Friday, July 22, 2011
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...
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...
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.
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.
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.
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.
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.
Monday, June 20, 2011
QE2 and the Economy
QE2 clearly impacted asset prices, but how was the actual economy affected?
It should be noted that the recovery had basically lost all momentum in the summer of 2010 and that claims that the economy was "already on the road to recovery" before QE2 seem questionable, especially given the impact QE2 seemed to have on asset markets.
Starting with employment:
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Employment based on the Establishment Survey (the survey used to measure month to month changes in employment) clearly did better during the "QE2 period" than during the period before QE2. If employment growth continues at a 150,000+ pace over the next couple months this may just be momentum but if it remains weak (and I predict it will) it seems pretty clear QE2 positively affected employment growth.
The Household Survey (The survey used to measure unemployment) basically gives the same result. Simply put, the only time we've had adequate employment growth since the recession was during the period of QE2.
Since unemployment claims are measured on a weekly basis they provide a somewhat clearer picture of the impact of QE2 on employment. Unemployment claims sharply refute the claim that things were improving without QE2 (notice the "flatness" of claims from late 2009 to mid 2010) or that QE2 didn't help stimulate aggregate demand. This, along with the other employment data seem to strongly suggest QE2 positively affected the employment situation.
It's much harder to argue the turnaround in consumer credit was the continuation of the recovery before QE2. Consumer credit clearly fell until QE2 was hinted at and it started rising steadily immediately afterwards.
Both ISM surveys give the same basic result; the economy slowly gained momentum from late 2008 to early 2010 when it began to stall until QE2 began.
Industrial production is somewhat less clear, but it too seems to have slowed to a crawl in 2010 until a few months after QE2 began. It should once again be noted that economic expectations fell off a cliff before QE2 (very similar to the way they have today), so even a continuation of the previous trend is a success of some kind.
At no point since the recession did retail and auto sales grow so consistently and so strongly than they did during the "QE2 period". Also note the drop-off since QE2 effectively ended.
It will be interesting to see how data turns out the next few months. The weaker it is, the stronger the evidence that QE2 was effective.
In summary : The evidence that QE2 worked is enormous, but it wasn't enough. If the fed engages in further asset purchases, it should include an explicit target (inflation, NGDP) and should adjust their size according to changes in the performance of the economy.
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