Watts Witit

FOMC: Why The Recent Past Seldom Predicts the Future

Monetary policy will retain its easing stance with the federal funds rate expected to stay low through 2014. A lower inflation rate expectation could open the door to more asset purchases – possibly agency debt.

Past Performance is No Guarantee of Future Anything?

The Federal Open Market Committee (FOMC) retained its outlook for moderate growth and subdued inflation and, thereby, a path of the federal funds rate consistent with those expectations – this is not a forecast. The interest rate path in the future is conditional upon the outcomes for growth and inflation. The Committee extended its timeline for exceptionally low levels for the federal funds rate at least through late 2014. The FOMC is going with easier policy for a longer period. However, there are risks for decision makers here. The FOMC has opened the door to QE3 – see our Weekly Economic Commentary on January 13, 2012.

Expectations Change – Often

Modest economic growth remains the FOMCs expectation (and ours) over coming quarters and we both agree that consequently the unemployment rate will decline only gradually. The FOMC again lowered its growth outlook 2012 estimates, this time from 2.5-2.9 percent to 2.2-2.7 percent. Unemployment rate projections were actually lowered to 8.2-8.5 percent.

This increases the importance for decision makers to recognize that the outlook for interest rates is dependent on many factors and those factors do change over time. The FOMC projected core inflation at 1.5-1.8 percent for 2012 – a touch lower than previous estimates. The long run projection is 2 percent. Our outlook for 2012 is for moderation in the pace of core inflation (bottom graph). At present, the FOMC has decided not to pursue further policy options as many, including us, had expected. Additional security purchases (none dare call it QE3), focusing this time on mortgage-backed securities, remain an option that is aimed at helping the housing market.

The Recency Bias and the Danger for Decision Makers

In the early years of the past decade, many policymakers, including Chairman Bernanke, were talking about the Great Moderation in macroeconomic volatility of growth and inflation. Various explanations were advanced for this, including structural change (less manufacturing, more services), better economic policy and good luck. In 2007, the good luck ran out. This is, again, the problem when we tend to extrapolate the latest trend into the future (recency bias) and fail to recognize that the actual path for growth, inflation and interest rates is always in flux and that short-run changes in growth and inflation can lead to sharp movements in equity, bond and commodity prices. Despite the fancy graphs that have been produced, the likely path for interest rates going forward is very likely to be far more volatile than the smooth patterns in those graphs. Therefore, this creates both greater risks and opportunities for investors if market expectations become concentrated on the Feds numbers when the next surprise comes along, as it always does.

ONE truth that emerges clearly from the recent history of Federal Reserve monetary-policy action is that changing central bank policy goals is like steering the Titanic. You can see where the ship ought to go, and the captain himself might do his best to pilot it there, but the nature of the beast is that it simply wont turn on a dime. There are too many extremely cautious people influencing policy decisions and too much political and market scrutiny for that.

All the same, the ship has turned and is likely to continue altering its heading. Early in the crisis, the Fed reached for the relatively conventional tools at its disposal–reductions in its target for the federal funds rate and emergency liquidity provision. As the recession dragged on and the rate target approached zero, however, it became clear that more would be necessary to prevent a deep, depression-like downturn in the economy. The Fed initiated a series of asset purchases, focusing at first on restoring some level of function to critical markets, including that for home mortgages. Later, expansion of the Feds balance sheet became an explicit goal, in hopes of reducing long-term interest rates and supporting spending and investment in the economy. These efforts helped shepherd the economy into expansion and reversed a worrying fall in inflation expectations toward deflation. But the economys recovery path remained a disappointing one, of which too-low inflation and too-high unemployment were persistent features.

Seeing the need to do more and worrying, one presumes, about the effectiveness and political consequences of a much larger package of asset purchases, the Fed began feeling its way toward greater use of communication in easing policy. Last summer, it provided additional clarity about the path of its short-term rate target in changing the language of its statement. Where once the Fed indicated that rates were likely to remain low for an extended period, it began saying that rates would likely be low through at least 2013. Amid signs of continuing economic weakness, the central bank opted to make purchases designed to shift the compostion of its balance sheet in a stimulative way, but it continued to push toward greater easing through communication. And Ben Bernanke took a large step forward with this strategy at the conclusion of the Feds January meetings in Washington yesterday.

