C.M.O. 12.07.2009
Credit Market Overview
December 7, 2009
In the entertainment business there are people who become an “overnight success” which usually means they have been practicing their craft for many years and the “overnight” part comes when they finally get noticed.
Although not nearly as entertaining as show business the credit crisis has allowed more than a few people the “15 minute of fame” as Andy Warhol wished everyone would have. As the kangaroo court kind of grilling Ben Bernanke received last week surely shows; you really do need to be careful what you wish for.
The Federal Reserve Bank of St. Louis’ President, James Bullard has been doing a bit of limelight soaking lately speaking to reporters recently on how the joblessness of the two past recoveries might require a shift in thinking at the Fed.
“When we had this jobless recovery in the 1990’s it was a shock to most economists. Then you went to the 2001 recession and another jobless recovery – somewhat less of a shock. If we get a third jobless recovery, now you have to say we shouldn’t have expected the 70’s and 80’s and 60’s behavior. If a tepid recovery in labor markets is just the new reality; then you shouldn’t be saying, oh, we are just going to keep interest rates where they are based on labor-market issues.”
The timing of Mr. Bullard’s remarks is interesting given the job numbers on Friday but also in light of some of the other actions the Fed has been taking namely the testing of it’s ability to execute reverse repurchase agreements (a mechanism to drain liquidity from the banking system) as well as the reduction in the maturity of backstop loans the Fed makes to banks. The Fed had been making loans of up to 90 days but would now shorten that to 28 days.
“It’s consistent with other moves to slowly get markets less reliant on Fed support, but it’s not a sign of tightening” Michael Feroli a J.P. Morgan economist said. The Fed, to, was explicit in announcing that it’s “reverse-repos” were only a test and not a sign of tightening which was concurred with by Ira Jersey, head of the U.S. interest-rate-strategy group at RBC Capital Markets. “There’s no point in doing large scale reverse repos as long as the Fed is still purchasing assets”.
To the extent that JB’s comments on not waiting for jobs to recover might lead one to believe that he’s in favor of tightening now a few of his other statements should put that notion to rest. For one he’s “advocated to keep the asset-purchase program open but at a very low level, and wait and see what happens, and as information comes in about that program while the federal funds rate remains at zero”.
Bullard was also said to have pointed out at during a speech on November 18th that “the federal-funds rate target typically isn’t raised for 2.5-3.0 years after the end of a recession”.
The markets are not necessarily a believer however as the Fed Funds Futures contract was priced as if there was a 68% probability of a 0.5% Fed Funds rate by July 2010 up from a 42% probability before Friday’s numbers and an 18% probability at this time last week.
Enjoy the week.
Jim Delaney
