This page has been archived and commenting is disabled.
In Advance Of Bernanke's Speech At The Boston Fed
Readers have already likely had the chance to read the official Fed mouthpiece's bulletin on what to expect out of Bernanke's speech tomorrow at the Boston Fed. Since as we have disclosed previously anything that comes out of the WSJ on the topic of the Fed, gets Calvin Mitchell's stamp of pre- and post, approval we are positive the propaganda spin is in place: after all, can't make the Fed seem "too transparent." So while we are on the topic, here is Goldman's Sven Jari Stehn to confirm just what is best for the bankers: here it goes "For example, Glenn Rudebusch’s analysis—which assumes that Fed purchases
have larger effects on the economy than we estimate—implies that the
Fed would need to buy around $2tr of additional assets to compensate for
the zero bound."Did Goldman just informally double its QE2 expectations, and implicitly bring the 30 Year rate to zero, now that the Fed will have to buy every single treasury out there within its SOMA limit (oh yeah, that 35% SOMA cap - we give it 6 months).
Fed Chairman Bernanke’s speech tomorrow on tools and objectives of monetary policy will provide an opportunity to shape the policy outlook. The speech is likely to include comments on additional asset purchases as well as other options such as price level or nominal GDP level targeting.
- An additional approach to achieve a further drop in fed funds rate expectations and boost financial conditions would be for the chairman to discuss “optimal monetary policy” models which suggest that the “warranted” fed funds rate is currently deeply negative.
- Our “optimal policy models” have two implications. First, interest rate hikes will not be appropriate for a long time to come. For example, under our own economic forecasts it might take until 2015 or longer before a rate hike became appropriate (although we emphasize that this is a scenario projection built partly on assumptions about fiscal policy rather than a formal forecast). Second, substantial asset purchases would be required to make up for the constraints imposed in the interim by the fact that the funds rate is at the zero bound—which is why we expect the Fed’s expected purchases of US Treasuries eventually to cumulate to $1tr and possibly a lot more.
Fed Chairman Bernanke will speak at a conference in Boston tomorrow morning, providing an opportunity to discuss his views on the monetary policy outlook. He clearly intends to do this, as the title of his speech is “Monetary Policy Objectives and Tools in a Low-Inflation Environment.” In his speech the chairman is likely to include comments on additional asset purchases as well as other options such as price level or nominal GDP level targeting. However, as discussed in Tuesday’s Daily Comment we think that it is unlikely that the Fed will adopt price or nominal GDP level targeting any time soon. Rather, we see their mentioning as a signal that the Fed has plenty of options left to boost the economy.
An additional approach to provide guidance to markets and achieve a further drop in fed funds rate expectations, would be for the chairman to discuss “optimal monetary policy” models (see “Sealing the Case,” US Views, October 11, 2010). We have repeatedly argued that such models imply that the “warranted” federal funds rate—i.e. the rate appropriate if no zero lower bound existed—is deeply negative and should remain well below zero for a long time to come. This conclusion is robust across frameworks and forecasts used to derive it.
The starting point of this analysis is the so-called “Taylor rule”, which relates the fed funds rate to inflation and economic slack in the economy. Our version of this rule, which relates the funds rate to the concurrent unemployment gap (the difference between actual and structural rates) and core PCE inflation, suggests that the Fed would have cut the funds rate to -4¾% were it not for the zero lower bound. Glenn Rudebusch of the San Francisco Fed similarly concluded that the warranted funds rate is around -5% (see “The Fed’s Exit Strategy for Monetary Policy,” FRBSF Economic Letter, Number 2010-18, June 14, 2010.) Our preferred rule, however, is a “forward-looking” specification which links the funds rate to expectations of future inflation and unemployment. (For details see “The "Warranted" Funds Rate: Is It Really Negative?”, US Daily Comment, March 10, 2010.) Given our outlook of falling inflation and further increases in unemployment, this rule points to an even more negative rate of -6½%. While the FOMC’s latest (June) forecasts imply a funds rate not as negative as ours, these projections are in flux. We expect a meaningful downgrade of these forecasts (which will be published at the November FOMC meeting) which should result in a warranted rate which is 1-2 percentage points less negative than that implied by our own economic forecasts.
