Author Archives: WARREN MOSLER

The upcoming fiscal policy changes

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Another possibility is the Fed doesn’t want to cut rates due to inflation risks, and might see a tax cut as sufficient potential
support for demand to allow them to not cut rates and instead address the inflation issue.

This would be based on the mainstream notion (not mine) that monetary policy is for inflation, while fiscal may function to shift demand from one period to another, depending on the degree of ‘Ricardian Equivalence.’ (The mainstream presumption that agents won’t spend extra income from a tax cut as they ‘know’ there will need to be a tax hike later to keep the budget balanced.) The mainstream (again, not me) would also be concerned that the higher govt. deficit would somehow ‘crowd out’ private borrowing. Nonetheless, the Fed does have reasonably strong empirical evidence for them to believe tax cuts do support demand in the short run.

The Upcoming Fiscal Policy Changes

by NewstraderFX

(Forex Factory) There’s a growing consensus among economists that changes in Monetary policy from the Fed will not be able to do enough by themselves to prevent the economy from going into a serious downturn and that a stimulus from a change in Fiscal policy will be required. The fiscal stimulus in this case will probably take the form of a temporary tax cut.

It’s very likely that the current meetings of the Presidents Working Group on Financial markets (a.k.a. the Plunge Protection Team) have been at least in part for the purpose of discussing the ways and means of how they will work and that the actual cuts themselves will be announced during the State of the Union address. It’s also very likely that momentum for this is going to be building in market participants and that just as with a change in monetary policy, the markets themselves will trade according to the ultimate outcome of whatever happens from a fiscal perspective.

Former Clinton Treasury Secretary Lawrence Summers has been talking about this since November. In his opinion, the economy requires between 50 and 75 $Billion in temporary tax cuts. Martin Feldstein of the NBER is also suggesting that due to entrenched problems in the consumer and banking sectors, monetary policy changes will not have the same “traction” and that “some kind of fiscal stimulus” is now required. There’s a precedent here as well: Bush made a temporary tax cut during the 2001 recession so it seems fairly certain he will want to use the same tactic again. However, the implementation of a fiscal policy change will likely be more difficult from a political perspective because things are very different this time around. Back in 2001, Congress was under Republican control so passing the tax cut was relatively easy. Now that the Democrats have control of the Hill, the actual passage could be far more difficult.

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Re: Fannie/Freddie risk

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All that matters is their ability to keep buying new paper or, if they can’t, whether someone else steps in to buy it. That helps sustain aggregate demand.

The rest is just rearranging of financial assets.

On Jan 6, 2008 1:29 PM, Russell Huntley <rgnh@optonline.net> wrote:
>
>
>
> The Baltimore Sun is asking What will happen if Fannie and Freddie go bust?
>
> In a recent Securities and Exchange Commission filing, Fannie noted that it
> backs $2.6 trillion worth of single-family home loans. Underneath this pile
> of debt, the company has only $42 billion of capital. If the value of
> mortgages backing Fannie’s debt falls a few percentage points, the company’s
> capital could be wiped out. And because of the implicit government guarantee
> backing Fannie’s debt, American taxpayers would be on the hook for whatever
> debt Fannie couldn’t cover.
>
> Consider Fannie’s exposure to high-risk loans: about $300 billion of
> stated-income “liar loans,” $200 billion of interest-only mortgages, $120
> billion of subprime mortgages and $330 billion of high loan-to-value
> mortgages.
>
> Some of these high-risk loans fall into multiple categories and shouldn’t be
> double-counted, but you get the picture: Fannie has significant exposure to
> high-risk loans and only a small capital cushion to protect itself.
>
> Freddie Mac has a few hundred billion dollars of high-risk loans in its $2.1
> trillion book of mortgages. And Freddie’s capital cushion is a meager $40
> billion.
>
>

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The subprime mess

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On Jan 5, 2008 9:40 PM, Steve Martyak wrote:
> http://www.autodogmatic.com/index.php/sst/2007/02/02/subprime_credit_crunch_could_trigger_col
>
>
> also….
>
> 9/4/2006
> Cover of Business Week: How Toxic Is Your Mortgage? :.
>
> The option ARM is “like the neutron bomb,” says George McCarthy, a housing
> economist at New York’s Ford Foundation. “It’s going to kill all the people
> but leave the houses standing.”
>
> Some people saw it all coming….
>

The subprime setback actually hit about 18 months ago. Investors stopped funding new loans, and would be buyers were were no longer able to buy, thereby reducing demand. Housing fell and has been down for a long time. There are signs it bottomed October/November but maybe not.

