Tag: news

Current price levels and related trends are similar today, Bloomberg’s Rich Yamarone warns, to recent periods when deflation fears forced the Federal Reserve to ease policy. To determine the course of monetary policy, the Fed, Yamarone notes, looks at a number of indicators. What is worrying today is that several of them – production and employment – are moving in a somewhat softer direction (despite MSM propaganda). For those optimists leaning toward the potential for a more vibrant economic recovery, a word of caution: Comparisons to month-ago or even year-ago levels may be deceiving.

Via Bloomberg’s Rich Yamarone,

Commodity prices have been on a steady decline since mid-2011 and non-petroleum import prices have contracted at a 1.2 percent pace during the last 12 months. Given personal consumption expenditure (PCE) inflation of only 0.7 percent and an associated core PCE of 1.1 percent – both of which are important in policy deliberations – Fed officials would be justified in their concern.

Other than the obvious 2008 contraction in the general price level, which coincided with a depression and a banking crisis, the two most recent bouts of deflation worries were in 1998 and 2002. In 1998, fears of deflation among policy makers escalated throughout the year. Then-Dallas Fed President Bob McTeer noted during the Sept. 29 FOMC meeting: “Our most recent Beige Book report shows that the price picture has turned deflationary in several sectors. Weak international demand has continued to add to growing supplies and falling prices. We see price declines in gasoline, petrochemicals, oil and gas services, semiconductors, computers, primary metals, paper and paper products, and softwood lumber.” The Fed then went on to ease three times for a total of 75 basis points, bringing the target rate down to 4.75 percent.

Deflation fears picked up again in the third quarter of 2002 when PCE inflation sank to 0.7 percent and the core PCE was lingering around 1.5 percent. We are essentially at those same levels today. Ultimately, the Fed cut its borrowing target rate by 50 basis points to 1.25 percent.

 

To determine the course of monetary policy, the Fed of course looks at a number of indicators. What is worrying today is that several of them – production and employment – are moving in a somewhat softer direction. The industrial production index climbed 1.1 percent in November from a lowly 0.1 percent increase during October. The year-over-year pace currently stands at 3.2 percent. While that may seem desirable, it is a far stretch from the better than 8 percent gains posted in mid-2010. Employment growth has also taken on a flatter pattern.

For those optimists leaning toward the potential for a more vibrant economic recovery, a word of caution: Comparisons to month-ago or even year-ago levels may be deceiving.

Month-to-month changes are going to be elevated since the government shutdown of Oct. 1-17 reduced output and activity.

Similarly, October and November levels versus year-ago activity are deceptively strong due to the impact of Hurricane Sandy, which crippled the entire eastern seaboard leaving millions without power or transportation. For example, total retail sales in October last year were flat from the previous month and up a scant 0.1 percent in November from October. That makes the current year-over-year gains of 4.7 percent and 4.1 percent in November and October, respectively, appear better than they really were.

Given the fragility of the economy and the Fed’s unprecedented policy actions, a renewed threat of deflation leaves policy makers with few options.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/4QAn_Bias7I/story01.htm Tyler Durden

Current price levels and related trends are similar today, Bloomberg’s Rich Yamarone warns, to recent periods when deflation fears forced the Federal Reserve to ease policy. To determine the course of monetary policy, the Fed, Yamarone notes, looks at a number of indicators. What is worrying today is that several of them – production and employment – are moving in a somewhat softer direction (despite MSM propaganda). For those optimists leaning toward the potential for a more vibrant economic recovery, a word of caution: Comparisons to month-ago or even year-ago levels may be deceiving.

Via Bloomberg’s Rich Yamarone,

Commodity prices have been on a steady decline since mid-2011 and non-petroleum import prices have contracted at a 1.2 percent pace during the last 12 months. Given personal consumption expenditure (PCE) inflation of only 0.7 percent and an associated core PCE of 1.1 percent – both of which are important in policy deliberations – Fed officials would be justified in their concern.

