The Fed to push harder on the rope?

[Tilted]

Bernanke Hits Back at Fed Critics, Points at China

Great. Not only does the Fed have the (completely innapropriate) full employment mandate to go along with what its real policy job should be - monetary stability - but we also have Fed officials as policy adovocates and PR people. What next, direct elections of Fed officials? They should not be politicians - the further they are from being such, the better off we'd be.

 

[Tilted]

Well, what do you know? Someone must be listening to me with regard to ending the Fed's 'maximum employment' mandate. We need to get the Fed out of the (de facto) fiscal policy business and we need to reduce - not increase - its politicization.

Senator Bob Corker talking about the Fed as if he actually understands the situation - Ending the Fed's Dual Mandate

 

[Tilted]

The minutes from the FOMC's November 2-3 meeting, the one after which they issued the statement announcing the $600 Billion balance sheet expansion, have now been released. It's pretty clear that their decisions are being guided (in too large part) by general economic condition concerns, rather than by monetary stability concerns. The Fed really has become just one more (general economic) policy-implementing arm of the government.

Then there's this from page 8 of the minutes:

Participants generally agreed that the most likely economic outcome would be a gradual pickup in growth with slow progress toward maximum employment. They also generally expected that inflation would remain, for some time, below levels the Committee considers most consistent, over the longer run, with maximum employment and price stability. However, participants held a range of views about the risks to that outlook. Most saw the risks to growth as broadly balanced, but many saw the risks as tilted to the downside. Similarly, a majority saw the risks to inflation as balanced; some, however, saw downside risks predominating while a couple saw inflation risks as tilted to the upside. Participants also differed in their assessments of the likely benefits and costs associated with a program of purchasing additional longer-term securities in an effort to provide additional monetary stimulus, though most saw the benefits as exceeding the costs in current circumstances. Most participants judged that a program of purchasing additional longer-term securities would put downward pressure on longer-term interest rates and boost asset prices; some observed that it could also lead to a reduction in the foreign exchange value of the dollar. Most expected these changes in financial conditions to help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with the Committee’s mandate. In addition, several participants argued that the stimulus provided by additional securities purchases would help protect against further disinflation and the small probability that the U.S. economy could fall into persistent deflation—an outcome that they thought would be very costly. Some participants, however, anticipated that additional purchases of longer-term securities would have only a limited effect on the pace of the recovery; they judged that the economy’s slow growth largely reflected the effects of factors that were not likely to respond to additional monetary policy stimulus and thought that additional action would be warranted only if the outlook worsened and the odds of deflation increased materially. Some participants noted concerns that additional expansion of the Federal Reserve’s balance sheet could put unwanted downward pressure on the dollar’s value in foreign exchange markets. Several participants saw a risk that a further increase in the size of the Federal Reserve’s asset portfolio, with an accompanying increase in the supply of excess reserves and in the monetary base, could cause an undesirably large increase in inflation. However, it was noted that the Committee had in place tools that would enable it to remove policy accommodation quickly if necessary to avoid an undesirable increase in inflation.

First, I'm surprised by the inclusion of the bold-ed passage. It will be seized on by critics (foreign and otherwise) who have argued that QE II is a deliberate attempt to weaken the Dollar and advantage the U.S. economy at the expense of our trading partners.

Second, count me with the somes (e.g. Thomas Hoenig) rather than the mosts. Maybe I'll get a shirt printed that says 'Listen to the Somes!' As has been said before, the problem with this liquidity flood is that, if it by some chance starts to work, they'll have to fairly quickly undo it and reverse the effect. Monetary policy is either effective as a whisper, or it isn't going to be long-term effective at all. You can't just keep turning up the volume and expect that, once you get it loud enough, (sustainably) good things will happen.

 

[Larry Gude]

The Maybe I'll get a shirt printed that says 'Listen to the Somes!' As has been said before, the problem with this liquidity flood is that, if it by some chance starts to work, they'll have to fairly quickly undo it and reverse the effect. Monetary policy is either effective as a whisper, or it isn't going to be long-term effective at all. You can't just keep turning up the volume and expect that, once you get it loud enough, (sustainably) good things will happen.[/COLOR]

I like it.

We are compounding our disasters here. The title of this tread could not be more appropriate. Both Bush and Obama and Bernanke and Paulson and Geithner; pushing up a rope. When that doesn't work; push harder.

 

[Tilted]

How's that pushing going?

Treasury yields on November 2nd (the day before QE II was announced), on December 6th (the day the tax cut / unemployment extension was announced), and today:

3-month ...13% - ..15% - ..13%
2-year .....34% - ..42% - ..63%
5-year ...1.15% - 1.53% - 2.04%
10-year .2.63% - 2.95% - 3.46%
30-year .3.93% - 4.25% - 4.55%

(The Fed's Treasury purchases are supposed to be concentrated in the 2 to 10 year range.)


