Some Democrats have already expressed outrage that the GOP leadership is trying to strong arm the Fed and challenge its independence. Many believe the GOP is simply trying to prevent anything that can help improve the economy before next year’s election. Others may simply believe it is high time that this unelected powerful body is reined in.  

 I am more interested in their motivation. Or more to the point, if they believe the letter would alter the Fed’s course of action. Several people have criticized Chairman Bernanke for not exercising his authority during the 2008 credit crisis. Some have indicated that Bernanke ceded some authority over to Treasury Secretary Hank Paulson during the intense negotiations over what to do with Lehman and the various institutions that stood on the brink in September of 2008.

Former FDIC Chairman Bill Isaac pointedly noted in his book on the crisis how phone logs indicated that former New York Fed President and current Treasury Secretary Tim Geithner had been in contact with Paulson and other folks connected to Goldman Sachs much more often than with his boss at the Fed.

I am curious whether there is a notion out there that Bernanke is a soft touch who would acquiesce to such pressure.

He did not in this case as the Fed carried out it much anticipated “twist” strategy. It does seem to make more sense than another round of quantitative easing.

AS for the letter it will be interesting to see what the fallout is. The wording of it is vague enough that the authors could claim victory simply by the fact that there was no QE3, though that most likely was already off of the table.

The move would actively attempt to narrow the yield curve. A yield curve inversion (when longer-term rates are lower than short-term rates) is usually a sign of an oncoming recession, so it is odd the the Fed would actively attempt to narrow the yield curve.

The market reaction was interesting but I would like to know what active traders think of the move. Please give us your opinion.

Hence, instead of the usual prattle about whether a president should be seen vacationing during tough economic times or when major events occur, a new word is created — optics — and we discuss whether his judgment is skewed because he should know how it looks or more accurately how the other side would try and exploit it. 

So we ignore the silliness of the same media pundits who defended president Bush 41 for spending time in Kennebunkport during the first Gulf War, Bush 43 for setting a record for vacation time much of it during myriad of crises, criticizing President Obama. And we ignore that those defending Obama where the same ones talking up the insensitivity of past presidents taking vacation time amid crises.

The script goes, “It is not whether President Obama is shirking his responsibilities by taking a long vacation in a snooty playground of the rich, Martha’s Vineyard, it is how that looks to people who are struggling in a weak economy with high unemployment.”

Stop it. It is a boring, lazy story borne from having nifty photos and needing to do something with them and our bifurcated media world where people go to get their personal prejudices validated.

All presidents deal with issues 24-7 and can get the necessary information delivered to them. Everyone knows this, but we have pictures.

This tendency is troubling. Not because of the optics but because coverage of important and albeit complex issues continually get pushed aside for silly talk. It is not as if this is necessitated by a slow news environment. There is much to report on. We should be hearing about what policy a president is enacting, or not, to help improve the situation.

That is the great thing about covering trading, it is pretty easy to determine the importance and the impact of results. Prices move and they have a real impact; not on perception but in real dollars and sense.

A few years back the word was “green shoots,” referring to economic progress following the “Great Recession.”  Turns out most of those green shoots withered on the vines and we are just now talking about some of the policies and people who helped get us in the mess we are still trying to extract ourselves out of.

I am a little surprised that no one spoke of the optics of the Fed’s Jackson Hole symposium. Especially given that Fed Chairman Ben Bernanke did not offer anything new. He did throw it back to the President and Congress. Perhaps they can work on moving the economy forward and forget about the optics of it all.

Stop with the buzz words and start covering detail.

The Fed is telling us that it will maintain a zero interest rate policy—the same emergency policy that has been with us since December 2008 — for nearly two more years. 

Fed Fund futures had only priced in a 25 basis point increase in its June 2013 contract prior to the announcement so this shouldn’t have been than much of a shock. But I have to admit it shocked me.

