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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

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May 21, 2006


Data Dependence Points North

Last week's news brought a mix of I-told-you-sos, cringes. and even some sympathy for Mr. Bernanke and pals.  I reported on much of this in my posts on the April CPI release -- here and here -- but the reaction continued on through the week. The I-told-you-sos came from Bizzy Blog (honoring the presumed prescient Don Luskin) and from Barry Ritholtz (who has told us so before), seconded by Mr. Naybob.  Cringes can be found at The Capital Spectator, at The Skeptical Speculator, from the other side of the ocean via (a skeptical) David K. Smith, and at Asymmetircal Information, sharing the misery with Jim Hamilton.   Also at the Capital Spectator, the sympathy.  CS is all alone on that one.

In any event, the market has apparently decided that its time to think twice about the rate-hike pause scenario.  Once again, the probabilities of a pause in June versus at least one more rate hike switched places, according to the Carlson-Craig-Melick estimates from options on federal funds futures:

   

June_16

   

August is still a work in progress, but it is clear that sentiments are leaning hawkish:

   

August_4

   

The data, if it will do you any good:

Download implied_pdfs_051906.ppt

Download imp_pdf_june_051906.xls

Download imp_pdf_aug_051906.xls

May 21, 2006 in Fed Funds Futures , Federal Debt and Deficits , Inflation | Permalink

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Comments

It would be fine with me if BB stopped increasing Fed Funds NOW - IF he'd do three things.
1. Push our treasury bond yields up to 5.50-6% area to eliminate their speculative influence on housing.
2. Convince ALL Mortgage lending boards (including those he doesn't control) to tighten lending policies to eliminate their speculative influence on our housing.
3. Quietly address our out-of-control & still-growing derivatives mess to reduce its potential financial market influence.
BB's in a tough spot, he's dealing with entrenched forces who would love for this cycle to play out in the same old way - for them to continue their excesses until we hear a loud POP, then BLAME the explosion on the Fed.
BB deserves the time & support from all players to change the game. If that unnerves the financial sector, so be it. The sector's influence grew unchecked for 18 years. Its performance has left us teetering on the edge of a steep cliff, it's time for change.

Posted by: bailey | May 22, 2006 at 11:29 AM

It's interesting what Stephen Roach wrote today:

"The inference here is that the policy rule of the inflation targeter may need to become increasingly flexible as an economy approaches price stability. When inflation is low and a price-targeting central bank pushes nominal interest rates down to unusually low levels, there are new risks to confront — namely, asset bubbles."

That's what has happenned in the last years. Unfortunately, I don't think players have the incentives today to change their behavior, and higher interest rates won't help to stop the bubble softly. With China and current productivity growth, it is not inflation, but rather high asset prices that should be our concern...unfortunately, BB, as Greenspan before, believe the Fed has no jurisdiction over asset prices...

Posted by: Jon Plavnick | May 22, 2006 at 01:14 PM

Bailey, I am curious as to what you consider the derivatives mess?

Exchange traded derivatives pose no threat to the marketplace.

OTC derivatives have grown since the 2001 agreement on legal certainty. I believe they are beginning to unwind the mess they created, but will miss the deadline date.

How do you diversify risk in an uncertain economic environment without OTC derivatives?

Posted by: jeff | May 22, 2006 at 07:31 PM

I am wondering if an increase followed by a decrease is more likely. It is difficult to fight inflation that actually occurred in the past and is just showing up in the data now. Economic inertia can be difficult to stop in either direction.

Posted by: Lord | May 23, 2006 at 12:45 PM

Jeff, I certainly agree OTC settlement issues have not looked good. I've voiced my greater concerns with derivitives in the past & have nothing new to add. Only a few days ago Dave Iverson at Economic Dreams (re)listed a number of links addressing risks. http://forestpolicy.typepad.com/economics/

Posted by: bailey | May 24, 2006 at 01:09 PM

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