Thursday, August 4, 2011

Fed Funds and Aggregate Demand 8/4/2011



S&P 500
May 11 : 1342.08
June 8 : 1279.56
July 7 : 1353.22
August 4 : 1200.07

Treasuries
2 year
May 11 : 0.55
June 8 : 0.38
July 7 : 0.47
August 4 : 0.26
10 Year
May 11 : 3.18
June 8 : 2.94
July 7 : 3.16
August 4 : 2.42
30 Year
May 11 : 4.29
June 8 : 4.19
July 7 : 4.38
August 4 : 3.69

Inflation Expectations
2 year inflation swaps
May 11 : 2.16
June 8 : 2.01
July 7 : 1.92
August 4 : 1.65
5 Year TIPS Breakeven rate
May 11 : 2.19
June 8 : 2.02
July 7 : 2.10
August 4 : 1.79
10 Year TIPS spread
May 11 : 2.42
June 8 : 2.27
July 7 : 2.49
August 4 : 2.22
30 Year TIPS spread
May 11 : 2.53
June 8 : 2.45
July 7 : 2.67
August 4 : 2.58

Bloomberg Commodity Index
May 11 : 1672.35
June 8 : 1713.68
July 7 : 1717.93
August 4 : 1660.55

EUR USD
May 11 : 1.4249
June 8 : 1.4577
July 7 : 1.4351
August 4 : 1.4105

(Data from bloomberg.com)

Expectations have fallen dramatically the last couple weeks. Fed intervention of some kind is likely, but we still don't exactly know what the Fed's goal is. Will they react to past inflation rates? Commodities? Job growth? Financial markets? Inflation expectations? Only the FOMC knows. We also don't know how they'll intervene exactly. Hopefully they'll try something more flexible than QE2 was.

Here are predictions I made a couple of months ago. I think they've held up pretty well. The only thing I was off on was underestimating the importance of Europe's debt troubles. Although Europe's woes are also caused by tight money (the European Central Bank seems more concerned with what's good for Germany than what's good for Europe as a whole), there's no reason they should be lowering U.S. NGDP unless the Fed doesn't respond to higher dollar demand... but the Fed isn't responding (at least not until things get really bad), so Europe's woes are lowering U.S. NGDP.
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Friday, July 22, 2011

Bank lending and QE2


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Wednesday, July 13, 2011

No Surprises Here - Let's Hope Bernanke Has Learned His Lesson

Stocks, commodities and long term bond yields all rose in response to Bernanke's testimony today. Expected fed funds rates fell, which suggests any more stimulus is more about postponing tightening than anything else.

If the Fed does need to engage in additional asset purchases (and I think it's extremely likely it will) it should use more flexible policies than it did in QE2. Instead of announcing in advance it will purchase $X in bonds over a certain time period, the Fed should purchase or sell (if the economy improves rapidly) as many bonds as it needs on a month to month basis in response to changing economic circumstances. This would allow them to seamlessly transition between tightening and easing as if they were controlling the fed funds rate.

Better late than never...
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Friday, July 8, 2011

"The trade-offs (between growth and inflation) are getting less attractive at this point."

That was Bernanke during his April 27th press conference. What's happened since then?





Even if Bernanke was correct then, it seems clear that the trade-offs are once again incredibly attractive.
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Thursday, June 30, 2011

Fed Funds and Aggregate Demand 6/30/2011



S&P 500
April 27 : 1357
May 26 : 1325.69
June 22 : 1287.14
June 30 : 1320.64

Treasuries
2 year
April 27: 0.64
May 26 : 0.48
June 22 : 0.36
June 30 : 0.45
10 Year
April 27 : 3.35
May 26 : 3.06
June 22 : 2.96
June 30 : 3.15
30 Year
April 27 : 4.45
May 26 : 4.22
June 22 : 4.19
June 30 : 4.36

