I hate to rain on his parade but these claims are not substantiated:
The Fed is aggressively pumping money into the system,
This isn't correct. In early January they were increasing the RP free float more rapidly than the demand for loanable funds was absorbing reserves. When the economy is growing rapidly this has the effect of strong M2 growth. Not true when many sectors of the economy are slowing. Recently they have engaged in two coupon passes, one weak worth about $400 million and another, more the norm of $1.2 billion, but at the same time they are engaging in what could be called "sterilization", by initiating hefty matched sales. These operations are intended to withdraw the excess overhang of RP free float so that the coupon passes effect won't be amplified. The danger is that excess reserves still will tend to go into financial assets instead of real assets. It's a danger only because the FED thinks it is. The sterilization cools the exuberance that might bubble over into the stock market. The FED does not want the stock market averages to do a repeat of last year on the upside, because they fear that the stock market would be especially vulnerable just when they might have to get tough. 6 1/2% fed funds with free reserves running at $1 billion and no window borrowing is hardly "tough". In fact, it isn't necessary to get tough, but it may get there if the economy revives and public decides to play "me too".
commodities are fairly stable,
Commodities continue to deflate. The WPI trends down while the CPI trends up.
and short-term interest rates are declining rapidly.
No one knows where the equilibrium rate is. The free market, the market in corporates, T-paper, Eurodollars, is just going along with the FED. At the same time the FED can no longer look to them for guidance which they have been doing for 15 years. AG knows they can't get too far out of line with reality, but the problem is that they have preempted the measure of reality, and so you have a loose cannon shooting wildly at arbitrary targets.
My own guess is that rates are slightly too low. They should not have backed off 6%. I would have flipped the bird to the stock market. The way to get the stock market acting properly is to not give it what it thinks it wants. LET IT CRASH, if that's what it wants to do. The thing is if you take that attitude, it won't crash. IT WILL RISE. The threat comes when you try to prop up economy and appease markets. That's Democrat thinking.
If I'm right about rates, then in six months FED will have to start raising the fed funds target again. The reason will be rising cost pressures due to demands for compensation. One only needs to examine the Richmond District report referred to in this thread #1012 in order to see why. |
