What's the Fed *really* doing?

[bart]

A handy way of telling what the Fed is really doing, as opposed to what they're saying:


http://www.nowandfutures.com/images/fed_all_short_term.png


The green line (read on the left hand scale) is actually Total Fed Money (TFM) and includes all the various alphabet soup things over which the Fed has direct control. The thick burgundy line is the annual change rate for that data.
One can easily see the growing money creation rate, starting in early 2001 and peaking in late 2004, that helped hugely to "rescue" the US economy.

The thin black line is also an annual change rate, and adds in the trading activities (in bonds, MBSs, etc.) of the 20 Primary Dealers of the Fed, currently including folk like Goldman Sachs and Citigroup and JPM. GSDS stands for Government Securities Dealers Statistics.

The light blue line is also an annual change rate, and subtracts the total custodial account balance from TFM. It is close to half of the grand total of TFM, currently running around $2.35 trillion. The Fed custodial account includes money from other central banks being invested in TBills, TBonds and Agency (GSE, etc) debt.
It very roughly tracks the value of the dollar.

Overall though, it shows that the Fed is not currently creating money at a high rate and has not been since roughly last November/December. This chart is probably my key chart to help determine when the Fed switches back to inflating at much higher rates.

[zoog]

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Overall though, it shows that the Fed is not currently creating money at a high rate and has not been since roughly last November/December. This chart is probably my key chart to help determine when the Fed switches back to inflating at much higher rates.

Seems inevitable to me that they will have to at some point though.

[Sapiens]

The Fed ran out of Treasuries, the commercial banks can't keep monetary units on their balance sheets if they hold defaulted paper, since the Fed didn't have any more Treasuries they needed the U.S. Treasury to come online, hence the bailout of Fanny and Freddy... What a better way to get Treasuries out and onto the balance sheets of the commercial banks.

They are pretty smart huh?

Don't worry, monetary expansion will resume shortly...

[bart]

The Fed ran out of Treasuries, the commercial banks can't keep monetary units on their balance sheets if they hold defaulted paper, since the Fed didn't have any more Treasuries they needed the U.S. Treasury to come online, hence the bailout of Fanny and Freddy... What a better way to get Treasuries out and onto the balance sheets of the commercial banks.

They are pretty smart huh?

Don't worry, monetary expansion will resume shortly...

Definitely more than a little truth to getting the Treasury involved, just like the rebate checks (helo drop) in 2002.

But the Fed is very far from out of Treasuries. The most recent week's data at http://www.ny.frb.org/markets/soma/sysopen_accholdings.html shows about $433 billion of Treasuries, not including $39 billion of TIPs. The total SOMA balance is $473.3 billion.

[bart]

Seems inevitable to me that they will have to at some point though.

Very much agreed - stay tuned to this thread since the chart is a live link and I update it every Friday.

[Lukester]

Bart - Global inflation rates seem to have accelerated in the past six months (as Doug Noland logs, and EJ notes Mayer also suggests will accelerate notably more from here forward), while your charts evidence essentially static recent money supply growth. Evidently the transmission mechanism between the USD money supply and global inflation is not nearly as direct as some assume. My sense all along has been that global inflation is in fact surging due to components well outside of US monetary aggregates. USD and corrolary foreign monetary aggregates have provided a very large backwind, and have even been a primary driver through the first half of this decade, but the accelerating global inflation stats are responding to a whole new set of components now?

[bart]

Bart - Global inflation rates seem to have accelerated in the past six months (as Doug Noland logs, and EJ notes Mayer also suggests will accelerate notably more from here forward), while your charts evidence essentially static recent money supply growth. Evidently the transmission mechanism between the USD money supply and global inflation is not nearly as direct as some assume. My sense all along has been that global inflation is in fact surging due to components well outside of US monetary aggregates. USD and corrolary foreign monetary aggregates have provided a very large backwind, and have even been a primary driver through the first half of this decade, but the accelerating global inflation stats are responding to a whole new set of components now?


There's a huge difference between TFM and what you're likely referring to as money supply, the primary one being the concept of time lags and the secondary one is that the Fed is not the only entity that affects money supply.

As a very rough rule of thumb, it takes 9-20 months for Fed and bank actions to filter all the way through to the full society. Unless you're a total fan of Austrian economics, which doesn't believe in things like velocity or monetary lags that demonstrably exist, what you're seeing is mostly explained by the time lags & similar.