This Taylor rule approach, however, likely overstates the need for additional monetary stimulus because the economy is also receiving boosts from unconventional monetary policy and, at least until recently, from expansionary fiscal policy. Earlier this year we therefore constructed an estimate of the overall macroeconomic policy stance, which takes into account not only the position of conventional monetary policy but also the Fed’s quantitative easing and fiscal policy. Our analysis found that the overall policy stance can be expressed as a weighted average of the real fed funds rate (with a 40% weight), the impact of Fed MBS purchases on the mortgage/Treasury spread (40% weight) and the cyclically adjusted budget balance (20% weight). In the spirit of the Taylor rule, we then related this measure of the overall policy stance to expectations of inflation and the unemployment gap as a description of how overall macro policy has behaved in the past. (See “No Rush for the Exit,” Global Economics Paper, No. 200, June 30, 2010.) Again our conclusion was that although the current overall policy stance is very easy by historical standards it is not quite as easy as past behavior would suggest. In other words, while the Fed purchase program and the fiscal stimulus helped provide a substantial amount of stimulus, the response did not quite compensate for the fact that the federal funds rate hit the zero bound. This analysis suggests that the current warranted funds rate would be -3¾%—a rate somewhat less negative than that implied by our Taylor-rule analysis. (Again this warranted rate would probably be 1-2 percentage points less negative if we used the FOMC’s yet-to-be-released new economic forecasts.)
These models have two important implications. First, interest rate hikes will not be appropriate for a long time to come. For example, under our own economic forecasts it might take until 2015 or longer before a rate hike became appropriate (although, as discussed in the Global Economics Paper cited above, this is a scenario projection built partly on assumptions about fiscal policy rather than a formal forecast) [TD: yes, yes, we get it].
Second, substantial asset purchases would be required to make up for the zero bound. This is, of course, the reason why we expect the Fed to eventually buy more (and possibly a lot more) than $1tr of longer-term assets. A while ago we estimated that the Fed would have needed to buy an additional $5tr or more in 2009 to compensate for the fact that the funds rate could not be cut to its warranted level (see “What Does It Take to Beat the “Zero Bound”?”, US Daily Comment, April 13, 2010). The fact that policymakers did not adopt such an aggressive approach suggests that they were concerned about the unwanted side effects of such a policy, including the potential for renewed Fed-induced asset bubbles or the risk of large losses on the Fed’s asset portfolio. An “optimal” policy which takes these costs into account would therefore not attempt to compensate fully for the zero bound (see our Global Economics Paper, cited above). For example, Glenn Rudebusch’s analysis—which assumes that Fed purchases have larger effects on the economy than we estimate—implies that the Fed would need to buy around $2tr of additional assets to compensate for the zero bound (see paper cited above).
By presenting his own version of this type of analysis, chairman Bernanke could probably achieve a further drop in fed funds rate expectations and boost financial conditions. In fact, discussing “optimal policy models” might be a preferable way to ease financial conditions than talking about price level or nominal GDP level targeting, because the implied policy does not require a change in the Fed’s targeting framework (as it is based on historic Fed behavior). And such a discussion would not be a “commitment” because it would be based on uncertain economic forecasts. But a detailed explanation by Bernanke of just how long the funds rate might stay near zero could be a valuable complement to a November QE2 announcement.
...
Alternatively, the Fed chairman can just print a check for $100 trillion and LBO the world using another $900 trillion in 0% perpetual UST consols, AAAA+ rated by both S&P and Moody's. Ultimately, it will pretty much achieve the same task.
»
- 6030 reads
- Printer-friendly version
- Send to friend
- advertisements -
Anything that comes out of Ben's mouth usually sends gold north. That's all I care about.
