Category Archives: Interest Rates

2009-02-05 USER

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Nonfarm Productivity QoQ (4Q)

Survey 1.6%
Actual 3.2%
Prior 1.3%
Revised 1.5%

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Nonfarm Productivity TABLE 1 (4Q)

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Nonfarm Productivity TABLE 2 (4Q)

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Unit Labor Costs QoQ (4Q)

Survey 2.9%
Actual 1.8%
Prior 2.8%
Revised 2.6%

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Unit Labor Costs ALLX (4Q)

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Initial Jobless Claims (Jan 31)

Survey 580K
Actual 626K
Prior 588K
Revised 591K

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Continuing Claims (Jan 24)

Survey 4795K
Actual 4788K
Prior 4776K
Revised 4768K

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Jobless Claims ALLX (Jan 31)

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Factory Orders YoY (Dec)

Survey n/a
Actual -18.7%
Prior -13.8%
Revised n/a

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Factory Orders MoM (Dec)

Survey -3.1%
Actual -3.9%
Prior -4.6%
Revised -6.5%

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Factory Orders TABLE 1 (Dec)

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Factory Orders TABLE 2 (Dec)

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Factory Orders TABLE 3 (Dec)


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And the Wolf responds..

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(email exchange – in response to previous email)

 
>   
>   On Thu, Jan 15, 2009 at 5:09 PM, Martin Wolf wrote:
>   
>   
>   Inflation is default.
>   

I respectfully do not agree.

Default is failure to make payment as agreed.

There is no zero inflation contract.

In fact, most every currency has inflation most years.

>   
>   Surely that is obvious to everybody.
>   

Credit default contracts don’t include inflation, nor does any other default provision.

>   
>   When the economy finally recovers, the government will end up with a very large debt.
>   

It will be some % of GDP that you may consider ‘very large’.

>   
>   Such debt is owed to bond-holders and serviced by taxpayers.
>   

In the first instance it is serviced by crediting accounts on the Fed’s own spread sheet.

If aggregate demand is deemed too high at that time future governments may opt to raise taxes.

If future govts desire to alter the distribution of real output to those then alive they will be free to do that via the usual fiscal and monetary measures.

>   
>   Politicians who are elected by the latter will want to default on liabilities to the former
>   (particularly if many of them are foreigners) and provide taxpayers with goodies, instead.
>   

Very possible!

>   
>   A burst of inflation is how they have always done it.
>   

Yes.

>   
>   End of story.
>   

As above. If you mean to say deficits will cause inflation, then do that.
Default is the wrong word for an international financial column.
Surely that’s obvious to everyone.

>   
>   I suggest you study the history of Argentina or indeed of the post-first-world-war inflations.
>   

And you can study what the ratings agencies have considered to be defaults.

 
All the best,
Warren

>   
>   Martin Wolf
>   


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FOMC Statement

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Federal Reserve Press Release


Release Date: December 16, 2008

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Geitner ought to be able to hit that one..

Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Aggregate demand continued to fall

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

Inventory liquidations to continue and OPEC not expected to hike prices

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Low interest rates per se are believed to promote growth and employment.

The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level.

A larger balance sheet promotes growth, employment, and marketing functioning.

As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.

This implies the purchases have some benefit other than from keeping interest rates for these securities lower than otherwise, as it didn’t say the purpose was lowering mortgage interest rates.

The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Seems they still don’t grasp that it’s about ‘price’ (interest rates) and not ‘quantity’.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent.

They are still keeping it higher than the Fed Funds rates and still demanding collateral.

In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.

No mention of the USD swap lines to foreign central bands that was last reported to be well over $600B.

Still no evidence of a working understanding of monetary operations and reserve accounting.


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Re: Fed cut

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(email exchange)

The Fed has no way of ‘pumping money into the economy’ = they only alter interest rates.

Except by making loans they don’t plan on collecting (the swap line advances to CB’s?)

Which is functionally equivalent to fiscal spending which does add income and financial assets to the economy.

