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  • Why The Fed Is Not Worried About Deflation [View article]
    David, you're correct. Where we may differ in our beliefs about how they achieve that. I have no problem with the Fed jawboning the dollar's rise, if that's what they did. It was spiking pretty hard. Too hard, maybe. But, they do see these things as transitory and employment is their 'threshold' for inflation, as I read their statement.
    Mar 23, 2015. 07:50 AM | 1 Like Like |Link to Comment
  • It's Good To Be The Fed [View article]
    "... they'd be trying to sell junk"

    If you're being facetious, good on ya. If not, the Fed doesn't buy toxic assets.
    Mar 23, 2015. 07:46 AM | Likes Like |Link to Comment
  • Why The Fed Is Not Worried About Deflation [View article]
    That oil plummeted is a free market risk gone bad. Yes, jobs were lost affecting oil trade. However, the Fed does not regulate the currency for the sake of higher nominal oil and commodity prices. It simply adds liquidity trusting the free market to spend it wisely seeking risk. It does affect inflation as does the strength of the dollar, but what the Fed is looking for is enough employed folks with a descent wage and sufficient credit to buy what can be produced thus causing inflation not by jacking up prices due to speculation.
    Mar 22, 2015. 08:06 PM | 1 Like Like |Link to Comment
  • Inflation Not A Concern For The Fed [View article]
    "Can the gov't really afford to raise interest rates?"

    It's along story, but if one understands how the government finances itself by debiting and crediting federal reserves on the Fed's balance sheet (affecting our bank deposits in the process), you can see the government will always have all the money it needs to spend.

    It's merely a question of how much, what to spent it on, and an appropriate mix of taxation and borrowing (bonds are savings accounts.) These are ideological and legal constraints, not fiscal at all. The government is not broke and it does not fund itself with our money.

    The government spends its own money (federal reserves backed by US risk free debt) on the Fed liability side by allocating reserves across the banking system.
    Mar 22, 2015. 07:59 PM | Likes Like |Link to Comment
  • It's Good To Be The Fed [View article]
    "That anyone (read you) could state that the FED is part of the federal government, is quite beyond me."

    The Fed is part of the government. It reports to congress, supports it's congressional mandate, the chairman in appointed, and it returns profits to the Treasury. It's apolitical. This is one thing the author has right. (Among other ideas in other articles, as well as misguided notions through out his theory.)
    Mar 22, 2015. 07:51 PM | Likes Like |Link to Comment
  • Dollar Strength Is Coming To An End [View article]
    Stephen, "It's difference between rates in the US and Europe that drives the dollar flows...Speaking for myself, if Italy gives me 5% and the US 2%...once you include risk in the equation, the decision making process becomes more clear."

    Maybe it would be more accurate to say "nominal returns" (inflationary or deflationary) instead of (short term) rates drive capital flow. Semantics, maybe. When the US hikes 'rates' there will be better returns on short term savings that presently. This will attract dollars. This is the Fed's quantitative tightening policy tool.

    As Net said above, " should note that the dollar has risen significantly over time while the overnight rate has not." And, "Furthermore, strength in the dollar has precipitated carry trade unwind; causing further strength in the dollar."

    "There is little relationships between rates and currency."

    Well, the Fed boosts liquidity buying bonds and depositing cash in an asset swap. That's Fed policy tool, and it does so until it reaches a target funds rate.

    On easing and as cash builds up, overnight rates naturally fall. If the economy is in recession, that cash likely seeks returns where returns can be found in global growth regions. This sets up a carry trade on low returns domestically, save equities and bond prices as asset prices rise as a consequence. But, the yield curve flattens as inflation expectations fall.

    As the Fed hikes short rates, it will find buyers (they already are during testing) thus tightening liquidity while maintaining a large balance sheet - some of it illiquid but highly flexible using short term full allotment reverse repos. These RRP are Fed liability side/bank asset entries replacing liquid reserves thus tightening global dollar flows slightly thus decreasing the volume of loan funds traded globally and strengthening the dollar.

    This short term rate hike allows the Fed to 'target' the overnight or short term lending rates of loan funds without measurably affecting commercial bank lending rates - which are not ZIRP, but based on banks competing for our own creditworthiness.

    In a low yielding 'return' environment, money flees seeking higher yield. This does debase the currency generally into areas where attractive yields can be had on growth. This weakness happened against EM, and the dollar actually strengthened against the euro from $1.60 to about $1.30 because of crisis in Europe.

    So, there is a relationship between liquidity and currency strength, especially in a global economy. And a relationship between liquidity and rates that result from massive liquidity. The effect of the currency depends on where growth and returns can be found.
    Mar 22, 2015. 07:42 PM | 1 Like Like |Link to Comment
  • FOMC: Connecting The Dots [View article]
    "Finally, globalization will see to it that America's labour productivity keeps rising and thus, cost-push inflation remains contained."

