Posts filed under “Think Tank”

King Report: Treasury Minutes

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While most of the known world was transfixed on the FOMC soiree and its communiqué, an equally if not more important Treasury soiree and communiqué went largely unnoticed.

November 4, 2009
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee Of the Securities Industry and Financial Markets Association The Committee convened in closed session at the Hay-Adams Hotel at 10:32 a.m.

The Committee then turned to a presentation by one of its members on the likely form of the Federal Reserve’s exit strategy and the implications for the Treasury’s borrowing program resulting from that strategy.

The presenting member began by noting the importance of the exit strategy for financial markets and fiscal authorities. It was noted that the near-zero interest rates driven by current Federal Reserve policy was pushing many financial entities such as pension funds, insurance companies, and endowments further out on the yield curve into longer-dated, riskier asset classes to earn incremental yield…A critical issue will be the impact on the riskier asset classes as market interest rates move away from zero.

The presenting member then looked at the likely sequence of the Federal Reserve’s exit strategy. The member acknowledged that the central bank must address the uncertainty and fragility of the economic recovery and the dependence of the housing market on low rates. It was suggested that the most likely sequence would be the [1] draining of excess reserves from the banking system, [2] the cessation of the mortgage-backed securities purchase program, and [3] only then raising the Fed funds target rate.

Several members at this point asked why draining reserves before ending the MBS program made sense. The presenting member noted that the program was already set to expire, and other measures, such as a revival of the Supplementary Financing Program, could be utilized by the Federal Reserve at the same time.

The Fed’s $1.25 trillion Agency MBS buyback program is set to expire at the end of March, 2010, according to the last FOMC Announcement from September 23, 2009…The presenting member points out that the Fed can avoid adding reserves after they are first drained through a revival of Treasury’s Supplementary Financing Program (SFP)…

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Category: Think Tank

Gold bullion surging in all currencies

Gold bullion surging in all currencies I argued the bull case for gold in my posts over the past few months (see “Gold bullion – regaining its shine?“, “Gold bullion glitters bright” and “Gold bullion – challenging $1,000“. With the gold price scaling fresh peaks and closing in on $1,100, it would certainly seem as…Read More

Category: Think Tank

Morning stuff and the aftermath of the FOMC statement

Following the very dovish FOMC statement, the odds of a 25 bps rate hike by April have fallen to 36% from 54% yesterday and the odds of a hike by June have fallen below 100% for the first time. In response, inflation expectations 10 yrs out have risen to 2.12%, up from 2% just one…Read More

Category: MacroNotes

The Fed and the Unemployment Rate cont’d

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).

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November 4, 2009

In response to the recent piece we wrote about the Fed and the unemployment rate, Bloomberg anchor Kathleen Hays emailed the following: [Richmond Fed president] “Jeff Lacker told me he could see the Fed tightening before unemployment comes down when I interviewed him last month on The Hays Advantage.”

Kathleen also sent a recent NY Fed staff report (number 397) entitled “Monetary Tightening Cycles and the Predictability of Economic Activity.” We thank her for this response and we have posted the NY Fed staff study on our website, www.cumber.com. Also there is our original October 31 commentary.

We have several items to raise for discussion.

First point.

The NY Fed study seems to examine a separate issue than the study we cited. The authors looked at the unemployment rate AFTER the Fed had stopped tightening. In our view that may be helpful from a policy-issue perspective but it does not help us to determine whether the Fed will start to raise rates BEFORE the unemployment rate peaks.

As portfolio managers we are concerned with the latter. Academics can use the former to debate the efficacy of Fed policy making. We do not have that luxury. We must spend our days managing clients’ money in real time, not debating policy outcomes after the fact. We have to deal with what the policy is doing or will do to the financial markets. When government gets it wrong, which they often do, it is our clients who will pay the price for their errors.

Second point.

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Category: Federal Reserve, Think Tank

Ben the Bartender

Ben the Bartender is working the after hours party as the Fed will keep rates at “exceptionally low levels…for an extended period.” Also with respect to inflation, the commentary is identical to the Sept 23rd meeting which is highly dovish, this even as gold is at a record high, the CRB index is up 8%…Read More

Category: MacroNotes

Bianco on Fed Action

Today’s FOMC Meeting Bloomberg.com – Fed Likely to Signal Economy Improving, Keep Interest Rates Low Federal Reserve officials may today indicate their $1 trillion injection into the economy is helping to revive growth without requiring an increase in interest rates from near zero, economists said. Policy makers will probably maintain their commitment to keeping rates…Read More

Category: Federal Reserve, Think Tank

Inflation expectations rising to the highest since Sept ’08

Ahead of the 2:15pm FOMC statement, the implied inflation rate today in the 10 yr TIPS is rising to 2.08%, matching the highest level since Sept 1st ’08 when the fed funds rate was at 2%. Of course much has changed since with the economy but it highlights the dilemma the Fed faces with their…Read More

Category: MacroNotes

ISM services

The ISM services index was a touch below expectations at 50.6 vs forecasts of 51.5 and it’s down from 50.9 in Sept. Business Activity did rise a hair to 55.2, the highest since Oct ’07. Unlike the rise in the employment component in the ISM manufacturing report, services employment fell 3.2 pts to 41.1, the…Read More

Category: MacroNotes

ADP jobs report

ADP said the private sector shed a net 203k jobs in Oct, a touch more than expectations of a drop of 198k. It is though the smallest amount of job losses since July ’08 but is now running 21 straight months. Sept was revised up by 27k to a loss of 227k. The goods producing…Read More

Category: MacroNotes

When does Ben say no?

As a parent, the easiest thing to do is say yes to the kids and give them what they want. What’s harder is to say no and instill some discipline. The Fed faces a similar issue today in deciding when to say no to extraordinarily easy money. Ben’s in a no win situation for now…Read More

Category: MacroNotes