Posts Tagged ‘Taylor rule’

Notes From Underground: The Chines raise interest rates and the GOLD makes all-time highs climbing a GREAT WALL OF WORRY

April 5, 2011

The FED released the minutes of the last FOMC meeting and there was very little that hadn’t already been revealed and digested by the market. In tonight’s reading, some in the media are trying to raise an issue that there is a rift between voting members. Readers of the NOTES will know the answer: There is no rift. Yes, between meetings there is a plethora of dissenting speeches but as the FOMC MINUTES are clear to record, the vote to stay the present course was unanimous. The thing that seems the most transitory to the FED is the lack of dissension when gathered at the same table. To paraphrase PUDD’NHEAD WILSON, WHEN ALL THE EGGHEADS ARE IN ONE ROOM, WATCH THE ROOM CLOSELY.


Notes From Underground: Is April EMPLOYMENT GOING TO BE A LION OR A LAMB?

March 31, 2011

The U.S. unemployment report will be issued on Friday  at the regular time: 7:30 CST. It seems that the consensus is for 210,000 nonfarm payroll, a rate of 8.9 percent and an increase in hourly wages of 0.2 percent. It seems that a 300,000-plus number is in the cards which is why the FED Presidents that are not of the perma-dove camp are ramping up the anti-inflationary rhetoric. Today, Minneapolis FED President KOCHERLAKOTA caused a late move in the DOLLAR, METALS and SHORT-DATED interest rates as he raised the possibility of the FED raising rates by 75 BASIS POINTS. The DOLLAR had been lower all day as month- and quarter-end positioning allowed the power trend funds to push their profitable positions in the desired direction, but KOCHERLAKOTA did cause a late reversal with his aggressive comments.


Notes From Underground: In a tribute to the Chantays–PIPELINE

January 2, 2011

No major stories this New Year’s weekend. Dilma Rousseff was sworn in as the new president of Brazil and spoke to the need to continue the policies of LULA. She said her influence will be on battling inflation but the markets will watch her cabinet’s actions as she has also voiced concern about the rapid appreciation of the REAL, as the Brazilian currency has appreciated 39 percent during the last two years. The strong REAL has begun to hamper the Brazilian equity markets as it was up  a mere 1.25 percent in a year that global commodities were the star performer. Brazilian debt markets are anticipating rates to rise this year so our eyes will be on the Brazilian central bank and watching to see how aggressive it is in stemming inflationary pressures.


Notes From Underground: China Imports Coal so it Can Stuff it in the World’s Stockings

December 26, 2010

Again, the world is given a Christmas “surprise.” Last year, the U.S. Treasury was nationalized Freddie Mac and Fannie Mae on Christmas Eve when no newsrooms were stirring with even a click of the mouse. This year, the Chinese Central Bank took center stage and announced a rate increase of 25 basis points. Now, I am convinced that this rate increase is NEGLIGIBLE to say the least. The world financial news is going to make this rate increase into an effort by the Chinese authorities to combat inflation but that is pure NONSENSE. The benchmark lending rate was raised 25 basis points to 5.81 percent and the benchmark deposit rate increased to 2.75 percent from 2.75 percent. The economic impact won’t even register.


Notes From Underground: Questioning the Taylor rule

January 3, 2010

The biggest story from the weekend is Federal Reserve Chairman Ben Bernanke’s speech at the American Economics Association in Atlanta. Bernanke calls for more regulation for the banking system, rather than using the hammer of  interest rates to prevent the onset of bubbles, especially in the real estate market. Calling for greater “systemic regulation” is a way for the FED to claim that it was not Fed policy that led to the current crisis, but rather the lax oversight of regulators. The FED chairman utilizes the Taylor rule to disallow FED responsibility for the housing bubble.

Many FED critics point to the sustained low rates in the early part of the decade that made the housing bubble inflate to such detrimental levels that affected the entire financial system. Bernanke defends the prolonged low rates as based on the Taylor rule. It is interesting that the Fed chairman uses this veil of inflation policy in the low rates policy of 2002-2004 but then goes on to take credit for the FED overriding the strictness of the Taylor rule during the present credit crisis. In a article on the FED chairman’s speech, Bernanke goes out of his way to say that the Taylor rule would have recommended the FED raise rates to a range of 7-8% through the first three quarters of 2008. Mr. Bernanke says that this would have been “a policy decision that probably would not have garnered much support among monetary specialists.” He goes on to explain that the FED focused on anticipated rates of inflation and not actual rates. So here we have spelled out that the FED has an asymmetrical bias that lends itself to being a serial bubble blower. The FED utilizes the models we have when they fit our preconceived view, but override them when we need a different outcome.

We agree that the FED would have been insane to raise rates in 2008 regardless of the Taylor rule, but this speech gives us pause to trust the judgment of the U.S. central bank and this is the problem of policy going forward. The call for greater systemic regulation is a smoke screen to hide the errors that the FED has repeatedly made. The rules for banks are already in place and the FED did a lousy job ensuring they were followed. Also, the Greenspan FED was a cheerleader for the use of adjustable rate mortgages that Bernanke now says needs more regulation.

The FED should be promoting a return to Glass-Steagall and the end of proprietary bank trading rooms putting the entire global system at risk. The split between commercial and investment banks allows the “brains” at the investment banks to act as fiduciaries for the entire system in a real-time basis. By removing the investment banks’ role, the entire system was shaken by the huge rewards that could be gained trading against their clients.

There was further news out of Russia in regards to energy. The Russians cut off shipments of crude oil to Belarus because of a tariff discrepancy  on Russian-exported oil. Minsk and Moscow had a previous arrangement that subsidized Belarus’s export of refined products to Europe. This subsidization allowed Belarus to sell crude products cheaper than Russian concerns because of the export tax they had to pay. Russia wants to end this and wants Belarus to pay the same export tax. The crude cutoff is not as severe as natural gas because crude is more readily available. The pattern that is developing is that Russia continues to use energy to flex its muscles in Europe. This will be an ongoing story as the Russians’ desire to find a way back onto the world stage, especially in the realm of global energy needs.

We also want our readers to be aware of an article in Monday’s Financial Times about why the developed nations cannot spurn emerging market investment. This is a theme that we will pay close attention to this year as the role of sovereign wealth funds (SWF) will play a dynamic role in the global financial world. (China’s GEELY buying Sweden’s Volvo from Ford is a precursor.)