Notes From Underground: MIlton Friedman was wrong about free lunch–Ben Bernanke had it at the National Press Club

Today, the main story was the address that Chairman Bernanke delivered to the National Press Club as his topic was the, “The Economic Outlook and Macroeconomic Policy.” The FED Chairman’s speech was a “redo” of Mervyn King’s speech 10 days ago. It seems that the FED is adhering to the same view as the BOE, in that the FED will stay the course on QE and its present monetary policy. Inflation is not a problem even though some highly visible price increases have taken place in some commodities but that is due to the growing demand from the emerging economies. Core inflation was “only 0.7 percent in 2010” and wage growth is non-existent, so there is no worry on the inflation front.

“Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.”

Thus, Bernanke is right in line with KING as without job growth the FED sees no need in raising rates. The FED chairman stressed that the unconventional tools the BANK has used will be in place until JOB GROWTH increases to prove that the U.S. economy is gaining traction. Furthermore, if the FED needs to, it can readily react to the any quick paced change in growth by utilizing the TOOLS at hand. (“In particular, our ability to pay interest on reserve balances held at the Federal Reserve banks will allow us to put upward pressure on short-term market interest rates and thus to tighten monetary policy when required, even if bank reserves remain high.”) When Ben was questioned about the FED‘s role in the rising inflation rates in the emerging world, he unequivocably said the FED bore no responsibility.

Quantitative EASE is a FED policy response to the U.S. economy and if the growth in the emerging markets was causing inflation, each nation had the necessary tools to combat rising prices. Raise interest rates and/or allow their currency to appreciate. Bernanke claimed it was unfair to blame the FED for rising commodity prices around the globe. Hmm, and I ALWAYS THOUGHT THAT FAIR WAS ONLY A LINE IN BASEBALL. So Chairman Bernanke received a free lunch and some parting gifts and the investment world was again advised that the FED will stay the course on QE until JOB GROWTH pushes the economy to a higher level of growth. YOU SEE OLD CHAP, IT IS ALL ABOUT JOBS.

Tomorrow, just by coincidence, the market will receive the data on job growth from the Canadians and the U.S. The Canadians report first at 6:00 a.m. CST and the consensus is for an increase of 16,000 jobs and for the rate to hold steady at 7.6 percent. BOC Governor Mark Carney was at Davos and in an interview raised concern about the strength of the LOONIE causing competitiveness problems for Canadian industry. It will be important to see what manufacturing jobs in Canada do. If U.S. growth is picking up, manufacturing jobs in the Ontario region should be increasing regardless of the currency’s strength. The Central Region of Canada is heavily dependent on auto and truck manufacturing so any increase in Canada should be good for the U.S.

The U.S. Employment Situation is anticipating a rise of NFP 155,000, a jobless rate of 9.5 percent. Average hourly earnings is expected to increase 0.2 percent and average hours worked will be flat. I believe it will take an NFP of more than 225,000 to put any type of pressure on short-term rates. Bernanke has stressed again that JOB GROWTH would have to get traction, which means bringing down the unemployment rate. In answering a question yesterday, Mr.Bernanke said it takes 150,000 jobs a month just to maintain the current rate, so logically it seems that NFP numbers must get to 250,000-plus on a sustained basis. A 200,000-plus number will be positive for equities as we know the FED will not react to one number.

Again I stress, ultimately asset prices will be affected by what happens to the U.S. interest rate CURVE. When the record steepening starts to correct, then we will have to adjust. Until then, prepare the technicals and use the corrective nature of markets to key data as an opportunity in currencies, equities and commodities. The DEBT markets are much harder because the FED has perverted the TREASURIES. And so it goes.

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6 Responses to “Notes From Underground: MIlton Friedman was wrong about free lunch–Ben Bernanke had it at the National Press Club”

  1. USIKPA Says:

    Sorry, if I may ask, what steepener (or index?) would you recommend watching from now on?

  2. yra Says:

    USIKPA—I still think the 2/10 curve is the best to watch.I like it becuase it is also relevant to other financial markets—back in 2006 the 2/10 was inverted and let investors know there was something amiss in the capital markets—I think it has the most relevance and that is why i prefer it—-but right now the Treasury market is so badly askew or perverted by FED action that the 30 year instrument certainly is of great value so that will be a good watch also

  3. USIKPA Says:

    2/30 is rolling over. 2/10 is about to, it would appear.

    Game over?

  4. yra Says:

    USIKPA–what do you mean rolling over.beforeI answer I want to be sure we mean the same thing–thanks

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