There were several important firsts in yesterdays announcement. To begin with, the Fed changed the language of its statement to indicate that low rates would likely be justified through at least late 2014. Second, Mr Bernanke said quite plainly that the Fed had adopted an inflation target of a 2% annual change in the price index for personal consumption expenditures. And finally, the Fed released new information alongside the standard economic projections, which showed the distribution of the committees views on when rates ought to rise. So we learn now that a majority of the Federal Open Market Committee thinks that rates should remain at very low levels until 2014 or later.

Many Fed watchers were disappointed with the Feds actions. They note that the Feds economic forecasts seem to indicate both too-low inflation and too-high unemployment, of the sort that would seem to justify much more easing. Where is the QE3 announcement, in that case? Others also complain that the Feds choice to push out the horizon for low rates to late 2014 suggests an implicit acknowledgement that the economy will be weak through at least that year. I think these criticisms are somewhat misguided, for two reasons.

First, the Fed did ease; communication is policy. A promise to keep short rates low for longer should–and did–push down long rates, which is also one of the explicit goals of long-term asset purchases. It should raise inflation expectations, which will reduce real rates and boost economic activity. And the establishment of the 2% target for PCE provides a framework within which the Fed can more easily act to raise inflation. One was able to discern a shift in Mr Bernankes comments at yesterdays press conference. In response to questions, he was able to say clearly that it might be necessary to take steps to push inflation back to target–to raise inflation–which had been a difficult idea for him to express previously. Saying we need to raise inflation is politically fraught. The new target may also give the Fed more leeway to let inflation rise. Its the top end, for one thing, of the Feds previously assumed accepted inflation range of about 1.5% to 2%. Its also PCE inflation, which has tended to run below CPI inflation in recent years. A target may also make it easier for the Fed to let inflation run above 2% for a while, so as to hit the target on average.

Second, the decision to push out the horizon for a rate increase isnt simply an admission that the economy will be weak in 2014. With the target rate at zero, the Fed can only bring down the real interest rate by raising inflation expectations. To generate higher inflation expectations, the Fed may have to promise to be imprudent at some future date–like 2014. Essentially, the Fed is hinting that it wont stomp on a boom in 2014 even if its generating increases in prices and wages that might normally make the central bank a little uncomfortable. That, in turn, should make those deciding whether to invest now a little more bullish about the prospects for their investments. That will make them more likely to invest in the first place, helping to generate the near-term boom that the Fed would like to see.

To boost the economy now, the Fed needs to raise inflation expectations. At this meeting, it gave itself a couple of key tools to help it accomplish that: a target framework that should facilitate higher rates of inflation, and a message that tells markets that it will tolerate more inflation. Together, those steps should be quite powerful. They might not be enough, of course. The Fed does have to demonstrate that its commitment to boosting the economy is credible, and doing that may require it to announce further increases in the size of the Feds balance sheet. I wouldnt be surprised to see Mr Bernanke add more purchases to the policy mix in the future, particularly if the inflation outlook continues to moderate and the pace of decline in unemployment slows or reverses.

The pace at which all of these moves have come together has been excrutiatingly slow at times. The American economy has faced month after month of elevated unemployment and the risk of a double-dip recession, all alongside historically low inflation. The case for more Fed action has been strong for quite some time. As frustrating as the delay has been, it is now plain that the Fed is working its way toward a monetary policy that is more intellectually coherent and effective at the zero lower bound than was previously the case. But for this long march, the American economy would be in far worse shape. And if this evolution continues, Mr Bernanke may well be judged to have accomplished something truly remarkable and praiseworthy, all within a very difficult economic and political environment.

