Tuesday, October 26, 2010
Friday, October 15, 2010
Comments on Ben Bernanke's Speech
Below is the most important part of the speech for monetary policy and gold price. My summary is:
1) The Fed feels the inflation rate is too low and unemployment too high.
2) With interest rates zero, they cannot lower interest rates further. Thus, the only policy tool they have is to increase the balance sheet.
3) But that tool has some disadvantages: a) They don't know the impact and so getting the 'right' size of stimulus is a guess. b) The public does not believe they can reverse course and withdraw the stimulus at the 'right' time.
Ben in this speech says they have to try anyway and they have 'new tools' to withdraw stimulus in a reasonable speed.
4) Thus, the Fed needs to provide additional stimulus to achieve the long-run goals of the Fed.
Impact on gold? As many expected, the impact will be to debase the currency to decrease unemployment. One element that was totally missing from the speech was the impact of the stimulus on exchange rates. The dollar is likely to fall in relation to other currencies with this policy. Then what will other countries do? Stimulate their economy. Result? Got Gold?
Ben Bernanke is really trying to do the best he can. He wants to maximize employment and minimize inflation. Right now, he feels inflation is 'under control' and unemployment is not. Thus, additional stimulus is coming from the Fed and if you have 100% of your assets in dollars, you will feel the pain of higher inflation and low interest rates on bonds. He is saying inflation will go to 2% per year or more. If you are getting 2% on a five year treasury, you will loose money. Gold looks to be golden when Central banks want to devalue their currency and are in a race to the bottom.
================================Part of the speech is below===================
Monetary Policy Tools: Benefits and Costs
Given the Committee's objectives, there would appear--all else being equal--to be a case for further action. However, as I indicated earlier, one of the implications of a low-inflation environment is that policy is more likely to be constrained by the fact that nominal interest rates cannot be reduced below zero. Indeed, the Federal Reserve reduced its target for the federal funds rate to a range of 0 to 25 basis points almost two years ago, in December 2008. Further policy accommodation is certainly possible even with the overnight interest rate at zero, but nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.
For example, a means of providing additional monetary stimulus, if warranted, would be to expand the Federal Reserve's holdings of longer-term securities.5 Empirical evidence suggests that our previous program of securities purchases was successful in bringing down longer-term interest rates and thereby supporting the economic recovery.6 A similar program conducted by the Bank of England also appears to have had benefits.
However, possible costs must be weighed against the potential benefits of nonconventional policies. One disadvantage of asset purchases relative to conventional monetary policy is that we have much less experience in judging the economic effects of this policy instrument, which makes it challenging to determine the appropriate quantity and pace of purchases and to communicate this policy response to the public. These factors have dictated that the FOMC proceed with some caution in deciding whether to engage in further purchases of longer-term securities.
Another concern associated with additional securities purchases is that substantial further expansion of the balance sheet could reduce public confidence in the Fed's ability to execute a smooth exit from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might lead to an undesired increase in inflation expectations, to a level above the Committee's inflation objective. To address such concerns and to ensure that it can withdraw monetary accommodation smoothly at the appropriate time, the Federal Reserve has developed an array of new tools.7 With these tools in hand, I am confident that the FOMC will be able to tighten monetary conditions when warranted, even if the balance sheet remains considerably larger than normal at that time.
Central bank communication provides additional means of increasing the degree of policy accommodation when short-term nominal interest rates are near zero. For example, FOMC postmeeting statements have included forward policy guidance since December 2008, and the most recent statements have reflected the FOMC's anticipation that exceptionally low levels of the federal funds rate are likely to be warranted "for an extended period," contingent on economic conditions. A step the Committee could consider, if conditions called for it, would be to modify the language of the statement in some way that indicates that the Committee expects to keep the target for the federal funds rate low for longer than markets expect. Such a change would presumably lower longer-term rates by an amount related to the revision in policy expectations. A potential drawback of using the FOMC's statement in this way is that, at least without a more comprehensive framework in place, it may be difficult to convey the Committee's policy intentions with sufficient precision and conditionality. The Committee will continue to actively review its communications strategy with the goal of providing as much clarity as possible about its outlook, policy objectives, and policy strategies.
Conclusion
In short, there are clearly many challenges in communicating and conducting monetary policy in a low-inflation environment, including the uncertainties associated with the use of nonconventional policy tools. Despite these challenges, the Federal Reserve remains committed to pursuing policies that promote our dual objectives of maximum employment and price stability. In particular, the FOMC is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate. Of course, in considering possible further actions, the FOMC will take account of the potential costs and risks of nonconventional policies, and, as always, the Committee's actions are contingent on incoming information about the economic outlook and financial conditions.
1) The Fed feels the inflation rate is too low and unemployment too high.
2) With interest rates zero, they cannot lower interest rates further. Thus, the only policy tool they have is to increase the balance sheet.
3) But that tool has some disadvantages: a) They don't know the impact and so getting the 'right' size of stimulus is a guess. b) The public does not believe they can reverse course and withdraw the stimulus at the 'right' time.