I wrote about it then as well, and have been forecasting the slowdown since I noted the fed’s financial obligations ratio was at levels in March 2006 that indicated the credit expansion had to slow as private debt would not be able to increase sufficiently to sustain former levels of GDP growth. And that the reason was the tailwind from the 2003 federal deficits was winding down. as the deficit fell below 2% of GDP, and it was no longer enough to support the credit structure.

Also, while pension funds were still adding to demand with their commodity allocations, that had stopped accelerating as well and
wouldn’t be as strong a factor.

Lastly, I noted exports should pick up some, but I didn’t think enough to sustain growth.

I underestimated export strength, and while GDP hasn’t been stellar as before, it’s been a bit higher than i expected as exports boomed.

That was my first ‘major theme’ – slowing demand.

The second major theme was rising prices – Saudis acting the swing producer and setting price. This was interrupted when Goldman changed their commodity index in aug 06 triggering a massive liquidation as pension funds rebalanced, and oil prices fell from near 80 to about 50, pushed down a second time at year end by Goldman (and AIG as well this time) doing it again. As the liquidation subsided the Saudis were again in control and prices have marched up ever since, and with Putin gaining control of Russian pricing we now have to ‘price setters’ who can act a swing producers and simply set price at any level they want as long as net demand holds up. So far demand has been more than holding up, so it doesn’t seem we are anywhere near the limits of how high they can hike prices.

Saudi production for December should be out tomorrow. It indicates how much demand there is at current prices. If it’s up that means they have lots of room to hike prices further. Only if their production falls are they in danger of losing control on the downside. And I estimate it would have to fall below 7 million bpd for that to happen. It has been running closer to 9 million.

What I have missed is the fed’s response to all this.

I thought the inflation trend would keep them from cutting, as they had previously been strict adherents to the notion that price
stability is a necessary condition for optimal employment and growth.

This is how they fulfilled their ‘dual mandate’ of full employment and price stability, as dictated by ‘law’ and as per their regular reports to congress.

The theory is that if the fed acts to keep inflation low and stable markets will function to optimize employment and growth, and keep long term interest rates low.

What happened back in September is they became preoccupied with ‘market functioning’ which they see as a necessary condition for low inflation to be translated into optimal employment and growth.

What was revealed was the FOMC’s lack of understanding of not only market functioning outside of the fed, but a lack of understanding of their own monetary operations, reserve accounting, and the operation of their member bank interbank markets and pricing mechanisms.

In short, the Fed still isn’t fully aware that ‘it’s about price (interest rates), not quantity (‘money supply, whatever that may be)’.

(Note they are still limiting the size of the TAF operation using an auction methodology rather than simply setting a yield and letting quantity float)

The first clue to this knowledge shortfall was the 2003 change to put the discount rate higher than the fed funds rate, and make the discount rate a ‘penalty rate.’ This made no sense at all, as i wrote back then.

The discount rate is not and can not be a source of ‘market discipline’ and all the change did was create an ‘unstable equilibrium’ condition in the fed funds market. (They can’t keep the system ‘net borrowed’ as before) it all works fine during ‘normal’ periods but when the tree is shaken the NY Fed has it’s hands full keeping the funds rate on target, as we’ve seen for the last 6 months
or so.

While much of this FOMC wasn’t around in 2002-2003, several members were.

