Category Archives: Fed

Yellen the Dove on inflation

Posted on by

“Inflation is a problem,” she said. Yet the problem isn’t excessive demand, rising wages, or a tight labor market, but “negative supply shocks.” Once the shocks wear off, the inflation rate can’t be sustained in the long run without a pick-up in wage growth, she said.

“There’s no textbook answer to what monetary policy should be doing at this time,” Yellen added.

Yes, there is – the mainstream says quite clearly ‘don’t add to demand during a negative supply shock. Or a triple negative supply shock. That will monetize the price increases and turn a relative value story into an inflation story.’

The FF rate is now below the year over year headline and core CPI; so, it’s easy for the Fed to now make the case the ‘real rate’ is negative and cutting it any could adversely alter long term employment and growth given the balance of risks between market functioning, inflation, and the output gap.

They also think they know that if markets are expecting a 25 basis point cut they need to do less than that to get a positive inflation response.

And, as before, they need to set a rate for the TAF and accept any bank legal collateral to be able to more effectively target LIBOR as desired.

Share

Re: Comments on G7 Statement on FX

Posted on by

(an email)

>
>   On Sun, Apr 13, 2008 at 11:41 PM, Craig wrote:
>
>   Ok. So then it seems to me that it’d be a big change
>   for foreigners to panic on USD assets. Not saying it
>   couldn’t happen, but it’d need a big catalyst. In the
>   mean time, I suppose foreigners will peck away,
>   the dollar will do what it does and purchasing power
>   parity will provide some elastic limits on downside.
>
>   True?
>
>   Craig
>
>

Ironically, the ‘fundamentals’ of the $ are pretty good – purchasing power parity is good, the govt deficit is relatively small, and the relatively difficulty of getting $US credit helps as well.

But the technicals remain extremely negative (we’ve cut off the traditional buyers) CBs, monetary authorities, and chunks of our own pension funds.

So it’s not so much as concern about ‘foreigners’ in general, but specifically CBs and monetary authorities no longer accumulating perhaps $50 billion a month, and no one else stepping in to replace them, so instead the $ goes to a level where the trade gap goes away.

And that level of the $ can be anywhere, as while the correction process is ‘using’ the level of the $ to get the trade gap to 0, the trade gap is not that strong/precise a function of the level of the dollar.

It’s an example of a ‘cold turkey’ adjustment (the sudden cut off of all the $ accumulators at once) with no prior thought to the subsequent adjustment process, apart from the limited understanding that it would somehow drive exports, and the mistaken notion that exports are a ‘good thing.’

I do think the rest of the G7 thinks the ‘answer’ for the G7 is to convince the Fed to stop cutting rates.

As I mentioned a while back, the Fed has become an international ‘outlaw’ seemingly prodding the world to follow it in an international race to the bottom regarding inflation. It started the game ‘who inflates the most wins’ with their ‘beggar they neighbor’/mercantilist weak/$ policy to ‘steal’ (or maybe in the way the Fed sees it ‘reclaim’) world agg demand and support US gdp with US exports at the expense of foreign gdp.

Now it seems this policy is backfiring. The weak $ has seemingly raised food/energy prices for the US consumer, weakening the financial sector as less income is available for debt service as well as other consumption, and while exports have helped it’s only been enough to muddle through. And US inflation is sprinting ahead as well.

So the Fed rate cuts have not been seen to have helped the financial sector, the consumer, nor the US economy in general.

The Fed is being seen as destabilizing the world’s economy, weakening the US financial sector, depressing US consumer demand, depressing foreign domestic demand, and driving US to dangerous levels.

Once again it seems it’s being demonstrated that weakening your currency and inflating your way out of debt is not a road to prosperity.

And world markets are pricing in further US rate cuts.

Good morning!

Warren

Share

Money (USD)

Posted on by

My take on the USD:

It was at a level based on foreigners wanting to accumulate $70 billion per month which also = the US trade gap (accounting identity).

Most of that desire to accumulate came from foreign CBs trying to support their exporters, oil producers accumulating USD financial assets, and foreign portfolios allocating some percentage of assets to USD assets.

Paulson cut off the CBs calling the currency manipulators and outlaws.

Bush cut off the oil producers by being perceived to be conducting a holy war.

Bernanke scared off the portfolio managers with what looks to them like an ‘inflate your way out of debt’ policy.

And US pension funds are diversifying out of USD into passive commodities and foreign securities.  Looks to me like the desire to accumulate USD overseas is falling towards zero rapidly.

This means they sell us less and buy more of our goods, services, and our real assets.

Volumes’ of non oil imports are falling and of oil imports are flat.

The dollar has gotten low enough for the trade gap to fall from over $70 billion to under $60 billion per month (February was an aberration IMHO).

The dollar will ‘adjust’ until it corresponds with a trade gap that = desired foreign accumulation of USD financial assets.

I see no reason to think the trade gap should not go to zero.

The USD probably has not traded down enough to reflect the zero desire to accumulate USD abroad.

