As previously suggested, the Fed doing anything would cause markets to believe it’s all going bad out there.
However, the US economic news still looks like modest improvement,
so I still suspect the reaction to the Fed will be temporary, and start wearing off around noon Eastern time today.
***SORRY, MISSED THE BOTTOM BY A FEW HOURS.
;)
As previously suggested, the Fed doing anything would cause markets to believe it’s all going bad out there.
However, the US economic news still looks like modest improvement,
so I still suspect the reaction to the Fed will be temporary, and start wearing off around noon Eastern time today.
q3 still looking up from q2 which was up from q1.
And gasoline prices now moving lower help the consumer a bit more,
so q4 should be up more than q3.
With GDP sequentially better all year, makes sense to me that earnings in general will continue to grow.
Employment not doing much as there is still some underlying productivity growth
which also helps keep unit labor costs in check.
This means stocks still be in their ugly trading range, with the lower bound somewhere around current levels.
Though potential external shocks remain.
With the ECB again writing the check today by buying Italian and Spanish bonds
the current situation is in fact operationally sustainable, and I suspect what we are seeing
is the resolution. The ECB buys as needed in conjunction with imposing austerity,
and the euro zone muddles through with flat to modestly negative growth and deficits higher than they’d like.
Note too, that the ECB buys bonds are relatively high yields, and pays relative low rates of interest on the clearing balances it creates
to make the purchases. This results in a profit for the ECB that adds to their stated capital and their stated capacities.
So as long as they keep buying there’s no default and not only no losses, but rising ECB profits.
And there’s no inflationary consequences because none of this increases actual spending by the national govts.
All it does is allow them to fund their austerity budgets as dictated by the ECB.
China continues to decelerate and so far avoid reporting a hard landing,
and while the jury is still out on that score, trade and demand growth is slowing.
They know how to increase demand but are holding back due to concerns of inflation.
Commodities are finally selling off and heading towards their marginal costs of production,
just as the textbooks describe, as global tight fiscal keeps demand in check.
And with seemingly no one in any position of responsibility understanding how their monetary systems work,
and instead carrying on as if they were all operating under some sort of fixed exchange rate constraint,
the odds of an acceleration in aggregate demand any time soon remain remote.
Initial jobless claims dropped by 9,000 to 423,000 the week ended Sept. 17, as expected. Continuing claims fell by 28,000 to 3,727,000 in the week ended Sept. 10. The four-week moving average of new claims, a more reliable indicator of the labor market’s recent performance, rose by 500 to 421,000
FHFA House Price Index Up 0.8 Percent in July
The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.3 percent in August to 116.2 (2004 = 100), following a 0.6 percent increase in July and a 0.3 percent increase in June.
The Fed has an account at the ECB.
And while banks can have accounts at the ECB, they are not currently segregated from the bank’s balance sheets.
In other words, if you have a euro deposit with a US bank, and the bank fails, you become a general creditor and could lose all of your euro.
This proposal would work as follows:
The Fed would act as agent for its member banks,
allowing them to open euro accounts at the Fed,
with the Fed keeping those euro in its euro account at the ECB.
These accounts would be segregated from the member bank’s balance sheet, so that any bank insolvencies
would not be a factor with regard to these segregated euro deposits.
The member bank must deposit all of these client euro deposits at the Fed.
Functionally, it would be as if the bank’s euro depositors had direct access to the Fed’s euro account at the ECB.
Therefore there need be no capital requirements associated with these accounts.
These accounts would allow global investors access to ‘risk free’ euro deposits.
Currently they must hold deposits in euro banks, national govt. debt, corporate debt, or actual euro cash.
This will help stabilize the euro financial structure and provide a bit of income from service fees for US member banks.
I thought the path of least resistance was for the Fed to not do anything,
on the grounds the economy was improving sequentially,
core was still up a bit, etc.
and thereby support positive expectations for modest growth
And that if they did anything to try to help they’d be signaling the economy needed help
which would cause concern that the economy was bad enough
for the Fed to try to do something to help.
So that’s what happened.
The Fed made a positive gesture,
indicating it was trying to help,
which signaled they think the economy needs the help.
So stocks sold off and bonds went down in yield.
But also as previously suggested,
it will soon wear off and be forgotten,
with the only lingering memory being their isn’t much the Fed can actually do to help.
“The food was terrible and the portions were small”
Comment from the post war Catskill resorts
So now the Fed’s being warned about shooting more blanks:
GOP Leaders Warn Bernanke About Further Fed Action
Published: Tuesday, 20 Sep 2011 | 6:13 PM ET
Top Congressional Republicans Tuesday took the unusual step of telling the Federal Reserve to refrain from further “intervention” in the economy on the eve of a policy decision by the U.S. central bank.
The group, which included the top two Republicans in both houses of Congress, said the Fed’s policies have been ineffective at supporting economic expansion and boosting employment.
“It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate,” the group said in a letter to Fed Chairman Ben Bernanke.
The letter was signed by House Speaker John Boehner, Majority Leader Eric Cantor, Senate Minority Leader Mitch McConnell and Senate Minority Whip Jon Kyl.
With economic prospects fading dramatically after a damaging U.S. debt downgrade in August and an escalation of European financial turmoil, the Fedhas made clear it is intent on taking further steps to lift growth.