Perhaps if they announced a third round of quantitative easing (QE3) it would have seemed too much of a reaction to the recent Standard & Poor’s downgrade of U.S. credit. And the market doesn’t seem afraid of U.S. credit as 10-year Treasury note futures rallied to all time highs (record low yields) so there is no immediate need for the Fed to starting buying up more Treasuries (see chart below). But it needed to acknowledge the recent weakness in the economy and at least appear to be taking some action.

It did, however, leave the door open for QE3: “The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.  It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.”

We have been critical of the Fed who have appeared to be talking out of both sides of its mouth during this crisis. At one point claiming the economy is improving and at the same time keeping rates at zero.

There was no confusion here as the outlook was grim.

More confusing is the market’s reaction. Equities where on their way to a pretty strong rebound when the announcement caused equities to tank to new lows. Then just as quickly they rebounded to close on their highs.

While this type of whipsaw reaction is seen during Fed auctions, the results of which are sometimes hard to read, their statement was pretty straight forward. It was either good news or bad news. I began wondering if conspiracy theorists would start to bring up the mysterious, “Plunge Protection Team”.

The market reaction was so weird it caused Andrew Wilkinson to write today: “The equity market’s strongest rally in several years is about as misplaced as had parents thrown a celebratory party for an eighth-grader after hearing their child would spend the next two years at the same grade level.”

I think Andrew is looking at the whole more than the parts. Remember the initial reaction was extremely negative. What happened next is a mystery to me as well, though I think it is related to the perma-bull mentality that is still rampant in the equity brokerage world. The internet was full of analysis from this space claiming we are at an historic buying opportunity. And yesterday’s S&P low represented a 20% drop in the index over one month. Surely the market was oversold and there is a portion of the investing world looking to buy a major bottom, and every serious downturn produces claims that this is a major bottom. Also, whether or not you subscribe to the PPT conspiracy theory, there is ample proof that the Fed will take action to attempt to prop up equity markets.

There have been numerous comparisons about what is going on in the U.S. economy with the Japanese lost decade (now decades). With the projection of a five-year period of zero interest rates, no time has that comparison been more apt.

Bernanke looked more comfortable in this second soiree with journalist, even if he didn’t let much slip concerning timelines the FOMC is looking at. It’s still a good idea to hear what the head of the Central Bank is thinking. Below is the webcast from the conference.

What questions were you hoping Bernanke would address? How does your outlook for the economy change as a result of what Bernanke says here? Be sure to check out our Mid-Year Economic Outlook that will be published in the July issue of Fututres on June 27.

Broadcasting Live with Ustream.TV

Today’s employment situation report showed growth in nonfarm payrolls of 54,000, about 120,000 fewer than were expected and that expectation was dropped this week due to other weak economic news. Namely Wednesday’s Institute For Supply Management’s (ISM) manufacturing index.

 ISM  dropped to 53.5 in May from 60.4 in April, the largest month over month drop since 1984.  The new orders component slipped to a reading of 51. Readings below 50 indicate a contracting economy. ISM has become one of the most followed economic indicators and if you have any doubt follow the below ISM chart along with a chart of the Dow Jones Industrial Average Index. Dips in ISM have been followed closely by drops in the stock market.

Federal Reserve Board Chairman Ben Bernanke announced in April that the Fed would complete QE2 this month in the Fed’s first ever press conference, though it was not clear whether or not he ruled out a QE3. What was clear was that the Fed would continue reinvesting principal payments from its securities holdings.

That is significant as ending that practice would be the first step in an exit strategy. That exit strategy seems to be further away today than it was last week, but if you were paying close attention to the markets you would have seen that expectations of Fed tightening have been pushed back fairly dramatically since April 1.

Despite what was on the surface a strong employment report for March, which was released on April 1, that is when Fed Funds began rallying sharply. On April 1 the expectation based on fed funds futures was for a 25 basis point tightening by December, now it indicates no change. The June 2012 contract indicated on April 1, rates would have risen to between 0.75%-1% by June 2012,  now it is pricing in no change. The October 2012 contract indicated on April 1 that the rate would be between 1%-1.25% by that time, now it is indicating a rate of 0.50% on the eve of the 2012 election.