Back to September 2007. The FOMC was concerned enough about ‘market functioning’ to act, They saw credit spreads widening, and in particular the fed funds/libor spread was troubling as it indicated their own member banks were pricing each other’s risk at higher levels than the FOMC wanted. If they had a clear, working knowledge of monetary ops and reserve accounting, they would have recognized that either the discount window could be ‘opened’ by cutting the rate to the fed funds rate, removing the ‘stigma’ of using it, and expanding the eligible collateral. (Alternatively, the current TAF is functionally the same thing, and could have been implemented in September as well.)

Instead, they cut the fed funds rate 50 bp, and left the discount rate above it, along with the stigma. and this did little or nothing for the FF/LIBOR spread and for market functioning in general.

This was followed by two more 25 cuts and libor was still trading at 9% over year end until they finally came up with the TAF which immediately brought ff/libor down. It didn’t come all the way down to where the fed wanted it because the limited the size of the TAFs to $20 billion, again hard evidence of a shortfall in their understanding of monetary ops.

Simple textbook analysis shows it’s about price and not quantity. Charles Goodhart has over 65 volumes to read on this, and the first half of Basil Moore’s 1988 ‘Horizontalists and Verticalsists’ is a good review as well.

The ECB’s actions indicate they understand it. Their ‘TAF’ operation set the interest rate and let the banks do all they wanted, and over 500 billion euro cleared that day. And, of course- goes without saying- none of the ‘quantity needles’ moved at all.

In fact, some in the financial press have been noting that with all the ‘pumping in of liquidity’ around the world various monetary
aggregates have generally remained as before.

Rather than go into more detail about monetary ops, and why the CB’s have no effect on quantities, suffice to say for this post that the Fed still doesn’t get it, but maybe they are getting closer.

So back to the point.

Major themes are:

  • Weakness due to low govt budget deficit
  • Inflation due to monopolists/price setters hiking price

And more recently, the Fed cutting interest rates due to ‘market functioning’ in a mistaken notion that ff cuts would address that issue, followed by the TAF which did address the issue. The latest announced tafs are to be 30 billion, up from 20, but still short of the understanding that it’s about price, not quantity.

The last four months have also given the markets the impression that the Fed in actual fact cares not at all about inflation, and will only talk about it, but at the end of the day will act to support growth and employment.

Markets acknowledge that market functioning has been substantially improved, with risk repriced at wider spreads.

However, GDP prospects remain subdued, with a rising number of economists raising the odds of negative real growth.

While this has been the forecast for several quarters, and so far each quarter has seen substantial upward revisions from the initial forecasts, nonetheless the lower forecasts for Q1 have to be taken seriously, as that’s all we have.

I am in the dwindling camp that the Fed does care about inflation, and particularly the risk of inflation expectations elevating which would be considered the ultimate Central Bank blunder. All you hear from FOMC members is ‘yes, we let that happen in the 70’s, and we’re not going to let that happen again’.

And once ‘markets are functioning’ low inflation can again be translated via market forces into optimal employment and growth, thereby meeting the dual mandate.

i can’t even imagine a Fed chairman addressing congress with the reverse – ‘by keeping the economy at full employment market forces will keep inflation and long term interest rates low’.

Congress does not want inflation. Inflation will cost them their jobs. Voters hate inflation. They call it the govt robbing their
savings. Govt confiscation of their wealth. They start looking to the Ron Paul’s who advocate return to the gold standard.

That’s why low inflation is in the Fed’s mandate.

And the Fed also knows they are facing a triple negative supply shock of fuel, food, and import prices/weak $.

While they can’t control fuel prices, what they see there job as is keeping it all a relative value story and not ‘monetizing it into an
inflation story’ which means to them not accommodating it with low real rates that elevate inflation expectations, followed by
accelerating inflation.

There is no other way to see if based on their models. Deep down all their models are relative value models, with no source of the ‘price level.’ ‘Money’ is a numeraire that expresses the relative values. The current price level is there as a consequence of history, and will stay at that level only if ‘inflation expectations are well anchored.’ The ‘expectations operator’ is the only source of the price level in their models.

