Grand benign neglect





Regardless of the announcement of a New “Twist” (or because of that decision ??), this week we witnessed the great contraction of the risk appetite globally. Really terribly. Although this partially reflects the disappointment of the market with the “Limit of Monetary Policy”, I assume this reaction can not be necessarily attributed solely to the Fed’s decision.

---------- Dow Falls Most Since October 2008

---------- Silver falls 18%, the most since 1984

---------- Treasury Bonds Post Biggest Gain Since ’08 on Economy, Fed Operation Twist




This makes me recall the massive sell-off following the FOMC statement on August 10th, 2010 amid growing fear of the European debt crisis and the deflation, which resulted in Chairman Bernanke’s speech in Jackson Hole and then the launch of QE2 in November.

---------- Fed Effort to Aid Recovery Fails to Calm Investors



Even though we still have the debt problem of the EU which in fact seems to be even worsening, as many pointing out, given the inflationary trend and the backlash form the Congress, this time we couldn’t expect the QE3. With the already extreme low interest rates, there are few options for the Fed's monetary policy. Still, some economists say that the effect of lowering the interest rates --- for the shorter-term with the pledge “at least mid-2013” and for the longer-term with the “Twist” --- would be powerful in the long run. The monetary policy operates with a time lag, so it is too early to judge. Now we have to keenly keep an eye on the development of the European turmoil and the impasse of the Congress.

---------- Fed’s ‘Operation Twist’ Fails to Convince Investors It Will Boost Growth

---------- Fed drive to lower mortgage rates may fall short

---------- EU May Speed Permanent Fund to Stem Crisis

---------- Geithner Urges End to European ‘Cascading Default’ Threat

---------- All Eyes on Bernanke's Next Move


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Today's FOMC

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The Bloomberg News has never failed to provide fulfilling and quality contents. Of those, I recently found a prominent one. I assume that this illustrated the tough challenge the central banks currently face very well. Being focused on it’s next step, the Fed’s in a dilemma of whether to be a guardian of the price or to be a savior of the economy. This is what the “raison d’etre” of the Fed is.


Bernanke Joins King Tolerating Inflation
By Scott Lanman and Simon Kennedy - Sep 19, 2011 6:18 PM GMT+0900
Inflation flashing red may be less of a green light for higher interest rates as global growth falters. [ more ]



The Fed today is expected to launch the “Operation Twist (2.0)”. If so, my focus is on how it will be operated; the time span, the amount and so on. Though I’m personally interested in an explicit target ( Evans Strategy) and the Chairman Bernanke’s handling the FOMC after the three dissents.

       -----Fed Ponders Jobs, Inflation Targets

       -----Bernanke Is Tolerating Dissent but Pushing Past It


 
According to the Survey, any other option than the Operation Twist will have a slight or no possibility.

       -----Fed May Extend Duration of Treasuries With ‘Operation Twist,’ Survey Shows

       -----The Twist and Shout Should Be the Fed’s Next Maneuver: View




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Fed's next steps --memo

Amid mounting expectations for the Fed’s next movement, there are several possible options;

① additional bond buying (QE3)
② lowering the 0.25% interest rate it pays banks on the $1.6 trillion in excess reserves
③ pledging to keep its balance sheet near a record $2.85 trillion (as of Sept. 1)
for an “extended period” or for a specific time
④ lengthening the average maturity in its portfolio
     -----Bernanke Seizes Day With Financial Repression as Congress Shirks Policies
     -----Pimco, Goldman, RBC Say Bernanke to Revisit Operation Twist
     -----Fed ‘Twist’ Could Push U.S. 10-Year Yield Toward 1.6%, CRT Capital Says
     -----‘Helicopter Ben’ risks destroying credit creation

and according to the minutes of August 9 meeting, some officials argued that “the Fed should have linked its pledge to achieving “explicit values” on the nation’s unemployment rate or an inflation rate”.
     -----Evans Calls for Further Fed Stimulus to Reduce U.S. Unemployment to 7.5%
     -----The Fed's Dual Mandate Responsibilities and Challenges Facing U.S. Monetary Policy



After the recent financial shock, we’ve witnessed changing stream in the economic activities globally.
There are more than a few economists who point out the structural factor underlying the ‘unfathomable’ stagnation.
     -----Employers Ready to Hire Can’t Find Workers Among 9.1% Unemployed
     -----Shrinking Labor Force May Curb U.S. Expansion for Two Decades
     -----Obama Faces 27-Week Jobless Rise as This Century Is Different

Though we should learn from history about ravages of inflation, recent global economy seems a bit sagging.
Lackluster economy tends to be more vulnerable to unanticipated shock and is not necessary a bountiful soil for prices.

     -----Uncaged Inflation, a Beast Easy to Free, Hard to Control: View


     -----Stagnant August Hiring in U.S. May Signal Renewed Recession
     -----The Second Great Contraction
     -----Economies in Peril Proving Voters Aren’t Careful About What Is Wished For
     -----BRICs No Cure for Global Economy This Time as Avon to Siemens Shares Sink


     -----Central Banks Refocus as Inflation Scare Passes
     -----Food-Price Gains Driven by Chinese Consumers Defy Easing Global Inflation
     -----TIPS Offer Cheap Inflation Shield as Expectations Fall, RBC’s Latter Says


Then, in a while, we’ll see a prescription.

     -----Fed Policy Makers Prepare for Action This Month
     -----Bernanke Says Tighter Budgets May Hurt Recovery as Fed Considers Stimulus


     -----The U.S. Economic Outlook
                  Chairman Ben S. Bernanke     September 8, 2011
                       At the Economic Club of Minnesota Luncheon, Minneapolis, Minnesota







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