Dhaka, Jan 26 (bdnews24.com)?The central bank#39;s new monetary policy has once again exposed deep cracks in the economy, the BNP remarked on Thursday.

Announcing a contractionary monetary policy earlier in the day, Bangladesh Bank revised down its growth target and said inflation may shoot the estimated 7.5 per cent for the ongoing fiscal.

BNP spokesperson Mirza Fakhrul Islam Alamgir issued a reaction hours later, saying, The nation is heading towards destruction.

The banks are broke from loaning out excessively [to the government], three million investors in the stock market have lost everything. The Bangladesh Bank policy reflects this scenario.

Fakhrul said the government and its wrong policies were to be blamed for inflation.

The food price inflation is already 13 percent. The growth target set in budget will not be attained, he said.

Industries are shutting down, the garment sector is becoming weak. Exporters say orders have gone down 17 percent. The labour market is also shrinking, the acting secretary-general added.

It central bank projects 6.5 per cent to 7 per cent growth and 9 per cent inflation, and private sector credit growth target at 16 per cent. The finance minister had set targets of 7 per cent growth and 7.5 per cent inflation for this fiscal in his budget speech. But average inflation stood at 10.7 per cent until December.

Fakhrul said the president#39;s opening speech for the year-opening session in parliament was #39;divorced from reality#39;.

We respect the president, but he does what Awami League says. He praised Awami League in parliament, reading from a speech like a parrot. It had no connection to reality, he said.

In fact, the ruling party was to be blamed for an #39;ongoing political crisis, the BNP leader said.

The fifteenth amendment abolished the neutral caretaker government system from the state, and yet the president is praising the fifteenth amendment, the former state minister added.

bdnews24.com/sm/sh/bd/2032h

There are two faucets and a drain in a pool. One of the faucets can fill the pool in two hours, the other in five. The drain can empty the pool in four hours. How long will it take for the pool to fill up if it is one third full to start with?

I was completely conpuzzled by these problems at primary school. Not that I was bad at math, but I just couldnt figure out why anyone in her right mind would not plug the drains if she wanted to fill up the pool in the first place.

After all these years, I am faced with the same problem again. The Central Bank of Turkey has been selling its foreign exchange reserves to protect the lira, but then coming up with ingenious schemes to collect them. For example, it is allowing banks — the very ones to which it has been selling this foreign currency — to maintain their lira required reserves at the Bank in foreign currency.

With dollars being filled and drained at the same time, it isnt a big surprise that this method has not been very effective. The Bank sold about $1.5 billion on Tuesday, of which $750 million was the daily auction and the rest the Banks first direct intervention since 2006. However, by the end of the day, the lira had barely moved.

Since increasing the supply of foreign currency has not worked, the Bank has now turned to domestic currency. By raising the overnight lending rate from 9 to 12.5 percent (8 to 12 percent for primary dealers) at Thursdays rates meeting, the Bank has provided itself the necessary room to squeeze lira liquidity.

The resulting higher overnight rate will, in turn, make it more expensive to short the lira. Since the borrowing rate was kept at 5 percent, the wider window has increased volatility as well, which would further deter speculative flows. However, if the Central Bank is aiming to strengthen the lira with the familiar supply-demand mechanism, it may not have as much luck.

While banks are extremely dependent on the Central Bank for liquidity, they may respond to a liquidity squeeze by selling off their government bonds. The result would be a bloodbath in the short end of the yield curve rather than a stronger lira.

But if tightening domestic liquidity doesnt work, the Bank is likely to pull other tricks out of its hat, as Central Bank Gov. Erdem Baþccedil;ý has recently hinted. This line of thinking is reminiscent of Nasreddin Hodja trying to ferment the Akþehir Lake with a cup of yoghurt.

By telling the doubters what if it works, the wise Hodja is noting his extremely asymmetric cost-benefit structure: If the fermenting doesnt work, he will lose only his cup of yoghurt, but if it does, hell have a lake of yoghurt.

