Tag Archives: Kohn

Balance of risks revisited

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“I don’t think that’s fair because I don’t — again, I think I’ve been pretty clear in saying we have an economy in the US that is fundamentally healthy. I think the jobs numbers today showed an economy that is fundamentally healthy. We’ve got very strong demand outside of the US. We’ve got exports growing, employment strong, inflation is contained. There are some risks, and I’m focused on those risks. That’s my job, and the biggest risk we have is housing and housing is a big drag on our economy and still, we’re going through a turbulent time in the capital markets. That’s a risk so we’re focused on the risks, but let’s not forget that we have a healthy economy.”
-Paulson

Two days before the Fed meeting Paulson is making the case that the economy is strong and he says the risks are *his job* and not the Fed’s job. Also, he said we have a strong $ policy after being silent on that for several months or more. No cut in the fed funds rate Tuesday would support his statements.
This article is the consensus view that’s pricing in a 25 cut on Tuesday.

US Fed seems poised to lower interest rates again at its meeting Tuesday

By JEANNINE AVERSA updated 6:46 a.m. ET, Sun., Dec. 9, 2007 WASHINGTON

A lot has changed since the U.S. Federal Reserve hinted two months ago that it might be finished cutting interest rates for a while. Credit has become harder to obtain,

Not true per se. Some spreads have widened, but absolute levels for mortgages, for example, are lower, and good credits are getting LIBOR minus funding in the bond markets. Yes, funding is more difficult and more expensive for ‘Wall Street’, but ‘Main Street’ borrowing needs are being met at reasonable terms.

Wall Street has convulsed again,

Stocks are generally up recently, and up for the year.

and the housing slump has intensified.

Maybe modestly, with some indicators flat to higher. Prices down for the quarter but YoY prices still higher as reported by the two broader measures.

As a result, policymakers at the central bank now appear to have changed their minds about the need to drop interest rates again.

Yes, that’s the appearance as seen by the financial press. (I haven’t read it that way.)

The Fed had cut rates twice this year and officials suggested in October that might be enough to help the economy survive the credit and housing stress.

And immediately afterward in several speeches as fed officials attempted unsuccessfully to take the cut out of Jan FF futures.

Then the problems snowballed,

There were no ‘snowballing problems’ only some spread widening even as absolute rates were generally lower and LIBOR rates going up over the next ‘turn’ at year end.

leading Fed Chairman Ben Bernanke to signal that one more cut might be needed.

Again, that’s how the financial press heard him. They never even reported firm the firm talk on inflation risks becoming elevated. The attitude is anything the fed says about inflation is just talk they have to say and that they don’t mean and not worth reporting.

Analysts expect the Fed to trim its key rate, now at 4.5 percent, by one-quarter of a percentage point at the meeting Tuesday. Some even speculate about the possibility of a half-point cut.

Yes, that’s the consensus.

Banks, financial companies and other investors who made loans to people with spotty credit

and fraudulent applications

or put money into securities backed by those subprime mortgages have lost billions of dollars (euros). Investors in the U.S. and abroad have grown more wary of buying new debt, thereby aggravating the credit crunch.

Yes. But again, ‘Main Street’ still remains well funded at reasonable terms.

All this has added to the turmoil on Wall Street, and Bernanke and other Fed officials say they must take it into account when deciding their next move.

Yes. And the economic numbers have come in strong enough for markets to take up to 35 bp out of the Eurodollars and nearly eliminate pricing in a 50 cut in the last few trading days.

But does lowering rates mean the Fed essentially is bailing out investors or encouraging more sloppy decision-making? In other words, what exactly is the Fed’s job?

Bernanke and other Fed officials say it is to make policy that keeps the economy growing and inflation low, a stable climate that benefits individuals, businesses and investors. The Fed also has a responsibility to ensure the banking system is sound and financial markets run smoothly.

Yes, exactly.

“There is a link between Wall Street and Main Street. The Fed is taking the right actions, but they should be careful,” said Victor Li, an economics professor at the Villanova School of Business.

That implies the question is whether the ‘market functioning’ risk is higher than the inflation risk, which is what the fed was addressing with the last two cuts.

This time ‘market functioning’ risk rhetoric has taken a back seat to ‘economic weakness’ risk rhetoric.
One more story of note:

Fed’s Inflation Measure Says Rates Can’t Fall as Traders Expect

By Liz Capo McCormick and Sandra Hernandez

Dec. 10 (Bloomberg) — The key to whether the Federal Reserve continues to cut interest rates after this week may hang on the wall behind economist Brian Sack’s desk in Washington.

