Forex Futures Forum Archive for 05/15/2004

Mtl JP 23:01 GMT May 15, 2004 Reply   
Greenspan recently asked (in front of bankers in Chicago) “Has something fundamental happened to the U.S. economy and, by extension, U.S. banking, that enables us to disregard all the time-tested criteria of imbalance and economic danger?” He answered his own Q: “Regrettably, the answer is no. The free lunch has still to be invented.” Really ?... could have fooled me.. I expect the FED & Co. were/are more worried about deflation than inflation - especially in assets that guarantee the bankers' loans, and that have "flipping" and "speculation" and "bubble" and "crash" stamped allover? And to think that, as a bonus, China and Japan are in on the asset-deflation worrywagon...

Livingston nh 20:43 GMT May 15, 2004 Reply   
JP - first Berry has a penchant for stating the obvious - a few weeks ago his article was that Fed sees no inflation

I agree with you that the Fed is concerned about the recovery's endurance but as I quoted earlier from the March 1994 Fed transcript this concern did not slow the panicked G'span Fed back then // so far (up 'til Friday's bond rally) the 10 year has been hit worse than '94 in the last two months

The bond market is now faced with dual threats from the Fed. The first is the obvious tightening that is necessary to undo the emergency rate and restore Fed Funds to neutral. The appropriate level is subject to debate but there is agreement that it is higher than 2%- that is the easy part.

Last year the Fed talkers went out of their way to assure one and all that a rise in interest rates would not mean a lack of accomodation by the Fed, e.g., a 2% Funds rate could be easy in a recovering economy. That promise of accomodation went out the window with the last Fed meeting. WHY?

Because the second threat, inflation, is the more difficult to assess. Because it has been more than 20 years since the bond market has had to deal with it - the current Fed (and its Chairman) have been faced with the shadow of inflation, the bogeyman that is warned of but never seen - it is also worth noting that inflation is now running a bit hotter than when G'span took over from Volcker back in summer of '87

SO now we have a Fed poised to get back to a "neutral" policy and a bond market saying that may not be enough.

I agree with your idea of a battle between the Fed and the market. But I think on past performance the Fed has the last word. IMO the Fed follows the Bond Market which lags inflation, the cause of which condition eludes the Fed members apparently (like a bubble that you can't see until it bursts)

Poole of the St. Louis Fed gave this scary speech LINK
a few weeks ago - concluded with this -
"Instead, I hope I’ve convinced you that there is no regular and reliable relationship between inflation in materials prices or goods at an early stage of processing and retail price inflation.

Of critical importance to maintaining low and stable inflation is the FOMC’s commitment to act aggressively when inflation risks change, either up or down. That commitment anchors market expectations of long-run inflation, and makes the economy more robust to short-run inflation shocks. Short-run disturbances do not automatically get built into inflation, which helps to dampen the impacts on the economy of inflation shocks.

This stable environment also helps the FOMC to avoid mistakes. Above all, we do not want to respond to inflation noise, which would add further instability to the economy. Extracting the inflation signal, and responding to it, is what we try to do."

We will see how well they do at signal extraction but the whole speech is an incredible statement about inflation and the condition of the Fed.

Santomero of the Philly Fed had some comments last week
LINK about inflation and productivity (thanx to NYC3 for the SF Fed paper by Baily on productivity) that were a little more mainstream -- but he had this to say about your fragile markets as a Fed concern - "The recently expressed concerns about "excessive risk taking" in financial markets are, at bottom, concerns that when interest rates start to rise, there will be substantial revaluations of financial assets. Stock- and bond-holders will experience unexpected losses in wealth, and financial disruption could follow. I am not convinced by these arguments." sounds like the Bies speech of your earlier post

The Fed will panic and the markets will pay the price

Livingston nh 20:06 GMT May 15, 2004 Reply   
Well - it would be great if we could get rid of Manila's cut and paste travelogue of Tajikstan

Mtl JP 19:58 GMT May 15, 2004 Reply   
nh /
It is diffucult to immagine that Greenspan is a fool. It is also a safe bet that ge can and does read the CPI report. His foolish statements abou invisibility of bubbles until after they burst has not gained him favour. Bottom line is that he may try to spout pronouncements about excesses and irresponsibility (which he himself has instigated) but he simply points out the embarassingly obvious fact that he missed the boat and now can’t do anything to reign it in. He will not say the simple fact that him and his FED simply have no choice but to keep the chaeap money flow going.. so as to keep “the recovery” from coming to a sudden and dead stop. So now we have the FED, yet agian, engaged in a word shell game of interest rate intentions. Gingerly, it it is hinting at raising s/t rates, nevermind the fact that it has kept them at 1% (in responce to whatever emergency it percieved): Fed Appears Certain to Raise Rate by .25 Percent>: John M. Berry (Bloomberg). I have a strong suspicion the Fed does not intend to do make any drastic rate changes UNLESS it is absolutely forced into doing so, scratching and screaming, simply because otherwise the market could get disproportinately nervous. Market vigilantes (the bond guys) aren’t Prozac users, given 10-yr note yeald rise from FOMC March meeting. I have mentioned earlier (on GVI) that 2004 will be the battle year of who sets the rates: FED or the market, with market implications pretty clear.