Other than the obvious 2008 contraction in the general price level, which coincided with a depression and a banking crisis, the two most recent bouts of deflation worries were in 1998 and 2002. In 1998, fears of deflation among policy makers escalated throughout the year. Then-Dallas Fed President Bob McTeer noted during the Sept. 29 FOMC meeting: “Our most recent Beige Book report shows that the price picture has turned deflationary in several sectors. Weak international demand has continued to add to growing supplies and falling prices. We see price declines in gasoline, petrochemicals, oil and gas services, semiconductors, computers, primary metals, paper and paper products, and softwood lumber.” The Fed then went on to ease three times for a total of 75 basis points, bringing the target rate down to 4.75 percent.

Deflation fears picked up again in the third quarter of 2002 when PCE inflation sank to 0.7 percent and the core PCE was lingering around 1.5 percent. We are essentially at those same levels today. Ultimately, the Fed cut its borrowing target rate by 50 basis points to 1.25 percent.

 

To determine the course of monetary policy, the Fed of course looks at a number of indicators. What is worrying today is that several of them – production and employment – are moving in a somewhat softer direction. The industrial production index climbed 1.1 percent in November from a lowly 0.1 percent increase during October. The year-over-year pace currently stands at 3.2 percent. While that may seem desirable, it is a far stretch from the better than 8 percent gains posted in mid-2010. Employment growth has also taken on a flatter pattern.

For those optimists leaning toward the potential for a more vibrant economic recovery, a word of caution: Comparisons to month-ago or even year-ago levels may be deceiving.

Month-to-month changes are going to be elevated since the government shutdown of Oct. 1-17 reduced output and activity.

Similarly, October and November levels versus year-ago activity are deceptively strong due to the impact of Hurricane Sandy, which crippled the entire eastern seaboard leaving millions without power or transportation. For example, total retail sales in October last year were flat from the previous month and up a scant 0.1 percent in November from October. That makes the current year-over-year gains of 4.7 percent and 4.1 percent in November and October, respectively, appear better than they really were.

Given the fragility of the economy and the Fed’s unprecedented policy actions, a renewed threat of deflation leaves policy makers with few options.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/4QAn_Bias7I/story01.htm Tyler Durden

From Ben Hunt of Epsilon Theory

Whatever It Takes

A few observations on what to look for in the language of the FOMC announcement tomorrow from a game theoretic perspective…

Ever since Mario Draghi ad-libbed the lines “whatever it takes” in his July 2012 speech in London, a speech that together with the equally fabulistic OMT program rescued Europe and the Euro from the clutches of Spanish and Italian sovereign debt woes, this has been the go-to phrase for any politician or central banker seeking to imply unlimited resolve in bringing the firepower of the State down on an unruly market. Angela Merkel and Nicolas Sarkozy immediately seized on Draghi’s line once they saw what a salutary influence it had … Barack Obama now uses the phrase in the context of everything from budget fights to immigration reform to community college funding … Ben Bernanke is much more reticent to use the phrase directly (he’s smart enough to see it as the psychological weapon that it is, a weapon that diminishes from overuse), but his words are constantly interpreted by the media as implying a “whatever it takes” stance. In fact, I’m hard-pressed to come up with a more prevalent  — or powerful — policy language meme than “whatever it takes.”

Why is it so popular? Because it works like a charm in the Common Knowledge game. Underpinning the CK game is a vast array of forward looking expected utility calculations that each and every one of us makes regarding our expectation of everyone else’s expectations of everyone else’s expectations. I know that’s a mouthful, and for some background on the mechanics of the CK game and Fed communications you can look here and here and here in prior Epsilon Theory notes, but essentially you’re playing what Keynes called the Newspaper Beauty Contest. The drivers of the CK game are public statements by famous people like Mario Draghi, and the expected utility calculations we unconsciously make in our heads are based on Who and What … Who is making the statement and how likely is it that he or she will deliver on the statement, and What is the likely impact of the policy if it comes to pass.

