Perhaps I should start with a small apology because my post yesterday did not even consider the forthcoming release of the FOMC minutes.? Not that I would have had anything great to say, but being asleep is being asleep. 😉
1) I’ve been banging the increasing inflation drum for a few years, and now I think inflation is getting some traction.? There was the CPI report today, of course, but I don’t put too much stock in monthly numbers — there is too much noise.? (I don’t think anyone wonders why I don’t spend a lot of time on quarterly, monthly or weekly data releases, but if anyone does wonder, it is because the signal to noise ratio is low.? The shorter the period, the lower it gets.)? I follow a melange of public and private bits of data, but try to look at it over longer periods of time — at least a year if possible.? A rise in inflation will make the FOMC’s life difficult.? I have been arguing for asset deflation and price inflation for some time now, and that is not a mix that I would enjoy trying to manage, if I were on the FOMC.
2) But there’s another reason why I have been arguing for price inflation.? It was about four years ago that I suggested on RealMoney that the cycle would end when China begins to experience a bout of price inflation.? Well, we are there now.? It was simple for China (and other nations) to ship us goods or provide services when the US Dollar was stronger, and inflation was low.? It is much harder with a weaker dollar, and rising price inflation.? The people of China need American goods, not more paper promises stuffed inside their central bank.
3) A few central banks aside from the Fed have loosened recently, but not many, and not much.? The US is walking alone here, and other nations are trying to cope.? Many other countries are willing to let their economies slow a bit, and perhaps let their currencies rise versus the US dollar in order to reduce inflation.? A few are still tightening.? The inflationary impacts of our monetary policy continue to radiate out, and will continue to, until the Fed starts its next tightening cycle.
4) The way I understand the FOMC’s behavior at present, is that they will drop rates hard for a time, and then remove policy accommodation dramatically once normal economic activity resumes.? My concern is that it may be more difficult removing policy accommodation than many suppose.? The TAF is holding down the TED spread at present, though the TED spread is still high.? What happens when it goes away?? Extending liquidity is always easier than removing it.? And, as it said in the 1/21/2008 portion of the FOMC minutes:
Some members also noted that were policy to become very stimulative it would be important for the Committee to be decisive in reversing the course of interest rates once the economy had strengthened and downside risks had abated.
The FOMC is not intending on letting low short rates remain for a long time.? That would make me queasy if I had a lot of money riding in the belly of the yield curve, say 4-7 years out.
5)? How would I characterize the FOMC minutes, then?? Weak economy, but not a shrinking economy.? Difficulties in the lending markets; credit spreads are high.? Inflation higher than we would like, but economic weakness, especially that affecting the financial system comes first.
6) From yesterday, my friend Dr. Jeff asked:
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 🙂
The nice fellow at the Fed who e-mailed me back confirmed that I should be looking at the H.8 report for an M3 proxy.
This is what I wrote at RealMoney two years ago:
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David Merkel |
| Taking a Substitute for Vitamin M3 | ||
| 3/14/2006 3:26 PM EST |
If you’re not into monetary policy, you can skip this. Within the month, the Federal Reserve will stop publishing M3. Now, I think M3 is quite useful as a gauge of how much banks are levering themselves up in terms of credit creation, versus the Fed expanding its monetary base. I have good news for those anticipating withdrawal symptoms when M3 goes away: The Federal Reserve’s H.8 report contains a series (line 16 on page 2 – NSA) for total assets of all of the banks in the US. The correlation between that and M3 is higher than 95%, and the relative percentage moves are very similar. And, from a theoretical standpoint, it measures the same thing, except that it is an asset measure, and that M3 incorporated repos and eurodollars, which I think are off the balance sheet for accounting purposes, but should be considered for economic purposes.
But it’s a good substitute… unless Rep. Ron Paul’s bill to require the calculation of M3 passes, this series will do.