While you meant this to be sarcastic, obviously such a large figure would lead to instant hyperinflation.
But something like 1 trillion is still within the reach of responsible economic policy (it is 8% of GDP) - especially if the very real danger we are facing here is Great Depression style 20% unemployment and protracted deflation.
The Fed printing 1 trillion is also clearly aimed against the export of US jobs to China: which ZH rallies against on every possible occasion. The depreciating dollar improves the global competitive position of US corporations and weakens the positions of trade-surplus countries (China). (So you cannot validly ridicule the falling value of the dollar while not acknowledging that it actually helps the US economically.)
The Fed is also in an arguably special and unique position: it is the only 'global' actor in the US economy that can break the game-theory deflationary spiral that the many-actors model results in. If the Fed wouldn't try to do something, with such unemployment and with such disinflation dynamics, they could be rightfully accused of negligience. In that sense, and if it works out positively, they will be remembered as brave men. If it fizzles out then we are there were we started from: a deflation trajectory.
So the Fed has little choice but to do something. It is the only actor able to do so.
In that sense the continued ridicule of the Fed's actions on ZH is somewhat intellectually dishonest, as it's never accompanied by actual valid economic arguments.
Two questions:
1. What is your main argument against allowing deflation to run its course?
2. If you were king, what would your course of action be for, say, the next 6 months, 1 year and 3-5 years?
As a net creditor I'd welcome the increase in my net worth. As a human being I'd hate the massive suffering deflationary episodes are causing. Even if you do not accept the Great Depression as a valid example, look at the suicide rate of Japan for example, and note the period where deflation started to take hold:
http://theincidentaleconomist.com/wordpress/wp-content/uploads/2010/10/S...
The majority of economists and sociologists who have studied deflationary economies have come to the conclusion that it's not a good place to be in, and that it's a very hard place to come out of.
I'd hate to live in a country with 20%+ unemployment rate - it's not a funny place to be in.
Hey, that's four questions! :-)
If I were king I'd resign immediately.
Assuming that I would be forced (by you :-) to stay in office for that period of time I'd run calculations and would try to get out of the ZIRP death-trap as much as possible. In 2009 I'd have enacted a 1.5 trillion stimulus, not a 0.75 trillion half-stimulus.
The japanese have not succeeded in getting out of it. But I'd keep trying. I'd fear inflation much less than deflation. Too much inflation is a well-known, tried-old illness that has numerous policy tools to get under control. Deflation is so special because in ZIRP the monetary base suffers a phase transition and turns into a 'gas' and stops being an effective policy tool - massively reducing the degrees of freedom.
If I were a king who had a time machine I'd also have gone back to 2003 and would have stopped the Bush/Cheney Iraq war and would have stopped the Bush tax cuts for the rich. I'd have spent those 5.3 trillion dollars on balancing the budget and making the US economy fitter for whatever bubble came around next.
Does this answer your questions sufficiently?
Hey critical you are in a country with 20% unemployment.
The effective unemployment rate is around 17% (never mind the official stats). By 20%+ I mean that the US is very close to crossing a critical threshold of unemployment.
You mean Spain?
More, you give us all a good laugh here on ZH.
your solutions are to support the TBTF not the John Q who is UE.
Some have suggested we need more lamp posts for the likes of you.
If the 40%+ jump in the sucide rate in Japan I linked to gives you a "good laugh" then you are not only ignorant about deflationary societies but also rather cruel and possibly sick.
Maybe it was all the damn ineffective QE that made them do it.
The bump in the rate of suicides in Japan happened in the late 90s - well before the idea of the current massive QE attempt by the BOJ and the japanese government has been conceived.
#1. You don't understand how full of shit these people are. There never was as high of unemployment during the great depression as was widely reported. The illusion was different then. The industrial revolution had kicked off and they wanted cheap labor so they are severly over represented unemployment to make people think there were no jobs and they would have to work for cheap. The misery of the great depression wasn't in unemployment it was in rising prices while lowering wages to pay for the industrial revolution. Deflation lasted some 6 months though you'd think it went on for 10 freaking years. A one off inflation hit during the gold heist from 32 dollar gold to 45 dollar gold was a kick in the ass.