The power of “whatever it takes” is in the What. Expected utility calculations cannot handle an unlimited result, and there’s a little piece of our brain that goes on tilt when it tries to process that phrase, particularly if it’s being said by a powerful Who. That little piece of our brain returns a Does Not Compute result when it hears “whatever it takes” in a policy context, which leaves the rest of our brain floundering. Luckily for us, we have no shortage of media messengers who are only too happy to tell us what it means and repeat the message ad infinitum, because it makes those media messengers relevant and useful. And if they’re more relevant they can sell more newspapers or ads or whatever. Everyone wins!

So what does this have to do with the FOMC announcement tomorrow? There’s a lot of chatter out there that the Fed will hold off on a taper announcement, but will put some sort of limit on the overall size of this latest round of QE launched in September 2012. In other words, monthly purchases will continue at the current rate, but this will no longer be a QE-forever program. From a CK game perspective, placing a limit on the QE program is a more market-negative statement than a taper. This is what I’m going to be watching for tomorrow, along with whatever dovish (market-positive) language is inserted around forward guidance on rates. And then the battle for meaning and interpretation will be joined …

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/lbfnjeK16sE/story01.htm Tyler Durden

From Ben Hunt of Epsilon Theory

Whatever It Takes

A few observations on what to look for in the language of the FOMC announcement tomorrow from a game theoretic perspective…

Ever since Mario Draghi ad-libbed the lines “whatever it takes” in his July 2012 speech in London, a speech that together with the equally fabulistic OMT program rescued Europe and the Euro from the clutches of Spanish and Italian sovereign debt woes, this has been the go-to phrase for any politician or central banker seeking to imply unlimited resolve in bringing the firepower of the State down on an unruly market. Angela Merkel and Nicolas Sarkozy immediately seized on Draghi’s line once they saw what a salutary influence it had … Barack Obama now uses the phrase in the context of everything from budget fights to immigration reform to community college funding … Ben Bernanke is much more reticent to use the phrase directly (he’s smart enough to see it as the psychological weapon that it is, a weapon that diminishes from overuse), but his words are constantly interpreted by the media as implying a “whatever it takes” stance. In fact, I’m hard-pressed to come up with a more prevalent  — or powerful — policy language meme than “whatever it takes.”

Why is it so popular? Because it works like a charm in the Common Knowledge game. Underpinning the CK game is a vast array of forward looking expected utility calculations that each and every one of us makes regarding our expectation of everyone else’s expectations of everyone else’s expectations. I know that’s a mouthful, and for some background on the mechanics of the CK game and Fed communications you can look here and here and here in prior Epsilon Theory notes, but essentially you’re playing what Keynes called the Newspaper Beauty Contest. The drivers of the CK game are public statements by famous people like Mario Draghi, and the expected utility calculations we unconsciously make in our heads are based on Who and What … Who is making the statement and how likely is it that he or she will deliver on the statement, and What is the likely impact of the policy if it comes to pass.

The power of “whatever it takes” is in the What. Expected utility calculations cannot handle an unlimited result, and there’s a little piece of our brain that goes on tilt when it tries to process that phrase, particularly if it’s being said by a powerful Who. That little piece of our brain returns a Does Not Compute result when it hears “whatever it takes” in a policy context, which leaves the rest of our brain floundering. Luckily for us, we have no shortage of media messengers who are only too happy to tell us what it means and repeat the message ad infinitum, because it makes those media messengers relevant and useful. And if they’re more relevant they can sell more newspapers or ads or whatever. Everyone wins!

So what does this have to do with the FOMC announcement tomorrow? There’s a lot of chatter out there that the Fed will hold off on a taper announcement, but will put some sort of limit on the overall size of this latest round of QE launched in September 2012. In other words, monthly purchases will continue at the current rate, but this will no longer be a QE-forever program. From a CK game perspective, placing a limit on the QE program is a more market-negative statement than a taper. This is what I’m going to be watching for tomorrow, along with whatever dovish (market-positive) language is inserted around forward guidance on rates. And then the battle for meaning and interpretation will be joined …

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/lbfnjeK16sE/story01.htm Tyler Durden