What do equity markets want?

The Bernanke speech at Jackson Hole did not provide any monetary policy help for the markets. In fat, the focus was on the inability of monetary policy to help in all situations. The job must be on fiscal policy and the government has to get its house in order.

Yet, we are seeing equity rally based on the view that the US economy is not doing that bad. Bernanke stated that help is not needed, so now we have an equity rally?

This is odd given the falling forecasts from most economists and a revision downward of the CBO growth forecasts. There is little to drive markets higher.

Alan Krueger nominated for CEA

Alan Krueger is known as a strong labor economist who has worked effectively in policy circles. He as chief economist for the Labor Department under Clinton. He has also provided advice to Treasury over the last two years. This is a good pick to provide innovative thinking on how to bring down the unemployment rate.

Cotton defaults and pricing issues

There has been an increase in cotton defaults of long-term contracts. This will have an important impact on the cotton market because there is a growing movement to spot contracting from longer-term contracts. This is similar to what has been seen in the iron ore market. This structural change will make the futures market more important. Futures markets have been limited when there is strong forward contract markets.

Demand side as important as supply side for corn

There is a race to the bottom for crop estimates and yields for corn. There is even talk that corn yields could be the worst in a decade as Midwest heat has taken its toll on the crop. Prices are expected to go higher, but there has to a close look at the demand side.

The demand for corn by bioethanol may flatten given the current high prices. The demand by bioethanol has now exceeded that of livestock demand but this may change with structural changes in blend subsidies by the government. Margin will fall as gas prices decline. Livestock herds have been declining as the bite of higher grain prices increase. Wheat crops have been good in Canada so substitutes will play a part in demand. There will be les demand as prices increase so those who think corn is headed to all time highs may be disappointed.

When wheat prices rise export duty talk increases

Wheat is a international crop with some countries using their exports as mechanism for imposing domestic economic policies and a source for revenue. The talk this week has been about new duties on Russian wheat.

When prices increase on world markets, there should be a greater movement to export from wheat producing countries which will reduce domestic supplies and increase local prices. This increase in exports to offset global demand will affect consumer prices in Russia and retard domestic meat production. The view from many market observers is that an increase in world prices will naturally lead to some duty regulation by the Russian government.

The discount price gap of Russian wheat to US and French has declined as the market has tightened. The impact of potential for duties will be an increase in demand today to prepare for potential higher prices. The wheat market becomes more exaggerated.

The 2% solution for the Fed

The Fed does not seem to know what to do other than to keep interest rates low. QE3 is possible but the Fed is not willing to commit.

Core inflation is below its target of 2% but close at 1.8%. Perhaps the right target for the Fed should be to make it clear that it will follow closely a policy of keeping inflation no lower than 2%. This policy is not the same as keeping it at 2%. It is not an inflation policy, but it will tell the market that it is not willing to allow prices to fall. It would be a clear mandate to have deflation not be an issue. If bonds need to be bought so be it. The policy will be clear that QE will occur as long as inflation is below 2% and will not be conducted if above.

This 2% solution is consistent with some leading economist who want to see 2% inflation. Now saying that you will not tolerate deflation will mean that many prices will have to go up above 2% given that housing is still declining or at best flat. It provides clarity and operation objectives.

Bernanke and Jackson Hole

Hope exists in the form of expectations that Chairman Bernanke will do something to boost the impact of monetary policy. Nothing will actually be done at the Jackson Hole meeting. The only hope would be in the form of a phrase or statement, and we found out that this hope will not be realized.

The speech was more focused on the the impact of fiscal headwinds and fiscal sustainability as not being incompatible. This is the problem that needs to be solved not a change in monetary policy.

Bernanke did not take any major action and defended its August 9th decision to continue the low interest rate policy. He also said that he would increase the FOMC committee meeting to two days from its original one to allow for further discussion. That type of talk is not moving out on a limb.

Many want a more aggressive Fed that will increase inflation. They argue that the Fed is dominated by the creditor class through Fed bank president chosen by banks within their district. Hence there will be less active action on this front. It is an odd argument given the history of currency and credit debasement by the Fed over history, but it is the one that is in fashion at this point by those who want aggression.

We did not get a clear message from the Fed and this should be a market worry.

