Wednesday, June 07, 2006

6% Fed Funds Rate - "Monetary Policy Nirvana"

From the Wall Street Journal:

Economic Rehab

"The stock, bond, currency and commodity markets are bouncing around wildly. While there are many crosscurrents, monetary policy and economic data are front and center in day-to-day market volatility. As a result, some market observers are trash-talking the new Federal Reserve Board chairman, Ben Bernanke, and blaming him for all sorts of perceived missteps."

"This is unfair. Mr. Bernanke is doing a fine job. The inflationary pressures he is fighting today were baked in the cake before he arrived. Monetary policy was overly accommodative for too long, and even after 16 rate hikes the Fed has not yet reached neutral. Weaning investors, home builders, hedge funds and proprietary trading desks from 50-year low interest rates is like forcing them to quit smoking: It's good for the health of the economy, but it hurts and they are complaining loudly."

"Historically, housing has been a solid leading indicator of business cycles, but the special circumstances of recent years suggest that this time it is sending a misleading signal. And while some believe that a slowdown in housing will undermine consumer spending, this fear is overblown. Cash-out financing (or mortgage equity withdrawal) may have increased spending for those who took advantage of low interest rates to refinance, but every dollar of borrowing was funded with someone else's savings."

"In other words, there is little evidence that rates have reached a level that is detrimental to the economy. The Fed is not tight; it is just less loose. This can be seen in real time by watching market-based indicators. Commodity prices remain elevated and the dollar continues to weaken; both suggest excess money creation. Moreover, the economy has not experienced a recession in over 45 years without the federal funds rate rising above nominal GDP growth. In the past year nominal GDP growth has been 6.9%, so with the federal funds rate at 5%, monetary policy is still accommodative."

"Nonetheless, the Fed is very close to a neutral monetary policy. Using nominal GDP as a target, and looking back historically, a neutral rate is likely close to 6%. If the Fed could get rates to this level soon, the economy could continue to grow based on underlying entrepreneurial activity and productivity -- a rate estimated to be 3.5% or 4% per year. A neutral rate would also put a lid on inflation, stabilize the dollar and cap commodity prices, including oil. A 6% federal funds rate would be monetary policy nirvana."

-Hat tip to ChicagoFinance for this piece.

33 Comments:

Blogger grim said...

From the AP:

Consumers borrow at rapid pace in April

Americans increased their borrowing in April at the fastest pace in 10 months as credit card spending and auto loans both picked up.

The Federal Reserve reported Wednesday that consumer borrowing rose at an annual rate of 5.9 percent in April, a significant increase from a tiny 0.8 percent gain in March.
...
The 5.9 percent rate of increase for overall borrowing was the biggest gain since borrowing rose at a 6.8 percent rate in June of last year.

The increase in dollar terms was $10.6 billion, which pushed total consumer credit to a record $2.17 trillion. The Fed’s measurement of consumer credit does not include mortgages and other loans secured by real estate.

6/07/2006 06:26:00 PM  
Anonymous Anonymous said...

Someone here should write a how-to on wikiHow for "Understanding Federal Monetary Policy" for the average American.

Anyway, I was on there to search real estate and there's not a whole lot.

If it was there, you could re-link to it every time someone asked the same question over and over.

6/07/2006 06:49:00 PM  
Anonymous Anonymous said...

"And while some believe that a slowdown in housing will undermine consumer spending, this fear is overblown. Cash-out financing (or mortgage equity withdrawal) may have increased spending for those who took advantage of low interest rates to refinance, but every dollar of borrowing was funded with someone else's savings."

Someone else's savings...yeah, sure.

6/07/2006 08:01:00 PM  
Blogger RentinginNJ said...

Someone else's savings...yeah, sure.

Well I guess they are counting China as “someone else’s savings” now. The savings rate in this country is negative.

6/07/2006 08:30:00 PM  
Blogger RentinginNJ said...

Americans increased their borrowing in April at the fastest pace in 10 months as credit card spending and auto loans both picked up.

Interesting article in light of the news earlier today that that home refinancing applications dropped to their lowest level in a year. Looks like the “housing ATM” is running out of cash and people are turning back to borrowing the old fashion way; with high interest credit cards.

6/07/2006 08:35:00 PM  
Blogger Richie said...

I don't mind the rate increases. Only helps my savings account!

6/07/2006 08:53:00 PM  
Anonymous Anonymous said...

Americans are back to borrowing the old fashioned way - on credit cards.

And, I don't believe the apologists who say that Americans need credit cards to pay for lifes necessities because their salaries are not keeping up.

Designer clothes, IPODS, Premium Denim, Dinner for two at $300 are not necessities.

Certainly not in the NYC area or the suburbs where everyone is walking around with IPODS, $300 Jeans, expensive cell phones, & driving around in expensive Sedans or SUV's.

I always wondered how the average 20 'something' you see has so much disposable income. Either they are making $200,000 a year, or they are putting everything on credit cards.
The majority of people in the region aren't even homeowners, but spend over $2,000 a month on rent.

