The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
NGDP level targeting – the true Free Market alternative (we try again) | The Market Monetarist
Scott Sumner suggests that NGDP targeting is a far more conservative approach than the current inflation targeting practiced by the Fed and many other central banks:
Most of the blogging Market Monetarists have their roots in a strong free market tradition and nearly all of us would probably describe ourselves as libertarians or classical liberal economists who believe that economic allocation is best left to market forces. Therefore most of us would also tend to agree with general free market positions regarding for example trade restrictions or minimum wages and generally consider government intervention in the economy as harmful.
I think that NGDP targeting is totally consistent with these general free market positions – in fact I believe that NGDP targeting is the monetary policy regime which best ensures well-functioning and undistorted free markets.
And here explains why inflation is not a threat under NGDP targeting:
Inflation will be higher under NGDP targeting. This is obviously wrong. Over the long-run the central bank can choose whatever inflation rate it wants. If the central bank wants 2% inflation as long-term target then it will choose an NGDP growth path, which is compatible which this. If the long-term growth rate of real GDP is 2% then the central bank should target 4% NGDP growth path. This will ensure 2% inflation in the long run.
Read more at NGDP level targeting – the true Free Market alternative (we try again) | The Market Monetarist.
Analysis: Bond managers fret junk bond rally is losing steam | Reuters
Jennifer Ablan and Sam Forgione at Reuters explain why Dan Fuss, vice chairman and portfolio manager at Loomis Sayles, which oversees $182 billion in assets, is slashing exposure to high-yield bonds:
Fuss and others worry the Fed’s easy money policy – short-term interest rates held at effectively zero and a bond-buying program known as quantitative easing – will soon foster inflation, a bond manager’s biggest fear. That would drive up interest rates, so bond prices, which move in the opposite direction to rates, would fall.
Read more at Analysis: Bond managers fret junk bond rally is losing steam | Reuters.
What to do about the US currency war | Alan Kohler | Business Spectator
Alan Kohler writes about the Fed’s quantitative easing strategy which is effectively debasing the US dollar:
Because it is trying to reduce the world’s reserve currency, the Fed is effectively giving other countries two choices: either allow your currencies to appreciate against the US dollar and thus make your economies less competitive and crunch your export industries, or print money with us and risk (or perhaps guarantee) inflation.
It is a Hobson’s Choice, and like most other countries’ central banks, the Reserve Bank of Australia doesn’t quite know what to do.
The strategy is also debasing the more than $2 trillion of US Treasuries held by China and Japan, placing these Asian exporters in an awkward position. Repatriating their investments would send the dollar plummeting against the yuan and the yen, reversing their export advantage maintained over the last two decades through capital account inflows into US Treasuries. Capital inflows were used to offset the current account outflows and prevented the yen and yuan from appreciating against the dollar. If the flows reverse, the US will enjoy an unfair trade advantage from an under-valued dollar.
Methinks those who predict a globally dominant China with continued growth rates of 7% to 8% are a mite premature. …….Possibly a century or two.
Read more at What to do about the US currency war | Alan Kohler | Commentary | Business Spectator.
Fed set to unveil extra asset purchases – FT.com
Robin Harding at FT writes:
The other issue on the agenda is replacing the FOMC’s current forecast that rates will stay low until mid-2015 with a set of preconditions for the economy to reach before it considers raising rates. “I now think a threshold of 6.5 per cent for the unemployment rate and an inflation safeguard of 2.5 per cent . . . would be appropriate,” said Charles Evans, president of the Chicago Fed…..
The problem is that both of these thresholds are moving targets:
- Unemployment is based on surveys and only includes those who have actively sought a job in recent weeks. It fluctuates with the participation rate.
- Inflation is also subjective, dependent on the basket of goods measured and estimates of housing inflation that are subject to manipulation.
Targeting nominal GDP growth would be far more accurate.
Nomura: China recovery unsustainable | | MacroBusiness
Interesting take by Nomura, reported by FT Alphaville.
Nomura thinks that after this year, China’s days of 8 per cent-plus growth are finished, and that stimulus efforts will run into problems with CPI inflation, not to mention its own credit system…..