Unfortunately, the Central Bank does not have that luxury. It needs reserves for the real tough times, in case the Euro Area goes bust, and banks higher funding costs will be reflected in credit rates, exacerbating the slowdown in economic activity.

Luckily, the Bank finally adopted a hawkish tone with regard to inflation in its one-pager accompanying the rates decision. If they continue in this vein in this weeks Inflation Report and next weeks monthly meeting with economists, they could help the lira for once.

Duncan Black complains because he thinks I have not been critical enough of nominal GDP targeting via unconventional monetary policy alone:

Eschaton: Why Dont They Lend Me $30 Billion On The Security Of My Cats?: If were going to actually move to more unconventional monetary policy, can we please recognize that the reason to do so is largely because conventional monetary policy – acting through the banking system – isnt working? We should understand that it isnt working because it almost destroyed the world a few years ago and is about to do so again because, you know, nothing changed and the overpaid assholes who almost destroyed the world then are still in charge. If were going to give out dodgy loans, how about giving dodgy loans to people who might do something with the money other than visiting the Great Casino?

Point taken.

Touche.

I will report to the reeducation camp tomorrow, and if Duncan will send me pictures of his cats I will draw up plans for the DBCFRLF alongside the JDDFRLFhellip;[1]

I have been saying that coordinated fiscal and monetary policy–jen-U-ine helicopter drops or simple government-print-and-buy-useful-stuff–is the superior way to accomplish nominal GDP targeting, and that doing so via monetary policy alone runs risks.

But I have not been saying so loudly enough.

Look: targeting the nominal GDP path via monetary policy alone in a liquidity trap is a bet that private-sector financiers will:

• be confident that the policy will not be reversed when the economy emerges from its liquidity trap,

• be confident that the policy will succeed and that they should start spending now in anticipation of the faster nominal GDP growth that the policy will produce, plus

• a little bit of taking risk onto the Federal Reserves balance sheet and so freeing up private financier risk-bearing capacity to expand their loan portfolio.

Mostly, that is, the policy is a policy that succeeds if it is generally expected to succeed and fails if it is generally expected to fail. It thus has the confidence fairy nature.

To the extent that the policy does not have the confidence fairy nature, it is because it changes asset supplies here and now and thus private financiers incentives to lend and businesses incentives to produce. It does so because the policy involves swapping one asset for another asset that is not the same.

Right now because we are in a liquidity trap short-term Treasury bills and cash are effectively, for the moment, the same asset: they are both short-term zero-yield safe nominal government liabilities. Very few believe that the Federal Reserves buying Treasury bills for cash and saying: See! We are doing something! Nominal GDP growth will be faster! You should raise your expectations of real growth and inflation and act accordingly! would actually do anything. By contrast, if the Federal Reserve buys long-term Treasury or agency or private debt the assets it is buying carry an expectational term premium, duration risk, and (perhaps) default risk: they are not identical to the assets that they are selling. Because the private sectors asset holdings change, private-sector financiers and businesses have incentives to change their behavior even if they dont buy the appearance of the confidence fairy at all–and the fact that they will change their behavior even if they dont believe is a reason for people to believe.

The superiority of unconventional monetary policy thus works off of the fact that the assets the government is buying are different than the assets it is selling–and thus the more different the assets it buys from the assets it sells, the greater the non-confidence-fairy bang from the policy.

What asset is most different from cash?

With a helicopter drop, the Federal Reserve sells cash and it buyshellip; nothing at all. Cash and nothing are pretty different assets. Add cash to private-sector portfolios and take nothing away, and portfolios have shifted in meaningful ways and people will change what they do.

With print-money-and-buy-useful-things, the government sells cash and buyshellip; roads, bridges, research into public health, flu shots, killer robots–all kinds of things that are very very different indeed from cash.

Thus, as Milton Friedmans teacher Jacob Viner knew well back in 1933, coordinated fiscal and monetary expansion via printing money and buying useful stuff (or handing it out via helicopter drops) is a policy that really does not have the confidence fairy nature. Because it does not require confidence to start working, it will (probably) work much more rapidly and certainly.