Sack, head of monetary and financial market analysis at the Fed in 2003 and 2004, uses a chart that plots forward rates measuring investor expectations for inflation in five years. The gauge is so accurate that Sack and his colleagues persuaded the central bank to use it to help set policy. The chart is autographed by former Fed Chairman Alan Greenspan.

Right now, it shows current Fed Chairman Ben S. Bernanke may have less room to lower borrowing costs than investors in Treasuries anticipate, potentially setting bondholders up for a fall. The expected inflation rate, which Sack says replicates what Fed officials use, reached 2.91 percent last week, the highest since 2004, when the central bank began the first of an unprecedented 17 rate increases. The measure was at 2.79 percent on Nov. 1.

“One of the defining features of the Bernanke Fed to date is its emphasis on measures of longer-term inflation expectations,” said Sack, whose partners at Macroeconomic Advisors include former Fed Governor Laurence Meyer. “The Fed is willing to tolerate short-run movements in inflation, but only as long as those movements don’t appear to be dislodging long-run inflation expectations.”

Any evidence that accelerating inflation is becoming entrenched may heighten the Fed’s debate as policy makers consider cutting rates to keep the worst housing market in 16 years and mounting losses in securities related to subprime mortgages from tipping the economy into recession.

`Inflationary Pressures’

The gauge used by Sack, dubbed the five-year five-year forward breakeven inflation rate, suggests bets on lower Fed funds rates may be too bold.

Sack and other analysts derive the measure of inflation expectations from yields on five- and 10-year Treasury Inflation Protected Securities and Treasuries.

Five-year TIPS yield 2.15 percentage points less than five- year notes. This so-called breakeven rate is the average inflation rate investors expect over the next five years. The forward rate projects what the breakeven will be in five years, smoothing blips in inflation expectations from swings in oil prices or other events.

The five-year TIPS’ breakeven rate rose to a six-month high of 2.47 percent Nov. 27, the week after oil climbed to a record $99.29 a barrel, from about 1.9 percent on Aug. 31. As crude fell to a six-week low on Dec. 6, the breakeven rate declined and Sack’s measure dropped to 2.85 percent.

Bernanke mentioned the forward rate in a 2004 speech. Simon Kwan, a vice president at the San Francisco Fed, singled out the measure in a 2005 report, saying it “captures the market’s assessment of how well the Federal Reserve promotes price stability in the long run.”

Gaining Steam

Most analysts expect the economy to gain steam through 2008. Growth will slow to 1.5 percent this quarter from a 4.9 percent annual rate last quarter, and rise to 2.6 percent by 2009, according to the median forecast in a Bloomberg survey from Nov. 1 to Nov. 8.

The dollar, which is poised to depreciate against the euro for a second straight year, is also fueling inflation concerns. The currency’s drop and oil’s climb pushed import prices up 1.8 percent in October, the most in 17 months.

The government may say this week that consumer prices, which set TIPS rates, increased 4.1 percent last month from this year’s low of 2 percent in August and the biggest rise since July 2006, according to the median estimate of 19 economists. Food, imports and energy prices may raise inflation expectations, Bernanke said in a Nov. 30 speech in Charlotte, North Carolina.

To contact the reporter on this story:
Liz Capo McCormick in New York at Emccormick7@bloomberg.net ;
Sandra Hernandez in New York at shernandez4@bloomberg.net .

Last Updated: December 9, 2007 10:58 EST

‘The numbers’ could be used to support most anything the fed might do.The inflation numbers are both more than strong enough to support a hike, with CPI due to be reported north of 4.1 on December 14, and core moving up out of ‘comfort zones’ as well, not to mention ‘prices paid’ surveys higher and higher import and export with the weak $. Add to that the recent strong economic data – employment, CEO survey, and even car sales up a tad, etc. etc.

Inflation can also be dismissed as ‘only food and energy’ and due to fall based on (misreading) future prices as predictors of where prices will be, leaving the door open to cuts due to both ‘market functioning’ as justified by FF/LIBOR spreads at year end and the possibility of Wall Street spilling over to Main Street by ‘forward looking models’.

