Cyrillic Partners

Alan Greenspan told a group of executives in Oslo that the falling dollar shouldn’t be a Federal Reserve priority unless it is creating inflation.

From Reuters: Asked if the Fed should take the weak dollar into account, he said: “To the extent that a weakened dollar is of such a margin that it creates problems, then yes, the central bank needs to address that. One has to ask what are the inflationary consequences of a weakening of the dollar.”

This question may have more to do with the mix of imported and domestic goods that a person typically consumes. A basket of mostly imported goods would drive up an individual’s consumer-price-index. It also has to do with the price stickiness of import-competing goods. As prices on imported automobiles go up, for example, how long will it take General Motors to increase the price on its cars and trucks?

At least the former Fed chairman isn’t spouting as much doom and gloom earlier this month (see our post on it).

The FOMC released the minutes from its last meeting Tuesday, showing a closely divided board when it came to cutting rates. It also downgraded its optimism on economic growth.

From Bloomberg: “Most members saw substantial downside risks to the economic outlook and judged that a rate reduction at this meeting would provide valuable additional insurance against an unexpectedly severe weakening in economic activity,” according to minutes of the Federal Open Market Committee’s Oct. 30-31 meeting. “Many members noted that this policy decision was a close call.”

The prediction for slower growth shouldn’t be that much of a surprise, not after Bernanke’s address to Congress earlier this month (read our story). Still, the extent to which the Fed anticipates a slow-down shocked some.

From CNNMoney.com: The Fed indicated in an addendum to its minutes that it now expects the economy to grow at about a 1.8 percent to 2.5 percent rate next year, down from a forecast in June of 2.5 percent to 2.75 percent growth. “I am surprised that their forecast for next year is as low as it is,” said David Resler, chief economist of Nomura Securities International Inc. “The forecast is considerably weaker than it had been and that is the most significant development in this report.”

So what’s the takeaway? Expect cuts when the FOMC meets in December. The Fed Funds Futures quoted on the CBOT indicate a 90% chance of another quarter cut in December and 67% odds that the Fed will do the same again in January.

Seems like the markets are betting against Kroszner and his sanguine predictions (which we covered here).

Read our coverage of the last rate cut here.

[Picture thanks to TheFreshTrader.com]

Rumors that the U.S. Federal Reserve was having an emergency meeting to discuss a rate cut spooked Asian markets Tuesday, demonstrating the importance of the FOMC’s efforts toward increased transparency (see our story).

From the MarketWatch story: “What happened was there was talk that the Federal Reserve was calling a meeting, which means there is a possibility that the U.S. may cut interest rates,” said Francis Lun, general manager at Fulbright Securities in Hong Kong. “It is just a market rumor,” Lun added.

Not everybody loves the Federal Reserve as much as we at Cyrillic Partners do. NORFED seems to be an organization that is so against Bernanke, et al, that it has decided to publish its own currency system, one based on silver holdings.

Everything was going fine for the group until mid last year, when the U.S. Mint issued a press release stating that NORFED’s “Liberty Dollars” were illegal. So NORFED owner Bernard von NotHaus sued the Mint and the Treasury and a bunch of other people earlier this year.

It seemed like a good idea until the FBI raided NORFED headquarters earlier last week and seized gold, silver and two tons of copper coins featuring Republican presidential candidate Ron Paul, according to a report by the AP.

NORFED’s position is particularly interesting to Fed-watchers. The organization’s premise is that backing their dollars with silver will eliminate the inflationary pressures on the U.S. Dollar. The group offers the following charts on its website:

The theory here is that increasing U.S. Federal Debt is driving the buying power of the dollar down. Right… Well anyway, people don’t necessarily have to fear inflation. It’s all about what rates you’re locked into or how sticky your wages are.

I’m not sure that the currency really “competes” with the U.S. Dollar, which is what most of the case will turn on, it seems. From The Washington Post story: In the affidavit, an FBI special agent states that he is investigating NORFED for federal violations including “uttering coins of gold, silver, or other metal,” “making or possessing likeness of coins,” mail fraud, wire fraud, money laundering and conspiracy. “The goal of NORFED is to undermine the United States government’s financial systems by the issuance of a non-governmental competing currency for the purpose of repealing the Federal Reserve and Internal Revenue Code,” he states.