[1] DBCFRLF: The Duncan Blacks Cats Federal Reserve Loan Facility. JDDFRLF: The Jamie Dimons Dog Federal Reserve Loan Facility.

The Court of Appeals has denied the petition filed by the Bangko Sentral ng Pilipinas and the Monetary Board to order an independent audit of the Banco Filipino Savings and Mortgage Bank.

The courts former special14th division through Associate Justice Agnes Reyes-Carpio ruled that the request of the BSP and MB would only delay the disposition of the petition filed by stockholders of Banco Filipino that assailed the ruling of the BSP, MB and the Philippine Deposit Insurance Corporation to take over the thrift banks operations.

The appellate courtsaid that if it considers BSPs motion, it would have to direct the parties to submit their own list of local and foreign auditors, then it is likely that parties would disagree on the list of auditors, which would possibly result in the filing of numerous pleadings before the Supreme Court.

It said that the independent audit is unnecessary considering that all evidence and material have already been submitted to the court. Rey Requejo

Top

I was thinking about the $50 million Crane is asking for in the move to the American League and what it meant.

Sure, its always all about the money, and that basically pays for the Astros payroll next season (or for a Carlos Lee buyout). But, what caught in my mind were the reports that said Selig may have gone to Drayton, asking for him to drop the price by $50 million to make the compensation work.

That doesnt make a lot of sense, though. Why would Drayton care about compensating MLB or Crane, when hes leaving? Hes only going to be forced to drop his price if Selig threatens to blow the whole thing up, and thats not going to happen at this point (I think).

No, the more I thought about it, the more it makes sense that the money is a way not only to justify the move, but also to make some of the reticent owners feel good about Cranes financing. While its assumed the reluctance to approve Crane has more to do with the discrimination and war profiteering claims, what if its not? What if there were more of those owners who had a problem with the debt service Crane would be bringing to the table?

By giving him that $50 million, Crane would be able to reduce that debt immediately by a good chunk. With the McCourt and Hicks messes, I think the other owners care more about that debt than the character issues.

That might explain how this whole interlocking mess is going down. If its a question of character, moving to the AL and the debt, this solution solves all that. Cranes visit with Selig allayed the character concerns, the move to the AL will be compensated, which in turn solves the debt problem. If that wasnt an issue? Why on earth does Selig have to give Crane money? Its a negotiating tactic and it worked on multiple levels.

NEW BERLIN, Wis., Oct 24, 2011 (BUSINESS WIRE) –
International Monetary Systems, Ltd.

/quotes/zigman/560968 ITNM
0.00%

, a worldwide leader
in business-to-business barter services, today announced that its stock
closed Friday at a two-year-high price of $1.95.

In addition, International Monetary Systems was ranked 5th on
the Milwaukee Business Journal’s recently issued list of Wisconsin’s
Top-25 best-performing stocks for 2011.

About International Monetary Systems

Founded in 1985, International Monetary Systems (IMS) serves 23,000
cardholders in 52 North American markets. Based in New Berlin,
Wisconsin, and managed by seasoned industry veterans, IMS is one of the
largest publicly traded barter companies in the world. The company’s
proprietary transaction clearing software enables businesses and
individuals to trade goods and services online using an electronic
currency known as trade dollars. The IMS network allows companies to
create cost savings and connect to new customers by incorporating barter
opportunities in their business models. Further information can be
obtained at the company’s Web site at:
www.imsbarter.com .

SOURCE: International Monetary Systems, Ltd.

International Monetary Systems, Ltd., New Berlin, WI
John Strabley — CEO
(800) 559-8515

Copyright Business Wire 2011

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Oct. 28, 2011 10:47a

MACAU, Oct 24, 2011 (MARKETWIRE via COMTEX) –
Today,
www.EquityMarketsInc.com announced its research report
highlighting Medtronic, Inc.

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and The Cooper Companies,
Inc.

