Feb 1. Yields grind lower, but positive impact is questionable
–Bernanke testifies before Congress today about the economic outlook and perhaps about the decision to forecast rates and policy far into the future. There was a piece on Business Insider yesterday reviewing forecasts of major financial institutions from the previous year, for the unemployment rate, CPI, ten year treasury yield, GDP and EUR/USD. http://www.businessinsider.com/the-nostradamus-awards-the-best-and-worst-economists-of-2011-2012-2 Most were substantially wrong, especially with regard to the ten yr note yield (too high) and CPI (too low). GDP was actually 1.7, average of guesses was 2.6. So what makes the Fed think it can do much better over a longer time frame than these professionals with significant resources at their disposal? Even the CBO projects GDP for 2013 way below the Fed’s estimate. http://www.zerohedge.com/contributed/cbo-report-omg Indeed, skepticism about the Fed’s latest move towards more “transparency” is growing. Bill Gross’ monthly missive was important in that he notes negative aspects of low rates with regards to growth, and alludes to economic distortions, as did a piece in the FT. The Pimco piece echoed Bullard’s (St Louis Fed) analysis from Sept 2010, Seven Faces of the Peril. http://research.stlouisfed.org/publications/review/10/09/Bullard.pdf The point is that these comments indicate erosion of confidence in the Fed at the margin; uncertainty may actually increase.
–Other news today includes Job Claims expected 371k. Treasury vol faded from a strong open yesterday, though there was late buying of EDU and EDZ straddles. New low in red/green pack spread just below 26 bps.