I can see the fed meeting going around in circles and it will come down to whether they care about inflation or not. Most of the financial community thinks they don’t, and they may be correct.

I think they do care, and care a lot, but that fear of ‘market functioning’ was severe enough to temporarily overcome their perceived imperative to sustain and environment of low inflation. And at the October meeting, the fear of some members has subsided enough to report a dissenting vote, along with half the regional banks voting against a cut.

I do think that if the fed cuts 25 it will be because they are afraid of what happens if they don’t as markets are already pricing in a 25 cut, even though this is what happened October 31, and Fisher said they wouldn’t price in a cut for that reason.

The Balance of Risks

So what would they anticipate if they don’t cut FF? The $ up, commodities down, stocks down, and credit spreads widening.

Is that risk less acceptable than the risk of promoting inflation and risking the elevation of inflation expectations if they do cut 25?

Then, there is the ‘compromise’ of cutting the discount rate and removing the stigma to address year end liquidity and ‘market functioning’ in general, with and/or without cutting the fed funds rate. The anticipated results would be a muted stock market reaction as FF/LIBOR spreads narrow, and hopefully, other credit spreads also narrow.

And if they cut the discount rate and don’t cut the FF rate, the $ will still be expected to go up and commodities down. And, with liquidity improved, stocks may be expected to do better as well.

But even though Kohn discussed this in his speech and others touched on the ‘liquidity versus the macro economy’ as well, there is no way to know how much consideration it may be given.

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Q&A with Kohn

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Kathleen Stephansen from Credit Suisse:
Just thank you very much for this very interesting speech. Just a question: You alluded to the discount rate and the stigma that it still carries. Would you think that if there was no spread between the discount rate and the Fed funds rate, whether that stigma would disappear?

Kohn from the fed:
I think if there were no spread, the economic incentives might overcome the stigma. I’m not sure that the stigma would entirely disappear.

Agreed.

But I think part of what we’re seeing — if I can sort of reframe your question — about the lack of use of the discount window is partly economic and partly non-economic or partly about the 50 basis points, but partly about the stigma. And obviously, if we take the 50 basis points away and you can simply borrow at the federal funds rate, in effect I think the funding market would come all into the Federal Reserve. I mean, everyone would be borrowing a lot, including people who don’t — it’s a very — it would be a very difficult thing to do.

Perhaps true, but not a ‘bad’ thing where the fed would be ‘broker of last resort’.

The question is, what is the further purpose of not doing it that way? What is gained by banks settling clearing residuals with each other rather than with the fed?

Net lending from the fed would be unchanged, as banks strive to minimize reserve balances in either case.

Real resources would be saved, as banks would not need to spend the time and effort trying to trade with each other.

The NY fed would have full control over the fed funds rate as it could keep the system modestly ‘net borrowed’ with open market operations as it did pre 2003.

The only possible value of the current arrangement would be if the employed market forces as a discipline on bank funding. But it doesn’t, so there is no advantage for the current set up that I can see.

There are people who don’t borrow at the federal funds rate, right — smaller, medium-sized banks. And if they saw this window, they would come in and borrow — basically, we would be giving them funds at a subsidized rate that people don’t ordinarily have access at the funds rate.

Point? Why should money center banks have access to cheaper funds than regional member banks? All carry the same deposit insurance, and smaller banks have higher percentages of insured deposits.

Doesn’t the fed desire the fed funds rate to be the universal cost of bank funds? If not, that can be addressed in other ways.

And we would be creating, I think, problems for the open markets, because they would have to anticipate how many reserves are going to be supplied through the discount window, which would be very hard to anticipate, and then drain those through open-market operations.

No, the NY fed would instead find its job far easier. Just keep banks net borrowed in any quantity. And if they over do it with excessive liquidity drains, it will only show up as increased window borrowings, not as a deviation of the fed funds rate from the target rate.

That’s not to say that circumstances might not dictate at some point that we do something more with that penalty. I don’t want to take that off the table. I think it’s fair to say — as I kind of hinted at in my little section on liquidity — that we’re looking at lots of different options about how to supply liquidity to the market. But I think we need to recognize that the one you came up with has some costs and some difficulties associated with it.

I see a reduction in costs and a reduction in the difficulties surrounding current policy.

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Second Look at Kohn Speech

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‘People can misinterpret almost anything so that it coincides with
views they already hold. They take from art what they already
believe.’ -SKubrick

Went through Kohn’s speech again and still don’t see it the way the markets do. Am I missing something?

