St Louis Fed

Ron Paul’s signature Audit the Fed legislation finally passed the House; on July 25, the House bill was passed 327 to 98. But the chances of a comprehensive audit of monetary policy — including the specifics of the 2008 bailouts — remain distant. All that the current state of secrecy does is encourage conspiracy theories. What is the FOMC trying to hide? Are they making decisions that they think would prove unpopular or inexplicable? We can’t have a real debate about policy unless we have access to all the data about decisions. Those who believe the Fed’s monetary policy has worked should welcome transparency just as much as those who believe the Fed’s monetary policy has not worked. If the Fed’s actions have been beneficial, then transparency will shine kindly on it. If not, then transparency will help us have a better debate about the road forward.

Just like last time around when stocks were plunging with no knight in shining armor in sight, until the Fed's faithful mouthpiece-cum-scribe Jon Hilsenrath showed up with a report, subsequently disproven, that more QE is coming minutes before the market close on July 6, so today stocks appeared poised for a precipice until some time after 3 pm it was leaked that none other than Hilseranth once again appeared, at precisely 3:55 pm, with more of the same. Ironically, the market only saw the word Hilsenrath in the headline, and ignored the rest. The irony is that this time around the Fed's scribbler said nothing that we did not know, namely that the Fed can do something in August, or it may do something in September, or it may do nothing, none of which is actually news.

Fed governors regurgitate it time and again to rationalize their policies.

That the just released consumer credit update for April missed expectations of a $11 billion increase is not much of a surprise. As noted earlier, the US consumer has once again resumed deleveraging: April merely saw this trend continue with revolving credit declining by $3.4 billion, offset by the now traditional increase in student and subprime government motors car loans, which increased by $10 billion. In other words, following a modest increase in revolving consumer credit in March, we have another downtick, and a YTD revolving credit number which is now negative. Obviously the government-funded student loan bubble still has a ways to go. No: all of this was expected. What was very surprising is that as noted in the earlier breakdown of the Z1, the entire consumer credit series was revised, with the cumulative impact resulting in a major divergence from the original data series. Why did the Fed feel compelled to revise consumer credit lower? Simple: as debt goes down, net worth goes up, assuming assets stay flat. Which in the Fed's bizarro world they did! Sure enough, if one compares the pre-revision Household Net Worth data (which can still be found at the St. Louis Fed but probably not for long) with that just released Z.1, one notices something quite, for lack of a better word, magical. Ignoring the March 31 datapoint which does not exist for the pre-revision data set, at December 31, household net worth magically grew from $58.5 trillion in the original data set to $60.0 trillion in the revised one!

The comedy continues: the April "Not in labor force" seasonally adjusted print: 88,419,000. And yet, the maximum reading permitted by St Louis Fed Not in Labor Force (LNS15000000) graph: 88,000,000. The data has now officially dropped off the chart. No further commentary necessary.

Simultaneous Global Printing Is Failing Miserably

Busy day today with lots of economic data and some more Fed good cap-bad cop theater as both hawk Bullard and dove Pianalto pretend to give an objective picture of what is on CTRL+P's mind.

"In the last three plus years, central banks have had little choice but to do the unsustainable in order to sustain the unsustainable until others do the sustainable to restore sustainability!" is how PIMCO's El-Erian introduces the game-theoretic catastrophe that is potentially occurring around us. In a lecture to the St.Louis Fed, the moustachioed maestro of monetary munificence states "let me say right here that the analysis will suggest that central banks can no longer – indeed, should no longer – carry the bulk of the policy burden" and "it is a recognition of the declining effectiveness of central banks’ tools in countering deleveraging forces amid impediments to growth that dominate the outlook. It is also about the growing risk of collateral damage and unintended circumstances." It appears that we have reached the legitimate point of – and the need for – much greater debate on whether the benefits of such unusual central bank activism sufficiently justify the costs and risks. This is not an issue of central banks’ desire to do good in a world facing an “unusually uncertain” outlook. Rather, it relates to questions about diminishing returns and the eroding potency of the current policy stances. The question is will investors remain "numb and sedated…. by the money sloshing around the system?" or will "the welfare of millions in the United States, if not billions of people around the world, will have suffered greatly if central banks end up in the unpleasant position of having to clean up after a parade of advanced nations that headed straight into a global recession and a disorderly debt deflation." Of course, it is a rhetorical question.

John Taylor, of the Taylor-Rule, who has not been sheepish with his views towards the Fed openly questioned the Fed's independence during a speech to the Joint Economic Committee today. During his testimony at the hearing on the 'Sound Dollar Act of 2012', Taylor noted: "The discretionary interventions of the Federal Reserve have been ratcheted up in such unprecedented ways in recent years that they raise fundamental questions about the future of monetary policy." Perhaps more pointedly, especially given Bernanke's speech today on the Fed's extreme actions and given the hope for a constant interventionist role for the Fed to keep our economy market afloat "The fact that the Fed can, if it chooses, intervene without limit into any credit market - raises more uncertainty, and of course raises questions about why an independent agency of government should have such power."