Couldn’t the same thing be said for any number of “currencies” printed or created for the purpose of exchange? Postage stamps come to mind.

[Images from NorFED website.]

Federal Reserve Board Governor Randall S. Kroszner made a speech Friday that pundits are interpreting as a signal that the Federal Reserve will not cut rates in December. You can find the whole text of his speech at the Fed’s site. Here’s an excerpt:

Against this backdrop, inflation expectations have remained reasonably well anchored. The prices of oil and other commodities continue, of course, to be a source of major uncertainty for the overall inflation outlook. Currently, quotes from futures markets suggest that investors expect food and energy prices to come off their recent peaks next year. That said, I think it’s also fair to say that political and economic developments around the world, not to mention the vagaries of the weather, make any forecast of oil and other commodity prices highly uncertain. Moreover, spillovers from the latest run-up in crude oil prices could begin to put upward pressure on core inflation.

So, to sum up, the economy seems poised to grow for a while at a noticeably slower pace than it did during the summer, in part because of lower home sales, less residential construction, and generally smaller increases in consumer and business spending. A sequence of data releases consistent with the rough patch for economic activity that I expect in coming months would not, by themselves, suggest to me that the current stance of monetary policy is inappropriate. I will, of course, continue to carefully assess the implications of the incoming economic data and financial market developments for economic growth prospects and the outlook for inflation.

[Thanks to the University of Chicago Chronicle for the image.]

The Federal Reserve is going to publish its economic estimates more frequently and expand them to include additional metrics.

Call it pay back to Alan Greenspan for his negative predictions (we republished a cartoon about this). It’s a subtle way to take power away from the various would-be prognosticators by publishing even more information. It makes the black box of the economy look a little less opaque.

Here’s the plan, from the Fed’s site:

In the future, the FOMC will compile and release projections four times each year rather than twice a year. In addition, the projection horizon will be extended to three years, from two. FOMC meeting participants will now provide projections for overall personal consumption expenditures (PCE) inflation, as well as for real gross domestic product (GDP) growth, the unemployment rate, and core PCE inflation. Projections of nominal GDP growth will be discontinued. Summaries and explanations of the projections will be published along with the minutes of the FOMC meeting at which they were discussed. These descriptions will provide a fuller discussion of the projections, covering not only the outcomes that most meeting participants see as most likely, but also the risks to the economic outlook and the dispersion of views among policymakers.

Read more about it in the Economist Magazine’s story.

The CPI increased 0.3% during October, keeping pace with the rate it set in September, according to the Labor Department. The core index, which doesn’t include energy price increases, only grew at 0.2 percent.

So what is the Federal Reserve going to do next month? It seems like the U.S. economy, despite a falling dollar and rocketing oil prices, is bullet proof.

The futures traders are betting on a quarter-point cut in the Target Rate, but I’m not certain it will happen. A lot of it will depend on the strength of the pre-Christmas buying season.

From the NYT story: “There’s been a lot of concern in the marketplace and in the business press about the dollar and high commodity prices feeding into core inflation and causing a problem for the Fed,” said Zach Pandl, an economist at Lehman Brothers. “Those concerns are pretty much overstated, and I think that was confirmed in the report.”

[Thanks to the Indy Star for the image.]

The Council on Foreign Relations has a nice explanation of the causes of the falling value of the dollar. It’s an important thing to understand, especially when people talk about the increasing cost of oil. The U.S. is a net importer of oil. When the value of the dollar falls, oil prices rise.

The falling dollar is getting the rhetoric up. Nobody’s worse than Henry Paulson. The Secretary of the Treasury has a knack for saying overly-defensive things that come off sounding insincere. Consider the last line from this story in the IHT:

“The dollar has been the world’s reserve currency since World War II and there’s a reason,” he said. “I put the U.S. economy up against any in the world in terms of competitiveness.”