    From your article,

    This is another interesting point, I've read on Bloomberg, as it relates to our ability to produce goods and services we must eventually buy. If productivity is high, the Fed should remain loose. If productivity is low, then we stand a chance of actually buying everything we can produce and inflation should rise. In this case, the Fed will tighten as employment is sufficient to pull prices higher. Maybe we need longer lunch breaks, hit the gym for a couple hours.
    Mar 22, 2015. 07:08 AM | 1 Like Like |Link to Comment
  • FOMC: Connecting The Dots [View article]
    "For some years we have felt that inflation as we know it (i.e. demand-pull inflation, whereby too much money chases too few goods) is a thing of the past..."

    If it were, the the Fed would not be lowering it's employment threshold in hopes of stoking inflation through employment, credit, and wages. We could simply stay at the zero bound forever, like Japan, sending our currency out in a carry trade seeking yield and stimulating growth around the globe without any mention, ever, of a rate increase. In other words, we could just debase it relative to commodities, oil, and $5,000 oz gold.

    That really hasn't worked, either. Commodities are lower these days, and oil dropped dramatically. There is less supply side inflation regardless of our monetary policy stance and the dollar is marginally stronger, too, if we weed out the effects of the euro. Nope, the Fed is concerned with demand side inflation due to full employment when you connect the dots.

    Prices still depend on both supply and demand. Right now, we may have too much supply relative to demand and that may well have been caused by our own supply side stimulus. Too much supply and prices fall just as they do on weak demand. They are the flip side of each other.
    From your link, "Students of our Economic Clock® know that America has an excess supply of money in order to combat her excess supply of goods. With that "excess supply of goods" diminishing, however, the Fed sees inflationary pressures down the road."

    Well, yea, I think that's right. Problem is, that excess supply of money did not reach main street in a meaningful way to combat the excess supply of goods left over from a strong economy that crashed. It flowed through the global supply side channels seeking yield where attractive returns could be had stimulating production and employment in growth regions already experiencing such things.

    "First, there is that anachronistic dinosaur, " a strong currency hurts exports" and thus economic growth."


    "We are a little leery of drawing too many parallels to 1937: the structure and inter-connectedness of the world economy has changed so dramatically that historical parallels sound nice, but can be mendaciously misleading."


    "Thirdly, we agree with the IMF's Christine Lagarde: a US rate rise could trigger an earthquake in emerging markets: too many greedy corporates initially piled in to "cheap" dollar debt which they must service out of their own, plunging currencies."

    Another interesting point. Probably so.
    Mar 22, 2015. 06:46 AM | Likes Like |Link to Comment
  • It's Good To Be The Fed [View article]
    "By the way, does anyone know why the Fed has decided to raise rates before unwinding the balance sheet. Logically you'd expect last in, first out. They cut rates, then did QE; so why not unwind the QE, then raise rates?"

    I'd have expected the author, an expert on the all mighty central bank and it's policies, to have figured this one out. I have. Guess news doesn't make it's way to ivory towers or the author is blinded by his own theory where such a move doesn't make sense, apparently. Maybe Brad De Long can explain it. I'm winded...

    "They weren't likely to absorb particularly large losses, and even if they did they didn't really need enough bonds to back up the monetary base, only the share held as bank reserves. "

    When a bond falls in price, does the Fed debit the banking system by that amount to balance the monetary base? Or credit the banking system when bonds rise? Do they debit the price they sold the bond to the seller, as well? "Sorry about reneging on the price, we didn't mean to buy the bond at the higher market price you bid to sell." Talk about Fed credibility being in the crapper...this is a doozy.
    Mar 22, 2015. 12:05 AM | Likes Like |Link to Comment
  • The Dollar's Near-Term Vulnerability Is An Opportunity For Medium And Long Term Investors [View article]
    Dollar strength is inevitable on US growth and divergent monetary policies. Just as dollars became cheaper on capital outflows, the dollar will strengthen on inflows as employment improves, inflation turns north, and monetary stimulus gradually winds down as a result. The dramatic rise in the index is one thing, more generally dollar strength is a mixed bag. It has hardly budged locally, rising about 8% since the taper tantrum way back in 2013, range bound since then, while rising only about 2% recently vs the huge spike against the euro.
    Mar 21, 2015. 11:58 PM | Likes Like |Link to Comment
  • Fed Funds Not So Easy: Major Implications For Stocks [View article]
    "We need to ramp up QE again so we take this debt out of private hands almost entirely freeing up cash."

    Maybe some of that cash will actually rain down onto main street next time. With employment grudgingly coming down, we may have been at the zero bound far too long. Unless we plan to stay at zero forever, we have to come off ZIPR/NIRP when the labor market is firm enough to begin putting pressure on domestic prices including home prices (MBS purchases). That's the goal of QE, anyway. Once it's met, it's over.
    Mar 21, 2015. 11:47 PM | Likes Like |Link to Comment
  • Dollar Strength Is Coming To An End [View article]
    "The days of the US dollar as an international reserve currency are numbered."

