Mike Shedlock

Analysts poring over the July 31 - August 1, 2012 Fed Minutes quickly honed in on the following paragraph. I put the key sentence in italics.

The Committee had provided additional accommodation at its previous meeting by announcing the continuation of the maturity extension program through the end of the year, and more time was seen as necessary to evaluate the effects of that decision. Nonetheless, many members expected that at the end of 2014, the unemployment rate would still be well above their estimates of its longer-term normal rate and that inflation would be at or below the Committee's longer-run objective of 2 percent. A number of them indicated that additional accommodation could help foster a more rapid improvement in labor market conditions in an environment in which price pressures were likely to be subdued. Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.

Several members noted the benefits of accumulating further information that could help clarify the contours of the outlook for economic activity and inflation as well as the need for further policy action. One member judged that additional accommodation would likely not be effective in improving the economic outlook and viewed the potential costs associated with such action as unacceptably high. At the conclusion of the discussion, members agreed that they would closely monitor economic and financial developments and carefully weigh the potential benefits and costs of various tools in assessing whether additional policy action would be warranted.

What's the Definition of Many?

There are 12 voting members on the FOMC.

Is "many" three, four, or seven? I think the wording of the Fed minutes was purposely vague, hoping to get a "bang for no buck".

Nonetheless, the Wall Street Journal, Bloomberg,  Reuters, the Chicago Tribune, the Hill, the Daily Beast, and numerous other sites are all expecting another round of QE.

Of course I expect another round as well, just not necessarily at the next meeting.

Indeed I think the Fed will take a pass at the next meeting unless all hell breaks loose before the next meeting which is September 12-13. Otherwise, I expect a "Fed does not want to interfere with the election" type of statement.

How Much Stimulus Does It Take?

Please note that the federal government is running budget deficits exceeding $1 trillion for four years running. That deficit is well beyond any stimulus the Fed could possibly provide.

Yet, unemployment rate is still above 8 percent. Counted accurately, the unemployment rate is probably between 10 and 11 percent. Include part-time workers who want a full-time and it is close to 20 percent.

Also note that Fed stimulus has goosed the stock market and commodities but done little if anything for the real economy.

Indeed, low interest rates have crucified savers on fixed income, and will punish pension plans the moment equities take a turn for the worse.

Sell the News Event Coming Up?

There is no more good news to be had from more QE, except of course for those holding gold.

And while everyone is pouring over every word the Fed says as if there is any real meaning to the words "many members", should the Fed actually cut rates in September, I would expect the reaction to be a "sell the news" event.

Here are a couple of charts from Tim Wallace regarding interest on the national debt. The first chart shows the interest rate is falling as debt skyrockets.

Key Questions

  1. How long can the trend last?
  2. How low will the rate go?

I do not know the answers to those questions, nor does anyone else. However, a rise in interest rates would cause a shocking increase in interest on the national debt.

Interest Rates vs. National Debt

click on any chart for sharper image

Interest on National Debt at Current Rate vs. Historical Average

Should interest rates rise to the long-term average, interest on the national debt would more than double from the 2011 figure of $454 billion dollars.

Here is a chart from the National Debt Clock site.

The site notes "Maturity of U.S. debt ranges from less than a year to over 20 years, with the average maturity about 3 years. More than half of the debt, however, is short term, maturing in less than a year."

That is an interesting assertion given 30 year rates are currently at short-term debt is at .09%, 10-year notes yield 1.67%, and the 30-year bond yields a mere 2.79%.

However, interest is on outstanding securities. A bond with a 6% yield maintains that yield until maturity. The average yield in Wallace's charts paid comes from Treasury Direct.

Currency Crisis Coming

If you get the idea a crisis of some sort is coming, fueled by out-of-control deficit spending as well as the Fed's ridiculous "Operation Twist Policy", then you get the right idea.

The Fed ought to be selling long-term bonds at these rates, locking in financing at attractive rates, not buying those bonds hoping to drive yields still lower.

Of course, that latter statement assumes there should be a Fed or deficit spending in the first place, neither of which I believe.

Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.