Fed Pumps More Money Into the Economy

The markets are feeling happy today: First of all the US payrolls numbers were better than expected, and now the Fed has also increased the money it will be pumping into the credit markets.

The Fed increased its cash-loan auctions to banks by around 50% to $75 billion and also increased its currency-swap arrangement with the ECB to $50 billion. According to the Fed, these actions were taken “in view of the persistent liquidity pressures in some term funding markets.” So there is still a liquidity problem, but it seems to be easing somewhat; after all Mars was able to obtain a significant amount of funding to purchase Wrigley (WWY), and that might signal others to look at funding similar deals.

Factory orders were also up 1.4%, thanks to stronger exports due to a weaker dollar. This beat analysts’ expectations after a 0.9% decline last month and shows that the weaker dollar is continuing to benefit US companies.

Chevron’s (CVX) profit is up 10% to $5.17 billion, or $2.48 per share in Q1, from $4.72 billion, or $2.18 per share last year’s Q1 on higher oil prices, beating analysts’ expectations of $2.41 per share. On the downside though, they said that margins were continuing to tighten for their gasoline refining business as gas prices at the pump haven’t increased as fast as crude oil prices.

If Clinton and McCain have their way, oil companies could soon have even fatter profits as they enjoy the benefits of the “gas-tax holiday” which would make them pay less taxes and would make it easier for them to widen their spreads on the oil/gasoline price differential. In the long run, this probably won’t benefit the consumer much, but shareholders of these companies should be happy.

Comments

[special1person]

"The markets are feeling happy today..."

It's my understanding that junkies feel happy when their dealers increase their supply of drugs.

I'm not The Amazing Kreskin, but I predict these "feelings of happiness" might possibly subside around October this year when the "junk" wears off...

[icandoitdon]

good analogy.....

nothing like free money to make wall street feel happy. but when the inmates run the asylum, the party can't last.

[L Moore]

You are right about the gas tax holiday idea going streight to the oil companies. If people pay $4 now they will still pay $4 then because there is no reason to lower prices. The gov won't get its revenue, the oil companies will keep the difference. The only way to make that idea work is to regulate gas prices.

[gaucho]

Well the numbers are great and so was Potemkin’s Village. I guess this is typical keep the economy going until elections are over no matter what the long term damage. The economy is sliding into a deep recession and numbers for GDP were an illusion. The FED estimated the inflations rate @ 2.6% as if the rest of the country was blind. Most people out there really believe that the inflation rate is more like 5-7% and I am one of them. Take this realistic inflation number and GDP actually fell by at least 2.5%. This is the second quarter that the FED has underestimated the inflation rate and conveniently came up with an anemic growth rate of .9% annually.
The housing market fall is accelerating and the FED keeps pumping billions into the banks. This cheap money will slosh around but the bond traders (smart money) will not touch the toxic waste called CDOs, VIE and XYZs. The consumer is tapped out but the FED states that consumer spending is flat. Plug in the huge increase in gas and food increases and the consumer is spending just to get by.
The 600 dollar ‘feel good’ will only pay for two months gas. Natural gas and oil increases will by themselves eat up the six hundred.
Consumer credit card debt increased at %5 in March alone. This is not a good sign. It means they are tapped out and cannot extract more money from their house so they are using plastic. Obviously this cannot continue for more than a few of months. Then the defaults start on the credit cards.
We keep hearing the worst is over yet the adjustable rate mortgages peaked in February through March of this year. SEE credit card debt spike in March. The delayed reaction will take minimum three months to show up on the banks delinquent list and 6-8 months for foreclosure. At that point the banks will dump the house on the market since they will already be full of REO properties. About that time the ALT-A and Option arms begin to reset. Many people will see their house values cut in half and just throw in the towel even if they could continue to pay the mortgage. Who wants to spend the rest of his life just to break even on their mortgage?

[buyitcheap]

Its to the point where we need high prices, and elimination of drilling restrictions to increase supply which will be the ONLY cure for this situation.

[Small TownIndiana]

I have to agree with with Gaucho. History has a tendency of repeating itself. The U. S. DID NOT get in this mess overnight, and will not pull out in the next couple of months. So, the FED will do "whatever" it takes in this election year. I've been unemployed for over 4 months now and it's not as if I'm a high school drop-out. I hold 2 BA's and can't find a job that will pay me more than $10/hr. That $600 won't even make 1 mtg. payment. Nice of them to give me some of my $$ back, but they're only going to make me pay taxes on it next year, so what' s the point?

