My Email (2005-01-07) to John Succo on Minyanville on the recent FED minutes
John to what extent if any, do you think it is possible the FEDspeak out of the December minutes was nothing more than an effort to stabilize the US$?
Jobs have not exactly been robust, in fact this far into a recovery they are downright pathetic, barely keeping up with birth rates. Yet the recovery is actually getting pretty far along. The FED had to notice the sharp drop in both housing starts and new homes. At least I would hope so! Although we see that “some” of the FED members are concerned about inflation expectations, we really do not know who or how many and I sure are suspicious of their motives at a time when it is clear that the economy is poised for a breather.
Were they to have signaled a chance of a pause, especially when the Euro was up there at 1.36 or so, they ran the risk of crashing the US$. I can certainly understand their concern over the junk bond bubble (tight spreads), but it is of their own making. I think they used up 100% of their ammo fighting the inevitable (a recession), and all they have to show for it is no jobs, a housing bubble, a junk bond bubble, and a stock market bubble. Had they just let the recession happen, we could have had 5-6 years of housing growth to look forward to coming out of the recession. Instead we compressed 6 years of housing expansion into 2 short years. Now what?
How can the FED be so nonchalant about a slowdown in housing? It seems to me that they are getting concerned about “inflation” far too late in the cycle. I doubt we have seen the full affects of 5 hikes yet. It takes time to filter thru. 5 hikes certainly killed UK housing stone cold, and certainly there is every possibility (likelihood) that 5 or 6 will do it here too. You can see the concern in consumers as well. Auto inventories are building, retail sales were dropping and it took huge price cuts by low-end stores to bring in customers (Walmart and Sears). Right as the economy is slowing, just like 2000, the FED is finally getting serious about inflation. Given that the economy is now cooling on its own accord, led by housing, is now the time to be concerned about inflation? I am sure many Minyans would say yes, but to me it seems like throwing water on a house fire after there is nothing left but a few glowing embers that are cooling off on their own accord.
Furthermore, I am 100% convinced that they have every intention to stay well behind the inflation curve, and I am not the only one.
Did you read the 2005 predictions by Bill Gross?
His #1 prediction is The Fed stays relatively low.
“Just a Singer in a Rock & Roll Band”
pimco.com
(1) The Fed stays relatively low
Our belief that the Fed stays relatively low ( ½% real short rates or less) is a long-standing one and based on several secular and cyclical observations. Since the primary global economic problem is a lack of what is known as aggregate demand, central banks everywhere will continue to remedy the affliction by keeping real short rates low. Low short yields help stimulate demand by creating gradually rising inflation, and nurturing capital gains in equity, real estate, (and yes) bond markets. In addition, the highly levered U.S. consumer and their main conduit – mortgage debt – require low short rates just to keep their heads above water. Thirdly, with the Fed now implicitly on board in support of adjusting our balance of payments deficit via a depreciating currency (and a reduced deficit), low real short rates are the monetary policy tool of necessity. Whether the Fed stops at 2½, 2¾, or 3½% is really more of a debate as to the future of U.S. inflation, not the fact that real short rates must stay down for a long, long time.
But going back to the Dec minutes: what would have happened if the FED minutes showed optimism about inflation, worry about housing, and worry about jobs? I think the US$ would have tanked, gold would have soared and perhaps we would have had some real panic somewhere. Instead, purposeful or not, the FED has talked up the US$ quiet handily, and given the dip-buying nature of “investors”, managed not to spook the equities market either.
One final thought.
The FED has managed to get rates back above Europe. They have to be breathing a huge sigh of relief over that. If they can pull off one more hike (likely now) they will have a half point cushion over Europe. If the FED gets a lucky break from the UK in the form of a rate cut (reasonable chance), that will lend more support to the US$. It will probably also increase the Euro relative to the British Pound. The EU is suffering and I doubt any of this will help them. Purposely or not, the FED is slowly forcing the EU into deflation. I have not decided if this is on purpose or just a consequence of the FED trying to extradite itself from problems it heaped on itself.
I will end with the question I began with:
To what extent if any, do you think it is possible the FEDspeak out of the December minutes was nothing more than an effort to stabilize the US$?
The FED sure bought themselves a “free shot” at stabilizing the markets in February by a “surprise pause” should they need it. If the US$ rallies in the meantime, they will have room for a pause that they did not have in mid-dec.
Comments?
Thanks
Mike Shedlock
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