#2. Different tact this time. The computer revolution is done. Stick a fork in it. The need for programmers and kernel hackers and IT personel is going to diminish. Process shrinking isn't over it's just going to take 5 times longer than it used to. The software hardware lag will ease up as software catches up to hardware. It was supposed to be replaced by a green revolution. But that just might not happen. There's information here being ignored and new information that just won't freaking be given until this crap falls down. The illusion is different this time. Unemployment is much higher than it is reported because they are less concerned with getting people to work cheap and more concerned with distorting peoples perceptions of how bad it is. Big problem the mass illusion spell that got cast by main stream media during 2009 didn't frickin WORK. There's a loss of control and it won't go away.
Here is an easily digestible tabulated set of data:
http://www.infoplease.com/ipa/A0104719.html
The max was in 1932 at 23.6%.
Do you suggest this data is falsified?
How about some photo evidence. The unemployed vying for work during the Great Depression:
http://www.english.illinois.edu/maps/depression/images/jobbureau.jpg
Squatter camp, 1936:
http://www.english.illinois.edu/maps/depression/images/camp2.jpg
Did that lady and child deserve this? Did they want this? Do you think this family wouldnt have taken any job instead of living like this?
Full gallery at:
http://www.english.illinois.edu/maps/depression/photoessay.htm
Falsfied or not it's all relative. We don't have farms to go back to. Empty stomach syndrome is coming back in a huge way.
Why do all of your and other Keynesian's solution revolve around enslaving thepopulace more with higher government spending and debt. Why not simply solve the problem by having the FED simply refinance every mortgage out there at an interest rate and/or mortgage balance which will free up the necessary cashflow for the citizenry to emerge from this insidious debt burden.
As you well know, the FED at a simple click of a button forgive the national debt they hold.
These are non deflationary as the velocity of freed up cashflow will create the inflation the FED wants, but the little people benefit too. your proposals will choke off any discretionary spending as food, energy and anything imported will rise faster than any wage gains to compensate.
That would be a form of economic stimulus - although it would reward speculators as well: a fair bit of the mortgage mess comes from high end mortgages that were done for speculative purposes and were non-payment did not occur due to economic hardship but due to fall in prices and the resulting tactical foreclosure.
The bigger problem is that it would either have to be implemented via the massive printing of money (back to square 1), or it would mean the unilateral change of existing contracts per government or legislative fiat - which would quickly end up at the Supreme Court, resulting in a settlement/bailout that would dwarf TARP. (The Supreme Court throwing out 300 years of legal precedent of contractual obligations seems unlikely.)
Do you agree?
And yet they still pay interest on reserves. Amazing.
They know the banks will need every penny they can get.
Let's see what happens.
At this point I'm guessing Ben is long gold and silver, and short the dollar. And who is going to audit him? :D
futures down, "theory testing." will he or won't he? whether we all know the answer i sure think I do.
Funny to think a few months ago they were talking exit strategies like repos.
Oops.
All these Ivy League economists learn to rely on pseudointelectual forward thinking theories and formulae but forget common sence, supply and demand and that 2+2=4
http://www.youtube.com/watch?v=kO8x8eoU3L4
THE BOSTON FED IS CONSIDERING GOLD AS MONEY:
http://www.bos.frb.org/education/pubs/wishes.htm
QE2 - bitchez!
silver to moon Miss Ben~
It's got a date with 28. But it'll really thrive at 35.
How can you call it a free market when one man calls the shots.
Why not let the market set interest rates like all other products?
Is the Fed smarter than the free market? Oh really, and one example is?
We don't need free markets. Look at China, first impose tyranny and impoverish everyone except the elite party members. Now that you have 500 million slaves the world is at your feet. That is a command and control system you can believe in.