[NormanLepoff, M.D.]

Great article and comments.

[steve west]

gee Grace how bout you print an article where you apologize for being so wrong about the direction of the market. Maybe you and Bill Cara can start column so we can all do the opposite of what you say

[Will Rahal]

It is not surprising that the FED continues pumping money into the financial system.
I have shown that the Industrial Production Index corresponding to Business Equipment relative to Consumer Goods is about to turn lower slowing the economy further and creating even more loan problems for the banking system.
See
wrahal.blogspot.com/20...

[gordon]

Will- good work. The media would have us believe the consumers won't hit a wall. Craig'slist & Ebay report that families are now so desperate they are selling heirlooms or anything they can. There's your "trickle-down&quo... Business spending and commercial real estate are next to turn down, or show up in the charts. Sam Zell saying it's time to buy is the perfect contrary indicator.

[fedinflation]

Every time the Fed pumps money into the mix, our dollar gets devalued. So if you have $100K in the bank your money just lost some value. It's a form of hidden, ugly un-talked about tax. Since the US manufactures so little of it's consumable products now with everything being out-sourced overseas, the price of everything we purchase is bound to go up. So not only is our dollar worth less, but to add to it pricing will go up for overseas items as our dollar gets weaker against other currencies. Printing money out of thin air is what got us in this mess. I hope people are prepared for the worst. Notice the $30Billion bail out from the Fed to Bear Sterns I would love to have a rich uncle like that to bail me out if I needed it.

[Will Rahal]

Thanks Gordon.
Heirlooms eh? What is next?

[warrenmosler]

as a purely technical point the fed is not 'pumping money' into the system.

what the fed is doing is attempting to keep interbank interest rates closer to it's target rates.

the fed does this by offering member banks a lower cost alternative when the interbank rates are higher than the fed desires them to be.

net lending to the banking system remains unchanged.

to the penny

as a matter of accounting

it's about price, not quantity

moslereconomics.com

[icandoitdon]

the fed has taken rates from roughly 5% to 2% in about 9 months. the whole point of this is to increase liquidity in the system...regardless of the dollars in circulation. if this policy works...the horse starts drinking the water it's led to...it will lead to a significant expansion in the money supply, will it not?

a reduction in the price of any commodity...money included....leads to an increase in the quantity demanded. that's what i learned in economics 101.

[warrenmosler]

You also learned that 'loans create deposits' meaning that for every $ borrowed there is a $ 'saved'

And that a change in interest rates merely shifts income between borrowers/savers.

And that any change in demand from a change in rates has to come from the differences in the propensities to spend/consume between borrowers and savers.

And that the govt is a net payer of interest, so any difference in propensity to spend has to overcome that hurdle as well.

That's why changes in interest rates, though disruptive, seldom can be shown to have done much.

so yes, borrowers have been helped some, and savers hurt some

and net govt spending is a tad lower than it would have been

see 'zero is the natural rate of interest' at moslereconomics.com

[fedinflation]

Sorry Warren - the Fed is pumping money made out of thin air. Warren - who owns the Fed Reserve??? And yes pumping money will always lower the dollars value. The article's title even suggests it. If you had 10 kilo's of gold in the world and it was worth $100 million. Now you find another 10 kilo's of more gold, the value of the gold already in existance would naturally tend to go down in value/price. Supply/demand - the same holds true for oil. OPEC pumps more - price goes down. The same holds true for what the fed does (PS Did you know the fed is not part of our govt but a group of private bankers - making the rules and pulling the strings of our servant govt???) Fiat money has never worked long term and you are seeing a time were it is happening again. They are pumping more money in hopes of slowing the inevitable collapse of the dollar - which is backed by nothing hence the reason they can print more out of thin air.

[icandoitdon]

"for every dollar borrowed there is a dollar saved."

that is true only in a vacum. the fed has the ability to create money by simply printing it, which they've never hestiated to do in times of "crisis." i use the term loosely, since even the slightest hint of recession they now seem to consider a crisis. if money growth occurs faster than the underlying rate of growth in an economy, it ultimately produces inflation and a decline in the value of the currency. the currency tends to lead since those markets are traded. inflation usually follows.

inflation and a declining currency is the enduring characteristic of all debtor nations.