October 15, 2010
More discussion of options for the Fed
I'm in Boston today at a conference at the Federal Reserve Bank. Fed Chair Ben Bernanke spoke this morning and this afternoon I presented results from my research with Cynthia Wu. I hope to have time later this weekend to say a little more about some of the presentations and discussion. But for now let me provide a link to an interview with CNBC on some of these issues.
Posted by James Hamilton at October 15, 2010 03:18 PMdigg this | reddit
Very nice. Thanks. And you deserve some kind of special award for having to suffer through Larry Kudlow's rantings. The patience of a saint.
But I don't think you quite answered the question at the end. The question wasn't "what do you expect the Fed to do"? The question asked what you would recommend that the Fed do in terms of QE2?
Posted by: 2slugbaits at October 15, 2010 03:43 PM
It seems the market pricing in QE2 and it's hard to see it as a positive. Since Bernanke's Jackson Hole speech, the yield on mortgage bonds is down all of 9bps and oil is up 10+%. And it's done a good job of punishing those emerging economies with flexible exchange rates.
So far, I think the predictions of the effects of QE2 seem about as accurate as the weather predictions in the Farmers' Almanac.
Posted by: Bob_in_MA at October 15, 2010 07:05 PM
The Fed should start increasing interest rates. Its clear that keeping them low is doing nothing, and anyway, the big investors are just borrowing american money and creating more bubbles with it, here and in foreign countries. They are borrowing in America and investing in Brazil, China, etc., driving up the price of oil, and of course blowing the crap out of gold, etc. All the Fed is doing is just funding ownership consolidation among the super-rich, allowing them to buy up even more of everything worth buying (add farm land to the list).
Raise interest rates, if nothing else it will make people think we've turned a corner...
Posted by: rational revolution at October 15, 2010 07:37 PM
It doesn't look like the market heard what it wanted to today.
I expect Wall Street wanted a firm commitment of $1 trillion or more. That would push the 10-year down about 40 basis pts (correct?) and send more investors into riskier assets (stocks)
That's the plan, right? Fight inflation by creating another asset bubble?
Okay. So the market gets a jolt. People feel richer and spread the wealth into more investment, hiring etc. But if that's the case, then why has Bernanke opposed fiscal stimulus? Judging by the CBO's report, that would be a cheaper way to raise employment and rev up the economy. Or does Bernanke really believe it can all be fixed with monetary policy?
More important, Bernanke's speech did not reduce uncertainty at all. When only a handful of experts really understand the basic principles involved, people are more inclined to stay on the sidelines and wait for greater clarity.
I'd say the speech was a flop. Bernanke tries to be clear, but he's not a good communicator, and it's hurting his cause.
Posted by: Raskolnikov at October 15, 2010 08:42 PM
Bob, Oil is going to be up no matter what as long as the global economy expands. The only way to tank it is to tank the global economy which would destroy so much wealth. 5 dollar oil would seem high. The system is dead. Nobody wants to admit that. Not multi-nationals. Not politicians. Not "plebians" themselves. They all want to bring back the boom. It ain't coming back. Raise taxes, have tax holidays, cut spending, raise spending. It does not matter, the boom isn't coming back. A little oasis is no substitution for the misallocations.
The longer the globalist waits to respond to misallocations of the current global system, the more they give a potentially devestating nationalistic and socialistic shocks that could bring all the cards down.
My advice is to not starve the petty bourgeois. We have all seen the crazies that brings.
The FED should be talking about this CONSISTANTLY. The FED's current structure is at risk as well. Abolish the FED? So be it, they can operate shadowly like they did before. They will whine and cry, but it is the lesser of two evils. Nationalize the FED? They are dead as a entity.
Nationalizing FED into treasury is the worst thing that the bankers and capitalists fear the most. The government can fund not debt bearing projects at 0 interest and begin the reindustrialization process.
Posted by: The Rage at October 15, 2010 09:26 PM
The answer is to lower the remuneration rate on excess reserves. Let the free markets decide interest rates. Screw the primary dealers. Let the commercial banks expand their earning assets, not the Reserve banks (thru FED credit).
Posted by: flow5 at October 15, 2010 09:57 PM
Very clear and accurate comments.
Could you please,explain to a neophyte why so much burden on the Federal reserve only when it comes to create full employment? On the long run,and after review of all efforts deployed.When is a conclusion to be made that a mandate of price stability and full employment could be looking like breeding the proverbial carp and rabbit?
"Treasury 30-year bonds tumbled, pushing yields to the biggest weekly increase since August 2009, on speculation that Federal Reserve efforts to spur the economy will reignite inflation"
"China Says Medium, Heavy Rare Earths to Last 15-20 Years, May Need Imports"
Posted by: ppcm at October 15, 2010 11:44 PM
this aggressive and sensationalist style of leading an interview, even by tabloid standards, is sick.
Posted by: Johannes at October 16, 2010 03:00 AM
Dudley said in his recent speech:
"some simple calculations based on recent experience suggest that $500 billion of purchases would provide about as much stimulus as a reduction in the federal funds rate of between half a point and three quarters of a point. But this estimate is sensitive to how long market participants expected the Fed to hold on to these assets."
How do you think that translates to term yields and comparison with your expectations?