Fiscal policy is needed

The central focus of the Bernanke speech at Jackson Hole was very clear. There are limits to what monetary policy can o. This does not mean that more action will not be taken but there are limits. Rates cannot come down any further so any change will have to be structural. That structural change could mean adjusting the shape of the yield curve. It could mean changing the rules of interest payments on excess reserves. These type of changes can help on the margin but there will not be a substitute for better fiscal policy.

Fiscal policy has to come in two forms which may seam contradictory. First, there is more nee for immediate stimulus. research suggests that fiscal policy is more important during times when rates are very low. The cost of crowding out is low. Second, there has to be changes in long-term deficits. Put another way, there needs to be cyclical stimulus and structural debt reduction at the same time.

The reaction of the markets has been strange with a strong rally on Friday. The Fed says nothing and the market rallies. We already knew that they would not be negative so why the rally? we will have to wait until next week to determine what the market is thinking.

Who is the importer of last resort?

The US has usually been the importer of last resort for the last few global business cycles. The US was always good for helping with excess global demand even if it was through borrowed money. The rest of the world would finance the purchases made by the US for the goods bought by US consumers. It was a nice system and would work well in conjunction with beggar thy neighbor policies of lowering currencies to make exports to the US more attractive. Consumers would get a benefit.

The issue is that the US now wants to be an export driven economy and not a consumer driven buyer.If this is to be the case, there has to be a new importer of last resort. Could it be China? This is the one of the elephant in the room questions. If China imports more, then it will change its role from a export powerhouse to the importer of choice for the rest of the world. This is what the rest of the world would like including the US, but it is not clear whether it will happen in the short-run.

EU bank funding is a problem

We follow the LOIS spread which is the Euribor - overnight interest rate swap spread. Market in Euro LOIS has exploded since the beginning of the month. There is significant risk with EU financial institutions.

This financial risk is even greater than the Greece, Ireland, Portugal problem. Of course, this are not a separate financial problem. The banks hold the paper that has fallen in value even if we do not admit it and the capital hit has not been taken. This bank investment will not be able to be turned over to invest in any other capital projects so its presence on the balance sheet restricts the future availability of capital available for lending. The lans will not be paid in full. If we actually took a capital haircut on these assets, there will be a significant decline in bank capital. Leverage to other institutions would have to decrease and financial intermediation would decline.

There is potential for bank failure so governments may have to intervene. the effect is an increase in funding costs and a risk premium for EU financial institutions which will decrease profits. There is a reason the euro has not increased even with the US economic problems.

Gold right or wrong as a risk indicator

Gold prices have been falling. Some of this price decline could be associated with higher margins, but there is a divergence between stocks and gold as noted by the graph. If gold is viewed as a safe haven and it is falling then the market thinks that risk-on trades should take place. This means that stocks should be increasing. There has been slight upward movement in equities so gold may be an indicator of good things for risky markets. CHF has declined so the demand for a Swiss safe haven has also declined.

However, if there is the belief that QE3 and inflation is around the corner, gold should still be going higher. Does this mean that the gold market is not predicting any Fed action?

Gold is bipolar. Sometimes it is viewed as a place for inflation protection and at other times it is viewed as a safe haven for risk. These two actions can be at odds.

Moody downgrade Japan to Aa3

Moody's has downgraded Japan from Aa2 to Aa3 based on the inability of the government to provide creditable solutions to their debt problems. Japan is having elections for its sixth leader n five years. There has not been any help at solving the debt to GDP ratio in Japan.

This is what is in store for countries which are in gridlock. Nevertheless, the cost of a lower rating has not hit Japan. Interest rates are low and the yen is at all time highs.

Krugman, Keynesian economics, and aliens

Interesting exchange with Krugman. The analogy is weird but the idea is true. The Great Depression did not really end until the spending increase of WWII. More spending is the Keynesian mantra if you assume that aggregate demand is the problem and do not look at the causes. We do have to get spending up but the only way to do this is through deficit spending. This will offset the borrowing from the private sector which must be paid down when balance sheets are corrected. Balance sheets will still have to be corrected and pushing the adjustment into the future will not make the problem go away accept if you inflate. If inflation is the ultimate solution, you do not want to be a creditor.

Krugman was a guest on CNN's "Fareed Zakaria GPS" on Sunday. Speaking with Zakaria and Harvard economist Ken Rogoff, he made the same case he has been making for years--that deficits are not the top economic concern of the day. Krugman noted that the effort of World War II helped end the Great Depression, and joked that something similar was needed today.