Financial Markets and Central Banking

I thought it might be useful to start this session with a few thoughts on some of the issues facing central banks as they deal with the consequences of the recent turbulence in financial markets.1 This list is not comprehensive: I have concentrated on the issues associated with our roles as monetary policy makers and providers of liquidity–and even in that category I cannot address all the issues in the short time allotted.Like every other period of financial turbulence, this one has been marked by considerable uncertainty. Central banks, other authorities, and private-market participants must make decisions based on analyses made with incomplete information and understanding. The repricing of assets is centered on relatively new instruments with limited histories–especially under conditions of stress; many of them are complex and have reacted to changing circumstances in unanticipated ways; and those newer instruments have been held by a variety of investors and intermediaries and traded in increasingly integrated global markets, thereby complicating the difficulty of seeing where risk is coming to rest.Operating under this degree of uncertainty has many consequences. One is that the rules and criteria for taking particular actions seem a lot clearer in textbooks or to many commentators than they are to decision makers. For example, the extent to which institutions are facing liquidity constraints as opposed to capital constraints,

Yes, he recognizes the difference. Lending is not constrained by capital.

or the moral hazard consequences of policy actions, are inherently ambiguous in real time. Another consequence of operating under a high degree of uncertainty is that, more than usually, the potential actions the Federal Reserve discusses have the character of “buying insurance” or managing risk–that is, weighing the possibility of especially adverse outcomes.

Inflation risk which they believe hurts long term optimal employment and growth versus systemic risk which they have called ‘market functioning’ risk.This is some kind of unknown catastrophic shutdown of the real economy due to dependence of the real economy on the functioning of the financial sectors. The risk is both nebulous and outside of mainstream models, hence the radically elevated uncertainty that led to the last two cuts as ‘insurance’ against this ‘market functioning’ risk.From the statement after the October 31 meeting, the inflation risk and the market functioning risk were ‘balanced’. This means the elevated market functioning risk was balanced by the elevated inflation risk.

The nature of financial market upsets is that they substantially increase the risk of such especially adverse outcomes while possibly having limited effects on the most likely path for the economy.

This refers back to the ‘neutrality of money’ theorem which states that in the long run the economy is supply side constrained and monetary policy is neutral for long term grown and employment, provided the fed keeps inflation expectations ‘well contained’. If expectations are allowed to become elevated, they believe the real losses are far higher than any short term real losses due to a slowdown or recession.

Moral Hazard

Central banks seek to promote financial stability while avoiding the creation of moral hazard. People should bear the consequences of their decisions about lending, borrowing, and managing their portfolios, both when those decisions turn out to be wise and when they turn out to be ill advised.

‘People’ here for the most part means shareholders and owners. That is the source of the ‘market discipline’ that regulates the risk companies and individuals take.

At the same time, however, in my view, when the decisions do go poorly, innocent bystanders should not have to bear the cost.

In general, I think those dual objectives–promoting financial stability and avoiding the creation of moral hazard–are best reconciled by central banks’ focusing on the macroeconomic objectives of price stability and maximum employment.

That is his answer to moral hazard. And he believes that price stability is a necessary condition for optimal long term growth and employment, which is the current ‘mainstream’ economic thought as supported by all of the world’s central bankers and major universities.

This is a direct statement as to the importance of not letting inflation expectations elevate.

Asset prices will eventually find levels consistent with the economy producing at its potential, consumer prices remaining stable, and interest rates reflecting productivity and thrift.

Continuation of the neutrality of money idea – markets will adjust in the long run to the economy’s optimal output and employment, as above.

Such a strategy would not forestall the correction of asset prices that are out of line with fundamentals or prevent investors from sustaining significant losses. Losses were evident early in this decade in the case of many high-tech stocks, and they are in store for houses purchased at unsustainable prices and for mortgages made on the assumption that house prices would rise indefinitely.

With this strategy – “central banks’ focusing on the macroeconomic objectives of price stability and maximum employment” – shareholders and owners will take the losses, not the government.

To be sure, lowering interest rates to keep the economy on an even keel when adverse financial market developments occur will reduce the penalty incurred by some people who exercised poor judgment. But these people are still bearing the costs of their decisions and we should not hold the economy hostage to teach a small segment of the
population a lesson.