As far as recent worldwide inflation, I'm still midstream on my "worldwide CPI w/o lies" research but here's my most recent beta version (the dotted red line). I have about 75% confidence in the work to date, and it probably errs in being too low.

http://www.nowandfutures.com/images/world_gdp_money1.png



Notice the very strong correlation between the dotted red line and Broad money (green) and Credit (pink), after a time lag. It's not that simple in practice but it should address your comments & questions.

[Sapiens]

But the Fed is very far from out of Treasuries. The most recent week's data at http://www.ny.frb.org/markets/soma/sysopen_accholdings.html shows about $433 billion of Treasuries, not including $39 billion of TIPs. The total SOMA balance is $473.3 billion.

Oops, guess I erred if you say so. ;)

[bart]

Oops, guess I erred if you say so. ;)

You are officially worrying me now... ;)

[Sapiens]

You are officially worrying me now... ;)

No worries old boy, all is as scheduled. I have plenty of scotch should things get out of hand... :D

[bart]

The Fed is back on the gas, as shown by the most recent few weeks data - just a reminder. And that assumes that the current acceleration is not just a bounce and will continue.

http://www.nowandfutures.com/images/fed_all_short_term.png



A varying time lag also does exist before it starts to impact investments and the overall economy too. Note that the Fed starting slowing last July/August and the stock market didn't peak until October.

And its far from the only factor, but what the Fed actually does makes a large difference in inflation and money creation rates.

[Finster]

A handy way of telling what the Fed is really doing, as opposed to what they're saying:


[Chartos El Bartos]


The green line (read on the left hand scale) is actually Total Fed Money (TFM) and includes all the various alphabet soup things over which the Fed has direct control. The thick burgundy line is the annual change rate for that data.
One can easily see the growing money creation rate, starting in early 2001 and peaking in late 2004, that helped hugely to "rescue" the US economy.

The thin black line is also an annual change rate, and adds in the trading activities (in bonds, MBSs, etc.) of the 20 Primary Dealers of the Fed, currently including folk like Goldman Sachs and Citigroup and JPM. GSDS stands for Government Securities Dealers Statistics.

The light blue line is also an annual change rate, and subtracts the total custodial account balance from TFM. It is close to half of the grand total of TFM, currently running around $2.35 trillion. The Fed custodial account includes money from other central banks being invested in TBills, TBonds and Agency (GSE, etc) debt.
It very roughly tracks the value of the dollar.

Overall though, it shows that the Fed is not currently creating money at a high rate and has not been since roughly last November/December. This chart is probably my key chart to help determine when the Fed switches back to inflating at much higher rates.

Nice going Bart! With the proliferation of the alphabet soup of TAFs, PDCFs, TSLFs, etceteras, it's nice to have something that captures the net effect of the Fed's monetary policy stance. Clearly, we can no longer rely on just the traditional Fed funds etceteras for that.

[bart]

Nice going Bart! With the proliferation of the alphabet soup of TAFs, PDCFs, TSLFs, etceteras, it's nice to have something that captures the net effect of the Fed's monetary policy stance. Clearly, we can no longer rely on just the traditional Fed funds etceteras for that.

Thanks Fin. I really am a bit proud of FTM and its general concept.
All the noise and commotion about whether the Fed is inflating or whether the Fed is deflating at least has a partial and fact based answer now.

The chart isn't perfect either... :eek: ... since there is some double counting and also some room for interpretation. The double counting is at least consistent over the period so comparisons are pretty valid.
Interpretation, beyond the relatively small differences for example between my M3 reconstruction and John Williams M3 reconstruction, issues are significant though which is the primary reason that I show more than one line.

Its yet another work in progress and also an application of:
"When the facts change, I change my mind. What do you do, sir?"
-- John Maynard Keynes


(and it aggravates V and various Austrians no end... ;) )

[metalman]

Its yet another work in progress and also an application of:
"When the facts change, I change my mind. What do you do, sir?"
-- John Maynard Keynes


(and it aggravates V and various Austrians no end... ;) )

who is it who frequently refers to 'keynesian claptrap'? how dare you quote sir keynes! he ain't no austrian, but a mere genius. :D

[bart]

who is it who frequently refers to 'keynesian claptrap'? how dare you quote sir keynes! he ain't no austrian, but a mere genius. :D

He's both my favorite sophist (one who practices elaborate and devious and fallacious argumentation) and "target" on another board. Finster kindly showed me the light, and the scars are mostly healed now... ;)

iTulip is much more interesting, since not only are there many more folk here that have escaped their cages... but they also actually dare and deign to think independently and have tolerance, but actually use real logic and facts... and make their own charts too. :eek: ;)

[Finster]

Thanks Fin. I really am a bit proud of FTM and its general concept.