Position: noneI since modified that to be total liabilities, and not total assets.? My use of M3 is a little different than most economists.? There is a continuum between money and credit, and M3 is more credit-like, while measures that don’t count in time deposits are money-like.? My view of M3 was versus other monetary measures, helping me to see how much the banking system was willing to borrow from depositors in order to extend credit.? As an aside, non-M2 M3 growth is highly correlated with stock price movement (according to ISI Group).
7) I give credit to the members of the FOMC who said (regarding the intermeeting 75 bp rate cut):
However, some concern was expressed that an immediate policy action could be misinterpreted as directed at recent declines in stock prices, rather than the broader economic outlook, and one member believed it preferable to delay policy action until the scheduled FOMC meeting on January 29-30.
This is just an opinion, but on policy grounds, I would have found it preferable for the FOMC to have cut 125 basis points on the 30th, rather than the two moves.? I don’t believe that the FOMC should react to short-term market conditions, and in general, they should avoid the appearance of it.? Monetary policy works with a long and variable lag.? One week would not have mattered; the FOMC needs to consider the way their actions appear, as well as what those actions are.
Since the DIDMCA the money supply has become unknown & unknowable. The Act created the legal framework for the addition of 38,000 more commercial banks to the 14,000 we already had, and in the process, the abolition of 38,000 intermediary financial institutions.
Even so, what went for M2 went for M3. And M2 erroneously includes MMFs in its definition. MMFs are the customer’s of the commercial banks. They are financial intermediaries.
Monetary savings are never transferred from the commercial banks to the financial intermediaries; rather are monetary savings always transferred through the financial intermediaries.
Whether the public saves or dis-saves, chooses to hold their savings in the commercial banks or to transfer them to intermediary institutions will not, per se, alter the total assets or liabilities of the commercial banks; nor alter the forms of these assets or liabilities.
Financial intermediaries (MMFs) lend existing money which has been saved, and all of these savings originate outside the intermediaries.
The utilization of these loan-funds, or the activation of monetary savings by these financial intermediaries, is captured thru the velocity of their deposits (bank debits/withdrawls), not thru the volume of their demand deposits.
I.e., from the standpoint of the economy, MMF deposits never leave the CB system. And the growth of the MMFs is prima facie evidence that existing funds/savings have already been spent/invested (transferred) by their owners/savers to borrowers. I.e., this represents a double counting.
Even now, M3 is meaningless. Though at some point, under this ACT, our means-of-payment money supply will eventually evolve and approximate M-3.
Check me if I go too far.
From the standpoint of monetary authorities, charged with the responsibility of regulating the money supply, none of the current definitions of money make sense. The definitions include numerous items over which the Fed has little or no control (e.g., M2), including many the Fed need not and should not control (currency).
The definitions also assume there are numerous degrees of ?moneyness?, thus confusing liquidity with money (money is the ?yardstick? by which the liquidity of all other assets is measured).
The definitions also ignore the fact that some liquid assets (time deposits) have a direct one-to-one relationship to the volume of demand deposits (DDs), while others affect only the velocity of DDs. The former requires direct regulation; the latter simply is important data for the Fed to use in regulating the money supply.
And obviously, no money supply figure standing alone is adequate as a ?guide post? to monetary policy.
Bank credit is defined as total loans and investments at all commercial banks.
“The FOMC often refers to the ?credit proxy? ? daily average total deposits at all member banks.”
Presumably, this corresponds to your “total liabilities, and not total assets”.
Bank credit proxy used to be an FOMC target: “The Federal open market committee?s strategy remained essentially unchanged for more than three years, from Sept 66, when the committee first began including a bank credit proviso clause in its directive until Dec 1969.”
Bank credit is defined as total loans and investments at all commercial banks.
“The FOMC often refers to the ?credit proxy? ? daily average total deposits at all member banks.”
Presumably, this corresponds to your “total liabilities, and not total assets”.
Bank credit proxy used to be an FOMC target:
“The Federal open market committee?s strategy remained essentially unchanged for more than three years, from Sept 66, when the committee first began including a bank credit proviso clause in its directive until Dec 1969.”