"If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months," he said. "And then if we discovered, oops, we made a mistake, there aren't any aliens, we'd be better--"

"We need Orson Welles, is what you're saying," Rogoff cut in.

"There was a 'Twilight Zone' episode like this in which scientists fake an alien threat in order to achieve world peace," Krugman said. "Well, this time, we don't need it, we need it in order to get some fiscal stimulus."

Arbitrage everywhere?

Kuznets Fallacy - The fallacy is to believe without historical inquiry that every price divergence represents an opportunity for arbitrage, buying low and selling high without cost of transaction. It doesn't seem so.

from D. McCloskey Bourgeois Dignity and Liberty

A good quote for anyone studying finance and economics. Opportunities exist and irrationality exists until you truly understand the dynamics of markets.

The microeconomics of monetary policy matters

A recent story by Bloomberg on the money that went to Wall Street to provide liquidity highlights the fact that the microeconomics of credit have very strong macroeconomic implications. Maybe this has always been the case. I remember the discussion on the failure of banks in the US in the Monetary History by Milton Friedman. The optics of failure and bank runs make a difference; however most of monetary economics is focused on the macro impact of credit flows. In a crisis, it is the micro that drives the markets and the liquidity needed by Morgan Stanley is perfect example of the micro issues.

Morgan Stanley borrowed $107 billion during the 2008 crisis. his was more than Citibank which is twice as large. Of course, you had to have reporters do a Freedom of Information Act to get at this information. The company never told anyone about this borrowing and the Fed was also quiet. It may have saved Wall Street. All we know is that monetary policies that are often micro in nature may have a greater than any setting of interest rates.

This is all about return of capital and not the return on capital

From RBS -

We have to treat ourselves as credit investors and not value investors.

The market perception is moving more into protection mode and this is not good for stock appreciation.

The golden age of natural gas - logistics will be the key

The price of natural gas is highly variable across regions. Cheap in the US. More expensive in Europe and most expensive in Asia. This will not continue but like the oil market it is the logistics that will often drive price as much as proven reserves.It is getting natural gas to the places that need it from those places that have it. LNG terminals will need to be built and pipeline projects approved.

Should the ECB do more?

There will not be a fiscal solution to the problems in EU. The only organization which has the ability to solve some of the bond market problems is the ECB. A viable solution is to take the approach of the Fed and engage in quantitative easing with a lowering of rates not a increase. The euro will decline and inflation will increase, but liquidity is needed

Unstable bond markets and ratings

While there has been much discussion about the S&P downgrade, rates have gone down. Some credit risk problem. We have to look the poster child of debt problems in the developed world. Their debt/GDP level is by some measures over 200 %. Japan has been downgraded to AA- and 10-year yields are blow 1 percent. This is the lowest level during any level in history.

There is a complet disconnect between credit risk and interest rates. Some may say that the same may come true for the US; however, these low rates have come with a cost of no growth for almost two decades and deflation. The population is aging and declining and there is little hope that growth will return to the 70's and 80's level. Rates are unconnected with credit risk except in the CDS market. There will be a non-linear effect. At some point the music will stop for Japan and for the US.

Something that cannot go on forever, will not as Herb Stein the economist pundit has noted.

Why isn't there a flax futures market?

Linen is made from flax and it it hitting all time price highs. It has fluctuated with fashion demand. Most of the linen (2/3rds) originates in Northern France and the Netherlands. It seems like it would be a natural for a small futures or forward market. Like most markets, it is unlikely to be successful. There has to be a competitive market of buyers and sellers. The sellers have to have risks which they cannot contract away through direct forward contracts. It is unclear that flax will make the grade, but it is worth a discussion.

The rise of emerging markets is still the most important global story

There has been so much focus on the US and European debt problems that the major economic story is just not discussed. The growth of merging markets is not declining. the future of the world is being determined outside the G3. Trade and development is critical if the developed world wants to improver their economic situation.

In less than 10 years the emerging markets will be larger than the developed markets. They will be taking more of the capital expenditures. they already represent more than half of all capital spending. This is up from 26% in 2000. Their demand in goods and services is staggering.

They represent over half the copper, motor vehicle sales, steel production, mobile phone subscriptions. They hold over 75 percent of foreign currency reserves and take half of all inflows for foreign direct investment.

Prices in commodities are not higher because of low developed market demand but prices would be significantly lower if the global demand was less.

Malthusians verus Cornucopians - who is winning?