Justifiably so. Many of my questions about monetary aggregates and Fed ops have been circling this very concept. Just exactly what is the net effect of Fed activities?

All the noise and commotion about whether the Fed is inflating or whether the Fed is deflating at least has a partial and fact based answer now.

The chart isn't perfect either... :eek: ... since there is some double counting and also some room for interpretation. The double counting is at least consistent over the period so comparisons are pretty valid.
Interpretation, beyond the relatively small differences for example between my M3 reconstruction and John Williams M3 reconstruction, issues are significant though which is the primary reason that I show more than one line.

Its yet another work in progress and also an application of:
"When the facts change, I change my mind. What do you do, sir?"
-- John Maynard Keynes


(and it aggravates V and various Austrians no end... ;) )

Before you can polish a gem you first have to have a gem. I look forward to following this indicator and its evolution.

[bart]

Many of my questions about monetary aggregates and Fed ops have been circling this very concept. Just exactly what is the net effect of Fed activities?


I've been playing around with the Fed Total Money stats and time lags and a few other items from the witches brew of financial stats the last few weeks, but haven't come to any substantive conclusions yet.

By far its biggest value so far though is to show what the Fed is actually doing, as opposed to what they're saying and what expectations they're trying to manage.

And just to confuse the area a bit... :eek: ... here's a longer term picture of FTM.

http://www.nowandfutures.com/images/fed_all.png

[bart]

An all time record high increase in the FTM rate of change was registered last week, far overshadowing the previous record set the week after 9/11.

And the FTM data does *not* include the $180 billion swap line extended by the Fed last week.

[Finster]

An all time record high increase in the FTM rate of change was registered last week, far overshadowing the previous record set the week after 9/11.

And the FTM data does *not* include the $180 billion swap line extended by the Fed last week.

Interesting coincidence, Bart. The FDI indicated that the deflation in effect since July 1 was halted last week - at least for the time being. I have already speculated that it may mark the cusp of a reversal back into high inflation, and the FTM may be foreshadowing just that. It's possible that the massive increase in FTM may have been needed just to halt the deflation, since the deflation was very sharp and deep and had gathered considerable momentum, but unless it stops pronto I think it means outright inflation. The results of the policies of the stabilizers have given us such instability that we are as balanced on a knife edge between inflation and deflation. The most unlikely outcome of all is therefore an absence of "flation" period; that is, we are now doomed to either crushing deflation or disasterous inflation.

Come to think of it, it's probably no mere "coincidence" at all ...

[bart]

Interesting coincidence, Bart. The FDI indicated that the deflation in effect since July 1 was halted last week - at least for the time being. I have already speculated that it may mark the cusp of a reversal back into high inflation, and the FTM may be foreshadowing just that. It's possible that the massive increase in FTM may have been needed just to halt the deflation, since the deflation was very sharp and deep and had gathered considerable momentum, but unless it stops pronto I think it means outright inflation. The results of the policies of the stabilizers have given us such instability that we are as balanced on a knife edge between inflation and deflation. The most unlikely outcome of all is therefore an absence of "flation" period; that is, we are now doomed to either crushing deflation or disastrous inflation.

Come to think of it, it's probably no mere "coincidence" at all ...

That's pretty much exactly like it appears from here, and especially including the non coincidental elements.

I do have a bias towards much higher inflation and other unsavory outcomes including things like exchange controls and that ugly euphemism "social unrest" on the longer term - very sad to say.

[Finster]

That's pretty much exactly like it appears from here, and especially including the non coincidental elements.

I do have a bias towards much higher inflation and other unsavory outcomes including things like exchange controls and that ugly euphemism "social unrest" on the longer term - very sad to say.

