Up and Down Wall Street
THURSDAY, JANUARY 26, 2012
Money for Nothin' and Bips for Free
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By RANDALL W. FORSYTH
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The Fed's plan to keep rates at zero is music to the ears of gold bulls.
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I have no idea if Ben Bernanke is a fan of Dire Straits, but he will be
playing "Money for Nothing," the British rock band's 1985 classic hit,
through the end of 2014. That's how long the Federal Reserve figures on holding
its key target interest rate, the overnight federal funds rate, close to zero,
making six years at the top of the policy charts since Bennie and the Feds'
version of money for nothing was released.
The "bips for free" part refers to basis points, or hundredths of a percentage point, which bond-market fans shorten to "bips." The Fed has maintained a 0-25 basis-point fed funds target ever since December 2008 at the depths of the financial crisis, at which point it ran out of bips. Since last year, the central bank had said the fed-funds rate would stay near zero through mid-2013. Tuesday, it extended the offer and the bips will be free through the end of 2014.
That was part of the new wave of transparency, which Bernanke has made a key theme during his gig at the Fed. The Federal Open Market Committee for the first time announced its expectations for the path of the fed-funds rate along with its projections for the economy, including gross domestic product growth, unemployment and inflation. (The Fed lays out the full score here.)
Just as a musical manuscript contain notes that are open to interpretation by the artist, the numbers and Bernanke's interpretation leaves a distinct impression. As long as inflation -- as defined by the Fed's favored measure of the personal consumption deflator -- remains at or below 2%, and the unemployment rate stays well above its long-term presumed natural rate somewhere between 5% and 6%, the central bank won't raise the fed-funds rate.
By the end of 2014, when the FOMC expects the jobless rate to be approaching 7%, it expects to begin hiking the fed-funds rate. The chart of the forecasts represents the full complement of the FOMC -- normally the seven members of Fed's Board of Governors and the presidents of the 12 district banks. Only the members of Fed Board actually vote, along with five district presidents, with the New York Fed president serving as a permanent member and FOMC vice chairman, while the other district presidents rotate annually. With the vacancies on the Board, there are only 17 data points and 10 voting members on the FOMC.
In his press conference, Bernanke emphasized the dual mandate given the Fed by Congress, to minimize both inflation and unemployment. And he properly rejected the so-called Phillips Curve trade-off, which asserts more jobs can be bought by tolerating higher inflation. Channeling Milton Friedman, Bernanke said inflation is a function of monetary policy while the labor market depends on an array of non-monetary variables.
That said, however, the Fed expects to maintain extraordinarily low short-term rates as long as inflation remains around its 2% target and unemployment stays well above 7%, a far sight away from the current 8.5% jobless rate.
At least that's how FOMC statement read. But BCA Research's Daily Insights (from the publishers of the influential Bank Credit Analyst) notes the committee's language was skewed in favor of the view of Bernanke and other prominent policy doves, which would include Fed Vice Chairman Janet Yellen and New York Fed President Bill Dudley. "If it were a simple majority vote, the Fed would tighten much earlier" than late 2014, according to BCA.
What emerges is a 2% inflation target, which Bernanke defended at his press conference as providing a cushion against deflation. Most Americans feel a higher inflation rate, given the cost of necessities such as food and energy, which are defined out of the "core" measures. Meanwhile, the fastest pace of price increases is felt in the least discretionary items, such as medical care and tuition. Those rising costs reduce real incomes for strapped families. The plunge in flat-panel television prices fails to provide much of an offset.
The Fed's declaration that rates will remain pinned near zero until late 2014 also opens the door for another round of quantitative easing, or outright Fed purchases of securities to expand its balance sheet. But the main beneficiary would be the financial markets rather than the real economy, contends Uwe Parpart, chief strategist and head of research of Reorient Financial Markets, a Hong Kong-based institutional brokerage firm.
While the Fed plans to continue to give money for nothing until the end of 2014, the European Central Bank also last month coincidentally provided cheap, three-year loans to banks. Parpart, in an interview with CNBC International, counts some 30 interest-rate cuts around the globe, with the latest coming from Thailand's central bank.
That's providing liquidity to get stocks going, Parpart observes; the economy is another matter. He harkens back to a similar move in Japan in 1999, which he notes didn't "kick-start the economy." Policy changes, especially regarding regulatory constraints, are what's needed in the U.S.
The markets are the ultimate arbiter of policy (even if the French socialist candidate for president recently declared himself an enemy of finance.) The biggest beneficiary of the Fed's announcement of its intention of free money through 2014 was gold and gold stocks.
While the S&P 500 SPDR exchange-traded fund (ticker: SPY) pulled out of the red after the Fed's statement at midday and ended up 0.84%, the SPDR Gold Trust (GLD) jumped 2.72%. And the Market Vectors Gold Miners ETF (GDX) surged 6.58%--even more than Apple (AAPL), which surged 6.24% on its blow-out earnings report. And both were dusted by the Market Vectors Junior Gold Mine ETF (GDXJ), which soared 7.62%, with almost the entire move coming after the Fed announcement.