In 1980, there was a bet between Paul Ehrlich author of "The Population Bomb" and Julian Simon of the Cato Institute. Ehrlich represented the modern Malthusians who believe that the population explosion will place stress on the global economy and lead to modern shortages of commodities. Simon was an optimist who believed that innovation would be bale to find or create commodities and products so there would not be any shortages. Simon asked Ehrlich to pick a basket of five metals that he thought would increase in real terms. Simon would take the other side of the bet. Simon won the bet. There was no scarcity. They reran the bet in 1990 and now the basket is higher in real terms.

Will the high real prices continue into the future? This is the main focus of commodity trading and investing. Should you be a natural resource pessimist or optimist? How do you play the and transition?

Presented in the Economist August 6th 2011

Quotes of the week August 2011

"The reason I talk with myself is that I'm the only one whose answers I accept" - George Carlin

Sounds like most politicians.

"A man does not know what he is saying until he knows what he is not saying" -GK Chesterton

That lying by omission thing?

"The trouble with the public is that there is too much of it" Don Marquis

Being president would be so much easier if you did not have to convince the public of what you are trying to do.

"Life can only be understood backwards but it must be lived forward" - Soren Kierkegaard

Big Mac index still shows dislocations

The Economist Big Mac index has been again produced and shows some major dislocations in exchange rates especially for Latin America. This is even after adjusting for GDP per person. The Economist has tried to eliminate some of the bias in the data through taking into account the fact that for a good that cannot be traded across borders. The local labor market will effect prices. Average prices will be cheaper in poor countries than in rich countries because labor costs are lower. Rich countries will have higher productivity and higher wages in traded goods. This productivity will also push up labor costs for non-traded goods. This is the Balassa-Samuelson effect. Hence, burgers should be cheaper in poor countries than in rich countries and thus exchange rates should be below the long-term PPP. PPP adjustments will be bigger for poor countries.

What is amazing is that the Big Mac index has survived for 25 years and still does a reasonable job of identifying over and undervalued currencies.

What is there left for monetary and fiscal policy?

Monetary and fiscal policy has been used in a myriad of alternatives only to continue to be unsuccessful. The following have been tried:

• zero policy rates
• QE1 and QE2
• credit easing
• fiscal stimulus - spending on capital projects, temporary tax cuts, increases in transfer payments
• ring fencing of assets
• special bank bail-outs
• special sovereign bailouts
• targeted housing policies on foreclosures and subsidies.

None have worked effectively at bringing growth back to pre crisis levels. Balance sheets are still being repaired and the government has taken on debt formerly taken on by consumers and business. The need for more radical change is necessary. We have to focus on the structure of the economy. First, there has to be a change in the tax system such that it is simpler and lower especially for small businesses where there is the maximum job creation. Stop talking with large company CEO's and focus on the shopkeeper and entrepreneur. Second, cut the cost of labor not through the asking of wage decreases but through a reduction in costs of hiring and firing and uncertain benefits. Third, increase fiscal spending but only through capital projects that decrease the cost of transportation and power. Fourth, move inflation higher so that real value of debt is decreased.

Is there a risk free bond?

Finance consistently discusses the risk free rate of return. This risk free rate is often tied to US Treasuries but whether we like it or not there is no risk free rate of return We are in a new era where there is mor risk everywhere. This is the new reality. Treasuries can have a default. If there is not an outright default, Treasuries will have higher risk from variation in expected inflation.

We also may be in a period of global risk because the risk free rate asset also served as the reserve currency. The public good aspect of Treasuries is now gone. We do not know what the effect of this change in the risk free rate will be in the longer or short run because it is too early to measure what are the alternatives. Nevertheless, the impact may be a shrinking of trade and capital flows because the risk of trafficing in dollars is now higher than before.

Seasonal switches in commodity markets

There is always talk concerning seasonality in commodity markets but there is little discussion on what is involved with changes in seasonality. One of the key issues not discussed is that the type of uncertainty changes with the seasons. The change in uncertainty is the main driver of seasonal price swings and should cause changes in the focus of research in commodity markets. A focus on the corn market can serve as a simple example of how the changes in seasonal uncertainty are represented in price and research activity. The supply of corn will be determined by acreage planted and the yield for each acreage. Supply will be q (the acreage) times yield.The sensitivity to price will be related to the amount of inventory that is held throughout the year.

We can identify four periods of uncertainty in the corn market:

1. Planting uncertainty during the spring which focuses on the amount of acreage that will be used by farmers. The acreage may be coming from other crops or from land that is fallow. It could be limited by flooding, but the spring uncertainty is size planted.