Posted by: JKH at October 16, 2010 04:07 AM
JKH: As I discussed here, a 50-basis-point decline in the fed funds rate in recent years was associated with a 20-basis-point drop in the 10-year rate. So I see Dudley's estimates as quite consistent with what Cynthia and I and others have come up with.
Posted by: JDH at October 16, 2010 04:27 AM
Comments from Federal Reserve officials saying that they want higher prices are an easing of monetary policy in and of themselves. Nominal long Treasury yields are rising, while TIPS yields are falling. Clearly the markets don't believe in liquidity traps.
Rising commodity prices are to be expected. They are traded every day in liquid markets, so their prices react quickly to incoming news. It takes much longer for wages and house prices to react.
Posted by: Jeff at October 16, 2010 04:45 AM
It is unlikely that wage inflation will occur in the years to come. The need for rising exports will increase the same competitive downward pressure that has kept wages stagnant all these past decades.
An important distinction regarding a depreciating dollar is that it will put upward pressure on the prices of manufactured goods and commodities in general but without as much upward pressure on agricultural goods. This of course due to the US being such a large contributor to domestic supplies, and a potentially larger contributor to domestic supplies, and then also able to make a substantial contribution to global food supplies. And, the upward pressure on most everything else due to manufactured goods coming from nations that will have fewer exports going into US markets, China of course being the biggy here.
But, naturally, commodity prices have upward potential that can be heavily influenced by speculation... and, QE does feed directly into that sphere of influence. If more nations do chose to protect their bond markets with taxes on foreign investment, as they probably will be forced to do as the hot flows heat-up, and as Brazil has already done, the potential for spikes in commodity prices seems very likely. Something similar to what happened with the 2008 spike in oil prices but more concentrated in size yet broader in scope.
I doubt if Ben Bernanke has the courage to take on this much risk in the face of so much international opposition, but if he does, if he is that delusional, or just 'a wild and crazy guy', he will most probably be remembered as the person who ended reserve currency status for the US. Whether this will be good or bad is too complicated to get into here so I'll just say it will make things very interesting.
Posted by: rayllove at October 16, 2010 11:13 AM
Re: "Treasury 30-year bonds tumbled, pushing yields to the biggest weekly increase since August 2009, on speculation that Federal Reserve efforts to spur the economy will reignite inflation"
What's nonsensical about that is if bonds fall and rates go up, it means QE2 was ineffective. So, what spurs the inflation?
The usual transmission of low rates to inflation is via bank lending. In September, bank lending fell at the highest rate since April (-7% SAAR.)
Posted by: Bob_in_MA at October 16, 2010 12:49 PM
Easing can actually cause deflation. If it drives up operating costs and drives down returns, as it seems to be doing, it will drive down consumption by event more than the increased cost. Just like when energy costs increase, spending foes down by even more.
As living expenses increase, people will be less willing and able to spend on bigger ticket items, rent, mortgages, and investment.
Unless constraints in supply of inputs are reduced, we'll just see rent seeking behavior rather than investment in production. This is the dynamic I think we're in.
Posted by: aaron at October 17, 2010 06:47 AM
From Ben Bernanke Speech (Monetary Policy Objectives and Tools in a Low-Inflation Environment): "..such a reduction in confidence might lead to an undesired increase in inflation expectations... To address such concerns and to ensure that it can withdraw monetary accommodation smoothly at the appropriate time, the Federal Reserve has developed an array of new tools.7"
Try as you might, footnote 7 DOES NOT direct you to any document that explains any new tools that the FED will use to reduce its balance sheet, expanded by its purchase of distressed securities from its primary dealers. Is the undocumented "new tool", higher FED interest on excesss reserves?
It doesn't take a rocket scientist to figure out that the FED can control inflation by increasing capital and reserve requirements (like the BOC). Only in America are we corrupt enough to bribe banks to withdraw money from the market.
Posted by: MarkS at October 17, 2010 07:58 AM
Please see the post at the link above to see why it matters very little what the Bubble Ben Shalom and the Inkjets do by printing digital fiat debt-money freebucks to bail out the insolvent TBTF and TBTE banks such as Bankrupt of America, JP More-Gain, Way Far-to-Go, and Godmen Sucks, all of which are the primary dealers to launder, I mean clear, the US gov't debt issuances.
The more China-Asia grows in terms of GDP and oil consumption and imports, the more the US and EU contract in per-capita oil production and consumption terms, and the closer we get to the onset of the post-Oil Age collapse phase.
The US debt-reflationary regime ended in '06-'07. Now we face an intractable debt-deflationary regime punctuated and exacerbated by the global peak production of oil, the imminent peak and decline of oil exports, and the inexorable decline in global per-capita oil production and consumption.
The most prudent actions e-CON-omists and so-called political and corporate "leaders" could do is tell us the unvarnished truth about Peak Oil and the implications for "the American way of life", and begin the process of adapting to a 33-50% decline in per-capita oil consumption and material standard of consumption over the next 10-20 years and beyond.
The post-Oil Age trip back to Olduvai, Natural Regression, and re-primitivism is inevitable; denying it makes the process more costly and painful when it is thrust upon us and collapse is the inevitable result.
Posted by: Nemesis at October 18, 2010 12:51 PM