – to head off inflation, I would suggest
taking a step back and recognizing that tighter U.S. monetary policy
will do nothing to stabilize Libyan oil production, reduce uncertainty
about political stability in the rest of the Middle East, or increase
the wheat harvest in Russia.

In fact, tightening monetary policy solely in response to
contractionary supply shocks would likely make the impact of the shocks
worse for households and businesses. To see why this is so, it is
important to keep in mind how supply shocks affect the economy.1 First,
supply shocks can lead to increases in food and energy prices that slow
economic growth. For example, because a person’s need to drive may not
be very flexible, spending on gas consumes a bigger portion of their
budget. So an oil shock tends to force consumers to reduce their
spending on other goods and services as they absorb higher oil costs.2
Second, while the prices of goods directly affected by the supply
disruption increase, other prices in the marketplace may be unaffected –
at least initially. If the supply shock involves food or energy, this
dynamic causes measures of total inflation to rise, but does not have a
large impact on what economists call core inflation – which excludes the
volatile food and energy sectors. But in the longer-run, the impact of
the supply shock on the prices of other goods will depend importantly on
how inflation expectations respond to the shock. If people expect that
food and energy prices will stabilize – in other words, that the price
shock will be temporary – and do not believe that the central bank will
allow any long-run effect on inflation, then the disruption to total
inflation will likely be temporary and the total inflation rate will
eventually converge with the lower core inflation rate. Since 1986, this
has largely been what happened when we experienced these types of supply
shocks – as I’ll illustrate in a moment with some charts.

Alternatively, if expectations of inflation do rise in response to
the supply shock, then (nominal) wages and salaries across the economy
will be pressured to increase over time to keep pace. If that happens,
the supply shock could affect prices throughout the economy – not just
those that that were part of the initial supply shock. In this case, the
core rate of inflation rises to converge with the higher measure of
total inflation. This was the U.S. experience in the 1970s, for reasons
I’ll discuss in a moment.

We at the Fed need to very closely monitor the data to make sure
that inflation remains contained. And we will. But as I believe I will
demonstrate this morning, the most likely result is that these supply
shocks cause slower growth in the near term while having only a modest
effect on longer-term inflation rates – which has been the U.S.
experience since 1986. Unemployment remains quite elevated, at 8.8
percent, and I anticipate a slower return to full employment than we
would have experienced absent these supply shocks. With the core
inflation rate over the prior year at a little above 1 percent, I
anticipate only a gradual return of core and total inflation rates to
something like our consensus “stable” rate of about 2 percent, over the
medium term.

If the economic data continue to support this outlook then the
current, accommodative stance of monetary policy is appropriate, and can
remain in place and continue to support economic growth – so that we
continue to make progress toward our goals of returning to full
employment and a sustainable long-run inflation rate – the two elements
of the Federal Reserve’s dual mandate from Congress.

The Impact of Recent Supply Shocks

Now that you know my basic take on this key – and current –
economic debate, allow me to flesh out my perspective with the
supporting data and analysis. The full impact of the recent shocks to
supply that I mentioned at the outset will likely emerge over time. But
clearly there have been significant increases in a variety of food and
energy prices. As Figure 1 illustrates, the recent turmoil in the Middle
East has contributed to a significant increase in oil prices, which have
risen to over $100 a barrel. This is well above the average of nearly
$80 a barrel experienced over 2010, but at the same time still well
below the peak of $146 a barrel that occurred in mid July, 2008.

The recent volatility in oil prices, as the chart shows, is quite
striking. Sharp increases have been followed by sharp decreases. This is
one reason we may not want to overreact to price changes – they could be

Figure 2 shows the movements in oil prices – their percent change
from a year earlier, in the top line – relative to the change in
compensation (the lower line), since 2000. Oil prices have risen
recently, but based on the history captured in this chart, one would not
expect much of a response in wages and salaries. This, of course, is one
reason why consumers feel worse off after an oil supply shock. Prices at
gas stations in Massachusetts are now around $4.00 a gallon, yet most
people’s need to drive cars has not changed much if at all. So income
available for buying other goods and services has been squeezed by the
increase in oil prices.3

-more- (1 of 3)

** Market News International **


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