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InvestmentFOMC Federal Reserve
« Previous 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Next » » mdorsey - Don't fight the Fed -- especially on the oil issue IRWIN KELLNERDon't fight the Fed -- especially on the oil issue Commentary: Crude's retreat figures prominently on the interest-rate front By Dr. Irwin Kellner, MarketWatch Last Update: 2:00 PM ET Jan 23, 2007 HEMPSTEAD, N.Y. (MarketWatch) -- The sharp drop in oil prices does not mean that lower interest rates are just around the corner. If anything, higher interest rates lurk, this time around. To be sure, when oil prices fall, they take some of the steam out of inflation. This is because lots of economic activity depends on oil, ranging from transportation, to heating, cooling and electricity -- not to mention the production of certain raw materials, for which oil is considered a feedstock. Less inflation, of course, has considerable benefits, not the least of which is boosting people's buying power. You can see this from the stats covering average hourly earnings. Until recently, the average worker was losing ground against inflation. Put another way, his or her wages were falling, after adjusting for inflation. But the sharp drop in oil prices beginning last summer gave these "real" earnings a lift by pulling down the rise in the consumer price index. Today, real wages are rising nearly 2% faster than the CPI. .......... In today's strong economy, still awash in excess liquidity in spite of 17 interest rate hikes by the Fed, these price increases are likely to stick. You know what this means? That's right, more inflation. These two words, more inflation, are anathema to the Federal Reserve. Its members are telling the markets this every way they know how, from speeches, to Congressional testimony, to the statements issued by the rate-setting Federal Open Market Committee. The central bankers' message: lower interest rates are off the table as long as we believe that inflation remains a problem. And while we may not change rates this month, we're more likely to raise them than to lower them in the future, as long as inflation remains above our comfort zone. http://www.marketwatch.com/news/story/cr... -- posted by mdorsey » SteveT - A Case Against a Flat Fed-Funds Rate . THE WALL STREET CONSENSUS is gradually shifting toward the view that the Federal Reserve may simply flat-line the federal-funds rate for the entire year at 5.25%, which has elicited comparisons to the year 1996 when the federal-funds rate was held at 5.25% for nearly the entire year while stocks rose by more than 20%. While there are some similarities between these two periods, we find important differences that cast doubt on the idea that the funds rate will remain stable at current levels for the year. Financial conditions are easier now than they were a decade ago. Real short rates are lower now than they were a decade ago, while commodity prices are higher and credit spreads are narrower. These are symptoms of easy financial conditions, excess liquidity and consequent reduction in the purchasing power of money. While it is true that the Treasury curve remains inverted (and was not during 1996), we believe this is a function of excess global liquidity and a bond market still priced for rate cuts that are unlikely to be forthcoming. Effective tax rates on capital are lower today than they were in 1996, while stocks are more undervalued (relative to bonds) than they were a decade ago. By our calculations (using the gross domestic product price deflator and the nominal tax rate on capital), the effective tax rate on capital is 21% today compared to 35% in 1996. Our capitalized corporate-profits model showed stocks to be about 20% undervalued relative to bonds during 1996 while there is a whopping 65% undervaluation today. If we adjust our discount rate for the effects of excess liquidity (which would boost the 10-year yield to about 6% to 6.25%), equities remain 25% to 30% undervalued relative to bonds. As the labor market continues to tighten against the backdrop of excess liquidity, we expect core inflation to push higher, casting doubt on the idea of stable short rates. The unemployment rate is about a full percentage point lower today (4.6%) than the average during 1996 (5.4%). Jobless claims as a ratio to the nonfarm labor force (a leading indicator of the unemployment rate) also are lower today than they were a decade ago. Not coincidentally, unit labor costs are rising much faster now (up 2.8% year over year) than their average growth rate in 1996 (0.52% year over year). In other words, either corporate profit margins are going to compress, which was the case during the late 1990s and early 2000s, or underlying inflationary pressures are going to remain elevated or move higher. We believe it will be the latter given the backdrop of easy financial/liquidity conditions now in place. For this reason, we expect headline and core inflation to converge in the 3% range or higher. Our indicators suggest the economy will prove more resilient than the consensus expects while inflation likely will run hotter than widely believed. Our equity valuation model suggests that stocks would still be undervalued by 25% to 30% even if short and long rates rise 75 to 150 basis points, which we expect before the end of this cycle. -- Michael T. Darda, chief economist The opinions contained in Investors' Soapbox in no way represent those of Barron's Online or Dow Jones & Company, Inc. The opinions expressed are those of the newsletter's writer(s). To be considered for this feature, please send material to Soapbox@barrons.com Comments? E-mail us at online.editors@barrons.com2 -- posted by SteveT » runner26 - Inflation still Main Concern Fed Minutes Show Inflation Main Concern, Bias Change Rejected By Craig Torres Feb. 21 (Bloomberg) -- Federal Reserve policy makers discussed dropping their inclination to raise interest rates, and then rejected the idea because inflation remained the ``predominant concern,' minutes of the Federal Open Market Committee's January meeting show. ``Members discussed whether the balance-of-risks language in its recent statements still was the best way to represent the views of the committee and decided that a change was not warranted at this time,' the minutes said. ``All members agreed that the statement should continue to stress that some inflation risks remained and note that additional policy firming was possible.' Fed officials voted unanimously to leave the benchmark rate at 5.25 percent for a fifth consecutive policy meeting. Traders