Well, that’s not particularly reassuring.

So what’s caused the dollar to fall even faster? Fears that the Federal Reserve will cut rates again. Cutting rates may accelerate inflation and further send the dollar down. Stay tuned.

Fed Chairman Ben Bernanke told congress to expect slower economic growth in the coming months, that the effects of the housing market meltdown hadn’t hit bottom and that the Fed would continue to watch for inflation. From the NYT’s story: Mr. Bernanke suggested that the two rate cuts in September and October should be enough to prevent a recession, though he quickly added that the central bank will be watching for new signs of trouble.

Bernanke said the economy had demonstrated a great deal of resilience over the past several months but that spikes in oil price were brewing inflationary pressures.

The overall message to congress: stay cool, things will get a little worse though, stay cool and things should be fine.

Of course nobody in congress wants to hear this. Legislators, the arbitrators of fiscal policy, want to do something–anything–to get things going. Just listen to what Senator Schumer said right before Bernanke came in front of the legislators, as reported by the WSJ:

“I’m very concerned that there may be a bigger storm on the horizon. Quite frankly, I think we are at a moment of economic crisis stemming from four key areas: falling housing prices, lack of confidence in creditworthiness, the weak dollar and high oil prices. Each of these problems alone would be enough of a threat to our economic well-being. But taken together, they are essentially the four horsemen of economic crisis.”

That’s a dude that’s jonesing for something to do. More here:

“I’m very concerned, Mr. Chairman, that none of the regulators, including the Federal Reserve, are acting quickly or boldy enough to deal with the risks we’re facing. A laissez faire hands off attitude might be appropriate if we had any one of these crises alone. But, confronting all of these problems at once should be a call to action because the danger we face is so much greater.”

So the match is on. Bernanke is called on to something (anything!) to turn the economy around. Congress is like a kid with a cold, begging the doctor to give him some pills when the best thing to do is just be cool.

[Thanks to Crossing Wallstreet for the picture.]

(Imagine the following Lol Quote: “Dude, ur economies–deh iz groovy.”)

Federal Reserve Chairman Ben Bernanke is going to throw down in front of Congress Thursday and say why he thinks the risks of inflation and the risk to growth are balanced, MSN reports.

The speech will come a day after Gov. Mishkin told the House Small Business Committee that although market conditions have improved during the last several weeks from “rapid deterioration” in August, “problems could spill over to the market for small business loans,” according to a report by The Washington Post. Catch the YouTube video of his address here.

From the W.Post: He said about 37 percent of small business loans in 2003 were collateralized by real estate assets and 15 percent was secured with personal real estate. “Looking forward, a reduction in the value of their real estate assets clearly has the potential to substantially affect the ability of those small businesses to borrow.”

The Fed is still exploring the link between real estate and business. Might make for an interesting thesis topic for someone.

Greenspan told a group of Brazilian business men that the global economy will acclimate to higher oil prices by consuming less oil. (One has to wonder how much the former Fed chairman made for that speaking engagement!) “The sooner we get the higher prices, the quicker the world economy will accommodate,” Greenspan said, according to a Bloomberg report. “They can be a remedy for high oil consumption, which can result in less and less dependence.”

Yep, supply and demand. That’s how it works. (Kudos, Lolfed for the pic.) Greenspan re-iterated his prediction that the U.S. faced a 50-50 chance of recession–over an unspecified period of time. (safe bet!)

The man did say something interesting though: “The ethanol thing is real.” Ethanol may, at some point, either replace or supplement gasoline as a renewable fuel for automobiles. He did say, however that the efforts of the U.S. government to encourage of corn-based fuels is a “mistake.” The reason? It drives up food prices. Brazil is a major ethanol producer, deriving the substance primarily from sugar cane.

This is the point of yesterday’s Fed post. Information is important to the economy and Greenspan’s talking doesn’t necessarily make Bernanke’s job any easier. Hey, we believe in free speech as much as anybody. But that doesn’t mean it’s appropriate to shout “Fire!” in a crowded economy.