>   
>   Rodger wrote:
>   
>   You and I were talking about a 0% fed funds rate. Almost there, now. Last I
>   heard, down to .25%. It will have no benefit. Wait, correction on that. There
>   will be one benefit. It gets us almost to the point where the Fed will stop
>   focusing on useless interest rate cuts, and start pumping money into the
>   economy. I hope.
>   
>   Rodger
>   


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Plosser and interest rates

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“There are all sorts of technical ramifications when the fed funds rate goes towards zero. There are a lot of questions we’re going to have to grapple with going forward,” Plosser told reporters after a speech at the Economic Club of Pittsburgh. “You have to think about what this means for policy, market functioning, how we manage reserves.”

Yes, about time they thought about how reserve accounting works. They don’t have a clue. There are no operational issues.

But this does mean they may be reluctant to cut to zero.


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ECB expected to cut rates 50 bps today

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ECB to Cut Rates as Slump Calls for `Radical Action’

by Christian Vits

Nov. 6 (Bloomberg) — The European Central Bank will cut interest rates for the second time in less than a month today as the region’s economy suffers its worst slump in 15 years, economists said.

“It’s time for radical action,” said Ken Wattret, an economist at BNP Paribas SA in London. “This is a very severe economic downturn, interest rates should come down a long way.”

Obviously they still haven’t figured out lower rates will make matters worse, as lower rates cut government interest payments (it’s a spending cut) which removes income paid to the private sectors.

The only aspect that might help is the hope that the lower rates drive the currency lower. This is one of those ‘be careful what you wish for’ conditions.

First, with falling aggregate demand around the world, export growth will be problematic even with the lower real wages that come from a lower currency.

Second, a falling currency raises import prices and reduces real terms of trade, particularly for a large energy importer like the eurozone.

Third, anything that weakens the economy and lowers standards of living is socially dangerous.

Fourth, the problems of USD debt including USD losses growing as a % of euro based capital and income that have been driving the euro down remain and the risk of an acceleration of this process increases as the eurozone economies weaken.


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Re: Fed finally gets interest on reserves right

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(email exchange)

Yes, a very obvious move for anyone with any sense of logic.

Again, we see continued evidence that the higher ups do not understand their own monetary operations.

Some of the remaining issues:

The TAF should at a minimum be unlimited and offered at a fixed rate, and the collateral requirements can be expanded to any bank legal assets.

The Fed should get Congressional approval to expand their treasury lending facility and lend any security in unlimited quantities at an overnight rate at a small
spread below their target Fed funds rate.

The Fed should cut off the (unlimited) swap lines to foreign central banks before it’s too late.

>   
>   On Wed, Nov 5, 2008 at 11:43 PM, Scott wrote:
>   

Press Release

Federal Reserve Press Release

Release Date: November 5, 2008
For release at 10:00 a.m. EST

The Federal Reserve Board on Wednesday announced that it will alter the formulas used to determine the interest rates paid to depository institutions on required reserve balances and excess reserve balances.

Previously, the rate on required reserve balances had been set at the average target federal funds rate established by the Federal Open Market Committee (FOMC) over a reserves maintenance period minus 10 basis points. The rate on excess balances had been set as the lowest federal funds rate target in effect during a reserve maintenance period minus 35 basis points. Under the new formulas, the rate on required reserve balances will be set equal to the average target federal funds rate over the reserve maintenance period. The rate on excess balances will be set equal to the lowest FOMC target rate in effect during the reserve maintenance period. These changes will become effective for the maintenance periods beginning Thursday, November 6.

The Board judged that these changes would help foster trading in the funds market at rates closer to the FOMC’s target federal funds rate.


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Re: Steep yield curve

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>   
>   On Wed, Nov 5, 2008 at 7:06 AM, Morris wrote:
>   
>   COLLAPSE OF ST RATES HAS DONE SQUAT FOR LT RATES- so consumer
>   has gotten no benefit in trying to procure Long Term financing especially
>   in housing, where all mtge rates are near the high for the last 52 wks–
>   the spread between Fed Funds to Jumbo Mortgages is now 680bps–
>   has got to be a record… Great for spreads at banks…not great for
>   consumers..
>   

And banks are not allowed to take ‘gap’ risk so it doesn’t do much for them, either.

Short rates are down because of Fed funds cuts by the Fed and the unlimited lending internationally via the swap lines bringing down three month rates.