I don't think they're putting enough elbow grease into it. They really need to push harder.

 

[Tilted]

Oh, and the FOMC's latest statement was released today.

Blah, blah, blah, we're gonna keep pushing like we announced last month that we would, blah, blah, blah.

The good news is that they didn't announce plans for a new round of asset purchases, nor did they adjust the target range for the federal funds rate into negative territory.

 

[Tilted]

Santelli: Clarity from Fed? No. Inflation? Yes.

 

[Tilted]

I think it's working.

3-month .13%
2-year .66%
5-year 2.10%
10-year 3.53%
30-year 4.60%

 

[Tilted]

Yields are back down some.

3-month .10% (seems misreported to me)
2-year .58%
5-year 1.89%
10-year 3.26%
30-year 4.38%

 

[Tilted]

Oh, jeebus... analysts already contemplating the possibility of QE3? WTH?

Me thinks we ain't in Kansas no more - and I'm not liking the chances that we'll get back there any time soon.

Why are Yields Rising?

 

[Tilted]

When a (not-so-oblivious) floor trader implies that a GOOD initial jobless claim number is among the only reasons he can think of to NOT be long equity markets, because it might cause the Fed to rethink its "accommodation" policy...

The Fed has become too much an actor rather than the stage, too much the paint rather than the canvas. We need to end the dual mandate. Everybody say it together: END THE DUAL MANDATE!



EDIT: This is what I was referring to - about the 3 minute mark:

Weekly Jobless Claims Slip - CNBC Video

 

[Larry Gude]

The Fed has become too much an actor rather than the stage, too much the paint rather than the canvas. We need to end the dual mandate. Everybody say it together: END THE DUAL MANDATE!

The Fed's dual mandate dates to a 1946 act

Repealing the 65-year-old mandate of the Fed to combat both inflation and unemployment would return the Federal Reserve to the disastrous policies it followed from 1929 to 1933 - policies that Milton Friedman and others have held responsible for turning a routine business-cycle downturn into the worst economic depression in our history.

Comment?

 

[Tilted]

The Fed's dual mandate dates to a 1946 act



Comment?

You mean, other than to make note that the first paragraph indicates that a Mr. George Will agrees with me, and to point out that that proves I'm right?

More seriously (but not much), do I really need to substantively refute logic that is roughly analogous to: While it's true that yellow is not green, everyone knows that yellow is part of green, so if using green to do something (say, let a car's driver know that it's safe to keep motoring through) is a good idea, then using yellow to do that same thing must be a good idea also. They're one and the same after all. If we stop using yellow to do what we've traditionally used green to do, it'll be like going back to the days when we didn't even use green to do it.

There is a huge difference between having the general government try to manipulate economic conditions and having the central bank try to. The former is merely generic misguided policy, while the latter is mindless - let's just follow in the footsteps of banana republics - policy.

The author of that piece is wrong on the history and wrong in their conceptual understanding of how things work. Central banks should not be just another policy arm of the general government. Their primary goal should be monetary stability in furtherance of general and widespread confidence in the nation's currency.

 

[Larry Gude]

You mean, other than to make note that the first paragraph indicates that a Mr. George Will agrees with me, and to point out that that proves I'm right?

More seriously (but not much), do I really need to substantively refute logic that is roughly analogous to: While it's true that yellow is not green, everyone knows that yellow is part of green, so if using green to do something (say, let a car's driver know that it's safe to keep motoring through) is a good idea, then using yellow to do that same thing must be a good idea also. They're one and the same after all. If we stop using yellow to do what we've traditionally used green to do, it'll be like going back to the days when we didn't even use green to do it.

There is a huge difference between having the general government try to manipulate economic conditions and having the central bank try to. The former is merely generic misguided policy, while the latter is mindless - let's just follow in the footsteps of banana republics - policy.

The author of that piece is wrong on the history and wrong in their conceptual understanding of how things work. Central banks should not be just another policy arm of the general government. Their primary goal should be monetary stability in furtherance of general and widespread confidence in the nation's currency.

More often than not, I would take Will's writing and codify it as law so, I was not taking exception with him or you. More interested in your take as a check against Will because I reflexively support him even more so than St. Brett.

That said, I am interested in the fed doing one and ONLY one thing; it's original intent, protect the value of the dollar. Everything after that is so much because it is meaningless in and of itself to promote employment or suppress inflation if the dollar has ever less value in the process. In my view. If the dollar has long term stable value, everything else follows as the individual can sustain himself via his savings, his cash savings. That makes us free, in my view, more than a job or low inflation. Of course, it is my belief that Fed intent was changed specifically to promote the importance and preeminence of the central government.

 

[Tilted]

More often than not, I would take Will's writing and codify it as law so, I was not taking exception with him or you. More interested in your take as a check against Will because I reflexively support him even more so than St. Brett. Blasphemy!

