Tightening? Not a Tightening?February 23, 2010 Posted by: Joe Morgan, CFA
Let's tighten it up now
Do the tighten up
Everybody can do it now
So get to it
- Archie Bell and the Drells
Last week, the Fed raised the discount rate from 0.50 percent to 0.75 percent and also shortened the term of loans allowed through the discount window from 28 days to overnight.
But was this a tightening in monetary policy? Practically speaking, the answer is "no."
Today, less than $15 billion in loans outstanding will be affected by this move, compared to the $1.2 trillion increase in the Fed's overall balance sheet during this crisis. The phrase "extremely nominal" comes to mind.
More importantly, Ben Bernanke stated just two weeks ago that this move was on the way and made it clear the action should not "lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy."
Consider it a "normalization" of relative rates.
But doesn't any move toward "normal" from today's decidedly "un-normal" situation indicate a tightening of some kind? If this rate move only affects the minutest number of borrowers, doesn't it still bring us one step closer to the move that affects the rest of us?
Possibly, although I believe that move is still in our distant future.
In fact, the day after the discount rate was normalized, the consumer price index for January revealed its first monthly decline since 1982 for the so-called core measure that strips away food and energy prices.
Inflation worriers are looking forward with the strongest of binoculars.
Gaming the Data?
There is speculation from those who watch such data that the Chinese continue to be net buyers of U.S. Treasuries through UK and other investment vehicles. These purchases show up through direct bidding and are not allocated to China in the traditional TIC data (so it looks like China is selling).
I mention this fact, not to argue one way or the other, but as a reminder of exactly how frail most data is. The same can be said of many economic statistics including the CPI...Read More