(See ‘Mandatory Readings‘ for how it all actually works.)

They also know that food/fuel prices are a leading cause of elevated inflation expectations.

In their world, this means that if demand is high enough to drive up CPI it’s simply too high and they need to not accommodate it with low real rates, but instead lean against that wind with higher real rates, or risk letting the inflation cat out of the bag and face a long, expensive, multi year battle to get it back in.

They knew this at the Sept 18 meeting when they cut 50, and twice after that with the following 25 cuts, all as ‘insurance to forestall’ the possible shutdown of ‘market functioning’.

And they knew and saw the price of this insurance – falling dollar, rising food, fuel, and import prices, and CPI soaring past 4% year over year.

To me these cuts in the face of the negative supply shocks define the level of fear, uncertainty, and panic of the FOMC.

It’s perhaps something like the fear felt by a new pilot accidentally flying into a thunderstorm in his first flight in an unfamiliar plane without an instructor or a manual.

The FOCM feared a total collapse of the financial structure. The possibility GDP going to 0 as the economy ‘froze.’ Better to do
something to buy some time, pay whatever inflation price that may follow, than do nothing.

The attitude has been there are two issues- recession due to market failure and inflation.

The response has been to address the ‘crisis’ first, then regroup and address the inflation issue.

And hopefully inflation expectations are well enough anchored to avoid disaster on the inflation front.

So now with the TAF’s ‘working’ (duh…) and market functions restored (even commercial paper is expanding again) the question is what they will do next.

They may decide markets are still too fragile to risk not cutting, as priced in by Feb fed funds futures, and risk a relapse into market dysfunction. Recent history suggests that’s what they would do if the Jan meeting were today.

But it isn’t today, and a lot of data will come out in the next few weeks. Both market functioning data and economic data.

Yes, the economy may weaken, and may go into recession, but with inflation on the rise, that’s the ‘non inflationary speed limit’ and the Fed would see cutting rates to support demand as accomplishing nothing for the real economy, but only increasing inflation and risking elevated inflation expectations. The see real growth as supply side constrained, and their job is keeping demand balanced at a non inflationary level.

But that assumes markets continue to function, and the supply side of credit doesn’t shut down and send GDP to zero in a financial panic.

With a good working knowledge of monetary ops and reserve accounting, and banking in general that fear would vanish, as the FOMC would know what indicators to watch and what buttons to push to safely fly the plane.

Without that knowledge another FF cut is a lot more likely.

more later…

warren

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Fed communications

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If conveying information is considered important for market function, why not just say it clearly and directly in a targeted announcement?

Kohn Says Fed Is Trying to Signal When Views Shift `Materially’

2008-01-05 11:15 (New York)
By Scott Lanman and Steve Matthews

(Bloomberg) Federal Reserve Vice Chairman Donald Kohn said the central bank has increased its communication on policy views to the public in the wake of the financial-market “turmoil” that began in August.

Fed officials have tried to signal when the central bank’s reading on the economic outlook shifted “materially” in between regular meetings, Kohn said in a speech in New Orleans. “We have tried to provide more information than usual to reduce uncertainty and clarify our intentions.”

Kohn spoke before a week in which Chairman Ben S. Bernanke and six other Fed policy makers are scheduled to deliver remarks. The speeches come amid increasing signs of danger to the U.S. economic expansion, including a jump in the unemployment rate to a two-year high and a contraction in manufacturing. Traders anticipate the Fed will cut interest rates again Jan. 30.

Still, investors “should understand” that officials “do not coordinate schedules and messages, and that members’ views are likely to be especially diverse” when circumstances are rapidly changing, Kohn said.

Kohn held out Bernanke’s last speech on Nov. 29 as a signal of a change in the Fed’s views. The chairman said at the time that volatility in credit markets had “importantly affected” the economic outlook and declined to repeat the Federal Open Market Committee’s October statement that inflation and growth risks were about equal. The Fed then cut rates on Dec. 11.