To bring long term rates down they need to stop issuing long term Treasury securities and buy back the stuff that’s outstanding. Treasury securities function as ‘interest rate support’ for their given maturity.

But even lower long term rates won’t do a lot when there is a shortage of aggregate demand because the budget deficit is too small.

And an unfriendly foreign monopolist setting crude prices can only be addressed by immediately cutting our consumption.

Warren

MOSLER’S LAW: There is no financial crisis so deep that a sufficiently large increase in public spending cannot deal with it.
(as stated by Prof. James Galbraith)


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Zero rate!

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Yes, but, of course, for the wrong reasons!

They all still act and forecast as if lower rates are expansionary.

This still has no support in theory or practice.

Outstanding government debt means the private (non-government) sectors are net savers.

Households remain net savers.

Lower rates directly cuts personal income.

And lowers costs for businesses including costs of investments that reduce costs.

I do favor a permanent zero interest rate policy.

That would mean the same amount of government spending needs less in taxes to support it (larger deficit).

Ex-Fed Gov. Meyer Makes a Case for a Zero Fed-Funds Rate

By Brian Blackstone

With the U.S. unemployment rate now expected to climb well above 7%, former Federal Reserve governor Laurence Meyer projects that Fed policymakers may have to lower the target federal-funds rate all the way to zero next year.

“However, the expected rise in the unemployment rate, paired with the rising threat of deflation, presents a risk that the FOMC will have to ease even further, perhaps all the way to a zero federal funds rate,” Meyer and Sack wrote in a research note.

Meyer and Sack said they think the jobless rate will rise to as high as 7.5% from 6.1% now. They also expect a significant gross domestic product contraction of 2.8%, at an annual rate, in the fourth quarter, after a projected 0.7% decline in the third. They also expect GDP to fall in the first quarter of next year.

Meyer and Sack expect the Fed’s preferred inflation rate gauge — the price index for personal consumption expenditures excluding food and energy — to moderate to just 1% growth, at an annual rate, by the end of 2010.

“Plugging our interim forecast into our backward-looking policy rule suggests that the federal funds rate should be cut to zero by the middle of next year,” Meyer and Sack wrote.

“Our forward-looking policy rule…gives similar results if we plug in our updated forecast, as it calls for a funds rate of about zero by early 2010,” they wrote.


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Re: Hungary

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(email exchange)

And this only makes it worse:

Hungary Raises Benchmark Rate to Defend its Currency (Update2)

By Balazs Penz and Zoltan Simon

Oct. 22- Hungary’s central bank raised its key interest rate in an emergency measure to shore up the country’s currency, after it fell to near a record against the euro.

The Magyar Nemzeti Bank in Budapest raised the two-week deposit rate today to 11.5 percent, the highest since July 2004, from 8.5 percent, it said in an e-mailed statement. The move came two days after the bank left rates unchanged at its regular meeting. The last emergency rate increase was in 2003.

Governments are net payers of interest, so raising rates adds to governments spending on interest and raises costs of doing business and costs of investments- all ‘inflationary biases’ that further weaken the currency.

And a weaker euro (just saw it at about 129) means unrealized dollar losses across the Eurozone grow as a percentage of (eurodenominated) capital, pushing the banking system and the national governments pledged to support it towards insolvency.

>   
>   On Wed, Oct 22, 2008 at 3:08 AM, wrote:
>   
>   I wonder whether this will prove a tipping point for the euro:
>   The willingness of the ECB to “bail out” a country that is not
>   yet member of the Eurozone is quite significant and signals the
>   concerns that EMU members now have about the disruptive
>   effects of a crisis in Hungary. Of course, they can do it now
>   that the have the sub-underwriter of last resort in the Fed.
>   Also, the ECB liquidity support, unlike IMF conditionality loans,
>   does not come with any attached string. The additional issues
>   that the ECB action has caused are however important: if 5
>   billion is not enough if the financial pressures intensify would
>   the ECB lend more? Will the ECB do similar swaps with other
>   Emerging Europe economies that are likely candidates – in the
>   next few year – for EMU membership? Also should Hungary now
>   use this additional international liquidity to prevent a further
>   depreciation of its currency or should it save this additional
>   ammunition in case things get worse?
>   


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