Given these numbers, talk of a double dip recession doesn’t seem so crazy.

While the Fed made sure the banks got theirs, there has been no sign of diligence from the Fed on the rest. Why didn’t  someone ask Ben specifically what have you done to “restore the flow of credit to American families and businesses” or more specifically, why didn’t you make the largesse you offered the banking sector conditioned on restoring that flow of credit.

 The troubled asset relief program (TARP) was passed to a great extent on Bernanke’s urging and one reason certain Congressman voted for it was to preserve home ownership. Neil M. Barofsky, special inspector general for TARP, noted in an op ed piece, “The legislation that created TARP, the Emergency Economic Stabilization Act, had far broader goals, including protecting home values and preserving homeownership. …Treasury promised that it would modify those mortgages to assist struggling homeowners. Indeed, the act expressly directs the department to do just that.”

Obviously this is an issue for Treasury but the Fed chief was paired at the hip with Treasury Secretary Hank Paulson in urging Congress to pass TARP and as mentioned above many in Congress voted for it based on a promise to modify mortgages. Remember the crisis in large part had to do with banks holding toxic assets of bundled below water loans. The banks got a do over but millions are still facing foreclosure based on unrealistic valuations that banks have already been compensated for. Now the banks are making record profits and foreclosures are still a drag on the economy. How could the two not have been tied together?

And any time Ben wants to talk about our “strong dollar policy” and how Fed policy has affected the dollar we will be willing to listen.

Bernanke defended QE2 saying “the second round of [security purchases] was affective.”

He said it helped equity markets, reduced spreads and volatility; adding that the economy responded to it with the same type of reaction as would be expected with an ordinary easing. He also said that he stated all along that it would not be a panacea.

This brought on the question, if it worked so well and since unemployment is still high why not continue it? His repsonse is the closest he came to a definitive statement saying, “the tradeoffs are getting less attractive,” and he specifically pointed to rising inflation and inflation expectations. That he acknowledged inflation is a victory for those frustrated with what they have viwed as the Fed’s ongoing denial of inflation.

While it appears that there will not be a QE3, it also seems that an exit strategy is still far off. After all the purpose of quantitative easing according to Bernanke was the same as a typical easing (rate cut), which would be impossible because the Fed Funds rate was already at zero. And easing is usually followed by a period of stability before positive growth leads to tightening. The Fed said, “the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings,” and also that economic conditions, “ warrant exceptionally low levels for the federal funds rate for an extended period.”

That was translated in the press conference to several meetings. So an exit strategy is far off, and given that any rate below 3% could fairly be called exceptionally low, normal policy is years in the future.

One critic of QE 1 and  2 is Kessler Investment Advisors, who point out that it did not do its job of bringing down longer-term rates. They support a recommendation by David Rosenberg, Chief Economist of Gluskin Sheff, for another round of QE but with no additional purchases, just swap the majority of short-term instruments purchased in QE2 with longer-term debt.

With our debt problems it may make sense to spread out the purchases.

Next what questions should have been asked of Bernanke.

The event is creating quite a stir but I am a little confused if people think that Fed Chief Ben Bernanke could be less opaque live than in a canned statement or in front of a Congressional hearing. Or more to the point, if what he says can tell us more about the direction of the economy than today’s S&P Case-Shiller Home Price Index, which showed prices in February for the 10-and 20-city composites are lower than a year ago and only slightly above their April 2009 bottom, or Thursday’s GDP report.

Case-Shiller’s 10- City Composite fell 2.6% and the 20-City Composite was down 3.3% from February 2010 levels.

David M. Blitzer, chairman of the index committee said, “There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing.”

The report goes on to note that, measured from their peaks in June/July 2006 through February 2011, the peak-to current decline for the 10-City Composite and 20-City Composite are -32.5% and -32.6%, respectively.