Ben in this speech says they have to try anyway and they have 'new tools' to withdraw stimulus in a reasonable speed.
4) Thus, the Fed needs to provide additional stimulus to achieve the long-run goals of the Fed.
Impact on gold? As many expected, the impact will be to debase the currency to decrease unemployment. One element that was totally missing from the speech was the impact of the stimulus on exchange rates. The dollar is likely to fall in relation to other currencies with this policy. Then what will other countries do? Stimulate their economy. Result? Got Gold?
Ben Bernanke is really trying to do the best he can. He wants to maximize employment and minimize inflation. Right now, he feels inflation is 'under control' and unemployment is not. Thus, additional stimulus is coming from the Fed and if you have 100% of your assets in dollars, you will feel the pain of higher inflation and low interest rates on bonds. He is saying inflation will go to 2% per year or more. If you are getting 2% on a five year treasury, you will loose money. Gold looks to be golden when Central banks want to devalue their currency and are in a race to the bottom.
================================Part of the speech is below===================
Monetary Policy Tools: Benefits and Costs
Given the Committee's objectives, there would appear--all else being equal--to be a case for further action. However, as I indicated earlier, one of the implications of a low-inflation environment is that policy is more likely to be constrained by the fact that nominal interest rates cannot be reduced below zero. Indeed, the Federal Reserve reduced its target for the federal funds rate to a range of 0 to 25 basis points almost two years ago, in December 2008. Further policy accommodation is certainly possible even with the overnight interest rate at zero, but nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.
For example, a means of providing additional monetary stimulus, if warranted, would be to expand the Federal Reserve's holdings of longer-term securities.5 Empirical evidence suggests that our previous program of securities purchases was successful in bringing down longer-term interest rates and thereby supporting the economic recovery.6 A similar program conducted by the Bank of England also appears to have had benefits.
However, possible costs must be weighed against the potential benefits of nonconventional policies. One disadvantage of asset purchases relative to conventional monetary policy is that we have much less experience in judging the economic effects of this policy instrument, which makes it challenging to determine the appropriate quantity and pace of purchases and to communicate this policy response to the public. These factors have dictated that the FOMC proceed with some caution in deciding whether to engage in further purchases of longer-term securities.
Another concern associated with additional securities purchases is that substantial further expansion of the balance sheet could reduce public confidence in the Fed's ability to execute a smooth exit from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might lead to an undesired increase in inflation expectations, to a level above the Committee's inflation objective. To address such concerns and to ensure that it can withdraw monetary accommodation smoothly at the appropriate time, the Federal Reserve has developed an array of new tools.7 With these tools in hand, I am confident that the FOMC will be able to tighten monetary conditions when warranted, even if the balance sheet remains considerably larger than normal at that time.
Central bank communication provides additional means of increasing the degree of policy accommodation when short-term nominal interest rates are near zero. For example, FOMC postmeeting statements have included forward policy guidance since December 2008, and the most recent statements have reflected the FOMC's anticipation that exceptionally low levels of the federal funds rate are likely to be warranted "for an extended period," contingent on economic conditions. A step the Committee could consider, if conditions called for it, would be to modify the language of the statement in some way that indicates that the Committee expects to keep the target for the federal funds rate low for longer than markets expect. Such a change would presumably lower longer-term rates by an amount related to the revision in policy expectations. A potential drawback of using the FOMC's statement in this way is that, at least without a more comprehensive framework in place, it may be difficult to convey the Committee's policy intentions with sufficient precision and conditionality. The Committee will continue to actively review its communications strategy with the goal of providing as much clarity as possible about its outlook, policy objectives, and policy strategies.
Conclusion
In short, there are clearly many challenges in communicating and conducting monetary policy in a low-inflation environment, including the uncertainties associated with the use of nonconventional policy tools. Despite these challenges, the Federal Reserve remains committed to pursuing policies that promote our dual objectives of maximum employment and price stability. In particular, the FOMC is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate. Of course, in considering possible further actions, the FOMC will take account of the potential costs and risks of nonconventional policies, and, as always, the Committee's actions are contingent on incoming information about the economic outlook and financial conditions.
Wednesday, October 13, 2010
Increased Production of Natgas
The latest production numbers still show an increased production of Natgas. As many producers have not yet pulled back drilling, this increase could continue for several months.
Tuesday, October 5, 2010
Very Interesting Production Data.
The following chart shows the EIA production data overlaid with Robry's estimated production data. Robry's monthly data is taken and multiplied by the number of days and 1,000 to get a comparable monthly number. (Note mistakes are possible in entering the data or messing up the number of days in a month!). The overall impact is to see results in general are similar. Recently, Robry has shown higher rates of change (eg production rising higher and falling more) than the EIA. Thus, this summer with production rising, Robry shows even higher production than the EIA. Overall, a rather interesting chart that shows what happens with real time data vs several month old data reporting.
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