The All-Dominating Handover

Monday, January 30, 2006

Let me first place a bet. US markets will go up in the first half of this week as I am confident the Fed will inject more than enough liquidity and the FOMC announcement will be leaning on the optimistic side.
The handover of the Fed chair from Alan Greenspan to Ben Bernanke is too important an event to allow anything else than greetings from the bull. Amidst growing fears that the current imbalances in the global economy are not sustainable - loudly voiced by ECB president Jean-Claude Trichet over the weekend - it would be a bad omen if declining asset prices would show otherwise. The owners of the Fed cannot afford a down-move in times of an anyway quite fragile economic outlook that is further burdened by exploding commodity and energy prices in the runup to a seemingly inevitable violent confrontation with Iran.
But the barrage of indicators (after last week's unexpectedly weak GDP data - although not all that unexpected because consumer credit data had shown that Americans were not storming stores wallets in hand recently) will pose an obstacle to the bulls as consensus estimates point towards a confirmation of slower growth. Surf to econoday for this week's macroeconomic indicators. And don't miss out on Tim Iacono's post about good ole' John Snow's attempt to calm the shock.
The strong surge of gold and silver prices over the past 4 weeks should also not be discounted when remembering the strong correlation of precious metals values and future inflation expectations. Gold started on a positive note in early Sydney trading.
While the Fed can be expected to continue its policy of baby-steps by raising the Fed Funds rate to 4.50% - at least this is what markets expect according to David Altig's Fed Funds expectations model - the statement will probably be very brief. Expect it to emphasize the point that future monetary policy decisions will be based on future economic data as Bernanke needs to start off a clean table at the next FOMC meeting at the end of March.
That leaves eight weeks where markets can ponder the pro's and con's for a pause or a continuation of the baby-step policy. In this period we will also get a clearer picture from the second and third reading of last quarter's GDP data. The Capital Spectator had a good post on this last Friday.
For my evaluation of Greenspan's legacy I recommend to scroll to the top and enter "Greenspan" in the "Search this blog" input box on the left side. If you lack time read at least the posts
Your reading saves me from repeating these valid issues one more time.
Rotations In The FOMC
In the Federal Open Market Committee (FOMC) the cards are getting shuffled thoroughly. While George W. Bush announced the nomination of Kevin Warsh and Randall Kroszner to the board of governors - where two seats have been vacant for months and will remain so for another couple of weeks - the annual rotation of voting members from the regional Feds will bring in the following new voters:
  • Jack Guynn (Atlanta)
  • Jeffrey Lacker (Richmond)
  • Sandra Pianalto (Cleveland)
  • Janet Yellen (San Francisco)
The backseats will be taken by the voters of 2005:
  • Richard Fisher (Dallas)
  • Michael Moskow (Chicago)
  • Anthony Santomero (Philadelphia, surprisingly announced his retirement by March 31 from his post last month)
  • Gary Stern (Minneapolis)
While we can be sure from last year's votes for a steady policy of "measured" steps that none of the outgoing FOMC voters exposed himself as either a dove or a hawk the new voters will certainly spend long hours digesting the data input fed to them by their economist teams before they establish their reputation.
This means that all options are open although I have problems to believe in a near end of the current rate cycle for two reasons.
  1. The weakening dollar has to be kept "attractive" to avoid a run to the exit.
  2. Prices are rising more than inflation data shows.
Sitting in the armchair I am happy to be able to offer another hand as well.
  1. If the coming economic data indicate that the Fed's baby-steps have been more effective than anticipated the FOMC will seriously discuss a rate pause in March.
  2. The world will never run out of wonders.
But let's not forget one all-important fact. Although the Fed raised rates 13 times in a row it has failed to close the liquidity tap as M3 figures clearly show. Stopping the publication of M3 will not make the problem go away.
Gentlemen, place your bets.


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