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. Full content and research is available at

www.EquityMarketsInc.com/research.php?id=MDT +COO.

Short-term outlooks within US and global economies continue to adjust
downward, as US Treasury yields touched their lowest levels in over
65 years. International Monetary Fund downgraded estimates for US
growth by 1.0% this year, down from 2.5%. ‘Significant downside
risks’ to the US economy were confirmed by the Federal Reserve
pressured by ‘strains in global financial markets’.

As the US dollar trades above an eight-month high against the Euro,
it highlights a deepening of the Eurozone sovereign debt crisis –
furthered by continued policy inaction from European governments. We
expect continued volatility until economic data stabilizes and we see
decisive policy action to deal with the Eurozone debt crisis.

Our members are preparing for a turn in tides. Currently, the Credit
Suisse Risk Appetite Indicator is at a 30-year low. For the past
three occurrences, this level has acted as a leading indicator of
large stock market rallies 18 months following.

Equity Markets has reviewed Medtronic, Inc. for its current position
within the healthcare industry. Medtronic, Inc. (Medtronic) is a
medical technology company. The Company is engaged in research,
design, manufacture and sale of products to alleviate pain, restore
health and extend life. It manufactures and sells device-based
medical therapies. The full research report on Medtronic, Inc.

/quotes/zigman/233680/quotes/nls/mdt MDT
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is available here:
www.EquityMarketsInc.com/research.php?id=MDT .

Equity Markets has reviewed The Cooper Companies, Inc. for its
development within the healthcare industry. The Cooper Companies,
Inc. (Cooper) is a global medical products company that serves the
specialty healthcare market through its two business units,
CooperVision, Inc. (CVI) and CooperSurgical, Inc. (CSI). CVI
develops, manufactures and markets a range of contact lenses for the
global vision correction market. The full research report on The
Cooper Companies, Inc.

/quotes/zigman/157221/quotes/nls/coo COO
-0.53%

is available here:

www.EquityMarketsInc.com/research.php?id=COO .

About Equity Markets
Our mission at Equity Markets is to be the best
source of content and research, while educating, enlightening and
informing investors. Equity Markets combines street smart analysts
and professional market researchers to provide investors with
detailed company profiles and market coverage.

Contact:

Samuel Littman
Email Contact

www.EquityMarketsInc.com

SOURCE: Equity Markets Inc

http://www2.marketwire.com/mw/emailprcntct?id=DE88ADAF21CFD6D7

http://www.equitymarketsinc.com/

Copyright 2011 Marketwire, Inc., All rights reserved.

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Cooper Cos.

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Oct. 28, 2011 4:02p

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MDT

Medtronic Inc.

$
35.48

+0.46
+1.31%

Volume: 5.02M
Oct. 28, 2011 4:00p

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COO

Cooper Cos.

$
71.06

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Volume: 588,336
Oct. 28, 2011 4:02p

US Federal Reserve Chairman Ben Bernanke told Senate Democrats Thursday the Fed has done all it can to stimulate the economy through monetary policy.

Some Senate Democrats have urged Bernanke to do more in the way of stimulus, but he told senators during the Democrats weekly policy lunch no further monetary stimulus is planned, The Hill reported.

Hes said hes done all he can do on the monetary side, and I think its probably accurate, Senate Majority Whip Dick Durbin of Illinois said. Now its up to us.

A Senate Democratic aide The Hill did not identify told the publication Bernankes message puts more pressure on Congress to pass a $35 billion measure to help retain jobs for teachers and first responders.

Thats right, we need to pass a jobs bill, and thats what were trying to do, the aide said.

During the session with Democrats, Bernanke said he and other US economic officials have offered suggestions to European leaders for avoiding financial crisis, UPI.com reported. Those attending the meeting declined to say whether Bernanke said he thought Europes financial troubles could be prevented from spreading beyond Europe.

There are some critical decisions being made over there that could have an impact on the United States, Durbin said. He did talk about some meetings that are coming up very soon that are very critical when it comes to the future of Greece.