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Minyan Mailbag: Fedspeak


We don't think they even really know...


Dear Professor Succo,

Does it seem to you that the fed talks out both sides of their mouth? They raise short rates, but at the same time, with the coupon passes and repos, aren't they REALLY providing more liquidity. Supposedly they do not want to have excess liquidity, causing rampant speculation in say, housing.

So does that not suggest they have yet to take away the punch bowl. MZM money supply was up $40 billion dollars as of today. Any thoughts would be greatly appreciated.

Minyan Rhino


The Fed (Fedspeak) never really says what it means.

The monetary aggregates as they exist are very difficult to decipher as to what is really going on with Federal Reserve policy. We don't think they even really know: there are so many variables at work within the economy that equilibrium is never really attained.

For example, we can look at M3 and see that around 2001 they had it growing year over year at 12%. Now that growth is 6%. But that growth is still higher than GDP, so we can roughly call it accommodative. But is it less accommodative than in 2001 when velocity was falling off of a
cliff? Velocity is falling now, but not like it did right after the terrorist attack.

All these variables interact differently over time and price.

My best guess is that the Fed is trying to be less accommodative to see how the economy responds. So far it seems that it is not responding well.

We look at liquidity numbers that try to incorporate velocity and those numbers are dropping rapidly.

Prof. Succo

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