Inflation Expectations
2 year inflation swaps
April 27 : 2.65
May 26 : 2.12
June 22 : 1.83
June 30 : 1.84
5 Year TIPS Breakeven rate
April 27 : 2.35
May 26 : 2.07
June 22 : 1.89
June 30 : 2.03
10 Year TIPS spread
April 27 : 2.60
May 26 : 2.34
June 22 : 2.24
June 30 : 2.48
30 Year TIPS spread
April 27 : 2.68
May 26 : 2.47
June 22 : 2.39
June 30 : 2.65

Bloomberg Commodity Index
April 27 : 1766.98
May 26 : 1684.28
June 22 : 1665.53
June 30 : 1667.7

EUR USD
April 27 : 1.4738
May 26 : 1.4129
June 22 : 1.4268
June 30 : 1.4496

(Data from bloomberg.com)

The potential resolution of the Greece crisis pushed markets in a positive direction this week. European debt problems could have potentially caused a flight from Euros into Dollars and since a higher demand for dollars could only have been offset by a larger supply, this would have required fed action... and we know how hesitant they are to act at a 0% fed funds rate.

If the economy can avoid any negative shocks the Fed might be able to get by without actions stimulus, but the recovery will likely continue at a "frustratingly slow pace" (to borrow a phrase from Bernanke) unless the Fed becomes willing to "put up with" higher NGDP growth.

One could put a positive spin on current events by pointing out that inflation pressures are non-existent and another commodity boom seems unlikely (given that the "boom" last year really just returned prices to pre-crisis levels). Year over year inflation should fall and it will be harder for inflation hawks to argue for tighter money under this scenario.

The problem with that argument is that the Fed already knows these things and still can't agree that money is too tight. The Fed has also shown how eager it is to tighten if things get even marginally better. I hope I'm wrong.
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Tuesday, June 28, 2011

Billion Prices Project vs QE2

The Billion Prices Project uses online data to measure prices on a daily basis. Their results  closely follow non-seasonally adjusted CPI.

You can see the important influence commodity prices have had on CPI, but seeing as how those were, at least partially, a result of QE2* and still don't fully explain the rise in prices after QE2 I see this graph as another strong piece of evidence that QE2 worked.

I expect price increases to continue to moderate in the future. The economy still can benefit greatly from more aggregate demand.

*Commodity price increases as a result of higher world aggregate demand (QE2) are reflecting something good, price increases as a result of supply shocks (Libya) are bad.  This is economics 101 but it is still very often misunderstood.
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Friday, June 24, 2011

Fed Funds and Aggregate Demand Watch 6/22/2011



S&P 500
April 27 : 1357
May 26 : 1325.69
June 15 : 1265.42
June 22 : 1287.14

Treasuries
2 year
April 27: 0.64
May 26 : 0.48
June 15 : 0.38
June 22 : 0.36
10 Year
April 27 : 3.35
May 26 : 3.06
June 15 : 2.97
June 22 : 2.96
30 Year
April 27 : 4.45
May 26 : 4.22
June 15 : 4.20
June 22 : 4.19

Inflation Expectations
2 year inflation swaps
April 27 : 2.65
May 26 : 2.12
June 15 : 2.00
June 22 : 1.83
5 Year TIPS Breakeven rate
April 27 : 2.35
May 26 : 2.07
June 15 : 2.01
June 22 : 1.89
10 Year TIPS spread
April 27 : 2.6
May 26 : 2.34
June 15 : 2.29
June 22 : 2.24
30 Year TIPS spread
April 27 : 2.68
May 26 : 2.47
June 15 : 2.44
June 22 : 2.39

Bloomberg Commodity Index
April 27 : 1766.98
May 26 : 1684.28
June 15 : 1674.20
June 22 : 1665.53

EUR USD
April 27 : 1.4738
May 26 : 1.4129
June 15 : 1.4172
June 22 : 1.4268

(Data from bloomberg.com)

Expectations for aggregate demand continue to slowly deteriorate as the Fed maintains a "neutral" policy. 
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