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Posted by warren mosler (72.161.109.198) on 14:02:12 11/21/07
Color for Fed forecasts:.
First, the forecasts assume the fed will be adjusting the econ as it
unfolds. Therefore the fed can't forecast too high inflation, too
high or too low growth as that would mean the fed isn't doing its job.
Second, the fed is still using futures prices in their forecasts so
the backwardations in crude and grains is keeping their inflation
forecasts lower than otherwise.
Third, mainstream econ says that whatever the rate of growth is that
corresponds with inflation inside the fed's target zone is the max non
inflationary growth for the economy. So that means the forecast of
growth lower than it is now is all the growth they want as it
corresponds with the inflation rate and unemployment rate they want.
(as above- it assumes policy adjustments to keep things 'ideal')
It does not mean that if growth is 'only' that high they will cut. If
anything, it implies that if growth is any higher than projected, and
inflation above the top of their range (whatever that is) they would
hike.
Point- the markets seem to be misreading the forecasts just released.
And the Fed remains inclined to leave ff alone Dec 11 as there are no
signs yet that the economy is doing worse than the Fed forecast at the
last meeting, or that the inflation outlook has gotten better. If
anything, gdp prospects may be doing a touch better than projected, as
claims were down, and the inflation outlook may be worse as the $ is
down, crude is up, and nov cpi could top 4%. Stocks are soft but
still up for the year, and there hasn't even been a 'correction' as
defined.
Additionally, a policy of 'inflate your way out of debt' and 'beggar
they neighbor' is totally out of line with any concept of central
banking, and I suspect that Bernanke has heard from other cbs with
exactly that message.
Assuming the fed isn't planning a cut, they will only have about a
week or so before the 'blackout period' in front of the Dec 11 meeting
to keep jawboning the jan ff rate to a 'no cut' presumption.
Currently jan ff are slightly discounting the possibility of a larger
cut, so they have some work to do.
The 'right move' remains to
cut the discount rate to the ff rate,
remove the stigma,
open the window to any member bank in good standing for any qualifying
collateral (the collateral banks own and are allowed to by is already
determined by the regulators and the banks can issue govt guaranteed
liabilities up to 100,000 to fund it, so this doesn't add any
'exposure' to the govt.)
Allow 90 day term funding at the window to allow the fed to set the
ceiling for 90 day member bank cost of funds.
Allow banks to fund up to 100% of their SIVs but restrict them from
expanding them from present levels, and require them to 'run off' over
time. This is not a bail out as the shareholders will still take any
losses if the collateral doesn't perform over time. It does prevent a
disruptive fire sale.
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