A Curious Dependency on Data

I was planning on linking to Paul Kasriel’s Critique of Bernanke‘s Congressional testimony anyway — and then I saw that this morning’s Barron’s excerpted the most relevant parts of it.

Pick your poison: the short version is here, the full 7 pager is linked at bottom:

"BERNANKE, WHILE DIFFERING IN STYLE, remains consonant with the substance of Fed policy, implying further increases in its federal-funds target are likely. Another quarter-point hike, to 4¾%, is all but certain at the next FOMC meeting March 28. And the fed-funds futures market is putting even money on a 5% funds rate being approved at the May 10 confab. The risks to the economy, according to Bennie and the Feds, is that the economy could overheat and bring further upward pressure on inflation without further monetary tightening. Those decisions will be dependent on incoming economic data.

This "data-dependent" policy approach strikes Paul Kasriel, Northern Trust’s director of economic research, as curious, given that monetary policy affects the economy with a lag of as much as 18 months. Bernanke last week also dismissed the notion that the negative yield curve — when short-term rates are higher than long-term ones, the opposite of the usual configuration — is a precursor of an economic downturn. Kasriel points to a similar situation in the second quarter of 2000, when the economy boomed at a 6.4% annual rate — just before contracting in the following quarter. The curve then also was negative, and also dismissed as a portent.

Another leading indicator (which also has fallen into disrepute with the consensus) is the real money supply, M2, adjusted for inflation. Put simply, money is hardly growing much faster than prices, leaving little to fund real activity. Indeed, Kasriel points out, money growth is weaker than it was near the onset of the 2001 recession.

Clearly, the yield curve and the money supply can, and have, been explained away by the best and the brightest in the economics field. Yet there is another symptom consistent with the same diagnosis: Commodity prices are off fairly sharply since the beginning of February — not just oil, but gold, as well. But all these forward-looking market indicators are ignored.

"For all the talk about a more-transparent Bernanke Fed, we still don’t have a clue as to what leading indicators the Fed uses to guide its policy decisions other than the latest set of economic reports," Kasriel laments. "The more things change, the more they stay the same."

Amen to that brother . . .


Chairman Bernanke’s Debut – Kasriel’s Critique (pdf)
Paul Kasriel
Northern Trust, February 15, 2006


Meet the New Boss
Barrin’s MONDAY, FEBRUARY 20, 2006   

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  1. Vegaman commented on Feb 18

    Personally I don’t see gold having moved 5% off the recent high and Oil still trading within the High/Low range made after Katrina last year as being “forward-looking market indicators”. You need to see a real and persistent break of the trend, and that has just not happened yet.

  2. Uncle Jack commented on Feb 18

    YoY change in PPI, recent release Friday, came in at 5.74%.

    No inflation here folks,
    keep it moving,
    nothing to see here.

  3. zanzibar commented on Feb 18

    Over the past 52 weeks M3 has grown 8.2% in nominal terms. And Bank Credit 9.8% and RE loans 14.5%.

    Is liquidity waning?

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