Haven't learned a thing. 

Bunch of irrelevant and reflexive (stock market is up so confidence - in what? manipulated markets? - is higher, so stock market is up so confidence is higher etc) stuff today, as the world central banks prepare to pump another $600-$1000 billion into the consolidated balance sheet and send input costs into the stratosphere. Somehow this is bullish for stocks. Luckily, it will finally break the EURUSD - ES linkage.

"Permanent increases in the monetary base foreshadow eventual increases in inflation that can increase, rather than reduce, unemployment."So, the Chairman was....lying?

We highlighted the following report from St. Louis Fed's Daniel Thornton in today's Frontrunning, but it may bear repeating as it is the first written salvo in the internal Fed trench warfare over QE2. The report is no surprise: as St Louis is the bastion of Daniel Bullard, one of the biggest non-voting hawks at the Fed, a group which is increasingly getting more vocal with such others as Philly's Plosser and Dallas' Fisher, not to mention Atlanta's Hoenig, the paper titled "Would QE2 Have a Significant Effect on Economic Growth, Employment, or Inflation?" is merely an attempt by the sensible undercurrent at the Fed to distance itself from the policies enacted by the supreme madman in charge of it all. While the report says nothing notably new, it does repeat what all QE2 skeptics know all too well: "It is possible – perhaps even likely – that almost all of any increase in the supply of credit associated with QE2 simply would be held by banks as excess reserves. If so, the effect of QE2 on interest rates could be small and limited to an announcement effect – the effect associated with the FOMC’s announcement – independent of the effect of the FOMC’s actions on the credit supply." Which begs the question - why is this report coming out now? Is this the red herring to the lack of a QE2 announcement on November 3? With everyone certain monetization is imminent and inevitable, is everyone about to end up on the wrong side of the trade? And if so, just how far will the market crash, now that at least 150 S&P points worth of QE2 are priced in...

In its September Monetary Trends letter titled "The Monetary Base and Bank Lending: You Can Lead a Horse to Water…" the St Louis Fed analyzes the phenomenon that has all monetarists up in arms, namely the surge in the monetary base and the very muted increase (and outright alleged drop in the case of the M3) of monetary stock, going back to the core topic at every debate over hyperinflation/deflation: the money multiplier, and its current reading of well below 1. What is the reason for this discrepancy: as the St Louis Fed explains: "The answer centers on the willingness of depository institutions (banks) to lend and the perceived creditworthiness of potential borrowers. A deposit is created when a bank makes a loan. Ordinarily, bank loans—and hence deposits—increase when the Fed adds reserves to the banking system. How ever, despite an increase in reserves of over $1 trillion, total commercial bank loans were some $200 billion lower in May 2010 than in September 2008. Banks added to their holdings of securities, which resulted in a modest increase in deposits and the money stock, but many banks were reluctant to make new loans." And herein lies the rub: if and when the economy ever picks up, and at this point that looks like an event that may well never happen, "Many economists worry that bank lending and monetary growth will eventually surge and, ultimately, cause higher inflation." The backstops offered by the Fed looks increasingly more brittle: reverse repos and IOER. The longer ZIRP continues, the more aggressive the Fed will have to become if and when the money multiplier finally shoots higher. If prior examples of hyperinflation are any indication, this will not be a seamless or smooth process, which is why aside from the traditional calls for hyperinflation as a result of a collapse in the faith of the monetary system as a whole, many are also calling for this outcome should the Fed, paradoxically, stabilize the economy. And it is about to get worse: the Fed's balance sheet is likely about to grow by another $2 trillion as soon as QE 2 is announced. Which means that by the time the economy needs to remove excess liquidity, the Fed will need to find a way to remove not $2Bn, but probably double that number. The simple conclusion is that the longer the Fed fights deflation, the greater the likelihood for (hyper) inflation as the final outcome once it ultimately rights the economy. We tend to think that Odysseus was faced with an easier choice.

"Foremost among the concerns of many is how to design a strategy that does not on the one hand raise interest rates prematurely, thereby prematurely nipping the economic recovery in the bud, while on the other hand does not keep rates too low for too long, thereby creating conditions that lead to a surge in inflation or inflation expectations. What’s needed is an effective policy to prevent the unprecedented monetary stimulus from becoming a destabilizing influence on price stability. Another key is accurately predicting inflation over the next few years.

Fed Chairman Ben Bernanke and other senior Fed officials are quite confident that they have the tools and the determination necessary to prevent an unwelcome acceleration in inflation or inflation expectations. Unlike previous episodes, though, the magnitude of the policy responses to the financial crisis and the Great Recession suggests that the FOMC’s margin of error seems much smaller than at any time in the Fed’s history." - Kevin Kliesen, St. Louis Fed