Internal Sunshine of the Fed’s Mind

The strong gains recorded in April in the US manufacturing sector (the ISM Index jumped to 54.8 and has now shown a sector in expansion for 33 months) exceeded analyst expectations and put a further dent into expectations that the Fed will be compelled to offer up another batch of QE. Today’s ADP private employment report (showing a bump of 119,000 positions for the month of April) and Friday’s US Labor Department non-farm payrolls (expected to come in at above 160,000) might shed light on the other aspects of the US economy that very much still matter to the Fed. Speaking of which…

…This week we got a couple of more glimpses into the current, relatively “sunny” type of manifest “Fed-think” courtesy of certain FOMC policymakers who made appearances in the media. CNN Money notes “that Fed presidents and the central bank's chairman, Ben Bernanke, are seemingly omnipresent at conference and media events these days. In addition to Evans and Lockhart, the heads of the San Francisco and Dallas Federal Reserve banks spoke at the Milken Conference.”

Dallas Fed President Fisher spoke to Bloomberg television on Monday and flat-out expressed opposition to any further Fed QE programs, saying at the same time that “monetary policy is one thing but it’s a very limited tool.” Translation: the Fed will not solve unemployment with its QE blunt instrument but it might spark inflation level that nobody wants.

Mr. Fisher did acknowledge that his institution may have boxed itself into somewhat of a tight corner and has made a quick exit from the current paradigm a tad difficult. Separately, The President of the San Francisco Fed, John Williams, said that the US economic outlook that he is currently observing “doesn’t warrant more bond buying,” and Atlanta Fed President Dennis Lockhart repeated that he’s skeptical of the benefits of such action. 

Remarkably, the time has now come when the Fed’s hawks as well as its doves are suddenly in accord about not easing any further. This is taking place at the same time as insistent assertions of quite the opposite scenario keep habitually popping up in the financial media. The difference is that the factions that envision endless QE are now being met with increasing amounts of denial – and some of it from the official sector itself – for the first time in three or more years. 

In any case, not easing more is one thing; raising rates is quite another. We also heard words on that topic this week. Richmond Fed President Lacker, speaking at the Bloomberg Washington Summit on Tuesday, said that the US central bank needs to stand ready to raise interest rates even if the unemployment level in America remains stubbornly above the seven percent figure. Which, it might just do, if recent indications are to be believed.

In Mr. Lacker’s opinion, the time to hike might come in a little more than one year from now and that it is a [very common] misconception to think we have to get unemployment all the way down to five or some number like that before we raise rates.Others disagree and would like to see even more easing from the Fed in order to cure the jobless situation – regardless of the risks such moves might present in terms of inflation. 

Following up on last week’s mention of certain commonly-accepted myths in the world of commodities, we now bring you this video clip from our own BNN television. Mr. Jeff Christian of the CPM Group in New York appeared on Business Day and stated his team’s finding about why exploding world population does not necessarily yield exponential gains in the real inflation-adjusted price of “stuff” (quite the opposite, in fact). 

Despite holding such “unorthodox” views, Mr. Christian remarked that he is often very well-received at certain commodity conferences. Mr. Christian also said that he likes the prospects offered by palladium, platinum, rhodium, iridium, ruthenium, and certain agriculturals. The take-away quote from Mr. Christian’s clip was (Nota Bene): We are paid to be correct, not to be bullish or bearish.”

Until Friday (and beyond), so are we. 

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About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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