The ECB has serious ideological issues regarding buying of USD.  Not the least of which they don’t want to give the impression that the USD is ‘backing’ the euro, which would be the appearance if they collected USD reserves.

The ECB has an inflation problem, and they believe the strong euro has kept it from being much worse.

The policy ‘shift’ might be the process of ending of US rate cuts at the next meeting by cutting less than expected.

This might first mean only a 25 basis point cut when the market prices in 50 basis points, followed by no cut when markets price in 25 basis points, for example.

This would firm the USD and soften the commodities near term, as after the last 75 basis point cut when markets were pricing 100 basis points.

But this does not change the foreign desires to accumulate USD as direct intervention by the ECB would, for example.

So the adjustment process that gets us to a zero trade gap will continue.

And it will continue to drive up headline CPI with core not far behind.

And US GDP will muddle through in the 0% to +2% range with weak private sector consumption being supported by exports, US government consumption, and moderate investment.

Share

WSJ: Taul Paul chimes in

Posted on by

The FOMC take this very seriously:


Volcker’s Demarche

On the dollar, Mr. Volcker’s blunt talk of crisis is a welcome tonic to the devaluationist consensus that now dominates Washington. The world has been staging a run on the greenback, with damaging results if it continues. Mr. Volcker noted that when “concerns about recession are rife,” the central bank will be tempted to “subordinate the fundamental need to maintain a reliable currency” to the impulse to shore up a flagging economy. The danger is that you lose both battles, as the U.S. did in the 1970s, and wind up with stagflation.

The present climate, Mr. Volcker told his audience, reminded him of nothing so much as the early 1970s. Then as now, certain commodity prices were rising fast – he cited oil and soybeans as two examples. Then as now too, these were explained away as speculative price run-ups and not as a harbinger of a broader inflationary trend.

We all know how that ended, and Mr. Volcker knows better than anyone. He was the one who, at the end of that decade, had to step in and raise interest rates to punitive levels to break the back of that bout of inflation. With commodity prices spiking again – soybeans are $12 a bushel today compared to $7 a year ago – Mr. Volcker is warning the Fed not to let inflationary expectations become embedded once again.

Share

ABC personal finance subcomponent

Posted on by

2008-04-09 ABC News Washington Post US Weekly Personal Finance Index

ABC personal finance subcomponent

Down but not out.

Weakness, but probably no recession as per Bernanke’s latest address before Congress.

Inflation ripping, as Fed staff raises it’s near term forecast.

The Fed ‘fights inflation’ with ‘slack’.

The Fed waiting for slack to be reduced before turning its attention to inflation is illogical at best.

Without the much anticipated further decline in home prices the Fed will find itself that much further ‘behind the inflation curve’.

The Fed needs the housing decline for its models to forecast inflation returning to comfort zones.

Share

Reuters: Bernanke: full effect of rate cuts yet to be felt

Posted on by

by Alister Bull

(Reuters) The full benefit of recent Federal Reserve interest rate cuts has not yet been felt, Fed Chairman Ben Bernanke said Thursday, nodding to a policy lag that may reduce the need for many more rate moves ahead.

Ben Bernanke

CNBC.com

Ben Bernanke

“Further actions will have to depend on how the economy evolves and we are looking of course at both sides of our mandate, growth and inflation,” Bernanke told a U.S. Senate Banking Committee hearing on the rescue of troubled investment bank Bear Stearns.

“The effects of monetary policy are felt over a period of time and we expect to see further positive effects of these policies going forward,” he said.

“I believe we have helped to offset the credit crunch to some extent.” Bernanke acknowledged in testimony Wednesday that there was a risk U.S. growth could contract slightly in the first half of this year, before picking up in the next six months.

On the other hand, recent economic indicators have been mixed, with some signaling that conditions were not getting worse at an accelerating pace and may even be stabilizing.

First time he’s used this kind of language.

Bernanke also stressed Thursday that the Fed was uncomfortable with the current high levels of inflation, while arguing that these pressures should abate in the months ahead.

“The primary reason for the high inflation is rapid increases in the price of globally traded commodities, including crude oil and food,” he said.

Headline U.S. consumer prices rose 4.0 percent in February versus a year ago.

“It is our expectation, which is consistent with the prices seen in futures markets, that these prices will moderate in the coming year and that therefore, overall inflation will tend to slow,” Bernanke said.

“However, we are aware of the uncertainties involved with that and we are obviously going to be watching the situation very carefully,” he added.

Share

Plosser the hawk

Posted on by

Plosser, Dissenting Fed Voter, Says Price Stability Is Priority

By John Brinsley
March 28 (Bloomberg) — Federal Reserve Bank of Philadelphia President Charles Plosser, who voted against this month’s interest-rate cut, said keeping inflation in check is the “most effective” way of ensuring economic growth and job creation.

“Price stability is not only a worthwhile objective in its own right,” Plosser said in the text of a speech at a conference in Cape Town today. “It is also the most effective way monetary policy can contribute to economic conditions that foster the Federal Reserve’s other two objectives: maximum employment and moderate long-term interest rates.”