saw only about a 12 percent probability that the U.S. central bank will cut rates by the end of June, according to yields on federal funds futures before the minutes were released. The minutes, released today in Washington, show policy makers unanimously guarded on inflation and waiting for solid evidence that price increases will subside. ``Participants did not yet see a downtrend in core inflation as definitively established,' the minutes said. ``All members agreed that the predominant concern remained the risk that inflation would fail to moderate as desired.' Officials are trying to sort through the risks of a weak housing market that's offset by low unemployment, which is in turn generating gains in income and spending. For now, they expect inflation to subside gradually with little cost to jobs or growth, forecasts presented to Congress last week show. Bernanke Testimony Chairman Ben S. Bernanke told the Senate Banking Committee on Feb. 14 that moderating prices for energy, commodities and housing should ``help foster a continued edging down' of core inflation. So far, data are mixed. The so-called core consumer price index rose 2.7 percent for the 12 months through January, up from 2.6 percent a month earlier, the Labor Department said today. The three-month annual rate on the personal consumption expenditures prices index, minus food and energy, slowed to 2.1 percent in December from 2.3 percent in November. Between the January meeting and Bernanke's testimony last week, Fed officials saw reports on prices, jobs, labor costs, factory orders, consumer confidence, earnings and retail sales. While lower energy and commodity price quotes could ease price indexes, Fed officials noted in the minutes that they are still focused on the balance of overall demand and supply. Labor Market ``The influence of more enduring factors, importantly including pressures in labor and product markets and the behavior of inflation expectations, would primarily determine the extent of more persistent progress' on inflation, the minutes said. Labor markets and wage growth were also cited as inflation risks in the minutes. ``Many participants observed that labor markets remained relatively taut, with significant wage pressures being reported in some occupations,' the minutes said. ``So far, aggregate measures of labor compensation were showing only moderate increases, but looking ahead, the possibility that labor costs might rise more rapidly' could be an ``upside risk to inflation.' To contact the reporters on this story: Craig Torres in Washington; Last Updated: February 21, 2007 14:07 EST -- posted by runner26 » smile_1 - Not that it should matter Not that it should matter but Greenspan said recession in the U.S. is possible, though not probable this year as excess inventory is being reduced quickly, according to people attending a CLSA Japan Forum in Tokyo today. ``By the end of the year, there is the possibility, but not the probability of the U.S. moving into recession,' Greenspan said, according to notes taken by Bernard Key, a former economics professor at Tama University in Tokyo, who attended the event. -- posted by smile_1 » permabear - How the Fed Lost Control of Money Supply How the Fed Lost Control of Money Supply Currency fund manager Axel Merk asks whats stopping the Fed curbing the excessive credit expansion. Fri 02 Mar, 2007 "The world is awash in money. This money has flown into all asset classes, from stocks to bonds, from real estate to commodities. In a world priced for perfection, should we enjoy the boom or prepare for a bust?" The world is awash in money. This money has flown into all asset classes, from stocks to bonds, from real estate to commodities. In a world priced for perfection, should we enjoy the boom or prepare for a bust? Let us listen to Wall Street's adage and "follow the money." After the tech bubble burst in 2000, policy makers in the U.S. and Asia set a train in motion they have now lost control over. In an effort to preserve U.S. consumer spending, the Federal Reserve (Fed) lowered interest rates; the Administration lowered taxes; and Asian policymakers kept their currencies artificially weak to subsidise exports to American consumers. These policies have lead to one of the longest booms in consumer spending ever - U.S. consumer growth has not been negative since the early 1990s. However, it was credit expansion, rather than increased purchasing power, that has fueled the growth. Until about a year ago, consumers took advantage of abnormally low interest rates to print their own money by taking equity out of their homes. This source of money is drying up as home prices no longer rise and sub-prime lenders (those providing loans to financially weak consumers) are facing difficulties. More prudent homeowners have not yet been affected as they buy their home based on longer-term interest rates; until December these interest rates have stayed abnormally low. In recent weeks, these rates have ticked up significantly, and we may see the next and more severe round of pressure being exerted on the housing market. In this phase, we will see monetary contraction: money that has subsidised not only the real estate market, but also consumer spending, stocks, bonds and commodities may dissipate. Why is it that asset prices have continued to soar despite the stall in home prices? Consumers have not been the only source of money creation. Corporate America is creating its share of money as cash flow positive businesses are piling up cash; but corporate CEOs seem to prefer to invest abroad, providing only limited stimulus to domestic money supply. A massive source of money supply growth is purely of a financial nature, it is volatility, or better, the lack thereof. Volatility in major markets was at or near record lows last year. With volatility low, risk premiums are low; when risk premiums are low, investors have an incentive to employ more leverage and still be within their risk comfort zone. What may seem like an abstract concept has propelled financial markets to the stratosphere. Two groups that have been most aggressive at taking advantage of this are hedge funds and the issuers of credit derivatives. Take as an example, a report from the Financial Times last December: the paper reported that Citadel Investment Group, a manager of hedge funds, had $5.5 billion in interest expense on assets of only $13 billion. The hedge fund group routinely borrows as much as $100 billion. Note that this is only the leverage visible on the financial reports; the instruments invested in may themselves carry yet further leverage.
