While economists and markets savants worry over the inflation
potential they see as inherent in the dramatic growth of aggregate
Federal Reaserve Bank credit, the Fed continues to battle a
decline in the broad based measure of credit driven liquidity as
adjusted for inflation. To counterract the continued unwinding of
private sector credit, the Fed has had to expand Fed credit and the
monetary base to provide sufficient monetary liquidity to support
The basics I look at to determine rate setting are now running about
70% in favor of leaving the 0.0 - 0.25% Fed Funds rate unchanged.
Over most of 2009, these measures were 100% in favor of not
changing the ZIRP. The breadth of the recovery in manufacturing
has improved substantially and is strong now. However, the system
operating rate remains very low. Moreover, short term business
credit demand continues to run off. My short term business credit
supply /demand pressure gauge is weak. With a reading of less than
-10 heralding a large imbalance in favor of supply, the gauge is just
shy of -12. It can be risky, disruptive and difficult to shrink reserves
when credit demand is falling, and I think the Fed would prefer to
see short term business loan demand turn up before tightening.
With over $1 tril. in excess reserves on hand, the Fed is apparently
considering targeting the rate it pays on such reserves (now 0.25%).
It is also considering a term structure for these reserves to
manage them better as the economy recovers further and as credit
The system continues to contract, with total footings off 3.6% yr/yr.
With an expected ongoing run off of business C&I loans, bank
system liquidity has improved markedly. This had to happen to
put the banks in better shape to lend going forward, and there is
no sign yet that liquidity improvement has peaked. Higher fees,
trading profits and a slowing in the growth of the loan loss reserve
account is allowing some improvement in capital position.
How About Benny?
Whoever or whatever you are in the world, you can be replaced.
With one third of the senate set to stand for re-election in 2010,
and with an angry electorate in evidence, some senators will feel
compelled to denounce Bernanke and not vote to re-confirm him.
All well and good. He deserves to get his nose rubbed in it for
lax regulation. But, Sens. Reid and McConnell best get their counts
right, because not re-confirming Benny would create a bad vibe
concerning the independence and integrity of the Fed.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!