*DJ Fed’s Plosser:We Will Continue To Support Dollar Funding Issues -CNBC
This means unlimited, unsecured, Fed $US loans to foreign central banks.
Hope they don’t game us this time…
Category Archives: Fed
Jackson Hole- comments tomorrow’s speech by Fed Chairman Bernanke
First, I see no public purpose in burning any crude oil to fly the Chairman and his entourage to make any speech.
He could just as easily deliver this one from the steps of the Fed in DC.
Congress should demand a statement of public purpose before endorsing any travel by its agents.
Next is what I expect from the speech.
The short answer is not much.
I don’t see more QE as the purpose of QE is to bring long rates down, and they are already down substantially. And the Fed now has sufficient evidence to confirm that long rates are mainly a function of expectations of future FOMC votes on rate settings.
To that point, when the Fed announced QE, and market participants believed it would spur growth, and therefore FOMC rate hikes somewhere down the road, long rates worked their way higher. And when the Fed ended QE, and market participants believed the economy would be slower to recover, long rates worked their way lower. Not to mention China hates QE and it still looks to me there’s an understanding in place where China allocates reserves to $US as long as the Fed doesn’t do any QE.
The Fed could cut it’s target Fed funds rate, the cost of funds for the banking system, down to 0 and lower that cost of funds by a few basis points. But those few basis points can hardly be expected to have much effect on anything.
It’s not the Fed has run out of bullets, it’s that the Fed has never had any bullets of any consequence.
And with the few it’s fired, it hasn’t realized the odds are the gun has been pointed backwards.
For example, it still looks to me lower rates, if anything, reduce aggregate demand via the interest income channels.
And QE isn’t much other than a tax on the economy, that also removes interest income.
So look for a forecast of modest GDP growth with downside risks, core inflation remaining reasonably firm even as unemployment remains far too high, all of which support continued Fed ‘accommodation’ at current levels.
Fed’s Plosser comments
They see it all about managing expectations.
So with the announcement they managed interest rate expectations a bit lower out to 2013.
But now they are concerned they managed expectations about economic growth and employment lower as well, which they believe works to lower actual growth and employment.
So now they are trying to adjust both a bit back in the other directions.
*DJ Fed’s Plosser: FOMC Statement On Econ Too Negative -Bloomberg Radio
*DJ Fed’s Plosser: Extending Policy To ’13 `Inappropriate’ -Bloomberg Radio
*DJ Fed’s Plosser: Expects Will Have To Raise Rates Before ’13 -Bloomberg Radio
Actual Rick Perry statement
According to a video appearing on the left-leading website Think Progress, a reporter asked Perry what he would do about the Federal Reserve.
Standing next to a “Perry President” sign, the governor replied, “If this guy prints more money between now and the election, I don’t know what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas.”
“I mean, printing more money to play politics at this particular time in American history, is almost treacherous, or treasonous, in my opinion,” he added.
QE and the dollar
THE DOLLAR DEBASEMENT MYTH & THE FED’S BALANCE SHEET
“I put together this chart [see link for chart] showing the dollar index versus the Fed’s balance sheet over the last three years. As you can clearly see – there is no real correlation between the size of the balance sheet and the USD. None at all.”
FED Dudley comments
*DJ Fed’s Dudley: Drop In Market Rates A Plus For Economy
He forgets about the interest income channels
*DJ Dudley: US Economic Growth Slower Than Expected
Yes, but still higher than the first half, as recently revised
*DJ Dudley: Has Revised Down Expectations Of Growth
Yes, but still higher than the first half when corporate earnings were relatively strong
*DJ Dudley: NY Region Growing Faster Than Nation
*DJ Dudley: NY Region Has Grown At ‘Slow Pace’
Yes, and better than the first half, helped by auto production resuming after earthquake delays
Retail sales were ‘normal’
The 9% federal budget deficit continues to provide reasonably support for modest GDP growth
The Fed’s ‘forecast’ for unchanged rates for two years is just that. It’s their expectation for rates based
on their outlook.
And while the Fed’s outlook will change as conditions change, markets are not taking it that way.
FOMC Statement(3 dissents)
Karim writes:
Pretty tepid response in light of the changed assessment of current conditions and outlook. No hike thru early 2013 was already priced, so stating that they are unlikely to hike thru at-least mid 2013 doesn’t buy them that much more in terms of taking out tightening. Also, didn’t apply ‘extended period’ to balance sheet nor say anything about balance sheet composition other than they will review (which they said last time as well). Made indirect reference to QE3 in last paragraph-saying ‘range of tools’ was discussed and they may be employed as appropriate.
Right, careful not to offend China.
New
Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected.
Yes, the first half was revised down which they didn’t expect.
But they did not indicate it has been improving quarter to quarter though Q1 and Q2 GDP and their forecast shows that.
Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting
Yes, seems their forecasts are a bit lower, but still higher than the actual Q1 and Q2 results.
and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
That implies the possibility of core moderating some, which Goldman has also forecast.
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
In line with their understanding with China and something closer to a strong dollar policy.
The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.
Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.
2011 Monetary Policy Releases
Old
Release Date: June 22, 2011
Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
Fed on bank capital post downgrade
Fed statement: No additional capital raise.
Earlier today, Standard & Poor’s rating agency lowered the long-term rating of the U.S. government and federal agencies from AAA to AA+. With regard to this action, the federal banking agencies are providing the following guidance to banks, savings associations, credit unions, and bank and savings and loan holding companies (collectively, banking organizations).
For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not change. The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board’s Regulation W, will also be unaffected.
Consumer credit up, Friday update
It doesn’t look to me like anything particularly bad has actually yet happened to the US economy.
The federal deficit is chugging along at maybe 9% of US GDP, supporting income and adding to savings by exactly that much, so a collapse in aggregate demand, while not impossible, is highly unlikely.
After recent downward revisions, that sent shock waves through the markets, so far this year GDP has grown by .4% in Q1 and 1.2% in Q2, with Q3 now revised down to maybe 2.0%. Looks to me like it’s been increasing, albeit very slowly. And today’s employment report shows much the same- modest improvement in an economy that’s growing enough to add a few jobs, but not enough to keep up with productivity growth and labor force growth, as labor participation rates fell to a new low for the cycle.
And, as previously discussed, looks to me like H1 demonstrated that corps can make decent returns with very little GDP growth, so even modestly better Q3 GDP can mean modestly better corp profits. Not to mention the high unemployment and decent productivity gains keeping unit labor costs low.
Lower crude oil and gasoline profits will hurt some corps, but should help others more than that, as consumers have more to spend on other things, and the corps with lower profits won’t cut their actual spending and so won’t reduce aggregate demand.
This is the reverse of what happened in the recent run up of gasoline prices.
Japan should be doing better as well as they recover from the shock of the earthquake.
Yes, there are risks, like the looming US govt spending cuts to be debated in November, but that’s too far in advance for today’s markets to discount.
A China hard landing will bring commodity prices down further, hurting some stocks but, again, helping consumers.
A euro zone meltdown would be an extreme negative, but, once again, the ECB has offered to write the check which, operationally, they can do without limit as needed. So markets will likely assume they will write the check and act accordingly.
A strong dollar is more a risk to valuations than to employment and output, and falling import prices are very dollar friendly, as is continuing a fiscal balance that constrains aggregate demand to the extent evidenced by the unemployment and labor force participation rates. And Japan’s dollar buying is a sign of the times. With US demand weakening, foreign nations are swayed by politically influential exporters who do not want to let their currency appreciate and risk losing market share.
The Fed’s reaction function includes unemployment and prices, but not corporate earnings per se. It’s failing on it’s unemployment mandate, and now with commodity prices coming down it’s undoubtedly reconcerned about failing on it’s price stability mandate as well, particularly with a Fed chairman who sees the risks as asymmetrical. That is, he believes they can deal with inflation, but that deflation is more problematic.
So with equity prices a function of earnings and not a function of GDP per se, as well as function of interest rates, current PE’s look a lot more attractive than they did before the sell off, and nothing bad has happened to Q3 earnings forecasts, where real GDP remains forecast higher than Q2.
So from here, seems to me both bonds and stocks could do ok, as a consequence of weak but positive GDP that’s enough to support corporate earnings growth, but not nearly enough to threaten Fed hikes.
Consumer borrowing up in June by most in 4 years
By Martin Crutsinger
May 25 (Bloomberg) — Americans borrowed more money in June than during any other month in nearly four years, relying on credit cards and loans to help get through a difficult economic stretch.
The Federal Reserve said Friday that consumers increased their borrowing by $15.5 billion in June. That’s the largest one-month gain since August 2007. And it is three times the amount that consumers borrowed in May.
The category that measures credit card use increased by $5.2 billion — the most for a single month since March 2008 and only the third gain since the financial crisis. A category that includes auto loans rose by $10.3 billion, the most since February.
Total consumer borrowing rose to a seasonally adjusted annual level of $2.45 trillion. That was 2.1 percent higher than the nearly four-year low of $2.39 trillion hit in September.
post debt ceiling crisis update
With the debt ceiling extended, the risk of an catastrophic automatic pro cyclical Treasury response, as previously discussed, has been removed.
What’s left is the muddling through with modest topline growth scenario we’ve had all year.
With a 9% budget deficit humming along, much like a year ago when markets began to discount a double dip recession, I see little chance of a serious collapse in aggregate demand from current levels.