2. Yield uncertainty occurs in the summer as weather determines the yield for each acre. Of course the type of acres planted and the location will affect yield but the weather will be the main variable. There is switch in the uncertainty from acreage to yield.

3. The third uncertainty will be related to the harvest. This is when supply uncertainty is resolved from 1 and 2 and will also be affected by the cumulative effect of weather through growing degree days.

4. The final uncertainty will be when the total crop is in and there is an accounting of the inventory that will be available. It will be the period when inventory risk will determine what will be prepared for the next spring.

Using this switching of uncertainty may help determine the risks that are associated with any crop. Since there is a global market, the uncertainties will overlap across regions.

Trade deficit pessimism

Trade deficit pessimism should increase with the recent numbers. The deficit, at $53 billion has reached a 32 month high and tells us that we will not be able to grow our way out of the current employment problem based on exports. The economic policy of the US has been based on lowering the dollar to push exports up. Unfortunately, exports are more tied to economic growth than prices in the short-run. If economic growth in the rest of the world slows, there will be a decline in exports form the US and the trade deficit will worsen. This will offset any policy to have lower prices drive exports.

Commodity innovation and long-term supply

There is growing fear about shortages in commodity supplies but there is little discussion on the differences in commodity markets and how supply problems will be solved.

I will make a distinction between search, novelty, and creation innovation with respect to commodity markets. Some commodity supply is determined by whether new supply is found. For example, oil and natural gas reserves are found. Innovation is used to help with the search process to find new reserves. Supply is also created because the amount of recoverable reserves are increased through increases in yield. Hence, there is search innovation and yield innovation.

The same to types of innovation occur with other extraction commodities. Mining is not involved with creating new commodity supply. Search technology is necessary because there is no new production of oil and gas. There supply is fixed and depleted.

There is a difference in supply creation with agricultural markets. New supply is not found. There can be yield innovation but not search innovation. Yield innovation will be through better seeds. Genetics helps with yield innovation but there is not search but creation technology. New hybrid seeds can be created but the biodiversity in agricultural markets is actually declining. Given that diversity is declining, the risks with agricultural markets are different than extraction commodities where a search process may be able to find more supply.

New production can be used to replace supply that has been consumed, but there is no search for supply. You generally cannot prospect for seeds. Hence, there is a greater dependent on innovation science to solve food problems. There is less likelihood that we can predict or generate a pipeline of potential new production because we do not know when new innovation can occur. With search we can be more systematic and determine through effort how much can be found.

The types of innovation that need to be made can effect the potential for new supply. We may be bale to generate new seeds. Hence, we may be bale to use science to create new supply, but for depletion commodities there is a limited supply which can be exhausted.

The occurrences and recognition of risks

The occurrences and recognition of risks^[1]

To explain problems associated with different types of risks, we use a simple box diagram to categorize the risks that can be faced by any decision-maker. This risk classification problem is the same for either short and long-term traders or discretionary and systematic managers. Risks in a simple two-dimension framework can be broken into four major types. Risks can be classified under one dimension as recognized or out of mind. Risks can also be classified by whether there have been occurrences or not. This 2x2 combination can describe risks by their recognition or occurrence.

Most decision makers encounter experienced risks. These are risks which have occurrences and can be recognized. These are the risks that have been occurred in the past and can be measured or counted. While all situations may not be the same, we have a basis for correlation, possible cause and effect, and control. The systematic manager may take experienced information through market and economic data and look for measurable relationships. The discretionary trader may use these past experiences to learn what is the most prudent strategy given a set of events. There is no guarantee of success because these experienced relationships have statistical error, but a clear link can be formed between information and market action. Our VaR calculations are based on experienced risks. This is one of the key reasons why we choose experienced traders for the portfolio. When someone has more exposure to a variety of market events, it will be easier to measure risks.

Contemplated risks are those that can be recognized but may not have occurred. In this case, traders can extrapolate from similar occurrences and make a judgment on what may happen even if there is not a specific example. The skill of being able to contemplate risk is important with any trader. They can take past situations and be able to use them to make judgments about the current environment. Scenarios can be built around risks that have not yet occurred.