That said, I am interested in the fed doing one and ONLY one thing; it's original intent, protect the value of the dollar. Everything after that is so much because it is meaningless in and of itself to promote employment or suppress inflation if the dollar has ever less value in the process. In my view. If the dollar has long term stable value, everything else follows as the individual can sustain himself via his savings, his cash savings. That makes us free, in my view, more than a job or low inflation. Of course, it is my belief that Fed intent was changed specifically to promote the importance and preeminence of the central government.

Yeah, it's become just one more policy arm of the central government.

I would clarify that while I think monetary stability is the only policy-type objective it should pursue, I think it should continue to fill some of the other non-policy-type roles that it fills. But, to some extent, it kinda has to in order to be the guardian of our currency (and the notion of money) - to be plugged in, so to speak, to have the ability to regulate money.

I'm talking about, for instance, being the communal clearing house for the nation's banks. Our banking system, and our economy in general, is much more efficient for it filling that role. Otherwise, money would just move too slow and banks would have this whole tit-for-tat, how much do I trust you thing going on that would be quite problematic given the way business, and people in general, operate now.

 

[Larry Gude]

I'm talking about, for instance, being the communal clearing house for the nation's banks. Our banking system, and our economy in general, is much more efficient for it filling that role. Otherwise, money would just move too slow and banks would have this whole tit-for-tat, how much do I trust you thing going on that would be quite problematic given the way business, and people in general, operate now.

Hmmm...you know MUCH more about this stuff than I so, I am interested in your comments in elaborating what you mean. The sense of the lay of the land that I am getting from Sorkin, TBTF, is that we could use a little more... deliberation...in how things work.

 

[Tilted]

Hmmm...you know MUCH more about this stuff than I so, I am interested in your comments in elaborating what you mean. The sense of the lay of the land that I am getting from Sorkin, TBTF, is that we could use a little more... deliberation...in how things work.

You lost me. I suspect you're talking over my head again, you might need to dumb down your inquiry so I know what it is I'm being asked to elaborate on. How the Federal Reserve System functions as a communal clearing house?

 

[Larry Gude]

You lost me. I suspect you're talking over my head again, you might need to dumb down your inquiry so I know what it is I'm being asked to elaborate on. How the Federal Reserve System functions as a communal clearing house?

And why you view it as a good thing.

 

[Larry Gude]

You lost me. I suspect you're talking over my head again, you might need to dumb down your inquiry so I know what it is I'm being asked to elaborate on.

The next time will be the first time.

 

[Tilted]

And why you view it as a good thing.

Hmmm... I think doing a good job of explaining it might require me to explain a fair bit of how the Federal Reserve System works, which I doubt you want me to do since it's somewhat involved (not as in hard to understand, just as in taking a bit of time to get enough detail to make the whole picture resolve right). Let me think about how best to do that, or in the alternative find something that does it better than I can.

But, as a simple answer and then a conceptual answer: First, it's a good thing in that it's somewhat necessary for the Federal Reserve to be a clearing house of sorts in order for it to be able to effectuate monetary policy.

Second, have you ever wondered how it is that the bank account system works? I mean, for instance, how can some guy in Powdunk, UT want to buy something from someone in Leonardtown, MD, and be able to do so so quickly and easily (either by pressing buttons on a computer or writing something on a piece of paper and mailing it). In this day and age, non-currency transactions process, in so far as consumers are concerned, just about as fast as currency (i.e. actual greenbacks) transactions do. The guy in Leonardtown doesn't know anything about the guy in Powdunk. He's not actually getting anything from the guy in Powdunk (i.e. actual cash) that he can be sure has value. For that matter, the bank he is trusting to handle his non-currency money for him doesn't know the guy in Powdunk or even the bank that the guy in Powdunk uses to pretend to send something to the guy in Leonardtown. Yet, everyone involved does this pretend thing and accepts that real consequences (i.e. actual cash to be had if need be) attach to these pretend transactions. The bank in Leonardtown doesn't say, 'now wait a minute, who is this Powdunk People's Bank and how do I know they're actually gonna give me money - maybe I should wait for them to send an envelope of cash out here before I tell my customer that he's got money in his account and can come get cash if he wants?'

Well, the reason is that someone everyone trusts is saying 'yes, that monetary transaction actually happened, even though no cash changed hands.' Someone is affirming the transaction as real and keeping the resulting books. Someone is definining whether or not electronic transactions are real in the same way that the transfer of cash from one hand to another defines that that transaction is real. By and large, the Federal Reserve System is the who is doing that now. Member banks maintain accounts there and they 'have' money in them because the Federal Reserve says they do. There's not much issue of trust, because the insitution that defines what money is to begin with is the one saying whether or not you have it, whether or not you just got more of it from someone else, and whether or not you just gave some of it to someone else.

I'll follow up more later.