About Me

Retired chief investment officer and former NYSE firm partner with 40 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 !!!

Tuesday, March 18, 2014

Monetary Policy

Tomorrow is Fed policy day (FOMC). Stocks players are anticipating a policy based 'pep
talk' from Ms. Yellen.

The economy still has resource utilization slack and is coming off a slow winter. Even so,
classical indicators which traditionally govern the direction of short term interest rates are
edging very much closer to suggesting that the time may be near for the Fed to begin to
move the Fed Funds rate % up. The Fed is normally inclined to raise short rates when my
business strength index tops the 135 level. It is now sitting around 132. It has been up here
before during the recovery but during that period, short term business credit demand was
still declining. Not so  now, as my short term credit supply / demand pressure gauge is moving
up in favor of demand, indicating tighter conditions at the short end. This is the first time
during the current economic recovery that all the indicators, including non-financial
commercial paper demand, are in position to signal it is time to raise rates.

If the economy improves further as 2014 wears along, you can expect the hawks who have
pushed for QE tapering will turn their attention to the Fed's ZIRP short rate policy. On balance,
the Fed is likely to stay with its ZIRP policy for as long as it can easily get away with it even
if the economy improves further as now expected. So far, investors have willingly gone along
with the policy. For example, the 1 yr T-bill mostly stayed in a tight .09 - .20% range since latter
2011 even though inflation has averaged well above that miniscule rate range over this interval.

An improving US economy and perhaps an additional bit of inflation pressure may well lead
players to demand a higher yield with the 1 yr "T" eventually moving up to .50% or higher to
signal the Fed that is time for Them to review the ZIRP. 1 Year Treasury Yield

Since there may finally be an economic case to raise rates coming, the issue of 'interest rate
suppression' would at last become relevant. A healthy economy in the long run would
feature a balance of savings and investment rather than the strong emphasis on asset inflation.
With housing prices and the stock market in solid recovery mode and no financial incentive
to save, continued economic expansion  from here should prompt more attention on the issue
of the continued desirability of a ZIRP even if the Fed goes on to suppress rates.  

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