    No doubt, but how large is that number? It's interesting to think about what would happen to all those reserve dollars, and euro dollars, when the dollar finally looses it's global usefulness. That's quite a huge mess to clean up, even gradually. I'd think dollars would be spent on remaining dollar denominated assets in the US. That's a large capital inflow and probably very inflationary. I'd likely be time for the US to tax a lot of that money out of existence paying down it's debt and keeping roughly the value of the dollar intact.
    Mar 21, 2015. 11:41 PM | Likes Like |Link to Comment
  • Dollar Strength Is Coming To An End [View article]
    "We may or may not see a rate increase this year but either way the dollar is going a lot higher."

    Agreed. It not like the over crowed trade may be a bit too crowded and consolidation sets in. The dollars rise is inevitable, even if tempered somewhat. It's as inevitable on quantitative tightening as it was weaker (in growth regions) on quantitative easing. It'll be gradual, for sure, as savings slowly rise and the US grows a bit more. When employment reaches a domestic inflationary threshold, now at 5.2%, monetary stimulus will begin winding down. We have to come off the zero bound, or remain on it forever stimulating the dollar downward.

    The Fed is interested in domestic inflation resulting from improvements in the labor market, that's what supply side stimulus (QE) is intended to do. The weak dollar is not a Fed policy tool, it's a consequence of it. And a strong dollar, on the back of higher employment and domestic inflation, might even be inflationary globally. This is where the Fed is trying to steer us, not simple currency debasement in a last ditch effort to spike prices.
    Mar 21, 2015. 11:36 PM | Likes Like |Link to Comment
  • Dollar Strength Is Coming To An End [View article]
    "...and because of that, the dollar's strength has been a misguided illusion."

    It is an illusion based primarily on the plummeting euro and yen, both in the dollar index. Some will argue oil and commodities are a reflection of dollar strength, as well. The dollar has moved marginally upward against some EM currencies I follow and basically range bound since the taper tantrum. The Aussie has it's own idiosyncratic problems separate of dollar strength. The dollar is likely getting stronger, but not as dramatically as it may seem.

    Further, dollar strength is inevitable on rate hikes and US growth as well as divergent central bank policies. In very much exactly the same way the dollar weakened against growth regions on quantitative easing, it will strengthen on US growth during quantitative tightening. It's inevitable as the Fed tightens the money supply as employment reaches lift off from the zero bound and gradually rising savings rates on US growth. It will happen gradually, and dollar inflows might even stoke a little more growth, employment, and inflation just as they did seeking yield abroad. If so, the pace of inflation will accelerate on monetary policy dollar repatriation and a strong dollar resulting from them.

    I guess the Fed could remain on the zero bound forever - like Japan - trying to debase the currency in a last ditch effort to impose higher prices on the economy - like Europe. But, they will not, the Fed will risk a little more stimulus until employment begins to put upward pressure on prices. At this point, the Fed will begin withdrawing monetary stimulus. It's as inevitable as the strong dollar is. The dollar is not the focus of Fed policy, the dollar float is not a Fed policy tool even though they may jawbone it's rise somewhat. Fed policy is domestic, though it has global reach which the Fed keeps an eye on. But it will act domestically, regardless, relying on foreign central banks and forward guidance to compensate.
    Mar 21, 2015. 10:30 PM | Likes Like |Link to Comment
  • Buy Gold As Fed Credibility Comes Into Question [View article]
    "maybe strong dollar is just that in regards to absurdly weak Euro and Yen? And it really isn't strong at all and not at all a result of growth?"

    Yea, in my view, this is part of it. It's strength is exaggerated by the yen and the euro as part of the dollar index. It is stronger generally, however, but not nearly as much in growth regions such as EM where I reside. The dollar is only about 2 to 3% stronger since the taper tantrum and has been range bound since. This is indicative of mildly weaker dollar inflows, which will likely decrease on US growth and stimulus winding down on rate hikes. Initially, though, the spread on savings is likely to be small and flows barely affected. A stronger inflow might be indicative of US growth.

    So, the dollars astounding strength is not really universal. The Aussie has it's own idiosyncratic problems tied to China's growth, not solely on US dollar strength. However, it is possible, and possibly likely, repatriated dollars will either seeks safe term savings (their initial resting place) or seek yield on US growth further stimulating the US economy improving employment and inflation in much the same way it did seeking yield abroad. Then we will see the white's of inflation's eyes on strong dollar repatriation to the US.

    I argue a strong dollar is just as inevitable on quantitative tightening as it was weaker (in growth regions returning yield) on quantitative easing, both on savings rates and US growth prospects. It has to be, unless we stay at the zero bound forever trying to debase our currency in a last ditch effort to stoke of inflation - like Japan. I think this is what Europe is doing as it's easy stance, 'patient' QE, and austerity failed to produce growth - unlike the US.

    I guess we could do it - remain on the zero bound indefinitely - for the sake of exports, commodities, and oil as Mr Jennings and I were debating above. But I just don't think the Fed ever fired a shot in the currency war, it's focus is (now) on 5.2% full employment and demand side inflation. It's possible our own monetary policy dollars could subsidize US growth, but that means a universally stronger dollar, regardless, and likely a more rapid pace of inflation and savings rates.
    Mar 21, 2015. 09:52 PM | Likes Like |Link to Comment