`Let People Know’

“We have attempted to let people know when our views of the macroeconomic situation had changed materially between FOMC meetings,” said Kohn said in prepared remarks at the National Association for Business Economics panel discussion, part of the Allied Social Science Associations annual meeting.

The vice chairman didn’t comment on the outlook for monetary policy or the economy in the text of his remarks.

Bank of Japan Deputy Governor Kazumasa Iwata and European Central Bank Vice President Lucas Papademos were also scheduled to speak in the same session.

Traders yesterday shifted to bets on 50 basis points of interest-rate cuts by the Fed this month from 25 basis points after U.S. hiring slowed more than forecast in December and unemployment rose to 5 percent. The Fed lowered its main rate a quarter percentage point to 4.25 percent at its last meeting on Dec. 11. A basis point is 0.01 percentage point.

Fed Speakers

Bernanke speaks Jan. 10 in Washington. Other Fed officials giving talks include Boston Fed President Eric Rosengren and Kansas City Fed President Thomas Hoenig, the last two policy makers to cast dissenting FOMC votes. Charles Plosser, head of the Philadelphia Fed, votes as an FOMC member for the first time this month; he will discuss his economic outlook Jan. 8.

The FOMC is scheduled to meet Jan. 29-30 in Washington.

Separately, Kohn said today that the FOMC’s new forecasts for inflation three years out do not represent an “explicit numerical definition of price stability,” something the committee decided against, but rather the inflation rate that is “acceptable and consistent with fulfilling our congressional mandates.”

Kohn, who said in 2003 that he was “skeptical” about a price target, chaired a subcommittee of officials that coordinated work on the Fed’s communication review that began in 2006. He suggested in September that his doubts about the idea had eased.

Inflation Expectations

“I expect that our new projections will provide some of the benefits of an explicit target in better anchoring inflation expectations while not giving up any flexibility to react to developments that threaten high employment,” Kohn said today.

He also echoed remarks by Bernanke that the Fed will continue to look for “additional steps” to improve communication.

Fed officials decided last year not to report members’ assumptions of the “appropriate” path of interest rates because of concern that investors would “infer more of a commitment to following the implied path than would be appropriate for good policy,” the vice chairman said.

Kohn, speaking yesterday at the same conference, said diverse views on the 19-member FOMC lead to better monetary policy decisions. “The authority of the chairman rests on his ability to persuade the other members of the committee that the choices they are making under his leadership will accomplish their objectives,” he said.

–Editor: Chris Anstey, Christopher Wellisz
To contact the reporter on this story:
Scott Lanman in Washington at +1-202-624-1934 or
slanman@bloomberg.net;
Steve Matthews in New Orleans at +1-404-507-1310 or
smatthews@bloomberg.net.

To contact the editor responsible for this story:
Chris Anstey at +1-202-624-1972 or canstey@bloomberg.net

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Re: banking system proposal

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Dear Philip,

Yes, as in my previous posts, bank stability is all about credible deposit insurance.

I would go further, and have all regulated, member banks, be able to fund via an open line to the BOE at the BOE target rate.

That would eliminate the interbank market entirely, and let all those smart people doing those jobs go out and do something useful, maybe cure cancer, for example!

This would not change the quantity of retail bank deposits, only the rate paid on those deposits, which would be something less than the BOE target rate. Loans create deposits so they are all still there, but with this proposal all the banks would necessarily bid a tad less than the BOE target rate for deposits. And note this pretty much the case anyway.

With insured deposits market discipline comes from via capital requirements, and regulators also tend to further protect their
insured deposits by creating a list of ‘legal assets’ for banks, as well as various other risk parameters. The trick is to make sure the shareholders take the risk and not the govt.

This would change nothing of macro consequence but it would enhance the efficiency and stability of the banking sector, presumably for further public purpose.

Note to that the eurozone has the same issue, only perhaps more so, as the ECB is prohibited by treaty from ‘bailing out’ failed banks. Hopefully this gets addressed before it is tested!