Plosser said today that keeping prices steady has to be the primary obligation of the central bank in order to ensure the economy runs as efficiently as possible. Price stability helps an economy’s ability “to achieve its maximum potential growth rate,” he said.

This is the mainstream macro economic position. (Not mine!)

It also addresses the dual mandate in the only logical manner the mainstream theory can address:

Low and stable inflation is the necessary condition for optimal growth and employment.

And they have volumes of maths to back it up.

In an effort to fend off a U.S. recession, Fed Chairman Ben S. Bernanke and his colleagues have slashed the federal funds rate by 2 percentage points this year, the most aggressive easing in two decades, even as surging oil and food costs threaten to stoke inflation. Plosser and Dallas Fed President Richard Fisher opposed the March 18 decision to cut the Fed’s main lending rate by three-quarters of a percentage point to 2.25 percent.

“Stable prices also make it easier for households and businesses to make long-term plans and long-term commitments, since they will know what the long-term value of their money will be,” Plosser said. “Price stability helps a market economy allocate resources efficiently and operate at its peak level of productivity.”

The Fed has lowered its benchmark rate six times in as many months since the collapse of U.S. subprime mortgages started to infect markets around the world in August last year. The world’s biggest financial companies have posted at least $195 billion in writedowns and credit losses tied to American mortgage markets.

“There seems to be a view that monetary policy is the solution to most, if not all, economic ills,” Plosser said. “Not only is this not true, it is a dangerous misconception and runs the risk of setting up expectations that monetary policy can achieve objectives it cannot attain.”

Public misconceptions over what central banks can and cannot do have “risen considerably over the years.” Central banks must therefore effectively communicate their goals and limitations, Plosser said.

The mainstream position is that rather than add to demand to address near term weakness and risk elevating inflation expectations, the government should instead let the output gap (unemployment and excess capacity in general) rise and bring inflation down.

If it does add to demand in an attempt to keep the output gap low and inflation elevates, a much larger output gap will soon be required to reign in the accelerating inflation problem.

The dissenting votes reflect this mainstream view that appears to be playing out in the least desirable way.

Share

Changing dynamics for the Fed

Posted on by

Cutting 75 basis points rather than the expected 100 basis points gave the Fed positive near term reinforcement from market participants:

  • Dollar went up
  • Food/fuel/commodities went down
  • Stocks did ok, including housing companies
  • Credit did ok

But it’s going to look to the Fed a bit like taking medicine: initial small doses have the desired effect, then things settle back, and it takes ever larger doses to keep moving the needle.

So now crude/food is moving back up, the USD is moving back down, stocks are doing ok, exports are booming, and the fiscal package is about to kick in.

For the Fed to keep moving the needle away from inflation it’s going to keep needing to not give markets all they are anticipating.

So with a 25 cut anticipated, they will realize they need to do no cut for a positive inflation response, and with no cut anticipated they need to hike, etc.

Credit markets will quickly get ahead of this and begin anticipating hikes.

The irony is higher rates will help support demand via the interest income channel.

And higher rates will support price increases via the cost channel.

Demand is being supported by increasing net fed spending and rising exports due to the reduced desires of non-residents to accumulate USD financial assets.

They no longer want to accumulate a net $60 billion a month of US financial assets (negative trade gap) due to the big 4 screaming fire in a crowded theater of previously content patrons:

  1. Paulsen calling CBs that buy USD currency manipulators
  2. Bush making it politically impossible for Muslim nations to further accumulate USD reserves
  3. Bernanke giving inflation a back seat to ‘market functioning’ via deep rate cuts into a triple supply shock
  4. Pension funds diversifying to passive commodity and non US equity strategies
Share

FOMC

Posted on by

Karim Basta:

  1. Further cut to gwth outlook
  2. Financial conditions tighter and housing getting worse
  3. Inflation receives greater concern than prior statement
  4. Conclusion: downside risks predominant and ‘timely’ means another intermeeting cut on the table.

Agreed, further comments below:

Release Date: March 18, 2008

For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Could have been 100 as anticipated by the markets. Fed shaded its cut to the low side of the priced in expectations.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed

Implies there is still some growth, not negative yet.

and labor markets have softened.

Looking unrevised February payroll number, not the lower unemployment rate. In January they looked at the higher unemployment rate. Unemployment has subsequently gone from 5.0% to 4.9% to 4.8% (rounded).

Financial markets remain under considerable stress,

They went a long way to relieve stress over the weekend.

and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Housing starts were revised up, and other indicators indicate it may have bottomed.

Inflation has been elevated, and some indicators of inflation expectations have risen.

This was noted in several Fed intermeeting speeches.

The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization.

They continue to make this projection even after being completely wrong for many meetings.

Still, uncertainty about the inflation outlook has increased.

That’s why – their forecasts have proven unreliable, and crude/food continues to rise as the USD continues to fall.

It will be necessary to continue to monitor inflation developments carefully.

Only ‘monitor’? No action planned.

Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.

Intermeeting action is on the table, for both growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.

Wonder how much less aggressive?

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco.

Share