Even Though the Fed Said They Are Worried, They Are Not Actually Worried
So says Minneapolis Fed President Narayana Kocherlakota. I have a simple question to pose to Mr Kocherlakota in that case: If they aren't worried, why the fuck are they buying more Treasurys? Because it's fun? Because Timmy Geithner asked nicely? Because they're pumping and dumping the U.S. economy?
The Federal Reserve’s Aug. 10 policy statement may have led investors to inaccurately believe the U.S. economy is in worse shape than presumed, said Narayana Kocherlakota, the central bank’s newest policy maker, who added a “modest” recovery appears to be under way.
The Federal Open Market Committee’s move to reinvest proceeds from mortgage-backed securities into Treasuries “had a larger impact on financial markets than I would have anticipated,” he said in a speech today in Marquette, Michigan. “My own interpretation is that the FOMC action led investors to believe that the economic situation in the United States was worse than they, the investors, had imagined. In my view, this reaction is unwarranted.”
The remarks by Kocherlakota, head of the Minneapolis Fed, are among the first by a policy maker since the FOMC’s decision last week to maintain its holdings of securities and prevent money from being drained out of the financial system. The Fed bought $2.551 billion of Treasuries today in the first outright purchase of U.S. government debt since October.
I love Bloomberg's choice of "outright purchase" as we all know the sneaky little bastards do plenty of Treasury shopping outside of QE and QE 2.1 within the bounds of their day-to-day market manipulation, er, open market activities.
In his speech, Kocherlakota also got into how FOMC meetings actually work. How helpful is that?
The typical FOMC meeting features two so-called go-rounds, in which every president and every governor has a chance to speak without interruption. The first go-round is referred to as the economics go-round. The meeting participants describe their views on current economic conditions and their outlook for future economic conditions. The presidents’ remarks will typically include references to their own local economies, as well as the national and global situation.
Who do I have to pay to see a go-round dedicated to bitchslapping Janet Yellen? Anyone?
I especially enjoyed this bit on the "disturbing" unemployment rate:
So the news about inflation and GDP is in the “good, but certainly could be better” category. However, the lack of vitality in the U.S. labor market can only be termed disturbing. The national unemployment rate remains at 9.5 percent in July. Private sector job creation remains weak—only 71,000 net private sector jobs were created in July.
If one digs deeper into the data, the situation seems even more troubling. Since December 2000, the Bureau of Labor Statistics has been keeping data on the job openings rate, which is defined as the number of job openings divided by the sum of job openings and employment. Not surprisingly, when job openings rise, the unemployed can find jobs more readily, and the unemployment rate typically falls. The inverse relationship between unemployment and job openings was extremely stable throughout the 2000-01 recession, the subsequent recovery, and on through the early part of this recession.
Beginning in June 2008, this stable relationship began to break down, as the unemployment rate fell much faster than could be rationalized by the fall in the job openings rate. Over the past year, the relationship has completely shattered. The job openings rate has risen by about 20 percent between July 2009 and June 2010. Under this scenario, we would expect unemployment to fall because people find it easier to get jobs. However, the unemployment rate actually went up slightly over this period.
What does this change in the relationship between job openings and unemployment connote? In a word, mismatch. Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs. There are many possible sources of mismatch—geography, skills, demography—and they are probably all at work. Whatever the source, though, it is hard to see how the Fed can do much to cure this problem. Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers.
What?! Are you telling me that the Fed can't magically transform people from construction workers to manufacturing workers? That's bullshit! They can transform a dollar into 90 cents no problem, why can't they manage to do that?
His comments are typical of a central banker in that he just can't seem to fathom why the data don't work out in practical application like the scenarios do on paper. "This should happen..." very rarely does, especially in an environment like ours currently which is jammed packed with too much fear and uncertainly to make sense even to the conductors of the economy. Or maybe they never get it, even in a typical textbook economy.
He's still holding out for a "return to normal", at which point he says the Fed should be ready to commit to rates above zero. Hahahahahahahaha, don't hold your breath for that one, buddy, we're never getting back to "normal" at this point.