A year ago, the Fed stopped publishing M3, a broad measure of money supply. Just because you lose control of something doesn't mean you shouldn't monitor it anymore. Of the major central banks around the world, only the ECB takes an active interest in money supply. Why is it that the Fed doesn't intervene and try to stem excesses in the credit industry? We find the answer by circling back to the consumer: if the Fed were to do something about the spiraling credit expansion in the derivatives markets, the imposed tightening would quite likely hurt the consumer. Typically, a recession would not scare the Fed, but globalisation has put the fear of deflation on Fed chairman Bernanke's table. Tight credit could cause a collapse in the housing market and in consumer spending; what has been a great boom would turn into a great bust. The fear also spills over to the U.S. dollar: as a result of the current account deficit foreigners must purchase in excess of over $2 billion U.S. dollar denominated assets every single day, just to keep the dollar from falling. As the U.S. economy slows, foreigners may be more inclined to invest some of their money elsewhere. The rising price of gold reflects many investors belief that the Fed would rather see a continuation of monetary expansion than allow a severe contraction. Fed chairman Bernanke has also made it clear in his publications that he favours monetary stimulus at the expense of the dollar to mitigate hardship on the population at large. Market forces will try to bring this credit expansion to a halt. While a crisis scenario with an imploding hedge fund causing ripple effects through the financial sector is possible and likely, we don't need a crisis for the party to end. What we need is increased volatility which we have already seen in the commodities and bond markets; the equity and currency markets have also indicated volatility may be on its way back. As volatility increases, speculators are likely to pare down their leverage. In our assessment, the economic slowdown induced merely by an increase in volatility may be sufficient to encourage the Fed to ease monetary policy once again. Any easing in this context will, in our assessment, have negative implications for the dollar. Investors interested in taking some chips off the table to prepare for potential turbulence in the financial markets may want to evaluate whether gold or a basket of hard currencies are suitable ways to add diversification to their portfolios. Axel Merk -- posted by permabear » mdorsey - Check this out Ben. Productivity gains slow, labor costs up Slowdown in line with forecasts but labor costs up more than expected. March 6 2007: 8:41 AM EST WASHINGTON (Reuters) -- U.S. business productivity growth was revised down sharply as expected in the fourth quarter, while labor costs soared, raising a warning on inflation. The productivity reading was revised to an annualized 1.6 percent pace, down from the original reading of 3.0 percent gain, according to government data on Tuesday. The slowdown in nonfarm business productivity, a measure of how much any given worker can produce in an hour, matched a forecast of analysts polled by Reuters. The slippage in productivity sent unit labor costs up at a thumping 6.6 percent annualized rate in the fourth quarter. Unit labor costs are a gauge of inflation and profit pressures that are watched closely by the U.S. central bank. -- posted by mdorsey » axolotl - Greenspan Needs to Shut up In response to Greenspan Needs to Shut up posted by honeyoneohone:
-- posted by axolotl » smile_1 - Bernanke challenges idea expansions die of old age "I would make a point, I think, which is important, which is there seems to be a sense that expansions die of old age, that after they reach a certain point, then they naturally begin to end," Bernanke said. "I don't think the evidence really supports that. If we look at history, we see that the periods of expansions have varied considerably. Some have been quite long." -- posted by smile_1 » permabear - Greenspan Needs to Shut up In response to Greenspan Needs to Shut up posted by axolotl:
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