Slaves are worthless. If you want to get things done, what you need is a middle class. Surprise! The Chinese middle class is now larger than ours! They did it by loosening controls and through the creation of free economic zones.
Saying that China is prosperous because of slave labor is like saying America was prosperous in 1900 because of slave labor. Surprise! Slave labor ended decades ago!
I hope you're kidding cause you know that all the people that actually do the labor in china work for nothing. They might have an exploding "middle" class but it is built on the back of the laborer.
he's acting like a President, isn't he? Giving speeches, being talked about. Does anyone even know who the President is right now?
I have a wonderful solution for the FED on how not to break the 35% SOMA cap.
The liquidity provider aka TBTFs buy most of the USTs. Then they slice them into CDOs that are then sold over to the FED. Since this is different issue no limit is broken, right?
Now, hand me that 10 mil.bonus for devising a way to both break the law and stay within it's limits!
I'm gonna be a quadrillionaire... I'm gonna be a septillionaire... I'm gonna be zillionaire...
Just enough to buy a cup of coffee...
... without cream or sugar.
I read nothing. Immediate scroll to post:
Fuck you fucking fuck cunts.
WOW. How many nasty old pads n plugs did those filthy bitches toss into the corner at your place my dear amphibian?
I'm not very "well off". I just have an internet connection and I prefer truth over fiction.
And I am very, very angry about what is going on.
The fact that policymakers did not adopt such an aggressive approach suggests that they were concerned about the unwanted side effects of such a policy, including the potential for renewed Fed-induced asset bubbles or the risk of large losses on the Fed’s asset portfolio.
We got all that and more from this supposedly watered down approach. Now that we have I am sure there will be even less restraint in future considerations.
It's 4:20 and the chairman is going to smoke us some more as he is off chasing the dragon in Boston.
http://www.youtube.com/watch?v=QnMrhFR8jNA
"An alarming report on Bank of America, compiled by Branch Hill Capital, a San Francisco hedge fund, circulated widely on Wall Street on Thursday. Branch Hill suggested that the bank, the nation’s largest, could be facing more than $70 billion in losses from mortgage securities that it may have to repurchase from Fannie Mae and Freddie Mac, as well as private investors."
http://www.nytimes.com/2010/10/15/business/15bank.html
The 13 percent decline in the Dollar Index since June has led some OPEC members to call for oil to rise to $100 a barrel.
The U.S. currency’s weakness means the “real price” of oil is about $20 less than current levels, Venezuelan Energy and Oil Minister Rafael Ramirez said after yesterday’s meeting of the Organization of Petroleum Exporting Countries in Vienna. The group, which accounts for 40 percent of global crude output, left targets unchanged and called for greater adherence to quotas, which are being exceeded by a supertanker load a day.
“OPEC is not interested in compliance right now,” Nordine Ait-Laoussine, the former Algerian oil minister who now runs Geneva-based consultant Nalcosa SA, said in an interview in Vienna. “They’re concerned about the dollar because as the dollar weakens, prices go up. They’re not paying any attention to production discipline.”
http://www.bloomberg.com/news/print/2010-10-15/opec-members-seek-100-a-barrel-oil-as-sliding-dollar-cuts-real-revenue.html
we're going to H E L L in a handbasket.
We're Going to Hell in a Handbasket
Ben Stein: "We're Going To Hell In A Hand Basket"
I'm going to Hell in a Bucket... but at least I'm enjoying the ride....
http://www.youtube.com/watch?v=vUiutKkMeiA
Chart: ES and ZB
"Before..."
http://99ercharts.blogspot.com/2010/10/es-zb_15.html
Chart: Dollar
Avant moi. le deluge.
http://99ercharts.blogspot.com/2010/10/dx.html
Chart: ES
Diamond Top
http://99ercharts.blogspot.com/2010/10/es_15.html
Really this is a great post from an expert and thank you very much for sharing this valuable information with us.
cheap vps
windows vps
forex vps
ucvhost