All the best,

Warren

On Jan 5, 2008 7:46 PM, <noreply@sundayherald.com> wrote:
>
>
> Hi Warren Moslder,
>
> Philip Arestis stopped by Sunday Herald
> website and suggested that you visit the following URL:
>
> http://www.sundayherald.com/business/businessnews/display.var.1945229.0.outbreak_of_common_sense_could_save_british_banking.php
>
> Here is their message …
>
> Dear Warren,
>
>
>
> Interesting developments over here. Would it make much difference I wonder.
>
>
>
> Best wishes, Philip
>
>

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Re: fed mandate discussion

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On 03 Jan 2008 20:05:33 +0000, Prof. P. Arestis wrote:
> Dear Warren,
>
(snip)
>
> One point is this: some more extreme people would argue that low inflation
> is both a necessary and sufficient condition for optimal longterm growth and
> employment.

Dear Philip,

Agreed, and we will soon see if the Fed leans in that direction, as
they professed repeatedly before Sept of this year as the way they
complied with their dual mandate of price stability and full
employment.

Seems hard to imagine a change to something like “full employment is a
necessary condition for low and stable prices” but I suppose anything
is possible!

All the best,

Warren

>
> Best wishes,
>
> Philip

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Re: fiscal response

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On 04 Jan 2008 22:29:03 +0000, Prof. P. Arestis wrote:
> Dear Warren,
>
> Many thanks.
>
> This is all interesting. The sentence that caught my eye is this: “A fiscal

> package is being discussed to day by Bernanke, Paulson, and Bush. That

> would also reduce the odds of a Fed cut”. This would indeed reduce the odds
> of a rate cut. But would Bernanke accept such a proposition when he
> believes passionately that crowding-out in fiscl policy is very much the
> order of the fiscal day? I am curious to see the result of this discussion.

Dear Philip,

Very good point!

Warren

>
> Best wishes,
>
> Philip
>

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2008-01-04 US Economic Releases

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2008-01-04 Unemployment Rate

Unemployment Rate (Dec)

Survey 4.8%
Actual 5.0%
Prior 4.7%
Revised n/a

It comes from the household survey – been volatile.

2008-01-04 Change in Nonfarm Payrolls

Change in Nonfarm Payrolls (Dec)

Survey 70K
Actual 18K
Prior 94K
Revised 115K

2008-01-04 Change in Manufacturing Payrolls

Change in Manufacturing Payrolls (Dec)

Survey -15K
Actual -31K
Prior -11K
Revised -13K

Payroll increases continue to decline modestly over time. The fed believes demographic changes will reduce the labor force participation rate, keeping unemployment relatively low and labor markets tight, even with fewer jobs.

2008-01-04 Average Hourly Earnings MoM

Average Hourly Earnings MoM

Survey 0.3%
Actual 0.4%
Prior 0.5%
Revised 0.4%

2008-01-04 Average Hourly Earnings YoY

Average Hourly Earnings YoY (Dec)

Survey 3.6%
Actual 3.7%
Prior 3.8%
Revised n/a

Remains firm, and productivity probably down, meaning unit labor costs rising some.

2008-01-04 Average Weekly Hours

Average Weekly Hours (Dec)

Survey 33.8
Actual 33.8
Prior 33.8
Revised n/a

2008-01-04 ISM Non-Manufacturing

ISM Non-Manufacturing (Dec)

Survey 53.6
Actual 53.9
Prior 54.1
Revised

Very firm and cross checks with th 93,000 increase in service sector jobs for December.

ISM Non-Manufacturing TABLE ISM Non-Manufacturing TABLE

ISM Non-Manufacturing TABLE

Note the strength in the price categories.

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Re: US Libor GC Spreads comment

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(an interoffice email)

Good report, thanks!