This is justifying the previous cuts. He is saying the fed cuts were in line with its macro objectives. This is moving a bit into the ‘reinventing monetary policy’ realm, as above, as the systemic risks they fear are not in their models nor in mainstream considerations.

Additionally, there is no identified ‘channel’ for the rate cuts to alter ‘market functioning’ apart from the ‘psychological’ considerations, while the fed identifies several ‘channels’ that connect rate cuts to higher inflation.

That’s where all the talk of being ‘quick to take the cuts back’ comes from several fed participants.

The design of policies to achieve medium-term macroeconomic stability can affect the incentives for future risk-taking. To minimize moral hazard, central banks should operate as much as possible through general instruments not aimed at individual institutions. Open market operations fit this description,

Correctly affirming open market operations are not ‘bailouts’ but not going as far as to explain how the merely ‘offset operation factors’. Probably not enough time to get all that in.

but so, too, can the discount window when it is structured to make credit available only to clearly solvent institutions in support of market functioning.

This reads to me like a prelude to a discount cut and removal of the ‘stigma’ as we recommended last week. The first step is to recognize that it’s operationally in no way a bail out for weak or insolvent banks. Nor does it help them economically in any way but only aids market functioning.

The Federal Reserve’s reduction of the discount rate penalty by 50 basis points in August followed this model. It was intended not to help particular institutions but rather to open up a source of liquidity to the financial system to complement open market operations, which deal with a more limited set of counter parties and collateral.

As above.

The Effects of Financial Markets on the Real Economy Related developments in housing and mortgage markets are a root cause of the financial market turbulence. Expectations of ever-rising house prices along with increasingly lax lending standards, especially on subprime mortgages, created an unsustainable dynamic, which is now reversing.

He recognizes it is indeed reversing.

In that reversal, loss and fear of loss on mortgage credit have impaired the availability of new mortgage loans, which in turn has reduced the demand for housing and put downward pressures on house prices, which have further damped desires to lend. We are following this trajectory closely,

Yes, and for quite a while. Note the word ‘trajectory’ as a downward path was built into the October 31 statement.

but key questions for central banks, including the Federal Reserve, are, What is happening to credit for other uses, and how much restraint are financial market developments likely to exert on demands outside the housing sector?

looking for ‘spillover.’

Some broader repricing of risk is not surprising or unwelcome in the wake of unusually thin rewards for risk taking in several types of credit over recent years. And such a repricing in the form of wider spreads and tighter credit standards at banks and other lenders would make some types of credit more expensive and discourage some spending, developments that would require offsetting policy actions, other things being equal. Some restraint on demand from this process was a factor I took into account when I considered the economic outlook and the appropriate policy responses over the past few months.

They already have forecast some ‘restraint on demand’.

An important issue now is whether concerns about losses on mortgages and some other instruments are inducing much greater restraint and thus constricting the flow of credit to a broad range of borrowers by more than seemed in train a month or two ago.

Right, have things gotten worse since October 31?

In general, nonfinancial businesses have been in very good financial condition; outside of variable-rate mortgages, households are meeting their obligations with, to date, only a little increase in delinquency rates, which generally remain at low levels. Consequently, we might expect a moderate adjustment in the availability of credit to these key spending sectors. However, the increased turbulence of recent weeks partly reversed some of the improvement in market functioning over the late part of September and in October. Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses.

There is a possibility of turbulence resulting in further tightening of financial conditions. This is not stated as a certainty.

Heightened concerns about larger losses at financial institutions now reflected in various markets have depressed equity prices and could induce more intermediaries to adopt a more defensive posture in granting credit, not only for house purchases, but for other uses a well.

Again, ‘could’ be a source of reduced demand. Again not a certainty.

Liquidity Provision and Bank Funding Markets Central banks have been confronting several issues in the provision of liquidity and bank funding. When the turbulence deepened in early August, demands for liquidity and reserves pushed overnight rates in interbank markets above monetary policy targets. The aggressive provision of reserves by a number of central banks met those demands, and rates returned to targeted levels. In the United States, strong bids by foreign banks in the dollar-funding markets early in the day have complicated our management of this rate.

Note that this is Euro banks that have been bidding up LIBOR.

And demands for reserves have been more variable and less flexible in an environment of heightened uncertainty, thereby adding to volatility.

This is a weakness in the NY fed’s ‘toolbox’ that he knows about but doesn’t want to directly criticize. Instead he offers remedies.