Chinese TV Host Says Regime Nearly Bankrupt | Epoch Times
A sobering assessment of China’s economy reported by Matthew Robertson:
Larry Lang, chair professor of Finance at the Chinese University of Hong Kong, said in a lecture that he didn’t think was being recorded that the Chinese regime is in a serious economic crisis — on the brink of bankruptcy.
The youtube audio requires translation:
Robertson summarizes Lang’s assessment into five key points:
- The regime’s debt sits at about 36 trillion yuan (US$5.68 trillion).
- The real inflation rate is 16 percent, not 6.2 percent as claimed.
- There is serious excess capacity in the economy, and private consumption is only 30 percent of economic activity.
- Published GDP of 9 percent is also fabricated. According to Lang, GDP has contracted 10 percent.
- Taxes are too high. Last year, direct and indirect taxes on businesses amounted to 70 percent of earnings…..
via Chinese TV Host Says Regime Nearly Bankrupt | Business & Economy | China | Epoch Times.
Here Comes the Dollar Wave Again | WSJ.com
Wall Street Journal opinion on the impact of QE3 on Asia:
If Asia stays true to form, the world is in for a bout of foreign-exchange interventions — some coordinated, some not — in a quest for stability. Yet these interventions will only encourage greater speculative flows, as some investors start betting on the next policy move. This would be America’s problem, too, given the growing number of American businesses trading with Asia that will grapple with a chaotic exchange-rate system…….
via Review & Outlook: Here Comes the Dollar Wave Again – WSJ.com.
Harry S Dent: Why the Fed will fail
Harry Dent is always entertaining to listen to, but is he right about the link between demographics and inflation?
There is simply no way the Fed can win the battle it’s currently waging against deflation, because there are 76 million Baby Boomers who increasingly want to save, not spend. Old people don’t buy houses! At the top of the housing boom in recent years, we had the typical upper-‐middle-‐class family living in a 4,000-‐square-‐foot McMansion. About ten years from now, what will they do? They’ll downsize to a 2,000-‐ square-‐foot townhouse. What do they need all those bedrooms for? The kids are gone. They don’t visit anymore. Ten years after that, where are they? They’re in 200-‐square-‐foot nursing home. Ten years later, where are they? They’re in a 20-‐square-‐foot grave plot. That’s the future of real estate. That’s why real estate has not bounced in Japan after 21 years. That’s why it won’t bounce here in the US either. For every young couple that gets married, has babies, and buys a house, there’s an older couple moving into a nursing home or dying.
In my opinion there is a clear link between credit growth and inflation: the faster credit grows, the faster the money supply grows, and the higher the rate of inflation. Demographics are one of the factors that drive credit growth, but they are not the only factor. Interest rates are just as important: when interest rates are low we tend to save less and borrow more. And jobs, as the Fed discovered, are also important: if you haven’t got a job, you can’t borrow from the bank even when interest rates are low.
At present I would guess that jobs are the biggest constraint on credit growth. Later, interest rates will rise when employment recovers — as the Fed attempts to take some of the heat out of the economy. Only then may demographics become the major restriction on credit growth, with older households down-sizing outnumbering younger households up-sizing. But that is by no means definite: solving the jobs crisis alone could take decades!
Harry dent quoted from John Mauldin | A Decade of Volatility: Demographics, Debt, and Deflation (application/pdf Object).
The Fed and the impact of QE
Unless the Fed announces a new round of quantitative easing before the November election, I do not see the S&P 500 this year advancing past its 2007 high of 1560.
The market generally overreacts to balance sheet expansion by the Fed, anticipating higher inflation. What it seems to overlook is the deflationary effect of private sector deleveraging which should enable the Fed to maneuver a soft landing.
The real impact of Fed policy is to subsidize debtors and starve creditors — private investors and pension funds — of yield. The net result is that investors are driven to higher yields — accompanied by higher risk — which is likely to cause more pain at the next down-turn.
The only way to compensate creditors would be to lower taxes on interest, but I question how high this would rank in either party’s priorities.