"Money for nothin' and bips for free" is the tune gold bulls are humming. Whether that will inspire a wave of hiring, as Bennie and the Feds hope, is another matter.
The "bips for free" part refers to basis points, or hundredths of a percentage point, which bond-market fans shorten to "bips." The Fed has maintained a 0-25 basis-point fed funds target ever since December 2008 at the depths of the financial crisis, at which point it ran out of bips. Since last year, the central bank had said the fed-funds rate would stay near zero through mid-2013. Tuesday, it extended the offer and the bips will be free through the end of 2014.
That was part of the new wave of transparency, which Bernanke has made a key theme during his gig at the Fed. The Federal Open Market Committee for the first time announced its expectations for the path of the fed-funds rate along with its projections for the economy, including gross domestic product growth, unemployment and inflation. (The Fed lays out the full score here.)
Just as a musical manuscript contain notes that are open to interpretation by the artist, the numbers and Bernanke's interpretation leaves a distinct impression. As long as inflation -- as defined by the Fed's favored measure of the personal consumption deflator -- remains at or below 2%, and the unemployment rate stays well above its long-term presumed natural rate somewhere between 5% and 6%, the central bank won't raise the fed-funds rate.
By the end of 2014, when the FOMC expects the jobless rate to be approaching 7%, it expects to begin hiking the fed-funds rate. The chart of the forecasts represents the full complement of the FOMC -- normally the seven members of Fed's Board of Governors and the presidents of the 12 district banks. Only the members of Fed Board actually vote, along with five district presidents, with the New York Fed president serving as a permanent member and FOMC vice chairman, while the other district presidents rotate annually. With the vacancies on the Board, there are only 17 data points and 10 voting members on the FOMC.
In his press conference, Bernanke emphasized the dual mandate given the Fed by Congress, to minimize both inflation and unemployment. And he properly rejected the so-called Phillips Curve trade-off, which asserts more jobs can be bought by tolerating higher inflation. Channeling Milton Friedman, Bernanke said inflation is a function of monetary policy while the labor market depends on an array of non-monetary variables.
That said, however, the Fed expects to maintain extraordinarily low short-term rates as long as inflation remains around its 2% target and unemployment stays well above 7%, a far sight away from the current 8.5% jobless rate.
At least that's how FOMC statement read. But BCA Research's Daily Insights (from the publishers of the influential Bank Credit Analyst) notes the committee's language was skewed in favor of the view of Bernanke and other prominent policy doves, which would include Fed Vice Chairman Janet Yellen and New York Fed President Bill Dudley. "If it were a simple majority vote, the Fed would tighten much earlier" than late 2014, according to BCA.
What emerges is a 2% inflation target, which Bernanke defended at his press conference as providing a cushion against deflation. Most Americans feel a higher inflation rate, given the cost of necessities such as food and energy, which are defined out of the "core" measures. Meanwhile, the fastest pace of price increases is felt in the least discretionary items, such as medical care and tuition. Those rising costs reduce real incomes for strapped families. The plunge in flat-panel television prices fails to provide much of an offset.
The Fed's declaration that rates will remain pinned near zero until late 2014 also opens the door for another round of quantitative easing, or outright Fed purchases of securities to expand its balance sheet. But the main beneficiary would be the financial markets rather than the real economy, contends Uwe Parpart, chief strategist and head of research of Reorient Financial Markets, a Hong Kong-based institutional brokerage firm.
While the Fed plans to continue to give money for nothing until the end of 2014, the European Central Bank also last month coincidentally provided cheap, three-year loans to banks. Parpart, in an interview with CNBC International, counts some 30 interest-rate cuts around the globe, with the latest coming from Thailand's central bank.
That's providing liquidity to get stocks going, Parpart observes; the economy is another matter. He harkens back to a similar move in Japan in 1999, which he notes didn't "kick-start the economy." Policy changes, especially regarding regulatory constraints, are what's needed in the U.S.
The markets are the ultimate arbiter of policy (even if the French socialist candidate for president recently declared himself an enemy of finance.) The biggest beneficiary of the Fed's announcement of its intention of free money through 2014 was gold and gold stocks.
While the S&P 500 SPDR exchange-traded fund (ticker: SPY) pulled out of the red after the Fed's statement at midday and ended up 0.84%, the SPDR Gold Trust (GLD) jumped 2.72%. And the Market Vectors Gold Miners ETF (GDX) surged 6.58%--even more than Apple (AAPL), which surged 6.24% on its blow-out earnings report. And both were dusted by the Market Vectors Junior Gold Mine ETF (GDXJ), which soared 7.62%, with almost the entire move coming after the Fed announcement.
"Money for nothin' and bips for free" is the tune gold bulls are humming. Whether that will inspire a wave of hiring, as Bennie and the Feds hope, is another matter.
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