ebook essays pieces of the puzzle
Friday, April 1st, 2011
dear ben

Given that you’re busy, you probably don’t read pix (or even go to puzzle central) that often.  I’ve been arguing that it’s time for you to let up a bit, that maybe (like God) you should rest and see if your current creation can be pronounced as good.

The chart above comes from the Bloomberg terminal.  The SEC may not be able to pay the going rate, given the attempts to starve it and all, but you’re coining it lately, so you probably have one in your office.

Anyway, when I look at the top part of the chart, I see your target for the Fed funds rate, along with the yield on the ten-year note.  Your gang has been pretty methodical, waiting until there’s lots of evidence, but market rates flop around — falling during last summer’s fake-out, then rising quite a bit since you started that QE2 thing in November (50-100 basis points across the curve, in fact).  And market-based indicators of inflation have jumped a fair amount during that time.

I must admit that I am a little peeved that your buying of bonds and pumping up the Fed’s balance sheet means that my chart doesn’t tell as clear of a story as it used to, but everyone knows you’ve been pulling out all of the stops.  There are a lot of indicators for you to look at, but I keep seeing ones that make me wonder whether you should be hedging your bets.  The ISM numbers released today (and shown at the bottom of the chart) fit into that category.  So do the statements from the CEO of Wal-Mart and others that labor in the real economy; if they are expressing worries about growing inflationary pressures, it’s possible that you’ve taken things too far.

A modest turn of the faucet away from the wide-open position might even cause Treasury rates to fall.  And the folks in the commodity pits could decide that it’s not a one-way trade after all.  Both possibilities would be better for the economy, not worse for it.  And, while you’ve taken to talking about the stock market, it’s already doubled and it’s not in your mandate anyway.

On the heels of an O.K. employment report this morning, commodities tumbled a little, so you’d have expected the hot ISM numbers ninety minutes later to keep the pressure on.  But at the moment that they were released, so was Dudley’s speech, and he sounded the “all clear,” making it another in a long line of risk-on days.

There are some cool intraday charts on that Bloomberg terminal that show what’s happened in the hours since.  You might think it’s coincidence or not important in any way.  I’m just one guy, but I disagree.

Watching the screens but thinking long-term,

tom

P.S.  I’m looking forward to your upcoming press conference.  Is there any way that I can get a badge?