	Out of mind	Recognized
No occurrences	Virgin Risks	Contemplated Risks
Past occurrences	Neglected Risks	Experienced Risks

The more difficult risks are those that can be classified as out of mind. Out of mind or risk not recognized can be classified as either being virgin (no occurrences) or neglected (past occurrences not used) risks. A virgin risk is one that has not been experienced or considered. A neglected risk is one that has occurred but is not currently contemplated.

A neglected risk is a problem with not looking back in history for what may have happened or not using information that is available. A simple example from a quant perspective will occur when you do not use enough data to make a decision. This is the classic problem associated with a small sample size or look-back periods. Events such as a stock market crash that has occurred but may be overlooked or neglected by some traders because it occurred years ago would be a neglected risk.

A virgin risk by its very nature is truly uncertain because we have no reference for what or when it may occur. At worst, “things happen”. The impact of a sovereign debt default in Europe could be a virgin risk. There have been no occurrences and even if we recognize this risk we cannot fully comprehend its impact or implications. A more localized example may have been the IEA strategic release of petroleum. Traders did not anticipate this action based on anything other than truly extreme market price activity.

Risks that are hard to recognize or do not have information available for forming probability judgments create ambiguity. Ambiguity causes investors to avoid taking risk. This avoidance of ambiguity creates a breakdown in past market relationships and range-bound behavior.

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[1] The section is based on work by Carolyn Kousky, John Pratt, and Richard Zeckhauser, “Virgin versus Experienced Risks” in The Irrational Economist: Making Decisions in a Dangerous World by Erwann Michel-Kerjan and Paul Slovi, editors

Strong yuan apppreciation

The yuan (CNY) has seen a nice appreciation in the last two days to 6.3937. This is the strongest level since the dollar peg was eliminated last June. This could be good news for the rest of the world since stronger yuan may lead to an increase Chinese imports and a decrease in Chinese exports.This is the policy that much of the world has been asking for from China.

Nevertheless, the relationship between trade and currency changes is complex and there have been strong arguments that the for China a increase in the yuan may not decease the trade surplus and may not lead to higher export prices. Certainly having free exchange rates is an improvement over a tight peg but the rest of the world may not get what they want. One effect is that inflation may be reduced if the yuan appreciates. The world also needs to see more Chinese domestic growth that will help the rest of the world and there is one simple way to get it if there is increased consumer demand for imports and not just increased inputs to export production.

The change may not be a direct policy response but may be caused by the Chinese to be less willing to buy US debt asset. There is no dollar demand to keep the yuan from appreciating.

Grains dominated by fundamentals

Forget macro risks for at least a day. The WASDE report was released and it shows lower inventory and lower ending stocks for corn, wheat and soybeans. Surprisingly, exports were also down. Exports will decline on higher prices but that should have allowed for higher inventory. This is the report that was expected at the end of June. The corn crop was reduced by 5.6% and the soybean is expected to fall 8.2%. Weather has reduced crop estimates and expectations are that the amount harvested will also be lowered.

This will be limit up day.

Swiss franc peg - another try at control

SNB has stated that a peg against the euro would be legal. The Swiss want to lower their exchange rate especially against their nearest neighbor. In fact, Swiss is surrounded by the eurozone. While this may make sense, it may be hard to achieve. It also ties CHF with a weak uncertain currency. One of the only reasons is that trying to move the CHF/USD does not make sense if you trade with Europe and your most frequent visitors are from Europe.

Te only way for the CHF to deprecate is if the rest of the world starts to behave.

The Bernanke monetary pledge

Bernanke and the Fed have pledged to hold rates low through mid-2013. This is similar to the pledge made by Bank of Canada Governor Mark Carney in 2009 and is consistent with the creditability school of central banking. An effective monetary policy is one that is clear, truthful, and creditable. The problem with Fed policy has been the language of "extended period of easing" is that it has no meaning without a definition of extended easing. That could be until December or it could be until mid 2012 or later. The Fed fund futures predicts whether next policy change will occur and it has been all over the map in what may be the expected to be the end of the easing policy. By providing specifics, the uncertainty is resolved and there has been a clear commitment to follow-through on a long-term strategy.

Now the issue is whether the market believes this "new" policy and is it enough to boost the economy.

Fed has no bullets

"The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."

The comments by the Fed suggested that there is no silver bullet policy to get the economy back on track. The comment also suggests that there will not be any positive news about the economy until 2013. They are expecting to hold the low rates for another 2 years. Additionally, there were three members who voted against the policy statement. There is no consensus at the Fed so there will be little extra help for equity or commodity markets.