In addition, the Federal Reserve is limited in its ability to restrict the actual federal funds rate within a narrow band because we cannot, by law, pay interest on reserves for another four years.

Supporting the measure now before congress to allow the fed to pay interest on reserves. This would assist the NY fed in keeping the fed funds rate at the target set by the FOMC.

At the same time, the term interbank funding markets have remained unsettled. This is evident in the much wider spread between term funding rates–like libor–and the expected path of the federal funds rate. This is not solely a dollar-funding phenomenon–it is being experienced in euro and sterling markets to different degrees. Many loans are priced off of these term funding rates, and the wider spreads are one development we have factored into our easing actions.

Defending past easings on the notion that even though fed funds are lower, to many the cost of funds is based on LIBOR which hasn’t gone down as much as the fed funds rate.

Moreover, the behavior of these rates is symptomatic of caution among key marketmakers about taking and funding positions, and this is probably impeding the reestablishment of broader market trading liquidity.

The fed funds/LIBOR spread is part of the liquidity problem.

Conditions in term markets have deteriorated some in recent weeks. The deterioration partly reflects portfolio adjustments for the publication of year-end balance sheets. Our announcement on Monday of term open market operations was designed to alleviate some of the concerns about year-end pressures.

Yes, much of the spread is not a year end issue.

The underlying causes of the persistence of relatively wide-term funding spreads are not yet clear. Several factors probably have been contributing. One may be potential counterparty risk while the ultimate size and location of credit losses on subprime mortgages and other lending are yet to be determined. Another probably is balance sheet risk or capital risk–that is, caution about retaining greater control over the size of balance sheets and capital ratios given uncertainty about the ultimate demands for bank credit to meet liquidity backstop and other obligations. Favoring overnight or very short-term loans to other depositories and limiting term loans give banks the flexibility to reduce one type of asset if others grow or to reduce the entire size of the balance sheet to maintain capital leverage ratios if losses unexpectedly subtract from capital. Finally, banks may be worried about access to liquidity in turbulent markets. Such a concern would lead to increased demands and reduced supplies of term funding, which would put upward pressure on rates.

This last concern is one that central banks should be able to address. The Federal Reserve attempted to deal with it when, as I already noted, we reduced the penalty for discount window borrowing 50 basis points in August and made term loans available.

That was a few days after we suggested it.

The success of such a program lies not in loans extended but rather in the extent to which the existence of this facility helps reassure market participants. In that regard, I think we had some success, at least for a time.

Yes, kept some of a lid on FF/LIBOR of around 50 bp plus the ‘stigma’ explained below.

But the usefulness of the discount window as a source of liquidity has been limited in part by banks’ fears that their borrowing might be mistaken for accessing emergency loans for troubled institutions. This “stigma” problem is not peculiar to the United States, and central banks, including the Federal Reserve, need to give some thought to how all their liquidity facilities can remain effective when financial markets are under stress.

A prelude to removing the ‘stigma’ as we also suggested a few days ago.

Conclusion

In response to developments in financial markets, the Federal Reserve has adjusted the stance of monetary policy and the parameters of how we supply liquidity to banks and the financial markets.

In this ‘conclusion’, he turns attention away to *how* they supply liquidity.

These adjustments have been designed to foster price stability and maximum sustainable growth and to restore better functioning of financial markets in support of these economic objectives. My discussion today was intended to highlight some of the issues we will be looking at in financial markets as we weigh the necessity of future actions.

Weigh the balance of risks, and how to address them.

We will need to assess the implications of these developments, along with the vast array of incoming information on economic activity and prices, for the future path of the U.S. economy. As the Federal Open Market Committee noted at its last meeting, uncertainties about the economic outlook are unusually high right now. In my view, these uncertainties require flexible and pragmatic policymaking–nimble is the adjective I used a few weeks ago. In the conduct of monetary policy, as Chairman Bernanke has emphasized, we will act as needed to foster both price stability and full employment.

To me, this speech adds up to a discount rate cut and removal of the stigma to foster liquidity and market functioning.

Price stability means no FF cut – the 75 bp ‘insurance’ has already been carried what they see as a high premium as inflation risks have elevated substantially since October 31, and CPI will likely be going through 4% year over year a few days after the meeting.

Full employment also means price stability, as price stability is a necessary condition for max long term employment.

Comments welcome – please send to others for their comments as well.

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