June 19, 2012. Is this problem the Fed’s to solve?

Going into the FOMC announcement tomorrow, one can be forgiven for asking WHY the Fed needs to do something. Corporate profits are at a record high of GDP. Cash hoards at corporations are regularly noted in the financial press. SPX is as high as it has been for three years and is less than 5% below its recent high. Consumption as a percent of GDP is near record levels, even after the supposed “deleveraging” and housing bust. [I suspect it is within this context that Obama said the ‘private sector is doing fine’] Ten year treasury yield is around 1.60%. If it’s not broke, don’t fix it?
This panel shows SPX. Not exactly a dire picture.

The panels below are derived from St Louis Fed data. The first is Corporate Profits as a percent of GDP. Over 12% and rising. The second panel below shows Personal Spending as a percent of GDP, higher than it has been for most of the past decade, in fact near the highest it has ever been. Do either of these graphs indicate stress that needs to be addressed?

FRED Graph

FRED Graph

The concerns about financial stress are due to the interconnected health of the global banking system. The true US economic stress that the Fed keeps pointing to, perhaps rightly so, is the elevated unemployment rate. But at this point, is that a problem that needs to be addressed by monetary policy?
We know that the velocity of money has collapsed as the monetary base has exploded. The money simply isn’t flowing through the economy.
Zerohedge ran a piece citing Goldman’s belief that furhter accommodation will be undertaken by the Fed at this meeting. http://www.zerohedge.com/news/part-its-new-qe-qa-goldman-warns-possibility-50-75-billion-flow-program
One course of action that GS mentions is the possibility of extending the period that the Fed vows to keep rates low for ANOTHER three years. This idea, (and several others in the piece and the financial press in general), completely dismisses the federal government as an agent of change that might influence employment trends. We know that currently the Fedl Gov’t spends $1.50 for every $1.00 of tax revenue collected.  Is that one of the factors causing business hiring restraint? Is it that far-fetched that a new administration could be elected and change the trajectory of business confidence regarding certainty of regulation/taxes and therefore the propensity to hire?

I’m sure the Fed will take Goldman’s ‘advice’ and attempt additional monetary ease. I’m just not sure that it matters.

Posted on June 19, 2012 at 2:07 pm by alexmanzara · Permalink
In: Eurodollar Options

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