Greenspan on asset prices, 1999

April 29, 2021

–In spite of strong and accelerating economic activity and increasing price pressures, the Fed is maintaining full accommodation with short rates pegged to zero and QE of $120 billion per month.  Might as well nickname it the 4×4 plan, looking for 4% unemployment and 4% inflation.  The curve was mildly steeper at futures settlement, with the thirty year bond up 2 bps to 2.305% and twos down 1.2 to 16.6 bps.  Tens ended more or less unchanged at 1.62%.  The dollar index eased a bit more; now trading 90.67.  The low of the year which occurred in January was 89.21.  The Fed’s unstated goal seems to be to push it below that level, with the help of the administration’s unbridled stimulus plans.  Unsurprisingly, the ten year tip breakeven closed at a new high of 242 bps.  If I heard this correctly, Powell said these levels were consistent with the Fed’s inflation goals.

–Stocks screamed higher late in the day as Powell withheld caution flags and Apple released blockbuster results.  The Fed’s preferred inflation metric, Core yoy PCE prices, is released Friday and expected +1.8%.  I’m not a conspiracist, but if 1.8 works for the Fed in terms of justifying loose policy, and works for the administration who doesn’t want blame for rising prices, then it will be 1.8.  Or 1.7.  

–There is talk that a taper announcement could occur at the Jackson Hole symposium in August. I went back to another interesting speech at Jackson Hole called New Challenges for Monetary Policy, by Chairman Greenspan in 1999.  Though some now disparage the former Maestro, his speeches are great.  This one in particular concerns asset prices, which were rallying wildly in 1999.  (Sound familiar?)  While Greenspan gave a lot of thought to the probability of unsustainable asset prices, the current Fed ignores such risks.  Maybe if you don’t talk about it, there won’t be a repeat of the 2000 “correction”. Here are just a couple of snippets from the 1999 speech:

I should like as a backdrop to this conference on the challenges confronting monetary policy to focus on certain aspects of one of the issues that will be more broadly discussed later this morning: asset pricing and macroeconomic performance.On such judgments of value rest much of our economic system. Doubtless, valuations are shaped in part, perhaps in large part, by the economic process itself. But history suggests that they also reflect waves of optimism and pessimism that can be touched off by seemingly small exogenous events.

FRB: Speech, Greenspan — New challenges for monetary policy — August 27, 1999Footnotes. 1 For example, Erik Brynjolfsson and Shinkyu Yang, “The Intangible Costs and Benefits of Computer Investments: Evidence from the Financial Markets,” MIT Sloan School, mimeo, April 1999.. 2 The Financial Accounting Standards Board (FASB) will require that the cost of repricing of options be charged against income starting later this year. …

–A final sad note: Juan Joya Borga, El ristas, or “The Giggles” passed away.  Best known for this interview, which wasn’t actually about bunds, but was tastefully dubbed with fake subtitles:  

Posted on April 29, 2021 at 5:16 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply