Fed official warns of higher interest bill for Uncle Sam

NEW YORK (CNNMoney) -- The Federal Reserve takes a lot of heat from critics for keeping interest rates low. But there's an upside that most people overlook: Low interest rates save the government money.

Speaking at a conference on monetary policy Friday, New York Fed President William Dudley stressed how lower rates reduce the interest that the federal government pays on the national debt.

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In addition, the Fed's policies have also led to larger payoffs for the U.S. government. By making huge asset purchases over the last couple of years in order to keep rates down, the Fed is also earning interest on those investments. That money gets returned to the Treasury. Last year, the Fed sent about $77 billion to the Treasury, more than double what it was earning before the financial crisis.

"The interest bill on the growing federal debt burden has been temporarily restrained by the low level of interest rates and high level of remittances from the Federal Reserve to the Treasury," Dudley said at the U.S. Monetary Policy Forum presented by the University of Chicago Booth School of Business on Friday.

The event is essentially a meeting of minds between Federal Reserve officials, members of foreign central banks and economists from some of the world's largest banks and top universities.

Dudley pointed out that the Fed determines monetary policy based on economic activity -- not the government's debt bill.
Why the Federal Reserve can't fix housing

That said, it would behoove fiscal policymakers (meaning Congress and the president) to think ahead to rosier days, when eventually, tighter monetary policy will raise the government's interest bill.

That's exactly why lawmakers need to come up with a credible plan for the nation's debt now, he said.

"The United States faces substantial fiscal challenges in the years ahead," Dudley said in prepared remarks. "In one important respect -- net interest expense -- these challenges may be more daunting that fully appreciated currently."

Dudley also recommended the U.S. focus on increasing exports -- one of Obama's chief goals -- as a means of rebalancing its trade gap. When imports grow faster than exports, it subtracts from economic growth.

He also urged countries that have large trade surpluses -- like China -- to "reorient their economies over time toward increasing domestic demand." To top of page
First Published: February 24, 2012: 2:30 PM ET

New York Fed President William Dudley

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Jobless Claims in U.S. Fall to Four-Year Low

Job seekers at a federal government job fair at the National Building Museum in Washington. Photographer: Xinhua/ZUMApress.com

Claims for jobless benefits unexpectedly dropped last week to the lowest level in four years, showing the U.S. job market is on the mend.

Applications (INJCJC) for unemployment insurance payments decreased 13,000 in the week ended Feb. 11 to 348,000, less than the lowest forecast of economists surveyed by Bloomberg News and the fewest since March 2008, Labor Department figures showed today. The median survey estimate projected an increase to 365,000.

The slowdown in dismissals coincides with a pickup in hiring and a drop in unemployment that’s helping repair a labor market still recovering from the 18-month recession that ended in June 2009. More job gains are needed to boost household spending, the biggest part of the world’s largest economy.

“It’s clearly reflecting a rapidly improving labor market, signaling further declines in the jobless rate,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “It’s good news for consumers, meaning stronger income growth and likely rising confidence that will support spending.”

Estimates for first-time claims ranged from 350,000 to 380,000 in the Bloomberg survey of 45 economists. The Labor Department revised the prior week’s reading up to 361,000 from an initially reported 358,000.

Wholesale prices rose less than forecast in January as food and energy costs dropped, a sign inflation pressures may remain subdued, another report from the Labor Department showed today.
Wholesale Prices

The producer price index rose 0.1 percent following a 0.1 percent decrease the prior month. Economists projected a 0.4 percent gain, according to the survey median. The core measure excluding volatile food and energy rose 0.4 percent, more than projected, led by a surge in drug prices.

The number of people continuing to collect jobless benefits dropped by 100,000 in the week ended Feb. 4 to 3.43 million, the fewest since August 2008. The continuing claims figure does not include the number of workers receiving extended benefits under federal programs.

Builders broke ground on more homes than forecast in January, helped by warmer weather and adding to signs the residential real-estate market is stabilizing, data from the Commerce Department also showed today.
More Starts

Starts rose 1.5 percent to a 699,000 annual rate from December’s 689,000 pace that was stronger than previously reported. The median estimate in a Bloomberg survey called for a rise to 675,000. Building permits, a proxy for future construction, also climbed.

Stock-index futures trimmed earlier losses after the reports. The contract on the Standard & Poor’s 500 Index maturing in March fell 0.1 percent to 1,340.3 at 8:47 a.m. in New York as euro area’s leaders remained divided over a bailout for Greece and Moody’s Investors Service reviewed global banks.

Those who’ve used up their traditional benefits and are now collecting emergency and extended payments decreased by about 22,800 to 3.48 million in the week ended Jan. 28.

The unemployment rate among people eligible for benefits fell to 2.7 percent in the week ended Feb. 4 from 2.8 percent, today’s report showed. Forty-four states and territories reported a decrease in claims, while nine showed an increase.

The figures follow a report earlier this month that showed improvement in the labor market. Employers added 243,000 jobs in January, the most since April, and the unemployment rate dropped to a three-year low of 8.3 percent, according to the Labor Department.
Firing, Hiring

Initial jobless claims reflect weekly firings and tend to fall as job growth -- measured by the monthly non-farm payrolls report -- accelerates.

The drop in joblessness over the last few months stems in part from fewer workers in the labor force, according to some Federal Reserve officials.

“A few participants noted that the recent decline in the unemployment rate reflected declining labor force participation in large part, and judged that the decline in the participation rate was likely to be reversed, at least to some extent, as the recovery continues and labor demand picks up,” according to minutes of the Federal Open Market Committee meeting Jan. 24-25 released yesterday in Washington.

Increased demand is prompting some firms to boost their payrolls. “Employee levels rose 5 percent as we continue to hire trainees to handle our 2012 forecasted volumes,” James Squires, chief financial officer for Norfolk Southern Corp. (NSC), the second-biggest railroad company in the eastern U.S., said on a Feb. 14 conference call.

To contact the reporters on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net; Robert Willis in Washington at bwillis@bloomberg.net