Although officials at the central bank differ on how best to address the economy’s woes, analysts expect Bernanke to muster a consensus behind a plan to rebalance the Fed’s portfolio to push down longer-term interest rates.
Officials hope that by weighting the central bank’s bond holdings more heavily toward longer-term debt they can spur mortgage refinancings and push investors into stocks or corporate bonds and away from safe-haven Treasurys.
The Fed is expected to announce its decision at about 2:15 p.m. on Wednesday.
Seems to me that though forecasts have been revised down, gdp growth continues to improve sequentially quarter to quarter for 2011,
q1 .5
q2 1.0
q3 1.5-2 forecast
And core cpi remains firm with the last 2.0 print.
Congress appears to accept the tax cutting elements of the jobs proposals, which would increase aggregate demand.
All this allows the fed to reflect sufficient (though cautious) optimism with regards to the economy,
giving reason to not make additional adjustments at this time, as many are anticipating.
And short and long rates are already low enough to be causing concern that they are brewing a future bubble of some sort.
Additionally, under their ‘expectations theory’,
that signal of optimism will give the economy more support than the proposed
‘monetary adjustments’ might have.
In fact, if they do make adjustments, they are concerned that will be taken as a no confidence vote from the Fed, and
could, in their minds, cause things to get worse.
furthermore, they are hesitant to make the speculated ‘final’ adjustments, and ‘use up their last bullets’ as they
are more than concerned they won’t have much effect, if any, and they want to at least keep the illusion that
there is more they can do.
But I’m only guessing at this point, and see the following outcomes:
Fed unchanged because the economy isn’t bad enough for an ease helps stocks and hurts bonds.
Fed does something shows the economy is bad enough to need help which hurts stocks and helps bonds.
And either outcome is quickly forgotten after initial market reactions.
It remains my position that Congress should not allow the Fed
to lend unsecured to foreign central banks without specific Congressional approval.
But the Fed does currently have that authority and they are again using it to keep $ libor from rising.
And that lending must be in unlimited quantities to insure $ libor is capped at the Fed’s target rate.
The Fed doesn’t want $ libor to go up because many US domestic loans are indexed to $ libor,
including adjustable rate mortgages.
That’s why I’ve been proposing the Fed not let its member banks index loans to $ libor, but instead
let them index to the fed funds rate, or some other rate controlled by the Fed.
That would return direct control of US $ interest to the Fed, obviating the need to use unsecured (and unlimited)
$US lending to foreign central banks.
By the way, when testifying to Congress the Fed Chairman states the lending is secured, with the Fed getting euro deposits as collateral.
And he believes that.
However, the euro are on deposit at the European Central Bank, who is also the borrower of the $ from the Fed.
So if he ECB defaults on the $ loans,
the only way the Fed could use those euro
is by instructing the ECB to transfer them to another’s account so the Fed can buy the dollars it wants.
So what are the odds of the ECB even taking the call from the fed if they just defaulted on it’s dollar loans from the Fed?
And what can the Fed do if the ECB doesn’t make payment and won’t let the Fed use its euro at the ECB to buy dollars?
It’s like lending your dollars to someone in a far away land who uses his watch for collateral.
But he gets to keep wearing the watch, and he’s out of your legal jurisdiction.
Interesting story, in that I’ve heard indirectly that my book,
The 7 Deadly Innocent Frauds of Economic Policy,
has been making the rounds at the Treasury as well as the Fed and other agencies,
and,
most interesting,
staffers who say they’ve read it asked that their names not be revealed.
Treasury to Accommodate Fed on ‘Twist’
Published: Wednesday, 14 Sep 2011 | 5:47 AM ET
The US Treasury would effectively accommodate a possible Federal Reserve stimulus to drive down long-term interest rates, according to people familiar with the matter.
The Treasury would play a crucial role if the Fed decided to launch “Operation Twist”, where the central bank would buy more longer-term Treasury securities to drive down long-term interest rates by reducing the amount of such debt available to other investors.
Seems several reasons Fed unlikely to ‘ease’ further:
GDP continues to move up sequentially since year end
Fed forecasts showing continuing modest growth
Core CPI remains firm
Employment still at least modestly growing (ex Verizon, household sector, etc)
Financial burdens ratios way down indicating the potential for a credit expansion is there.
China and much of the FOMC doesn’t seem to like QE or anything even vaguely related, including long term rate commitments.
Also, with the Swiss ‘peg’ vs the euro, as long as the Swiss remain relatively strong buying the franc, it translates into buying of euro. So this new buyer of euro offers further euro support/deflation to an already highly deflationary environment.
Karim writes:
Lockhart on the tapes yesterday (non-voter):
*LOCKHART SAYS MONETARY POLICY CAN’T `BE SEEN AS A PANACEA’
Good start. How about ‘completely ineffective with regards to aggregate demand.’
*LOCKHART SAYS `DOWNSIDE RISKS TO GROWTH HAVE RISEN NOTABLY’
Even with ‘accomodative monetary policy’
*LOCKHART SAYS U.S. MAY FACE `LONG PERIOD OF SLOW GROWTH’
*LOCKHART SAYS `SLACK IN OUR ECONOMY IS RISING’
That is, it’s getting worse, even with 0 rates, QE, and all the other measures the Fed has taken to reduce interest income in the economy.
Not talk yet about being over taxed for the size govt we have.