Ten Fed Notes, Plus One
I like variety at my blog. I like to think about a lot of issues, and the interconnections within the markets. Sometimes that makes me feel like a lightweight compared to others on critical issues. But what I am is a stock and bond investor who analyzes the economy to make better investment decisions, primarily at the sector level, and secondarily at the asset class level.
At present, analyzing the FOMC is a little confusing. Why?
- We have Fed Governors speaking their minds, because Bernanke doesn’t maintain the control that Greenspan did. Thus we hear a variety of views.
- The economy is neither strong nor weak, but is muddling along.
- The Dollar is weak, but doesn’t seem to be getting weaker; it seems that a pretty accommodative forecast of FOMC policy has been baked in.
- MZM and my M3 proxy are running ahead at double-digit rates, while M2 trots at around 6%, and the monetary base lags at a 2% rate. We are now more than nine months since our last permanent injection of liquidity. I asked the Federal Reserve in an e-mail to tell me what the longest time was previously between permanent open market operations one month ago, but they did not respond to me. (They did respond to me when I suggested my M3 proxy, total bank liabilities.)
- The Treasury yield curve still has a 2% Fed funds rate in 2008, but the recent curve widening should begin to inject some doubt into the degree of easing that the Fed can do. Once yield curves get near maximum steep levels, something bad happens, and the loosening stops. At a 2% Fed funds rate, we will be near maximum steep.
- The steepening of the curve has raised mortgage rates. So much for helping housing.
- The TAF auctions have reduced the TED spread to almost reasonable levels, but it almost seems that the Fed can’t discontinue the auctions, because the banks have found a cheap source of financing for collateral that can’t be accepted under Fed funds.
- At present, I see a 50 basis point cut coming at the 3/18 meeting. That’s what fits the yield curve, Fed funds futures, and the total chatter. For the loosening trend to change, we will need something severe to happen, such as a inflation scare or a dollar panic.
- Now the equity markets are not near their peak, but the debt markets are showing more fear, and that is what is motivating the Fed. Capital levels at banks? Credit spreads on bonds? Ability to get financing? The Fed cares about these things.
- In some ways, Bernanke cares the most. Of all the people to have in the Fed Chairman seat at this time, we get a man who is a scholar on the Great Depression, and determined to not let it happen again, supposing that it was insufficient liquidity from the Federal Reserve that led to the Depression. That might not have been the true cause, but it does indicate a Fed biased toward easing, until price inflation smacks them hard.
One last note. Though I haven’t read through the 2001 transcripts of the FOMC, I have scanned the 1999 and 2000 transcripts. The FOMC is flexible in the way that they view policy, and willing to consider things that aren’t perfectly orthodox, such as the stock market, even if it is hidden in the rubric of the wealth effect.
February 20th, 200810:48 pm at
What was the Fed reply about M3? I have continuing curiosity about this topic, as you know. My economist friends tell me that it is not a useful measure. It includes elements that are exchanges not increasing monetary supply and is also not subject to policy action. MZM is interesting, but distorted by investors selling stocks and going to cash. The latest macro textbooks stick to M2.
Meanwhile, many wingnuts (not you of course) see the dropping of the M3 reporting as some conspiratorial move. They credit large government bureaucracies with much more conspiratorial power than could possibly be mustered!
By reading actual transcripts, you have vaulted into the top 1% of Fed analysts - if you were not there already