Archive for the 'Fed Reaction Function' Category

The Dreaded Fed Reaction Function Strikes Again

The Labor Department announced today that the US economy added (a better-than-expected) 195,000 new jobs in June, while also revising upwards its estimates of job growth in April and May. Good news, right? Yes, it was good new, but there was also bad news. What was the bad news? Why, it was the good news, of course!

One hour after the Labor Department announcement, the NYSE opened with the S&P 500 10 points above its Wednesday close, and immediately started to fall. Here’s a picture of the S&P 500 so far today.

Image

What happened? The good news about job creation signals a strengthening economy that could be poised to start a real recovery as opposed to the pseudo-recovery of the past four years. But, as I explained last week, thanks to the Fed’s promise to start tapering off its asset purchases as soon as the economy starts to improve, the market now greets good news with fear and trepidation. So the good news about the economy is cancelled out by the bad news about Fed policy.

That explains why the yield on the 10-year Treasury note shot up this morning by 20 basis points today to its highest level in two years. And here’s a picture of what happened to the dollar/euro exchange rate today after the jobs announcement.Image

Well the sky is not falling — yet. But I just don’t know how much more good news like this the economy can stand.

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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