On Jan 4, 2008 10:41 AM, Pat Doyle wrote:
>
>
>
> Pre- August 2007 GC US Treasury’s repo averaged Libor less 17 across the
> curve. In early August and again in early December the spread between GC
> and Libor hit it’s wides in excess of 150bps for 3m repo and 180bps for
> 1mos.
>
>
>
> Today’s Spreads:
>
> 1m = L -46.5
>
> 3m = L – 77
>
> 6m = L – 82
>
>
>
> This recent narrowing of the spread is primarily a result of the TAF
> program and CB intervention but may also be attributed to continuing
> writedowns of assets. There is plenty of cash in the short term markets and
> now some of this cash is going out the curve helping to narrow Libor
> spreads. The problem banks continue to have is that their balance sheet size
> and composition is adversely affecting their capital ratios. Banks and
> Dealers remain very cautious about adding risk assets to their balance
> sheets. Bids are defensive as dealers are demanding higher rents (return
> for risk) for balance sheet. Dislocations still exist, for example it may
> make no sense from a credit perspective but AAA CMBS on open repo trades at
> FF’s + 75, while IG Corp trades FF’s + 40, even NON IG Corps trade tighter
> than AAA CMBS. The more assets are either sold or otherwise liquidated off
> of the balance sheets and the more transparent the balance sheet
> compositions become, then the quicker the markets will stabilize
>
>
>
> GRAPH OF 1 MONTH LIBOR VS. 1 MONTH UST GC
>
>

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Payrolls

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(email)

On Jan 4, 2008 10:43 AM, Mike wrote:

> Warren, right now economic sectors in stock mkt are pricing in a severe
> recession-your call on no recession is extremely out of consensus now-I
> think that mkt has overdone the recession theme short term…

Agreed!

We may get to 0 or negative growth for a quarter or so, but probably not due to financial sector losses, ‘market functioning’ issues, or housing related issues.

More likely if it happens it will be a fall off in exports or something like that.

Also, the Fed can’t talk about it, but it knows it’s way behind the inflation curve due to fears of ‘market functioning.’ Their concern now turns to the ‘insurance premium’ they paid- food, fuel, $/import prices.

ISM service just came out- solid number.

Orders and employment strong, prices strong.

And in today’s employment number service sector jobs expanded faster than the rest fell, so q4 remains ok at 2% or so, and q1 still looks up.

I still see GDP muddling through (assuming exports hold up), and upward price pressures continuing indefinately as Saudis/Russians keep hiking.

Saudi production numbers due out for Dec any day. That’s the best indicator we have for whether demand is holding up at current prices.

warren
> Mike

Yes, a weak number for sure, though probably as expected by those originally looking for negative growth for the entire quarter.

And only a few months ago a negative employment number was revised to a strong up number.

And unemployment is also a lagging indicator, reflecting the weakness of several months ago.

Service sector added 93,000, other sectors lost, so employment continues its multi year shift.

And, however weak demand may have been, from the Fed’s point of view it was still strong enough to further drive up food/fuel/import prices.

3 mo libor down again and now about 75 bps lower than August in absolute terms, and spread to ff falling and way down from the wides, cp starting to expand, and most everything indicating market functioning returning and financial conditions easing..

The Fed views this as an ‘ease’ the same way it viewed the reverse as a ‘tightening’ when it cut 50.

Even write down announcements have subsided with less than 100 billion in write offs announced so far. In 1998, for example, $100 billion was lost the first day due to the Russian default, with no prospect of recoveries. That’s probably equiv to a 300b initial loss today.

Also heard this statement on CNBC: current oil prices mean $4 gasoline at the pump, and that will cut into consumer spending so the Fed has to cut rates to keep us out of recession.

That’s exactly what the Fed doesn’t want to happen- they call that monetizing a negative supply shock and turning a relative value story into an inflation story.

With the return of ‘market functioning’ the risks to growth change dramatically for the Fed.

They are now far less concerned about ‘the financial system shutting down’ and instead can now get back to their more familiar discussion of the long term relation between inflation and growth when making their decisions.

A fiscal package is being discussed to day by Bernanke, Paulson, and Bush. That would also reduce the odds of a Fed cut.

With their belief that fiscal is for the economy and monetary policy for inflation, the mainstream might prefer to see a fiscal response to support gdp rather than an inflation inducing rate cut to support growth.

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