I guess that answers the question as to what part of the economy is declining to offset rising energy and food prices, which allows the Fed to claim inflation is not a problem. Unfortunately it doesn’t help homeowners that they are losing equity while shelling out more for everything they must purchase.

John Prestbo, editor and executive director of Dow Jones Indexes, talked about today’s market action in a statement while offering caution over tomorrow’s press conference. He wrote, “With today’s flurry of positive earnings reports, it’s no surprise that investors responded by pushing the Dow up to its highest levels in nearly three years. This wave of optimism could be challenged within the next 24 hours, however, as the market will undoubtedly be riveted to the Fed’s first-ever press conference tomorrow.”

The Wall Street Journal online offered a guide on keywords to listen to. Pardon me if I sound rude, but we are talking about parsing the words of a man who claimed their was little risk of a deepening credit crisis a few months before the worst economic crisis since the Great Depression and  someone who has refused to  acknowledge the inflation staring every consumer in the face. He also said there was little risk of moral hazard following the sweetheart deal the Fed put together for Bear Stearns and watched as Lehman Brothers wilted while expecting the same treatment.

In the past, bad economic news moved the markets in a positive direction because analysts assumed it would result in lower interest rates from the Fed, but with the zero interest rate policy now 28-months old and two rounds of quantitative easing nearly complete, would more easy monetary policy really be good news?

The press conference could give the media a chance to pin Bernanke down.  Ernie Patrikis, a regulatory partner with law firm White & Case who is also a former general counsel of the New York Fed and former alternate member of the FOMC, sees it as a good thing but wants more. “Why isn’t there a press conference after each meeting?” he asks. He goes on to say in a White & Case release, “There are complaints about the loose monetary policy under Chairman Greenspan. I do not recall Congressmen criticizing him for that then. Might the press do a better job?”

I guess we will find out tomorrow but if Bernanke says anything that causes the markets to move off its lofty (nearly-three-year) highs, will anyone be demanding a repeat performance?

Not sure what the significance is other than to confirm that Bill Gross is a good trader as Treasuries have dropped precipitously since August.

Oddly enough that is when Federal Reserve Chairman telegraphed his decision to launch a second round of quantitative easing. The Fed announced in November it would purchase $600 in U.S. Treasuries. That is a big headwind to sell into.

When we spoke with Pimco CEO and Co-CIO Mohamed El-Erian for our January issue he would not say if he thought the long-term bull market in Treasuries was over but did say, “Given how far yields have come down during the last 20 years, there is no longer the same room for U.S. Treasuries to rally.”

And Pimco had already announced it is moving into the equity space. El-Erian said they were moving in this direction,  “because to be relevant you need to be in a space that contributes to an overall solution.”

 Apparently that solution includes fewer U.S. Treasuries.

“One needs to call what is going on with agricultural commodities for what it is: A PANIC. Fears of food shortages are everywhere that has created a hoarding mentality and an escalation of what seems to be never ending rising prices.” 

This is from a trusted source who follows the markets closely. He is commenting on the huge rally across the commodity sector. It struck me as interesting on the heels of recent blogs I wrote regarding inflation. It is one thing to mention there are strong visible signs of inflation while the Federal Reserve is basically reporting none but quite another to note a crisis situation.

Who should you believe? Well the markets do not lie. Yes this is only food stuffs, what about energy? Crude oil has risen from below $40 at the beginning of 2009 to recent highs above $90. This is going on during a period the Bureau  of Labor Statistics (BLS) and the Federal Reserve are reporting virtually no inflation. The Fed, for the first time, in its January FOMC minutes acknowledges rising commodity prices but dismisses its affect on overall inflation.

Perhaps we should add crisis of confidence in official reports to our list of things to worry about. As the financial crisis—in all of its forms—took root over the last few years we have written on several occasions regarding the disconnect between government reporting and reality. How our leaders denied the credit problem up until a bailout became a necessity. Now they are saying it is ok to print money (Quantitative easing) because there is no inflation, when that is clearly not true.

How can a treatment be the right one when the diagnosis is clearly wrong?