Now rent & paying credit card debt is sure a great long term plan, right???

I have heard some scary credit card stories. Some people have total credit card debt of $40,000, $50,000 or even more.

6/07/2006 08:58:00 PM  
Blogger chicagofinance said...

Just guessing - people paying their taxes with credit cards?

I know of many examples.

6/07/2006 09:01:00 PM  
Blogger chicagofinance said...

www.pay1040.com

6/07/2006 09:03:00 PM  
Anonymous Anonymous said...

Its all a pathetic front & act anyway.

People in NYC act & think that they are better than others because they wear expensive designer clothes put on a credit card & they drive around in expensive SUV's & European Sedans.

In this economy, you don't even need a high paying job to succeed as a consumer.

Many people working in retail act like they are so happy & have everything in the world. We should all quit our jobs, become $15 retail salespeople and supplement our income on credit cards.

On shows like Real World, Sex in the City, American Idol & the other Reality TV garbage, 'Work' meaning a real job is not part of the equation.

The media glorifies stupidity, mediocrity, & over consumption for the seasons 'must have' item.

6/07/2006 09:14:00 PM  
Blogger grim said...

I didn't realize you could even pay your taxes with a credit card.. But then again, I'm the guy who didn't understand why anyone would go to one of those "pay-day loan" joints either..

grim

6/07/2006 09:38:00 PM  
Anonymous Anonymous said...

Is Wal-mart getting their pay day loan status approval?

6/07/2006 09:41:00 PM  
Anonymous Anonymous said...

On the $2000.00 rent issue, we pay $2200, but in includes heat, and I ran the numbers last weekend that Grim linked us to (something like 100.00 in rent equals approx. 12000 in mortage; how reliable is this?) and we couldn't live in anything at all like our duplex brownstone now, which is near the Path. So, while the rent is ridiculous (over 26,000 per year, ouch!), as most people say around this blog, it is much less ridiculous than a higher mortage on a POS or less rent in a dirty, unsafe neighborhood or a monumental commuter.

By the way, I got the IPod and cable too, even though I still drive the old Subaru and have blue jeans that we dark, dark, dark about 5 years ago but have faded and I still wear them.

It's all about choices and a little luck and a lot of hard work. You need the luck, though, in NYC, I think.

6/07/2006 09:59:00 PM  
Anonymous Anonymous said...

Chicago & Grim,

I immediately made the same assumption too before I saw your posts....noting that credit card debt increased significantly during the month of April 15th, can't be a good indicator....

Andy

6/07/2006 10:39:00 PM  
Blogger minutesfromNYC said...

The media glorifies stupidity, mediocrity, & over consumption for the seasons 'must have' item.

Especially MTV. They have to influence the younger generations to be exessive, demanding and ignorant.

6/08/2006 07:11:00 AM  
Blogger delford said...

Then lest just get it done and do 50 or 75 bp at the end of JUne. This babay step nosnense caused the nonsense to continue.

6/08/2006 08:38:00 AM  
Anonymous Anonymous said...

To the guy in the duplex, you live in DT JC. I live theere too and in the historic downtown area I feel like the people are, what the word for it ..... not Hobokenish. People in Jersey City while they have money are definately not as flashy and don't spend the same. There also are whats the term ... more beatniks than other places in the NYC area. It is my belief that people seeking to be away from the stereotypes have actually given JC its housing demand, because while I love where I live it is definately sketchy at times and not cheap. I think most people living there are a little more realistic about their finances i.e zero credit card debt and a low car payment or they own an older car. This excludes Newport, which is really like a Hoboken extension.

Now if only the housing prices would fall back to reasonable levels all would be good again!!

6/08/2006 09:22:00 AM  
Blogger chicagofinance said...

Hey - no Hoboken bashing!

I strive to be the bo-ho/beatnik financial planner. ;-)

6/08/2006 09:32:00 AM  
Anonymous UnRealtor said...

"I didn't realize you could even pay your taxes with a credit card."

You can, but the credit card companies charge a "processing fee" of 2-3%!

I wanted to pay my taxes on the credit card to rake in more rewards points, then pay off the balance in full.

Does this survey account for people who pay off their credit cards in full each month?

6/08/2006 01:11:00 PM  
Anonymous UnRealtor said...

"Especially MTV. They have to influence the younger generations to be exessive, demanding and ignorant."


Their shows "Cribs" and "Sweet 16" are a disgrace.

In "Cribs" you have one idiot after another pissing away all their money on $180,000 cars as if they'll have a gold record on the charts forever.

(Compare against the episode of "Behind the Music" for "MC Hammer" where he went bankrupt months after finishing construction of a waterfall-equipped hilltop mansion.)

On "Sweet 16" you have moronic parents raising vacuous, materialistic robots where they spend $200,000+ on a birthday party.

6/08/2006 01:18:00 PM  
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