It still looks to me like a Japan like lingering soft spot and L shaped ‘recovery’ with the Fed struggling to meet either of its mandates will keep this Fed ‘low for long’, and that the term structure of rates is moving towards that scenario.
With the end of QE, relative supply shifts back to the curve inside of 10 years, which should work to flatten the long end vs the 7-10 year maturities. And the reversal of positions related to hedging debt ceiling risks that drove accounts to sell or get short the long end work to that same end as well.
The first half of this year demonstrated that corporate sales and earnings can grow at reasonable rates with modest GDP growth. That is, equities can do reasonably well in a slow growth, high unemployment environment.
However, a new realization has finally dawned on investors and the mainstream media. They now seem to realize that government spending cuts reduce growth, with no clarity on how that might translate into higher future private sector growth. That puts the macroeconomic picture in a bind. The believe we need deficit reduction to ward off a looming financial crisis where we somehow turn into Greece, but at the same time now realize that austerity means a weaker economy, at least for as far into the future as markets can discount. This has cast a general malaise that’s been most recently causing stocks and interest rates to fall.
With crude oil and product prices leveling off, presumably because of not so strong world demand, the outlook for inflation (as generally defined) has moderated, as confirmed by recent indicators. As Chairman Bernanke has stated, commodity prices don’t need to actually fall for inflation to come down, they only need to level off, providing they aren’t entirely passed through to the other components of inflation. And with wages and unit labor costs, the largest component of costs, flat to falling, it looks like the the higher commodity costs have been limited to a relative value shift. Yes, standards of living and real terms of trade have been reduced, but it doesn’t look like there’s been any actual inflation, as defined by a continuous increase in the price level.
However, the market seem to have forgotten that the US has been supplying crude oil from its strategic petroleum reserves, which will soon run its course, and I’ve yet to see indications that Lybia will be back on line anytime soon to replace that lost supply. So it is possible crude prices could run back up in September and inflation resume. For the other commodities, however, the longer term supply cycle could be turning, where supply catches up to demand, and prices fall towards marginal costs of production. But that’s a hard call to make, until after it happens.
With the debt ceiling risks now behind us, the systemic risk in the euro zone is now back in the headlines. Unlike the US, where the Treasury is back to being counter cyclical (unemployment payments can rise should jobs be lost and tax revenues fall), the euro zone governments remain largely pro cyclical, as market forces demand deficits be cut in exchange for funding, even as economies weaken. This means a slowdown to that results in negative growth and rising unemployment can accelerate downward, at least until the ECB writes the check to fund counter cyclical deficit spending.
China had a relatively slow first half, and the early indicators for the second half are mixed. Manufacturing indicators looked weak, while the service sector seemed ok. But it’s both too early to tell and the numbers can’t be trusted, so the possibility of a hard landing remains.
Japan is recovering some from the earthquake, but not as quickly as expected, and there has yet to be a fiscal response large enough to move that needle. And with global excess capacity taking up some of the fall off in production, Japan will be hard pressed to get it back.
Falling crude prices and weak global demand softening other commodity prices, looks dollar friendly to me. And, technically, my guess is that first QE and then the debt ceiling threats drove portfolios out of the dollar and left the world short dollars, which is also now a positive for the dollar.
The lingering question is how US aggregate demand can be this weak with the Federal deficit running at about 9% of GDP. That is, what are the demand leakages that the deficit has only partially offset. We have the usual pension fund contributions, and corporate reserves are up with retained earnings/cash reserves up. Additionally, we aren’t getting the usual private sector borrowing to spend on housing/cars as might be expected this far into a recovery, even though the federal deficit spending has restored savings of dollar financial assets and debt to income ratio to levels that have supported vigorous private sector credit expansions in past cycles.
Or have they? Looking back at past cycles it seems the support from private sector credit expansions that ‘shouldn’t have happened’ has been overlooked, raising the question of whether what we have now is the norm in the absence of an ‘unsustainable bubble.’ For example, would output and employment have recovered in the last cycle without the expansion phase of sub prime fiasco? What would the late 1990’s have looked like without the funding of the impossible business plans of the .com and y2k credit expansion? And I credit much of the magic of the Reagan years to the expansion phase of what became the S and L debacle, and it was the emerging market lending boom that drove the prior decade. And note that Japan has not repeated the mistake of allowing the type of credit boom they had in the 1980’s, accounting for the last two decades of no growth, and, conversely, China’s boom has been almost entirely driven by loans from state owned banks with no concern about repayment.
So my point is, maybe, at least over the last few decades, we’ve always needed larger budget deficits than imagined to sustain full employment via something other than an unsustainable private sector credit boom? And with today’s politics, the odds of pursuing a higher deficit are about as remote as a meaningful private sector credit boom.
So muddling through seems here to stay for a while.