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Redacted Version of the January 2013 Version of the FOMC Statement

Wednesday, January 30th, 2013
December 2012January 2013Comments
Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions.Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors.Shades GDP view down, finally.

Remember when the FOMC cited the Tsunami in Japan for economic weakness that would soon go away?  More grasping at straws.

Although the unemployment rate has declined somewhat since the summer, it remains elevated.Employment has continued to expand at a moderate pace but the unemployment rate remains elevated.No real change.

So long as discouraged workers increase, this is a meaningless statement.

Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed.Household spending and business fixed investment advanced, and the housing sector has shown further improvement.Shades up their of business investment
Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.No change.  TIPS are showing rising inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is now at 2.86%.

The FOMC is wrong on inflation.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.No change. Any time they mention the “statutory mandate,” it is to excuse bad policy.
The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. Emphasizes that the FOMC will keep doing the same thing and expect a different result than before. Monetary policy is omnipotent on the asset side, right?
Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook.Shades up their views of the financial markets.
The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.No change. CPI is at 1.7% now, yoy, so that is quite a statement.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per monthNo change.

Does not mention how the twist will affect those that have to fund long-dated liabilities.

Wonder how long it will take them to saturate agency RMBS market?

 

The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction.and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.No real change.  Operation Twist continues.  Additional absorption of long Treasuries commences.  Fed will make the empty “monetary base” move from $3 to 4 Trillion by the end of 2013.
Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.No change.
The Committee will closely monitor incoming information on economic and financial developments in coming months.The Committee will closely monitor incoming information on economic and financial developments in coming months.No change. Useless comment.
If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability.If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability.No change.
In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.No change.  The FOMC promises what it cannot know or deliver.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.No change.

Promises that they won’t change until the economy strengthens.  Good luck with that.

In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.Not a time limit but economic limits from inflation and employment.

Just ran the calculation – TIPS implied forward inflation one year forward for one year – i.e., a rough forecast for 2014, is currently 2.41%.  Here’s the graph.  The FOMC has only 0.09% of margin in their calculation if they are being honest, which I doubt.

 

The Committee views these thresholds as consistent with its earlier date-based guidance. The inaccurate sentence is deleted.
In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.New sentence.  Giving yourself an out clause on the hard-and-fast promises made above?
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.No change.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen.No change
Voting against the action was Jeffrey M. Lacker, who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.Esther George takes up the thankless task of telling the FOMC that they are doing more harm than good.

 

Comments

  • I really think the FOMC lives in a fantasy world.  The economy is not improving materially, and inflation is rising. Note that the CPI is close their 2.5% line in the sand.  TIPS-implied inflation 1X1 (one year ahead for one year) is 2.41%, and 5X5 is 2.86% annualized.
  • Current proposed policy is an exercise in wishful thinking.  Monetary policy does not work in reducing unemployment, and I think we should end the charade.
  • In my opinion, I don’t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself. When this policy doesn’t work, what will they do?
  • Also, the investment in Agency MBS should have limited impact because so many owners are inverted, or ineligible for financing backed by the GSEs, and implicitly the government, even with the recently announced refinancing changes.
  • The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.  As a result, the FOMC ain’t moving rates up, absent increases in employment, or a US Dollar crisis.  Labor employment is the key metric.
  • GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers.

A Statement to Dr. Bernanke:

More debt will not get us out of this crisis.  The Great Depression ended when enough debts were compromised, paid off, or cancelled, which from my study is 1941, before World War two started.

Your policies further aid the growth of the budget deficit, and encourage malinvestment in housing and banking, two things in a high degree of oversupply.  The investments in MBS only help solvent borrowers on the low end of housing, who don’t really need the help.  Holding down longer-term rates on the highest-quality debt does not have any impact on lower quality debts, which is where most of the economy finances itself.

The problems with unemployment are structural, not cyclical.  Labor force participation rates continue to decline.  There is greater labor competition around the world, forcing down wages on the low end.  There is nothing that monetary policy can do to change this.  You can create stagflation through your policies, but not prosperity.

When inflation does arrive, the FOMC is going to find it very hard to raise Fed Funds or shrink its balance sheet.  The banks will not react well as you try to shrink, and the long rates that you have held down will react violently.

You haven’t thought through all of the “second order” effects of your policy.  Even the “first order” effects, which favor the rich over the poor, seem to elude you.  Assets rise, helping the rich.  Interest rates fall, helping the rich who can borrow.  Commodity prices rise, harming the poor.

Insanity is doing the same thing over and over, and expecting a different result.  When will you realize that the policies of the Fed aren’t helping, and need to be abandoned?

How to Become Super-Rich?

Wednesday, January 30th, 2013

My main goal this evening is to discredit those who tell you that you can get rich quick by investing in the secondary markets. That won’t work.  It sort of worked for Buffett, but a lot of his success came from creating a holding company, and buying entire businesses, not just fractions of companies that he would not control.

Even the top entertainers and sports stars rarely become super-rich unless they have an iron discipline, and hand over their excess assets to an honest and talented advisor, who shepherds them and grows them, and gives the client personal advice as needed.  That’s what I do, though I have no famous clients.

As with so many things, it comes down to self-control.  Can you defer self-gratification?  Will you seek talented advisors who are honest?  They aren’t easy to find.

Those that become super-rich form their own firms, and use them to further their wealth.  They hire talented people to grow their wealth.  It can be a purely industrial firm.  It can be part industrial and investing, like Loews, Berkshire Hathaway, Leucadia, Icahn, etc.  It can be a private firm, whether private equity, a hedge fund, or an industrial firm.

The main idea here is that great wealth typically comes through running a large firm that is very profitable, which concentrates the efforts of others.  Significant wealth never comes through your own labors or secondary-market investing.  It comes through creating a very profitable firm.

Now, I want to add one more tangential observation here.  It’s easier to make a lot of money by offering investment advice, than by investing your own money yourself.  Why?  In offering advice, your margins are virtually unlimited.  Every new subscriber is gravy.  Your own capital is limited, so your returns are limited.

But the record of newsletters is poor; that’s why I have never considered a newsletter.  I buy no newsletters because they have no value.  I sell no newsletters because my best insights should go to my clients.  I have never seen a newsletter in my life that genuinely offered value.

Far better that you build your own firm with your valuable differential insights, than that you try to make money in the public markets.  Those who are very rich managed large firms that became dominant.

-=-==-=-=–==-=-=-=-=-=-=-=-=-=–==-=-=-=-=-=-=-=-=-

Now, few of us can do that.  That’s the way the world works.  And most who try it will fail. Far better to aim lower and achieve a happy outcome, than strain after riches that never come.

Full Disclosure: long BRK/B, L

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.


Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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