Have you ever played Three Card Monte?
It’s a classic street con here in New York. All you have to do to win is guess which of three cards is the Queen. The dealer and his accomplices set up the mark with a fast shuffle, often on a cardboard box so that nothing expensive is left behind if the police break up the game, and even faster talk. The key to a successful con is distracting the bettor with talk so that he or she can’t follow the motion of the cards.
And if somehow the mark does guess correctly, the dealer and his crew always find an excuse not to pay off.
Right now the U.S. Federal Reserve is running its own version of the game. The talk by Ben Bernanke and Co. is all about how rates will stay near the current 0% to 0.25% range for “an extended period.” That’s kept asset prices rising.
Which is critical to the Fed’s plan to restoring the health of the financial system. If banks need to raise more capital, and they do, it sure helps if they’ve got a relatively liquid and climbing stock market to sell their offerings into.
In Three Card Monte you have to watch what the dealer does and not listen to the patter.
In the Fed’s case while its chairman, vice-chairman, and every governor who can command a podium somewhere are talking up the “extended period” promise, the bank is acting to reduce liquidity now.
The goal is to get the financial system back to something like normal.
So, for example, on November 17, the Federal Reserve announced that it will reduce the maturity of the loans it makes to banks through its discount window to 28 days effective January 14. During the crisis, when banks couldn’t meet their short-term funding needs through the commercial paper market, since that market had frozen solid, the Fed had extended these loans to 90 days. Now the Fed is moving to get out of the commercial paper business by reducing the term of its short-term loans.
There’s still quite a way to go. Before the crisis, loans from the discount window were overnight only.
This move follows other recent efforts to get the Fed out of the capital markets. For example, the Federal Reserve let the Money Market Investor Funding Facility, designed to help hard-pressed money market funds raise the money they needed to meet redemptions, expire in October. The Fed had setup this program in October 2008 when the financial markets were so locked up that money market funds couldn’t raise the funds they needed, raising the prospect of some money market investors being unable to withdraw their money. That, the Fed rightly concluded, could have set off a run on all money market funds as panicked investors all rushed to get their money while they could.
Yes, the Fed keeps talking about low interest rates for an extended period. But its actions show that the Federal Reserve is getting ready for the day when the economy and the financial system are ready to return to normal.
My best guess sometime in the second half of 2010.
The bank’s definition of “normal,” investors should remember, doesn’t include interest rates at 0%.
DJBarber
there is a search function built into this site. (Upper left corner, just below Jubak’s picture) You can use it to find older posts. (It comes in handy when trying to remember an idea from a month ago or so.)
One way to find a topic on the blog is to use the tag word cloud at the end of the first (and subsequent pages) of posts. A good sort term would be rally. I’m pretty sure that I’ve tagged every post that you note with that tag. But I’ll try to look back and make sure that’s true within the next day or so.
If the Fed only paid attention to domestic economics Krugman would be right but it doesn’t. The Fedf also has to pay attention to a falloing dollar and the government’s ability to fund its massive debt. To get more overseas investors to buy dollars, you might have to raise interest rates. The nervousness among some parts of the Treasury market right now, for example, doesn’t have anything to do with inflation but with the prospect that rates will go up because the U.S. has such huge funding obligations. There’s also the insurance factor. The Fed would love to raise rates so that it has move room to maneuver. When you’re at 0% you don’t have the ability to cut rates to stimulate the economy. The Fed wants to have that tool back in its toolbox as quickly as possible. The Taylor rule also has a major problem–since we don’t measure inflation very accurately, especially at the extremes, it’s tough to say with any precision what the Fed rate should be.
In 6 months, we’ll know who is right and who is wrong.
From Krugman:
The Fed has been up against the zero lower bound since the beginning of 2009, roughly when unemployment rose above 11 percent; right now the Taylor rule says that the Fed funds rate should be minus 6.7%.
So why should the Fed even be thinking about raising rates any time soon? We’re not likely to see 7% unemployment for years — and by the time we do, inflation will probably be even lower than it is now. I’d add that the Fed really should be raising its inflation target, meaning an even longer pause before it raises rates.
http://krugman.blogs.nytimes.com/2009/11/16/the-madness-of-the-inflation-hawks/
Mr. Jubak,
I relize my suggestion above almost feels like I am asking you to “spoon feed” us.
I think the problem that I am having is something that I mentioned some time ago.
On your old (and not nearly as good) MSN site, there was a place where you could click and get a complete index of all your stories. On this site, I see the “You may have missed” section and the “recent buys and sells” section, but no matter which one I use I have to scroll through all of the postings rather then just getting to the one I am looking for.
If you had an index here, I would probably be able to get to each of the posts that speak to my questions above in a speedier fashion. I suppose, for that matter, that I could just bookmark the post I want to be able to quickly refer back too….
Thankyou for your insight Jim,
So the feds are slightly reducing their involvment, i wonder how the economy will handle future the end to QE and fed tightening
much appreciated as always
To the guy who asked the question about yuan and renminbi:
renminbi is the official Chinese name for their currency, while yuan is a basic unit of the currency. It’s kind of like renminbi to us dollor, while 6.8yuan to one dollor. Hopefully you understand my example.
The first comment is a very good suggestion and I am looking forward to Jim’s new post too.
Jim – fair enough. Overall happen to agree with you BUT… the problem is with a very weak employment outlook the Fed has a huge problem.
http://krugman.blogs.nytimes.com/2009/10/11/when-should-the-fed-raise-rates-even-more-wonkish/
Some back-of-the-envelope scribblings:
Let me start with a rounded version of the Rudebusch version of the Taylor rule:
Fed funds target = 2 + 1.5 x inflation – 2 x excess unemployment
where inflation is measured by the change in the core PCE deflator over the past four quarters (currently 1.6), and excess unemployment is the different between the CBO estimate of the NAIRU (currently 4.8) and the actual unemployment rate (currently 9.8).
Right now, this rule says that the Fed funds rate should be -5.6%.
I’m confused…sometimes the currency of China is called the yuan and at other times, it is referred to as the renminbi.
Which one is it, or is it both?
DJBarber has some great suggestions. I’d love to see that blog!
Bet I can guess where you got those shoes!
Yes, I have played this game down on Water and Wall in the 80’s (Played once, realized what was happening, never played again, but it was always fun to watch the mechanics) On another note:
Is it possible to collect all of the advice regarding the following possibilities that you have talked about in several blogs:
China letting the renminbi appreciate.
The US moving up interest rates.
The dollar gaining strength.
A “double dip” recession.
Into one posting?
I am finding it difficult to find each of your blogs that talk about these items (I know you talked about some of these sometime ago in one blog, but I can’t find it)
and what your plan of action would be as a result of one or the other actually happening.
Is it possible to do one blog that contains:
What we watch for as an indicator of scenario 1, scenario 2, scenario 3 approaching?
What specifically we should look to do should one or the other scenario take place?
How you would expect the market to react to one or the other of the above? (Commodities rally dies, dollar denominated assets move up, gold goes down, or whatever etc…)
How you would reposition your Jubaks Picks in response (Or in anticipation?)