Parsing The Fed

The WSJ notes the differences between today’s Fed statement and that of December’s:

"THE FED’S STATEMENTS reflect how the members of the central
bank’s Federal Open Market Committee perceive the economy. The
slightest changes are scrutinized for clues about where interest rates
may be headed. The Jan. 31 statement announced that the Fed was keeping
rates steady at 5.25%, its fifth pause in a row after 17 increases in
17 meetings. The Fed’s language reflected what it sees as a pickup in
the economy, but reiterated that any rate increases will depend on new
data."

Click below to see the fully parsed statement:

Infofedparse0701

Sources:

Federal Open Market Committee
January 31, 2007
http://www.federalreserve.gov/boarddocs/press/monetary/2007/20070131/default.htm

Fed Holds Again
PARSING THE FED
Wednesday, Jan. 31, 2007
http://online.wsj.com/public/resources/documents/info-fedparse0701.html

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What's been said:

Discussions found on the web:
  1. Uncle Jack commented on Jan 31

    Unanimous vote because the lone dissenter no longer votes.

  2. eightnine2718281828mu5 commented on Jan 31

    I guess you guys didn’t get the memo explaining that the fed is clearly going to cut rates to 1% in May in response to the robust economy.

    How else would you explain the roman candle at 2:15?

  3. wunsacon commented on Jan 31

    eightnine2718281828mu5, would you please elaborate?

  4. eightnine2718281828mu5 commented on Jan 31

    My pet (convoluted) theory is that the Greenbucks(tm) produced by Alan Greenspan’s generosity get routed through a number of conduits; the Chinese get to sell us more widgets, and they send the profits back to us by buying bonds. So we got an artificial cap on interest rates, and the housing boom was the result. This of course attracts speculators.

    In order to build those widgets, the Chinese built lots of factories and modernized their shipping infrastructure; after that gets fired up, they need a lot of oil to keep things humming. So oil prices shoot up. Then of course the speculators see that spike in prices, and decide to tag along for the ride, pushing oil even higher.

    After the oil spike, the oil producers of course need a place to park all of this money, so much of it winds up in the US. I hear the Saudi’s like a more balanced portfolio than the Chinese due to their higher tolerance for risk, so some of it ends up in US assets and equities in addition to the bond market.

    Finally, because of globalization, the US worker sees his salary stagnate, but he can increase consumption by taking on cheap debt and cashing out some home equity.

    The money he spends ends up in corporate coffers which overflow due to flattening labor costs from all the labor arbitrage/outsourcing, and this cash is used to finance stock buybacks.

    All the money seems to be flowing uphill to higher levels of concentration and the American consumer has nothing but a higher debt load and granite countertops to show for it.

    Corporations realize that this can’t go on forever, which is why they don’t pony up for a capacity expansion binge. So they do buybacks instead.

    When the consumer peters out, demand will fall, and the corporations will be forced to reduce buybacks. Likewise, demand for Chinese imports will fall, the Chinese will stop buying bonds, and interest rates will rise. God knows what the dollar does; textbook analysis says the dollar will fall, but who knows for sure.

    If we hit a real recession, Chinese and US demand for oil will fall further, pulling the price of oil down, and the Saudi’s won’t be dumping quite so much cash into the US.

    And when all of this happens, we find out what Dr. Ben is made of.

    Sorry if this is incoherent; I have a fever of 102 and the antihistamines are really kicking in. :-)

  5. Lauriston commented on Jan 31

    Eightnine- interesting stuff. The more reason why I personally suspect problems will start with the Chinese financial markets, that’s what I am watching and linking to some worrying trends in China from my blog. They are “collateralizing” homes and taking credit card debt to buy stocks etc. From what you have written, it seems it may be a while yet before real problems start, maybe months if not a year or two down the line…

  6. DavidB commented on Feb 1

    No matter what they say, I believe Bernanke is at his desired interest rate base. I don’t think he’ll go much lower than this unless there is a crisis. The reason for this is that this rate does so many positive things. Not only does it support the dollar but it also encourages savings. It even keeps some speculative borrowing out of the credit market.

    I think Bernanke is a throwback to CBers of old. Greenspan was an anomaly that was accommodative to the market every time it sniffled creating the infamous ‘Greenspan put’. I think Bernanke wants to restore balance, choice and risk in the market and won’t be so quick to drop rates when we are redlining. Instead I think he will let the market make more of an effort to sort out it’s own problwms. R.E. will be the first major test of the new policy direction. I think we will see flat rates for quite a while and I doubt we’ll go much lower than we are during Bernanke’s tenure if at all.

    I think we are firmly in a new era and the bad memory of Greenspan can now go away and stay away for all our sakes

  7. js commented on Feb 1

    DavidB,
    I wish what you say is true about Bernanke. Facts from last year tell us otherwise. In June, he was talking like a true hawk against inflation. Stock markets tumbled. In July, our man did a classic flip flop and came out in Humphrey Hawkins saying he might stop raising even if inflation has not come down. And we get a big recovery in stocks. He could have let the stock market do its own thing in anticipating a slowdown (which was correct to a degree). BUT NO…he had to ease up on the monetary pedals to let the markets recover. We might get an over heated economy as a result. I believe Bernanke is following in Greenie’s footsteps to the T.

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