You betcha El Bartos. Just look at what happened as a result of a mere ten weeks of deflation: Fannie and Freddie imploded. Lehman collapsed. AIG disintegrated. Some of the world's biggest financial entities. We've had inflation so long and so strong that our system has become dependent on it. It cannot survive without it. Worse yet, it need not only inflation, but accelerating inflation.

[c1ue]

The most unlikely outcome of all is therefore an absence of "flation" period; that is, we are now doomed to either crushing deflation or disasterous inflation.

Scylla and Charybdis. And we're trying to sail between them.

[bart]

You betcha El Bartos. Just look at what happened as a result of a mere ten weeks of deflation: Fannie and Freddie imploded. Lehman collapsed. AIG disintegrated. Some of the world's biggest financial entities. We've had inflation so long and so strong that our system has become dependent on it. It cannot survive without it. Worse yet, it need not only inflation, but accelerating inflation.

I'm tempted to send you the raw FTM data to see if there's any decent correlation between its various incarnations and the FDI...

[Finster]

I'm tempted to send you the raw FTM data to see if there's any decent correlation between its various incarnations and the FDI...

Visual should do, as long as you keep in mind the FDI is "upside down" in relation to money supply and prices. That is, you'd either look for an inverse correlation or plot 1/FTM and compare that to FDI.

[bart]

Visual should do, as long as you keep in mind the FDI is "upside down" in relation to money supply and prices. That is, you'd either look for an inverse correlation or plot 1/FTM and compare that to FDI.

Here's a quick one with both key amounts inverted. I'm just wondering whether there's any lead or lag to it.

http://www.nowandfutures.com/d2/t_ftm_finster.png

[babbittd]

EJ: The Bernanke Fed will use interest rate policy to stay in the low inflation/stable price zone until they see the high deflation zone approach at which point they will start to target monetary aggregates, not interest rates,



EJ: the Fed is going to stop targeting rates and start to target aggregates after they drop rates to 2%, as it turned out two months later in April 2008. We can’t see the rise in M3 because the government doesn’t report M3 anymore -- clever.


Bart, do you think your FTM chart posted on 08-15-08, on which you commented that "the Fed is back on the gas" says that the Fed saw a high deflation zone and the zero bound approaching?

[bart]

Bart, do you think your FTM chart posted on 08-15-08, on which you commented that "the Fed is back on the gas" says that the Fed saw a high deflation zone and the zero bound approaching?

Yes on the higher (debt) deflation chance, but its dicey on the zero bound - probably not, as shown by the wild creativity the FOMC has shown with the facilities like TAF and SFP etc.

Check this week's FTM - another all time record since 1980 has been set, which makes their response after 9/11 look like a kindergarten effort.
By my estimate, slightly over $300 billion has been added in just one week.

[phirang]

Yes on the higher (debt) deflation chance, but its dicey on the zero bound - probably not, as shown by the wild creativity the FOMC has shown with the facilities like TAF and SFP etc.

Check this week's FTM - another all time record since 1980 has been set, which makes their response after 9/11 look like a kindergarten effort.
By my estimate, slightly over $300 billion has been added in just one week.

They will stand on their heads before they increase money supply, eh?

[bart]

They will stand on their heads before they increase money supply, eh?

http://www.nowandfutures.com/grins/rimshot4.wav

The winner of the first rimshot of the day! :rolleyes: ;)

[phirang]

http://www.nowandfutures.com/grins/rimshot4.wav

The winner of the first rimshot of the day! :rolleyes: ;)

Oy, seriously, they aren't adding to the money supply yet: these are all treated as swaps, and so they aren't dilutive if you ignore the inflationary impact of trading an apple for a turd.

[bart]

Oy, seriously, they aren't adding to the money supply yet: these are all treated as swaps, and so they aren't dilutive if you ignore the inflationary impact of trading an apple for a turd.

Granted that I misunderstood you somewhat... and there's lots of room for interpretation and even of what the definition of money supply is... but the majority of the over $500 billion added in the last two weeks are repurchase agreements that are trivial to convert to permanent or long term if and as needed.

Plus, the roughly $290 billion of actual swap lines with other CBs aren't even included in the totals.

Whether they're as extremely inflationary as they could be remains to be determined with certainty, but we're talking well over a trillion and perhaps over two trillion eventually with the bailout and whatever else is spewed out of Foggy Bottom (D.C.).