Wednesday, August 21, 2013

Warren Mosler — macro update

While the Fed believes labor markets have improved sufficiently to start somehow unwinding QE, they have made it clear the data and their forecasts are not going to trigger any actual Fed rate hikes anytime soon. For one thing there is currently no sign of any kind of developing private sector credit expansion that would cause them to immediately hike rates to ‘cool down’. In fact, at this point they are keeping rate policy arguably ‘as accommodative as possible’ to remain supportive of private credit expansion.
On the other hand, the ‘markets’ have become concerned about ‘supply side’ effects of ‘tapering’, fearing fewer Fed purchases will mean higher term rates, and particularly higher mortgage rates, even as the Fed funds rate remains well anchored at current levels.
So what we are seeing is a ‘market determined’ decision to hike longer term rates based mainly on supply fears and not on fears of ‘excess demand’ driving up rates.
And adding to the volatility is the notion that should the Fed someday decide things have ‘normalized’ and the economy no longer ‘needs’ negative real rates,
that would translate into the Fed shifting the Fed funds rate to maybe 3-4% to be at some ‘neutral’ spread to ‘inflation’ etc.
So it’s pretty much binary- we stay near 0 (life support) until it’s time to ‘normalize’ to 3-4%.
All of this makes it rational for market indifference levels to shift a full 1% or more-turning term financing on or off- on nuances of Fed language.
All of which comes back to the fact that the term structure of risk free rates, with floating fx, is necessarily a policy decision, best left to political decision vs market decision, because with floating fx ‘market decision’ is necessarily nothing more than forecasting reaction functions of those setting the rates. That is, the ‘feedback’ from today’s rates determined by market forces is nothing more than what markets think the Fed will vote into policy down the road.
And I see no value in paying the real price of the volatility/uncertainty we are seeing to get that kind of information.
So best to cut the highly disruptive volatility that goes with letting markets determine longer term risk free rates by having the Fed peg the entire term structure of risk free rates with, for example, a bid for the entire tsy curve at their target rate ceiling, along with an open ended securities lending facility.
That is, in my humble opinion best for the FOMC to vote on the entire term structure of risk free rates than today’s policy of voting on just the Fed funds rate and using ‘language’ to influence the curve.
But that’s just me…
(feel free to distribute)
The Center of the Universe
macro update
Warren Mosler | Valance Finance

13 comments:

googleheim said...

TRANSLATION :

Mike Norman's Invariant rule #3 indicates that they can set interest rates wherever they need to and no market force or institution tells them where to se them.

Sequester - and the dollar still weakens !! AND they talk about raising rates ?

Balance the budget - and the dollar still weakens ! AND they talk about raising rates ?

It's all "LANGUAGE" i.e. BS to the hilt.

If they are balancing the budget and sequestering the funds , then both republican and democrats are incorrect to do as such.

Why isn't the dollar strengthening ?

Why aren't rates going down or talk of keeping them still if balancing and sequestering are supposed to tame inflation and making everything just dandy ?

Matt Franko said...

Based on the fiscal data we are following daily, it looks like at least the worst of the fiscal impact of the sequester is OVER for this FY...

It may be completely over as the baseline for fiscal injection seems to be back above 10b daily...

This will be the case for the next 40 days left in the FY...

Then Sec Lew gets "a new set of books" to work with Oct 1 with the start of the new FY, the 2014 sequester cuts iirc are 80b or so but that can be realized over the entire 12 months of the fy and 'muddle thru' can continue...

rsp

Matt Franko said...

Another thing is that the Fed is buying 45B per month of longer term USTs direct from the dealers while since late May we have been at the debt ceiling so no new net issuance over these months...

so the Fed is taking away 45b/mo of UST inventory from the PIMCOs of the world by stepping in front of them at the dealers... and lowering the bond prices by lowering their bids....

soon the PIMCOs are going to be out of business if the Fed doesnt cease the purchases because there will be no new inventory available...

So they perhaps put Summers in to stop the QE while Bernanke being a much more monetarist academic than Summers will not let up on the QE which is screwing over the money managers as they will soon be out of business with no inventory to buy for their clients....

So these money managers are lobbying for an end to QE perhaps this will be Summers mission if he is selected...

But I would think that if they do get someone in there to stop the QE but that person leaves interest rates alone, there will be a pretty good bond rally off of these QE fomented lows...

rsp,

bubbleRefuge said...

Hi Matt + goog,

Goog, isn't the dollar going up against the BRIC's ? Vs Brazilian Real its near a 5 year high. VS Indian Rupee its a blow out.

Matt, what about fiscal effects of payroll tax increase ?

Matt Franko said...

JC,

I think the govts top line number is much more important than the ex post deficit...

iow, if workers would have continued to receive the 2% payroll tax holiday and just saved the balances, it made no difference...

So they lost the tax holiday and now they just spend all they take home and they dont save which is equivalent short term....

Even so, the tax holiday just increases INTRA-non-govt sector flow as the companies just give more to their employees and less to govt...

iow the payroll tax holiday is NOT operationally equivalent to an equivalent increase in govt spending via G or xfer payments....

The latter methods result in HIGHER flow from govt to non-govt which the key metric in a monetary economy under state currency...

A tax cut is NOT equivalent to an increase in govt $NFA injection...

The govt top line number is a better leading indicator than "the deficit" the deficit is only measured ex post...

The deficit answers: "What happened?"

The daily measure of $NFA injections answers: "What did we do today?"

If you can see the difference...

rsp,

F. Beard said...

That is, in my humble opinion best for the FOMC to vote on the entire term structure of risk free rates Warren Mosler

Do you know what risk-free investments deserve?

A big fat 0% or less to pay storage and transaction costs and perhaps an additional penalty for large scale money hoarding.

Matt Franko said...

F,

How are people supposed to generate retirement income? Charity?

rsp,

F. Beard said...

How are people supposed to generate retirement income? Charity?
Mat Franko

If they need it, the monetary sovereign should provide a generous pension.

googleheim said...

@bubble

I just ask the questions - if sequester and deficit cutting is working to strengthen the dollar then MMT is wrong.

The dollar is getting stronger against the Yen

but not the Euro - and Euro is queen of austerity right ?

Therefore, my questions are correct and MMT is wrong !

googleheim said...

@ Matt

What if Summers ends QE but gets the government into massive large scale deficit spending ?

You once indicated that QE is not MMT.

bubbleRefuge said...

but not the Euro - and Euro is queen of austerity right ?
Exactly! Austerity = strong currency.


Therefore, my questions are correct and MMT is wrong !

see above comment. also MMT assumes ceterus paribus.

Tom Hickey said...

I don't see that, googleheim. Austerity usually strengthens the currency just as higher interest rates do. Austerity is the fiscal means and interest rates the monetary.

Tom Hickey said...

Warren Mosler: QE is a tax.