Your preference has been saved. Remove your saved preference.
You must supply both a username and a password to login.
You must supply a username, password and token to login.
Sign on
Passport secured login icon  
Wealth Management
Asset Management
Asset Servicing
Insights & Research
About Northern Trust
Search go
Click to close drop down menu.
Click to close drop down menu.
Financial Intermediary
Learn about asset management solutions designed for Retirement Plan Advisors, TAMPs/Outsourcing Providers, Subadvisory Program Sponsors, RIAs/Financial Advisors and Trust Institutions.
Learn about asset management solutions including: global index management, active equity and fixed income, target retirement date funds, and manager of manager programs.
Get answers to your investment challenges with asset management capabilities including alternatives, exchange traded funds, fixed income, mutual funds and tax-advantaged equity.
Click to close drop down menu.
Northern Trust Logo

Weekly Economic Commentary


Kasriel’s Parting Thoughts – Has the Fed Boosted the Stock Market?

April 3, 2012

Download PDF Version

You bet. And aggregate demand for goods and services, too. If the Fed had not expanded its balance sheet in the past few years, the weakest U.S. economic recovery in the post-WWII era would have been even weaker and U.S. stock prices would have suffered. Chart 1 shows the year-over-year percent changes in monetary financial institution (MFI) credit. Private MFI credit is made up of the sum of loans and securities of commercial banks, savings & loan associations and credit unions. Total MFI credit is private MFI credit plus assets on the books of the Federal Reserve, i.e., Fed credit. The median year-over-year change in private MFI credit from Q1:1953 through Q4:2011 was 7.5%. In 2009, private MFI credit began what turned out to be its most severe contraction since the early 1930s. Although private MFI credit resumed growth in the second half of 2010, the rate of growth has been far below its long-run median rate of 7.5%. Even with the Fed’s second round of quantitative easing QE) from November 2010 through June 2011, total MFI credit, private plus Fed, has been growing well below the long-run median rate for private MFI credit. But without QE2, credit creation for the U.S. economy would have been even weaker.

Chart 1 - 04 03 2012

So, yes, the Federal Reserve’s actions have benefited the stock market as well as aggregate demand for goods and services in the U.S. economy. You got a problem with that? Would you have preferred that the Fed sit idle as it did in the early 1930s, with likely similar results for the stock market and the economy in recent years as occurred at that time? The Fed has simply provided some of the credit to the economy that the private MFI system would have had it not been crippled with loan losses. And even with the Fed’s additional credit creation, total MFI credit growth has fallen short of the long-run “normal” credit creation of private MFIs. I understand the frustration of those who argue that the stock market is being boosted “artificially” by the Fed. I, too, get frustrated when my forecasts are incorrect!

We Will Repeat One of the Silliest Market Rites on Wednesday – ADP

Tomorrow, Wednesday, April 4, the ADP estimate of private nonfarm payrolls will be released. Media will report that private payrolls in March increased/decreased by X thousands. Really? Is the ADP’s estimate what the actual change was in private nonfarm payrolls? Suppose you knew on Wednesday what the BLS was going to report as the change in March private nonfarm payrolls on Friday. Which estimate would you trade off of, that of ADP or BLS? Most people would trade off the BLS estimate. But we can’t constrain ourselves from trading off the ADP estimate. If the ADP estimates were good predictors of the BLS estimates, I might see the logic of this. Are the ADP estimates very good predictors? You can decide from the information in Chart 2. Mind you, this history of ADP estimates has been “sanitized.” That is, the ADP historical March figures match the BLS historical March figures because ADP figures are benchmarked to BLS levels in March. So the median “miss” of the ADP estimate to the BLS estimate of 55 K in absolute terms would likely have been even larger had not the ADP estimates been revised to comport with past March BLS estimates.

Chart 2 - 04 03 2012

To add to the silliness, the media will report that the ADP change came in above or below “economists” forecast of the ADP change. Why do we economists waste our time even attempting to forecast a number that will quickly fade into oblivion two days later? How much effort do most economists actually put forth in forecasting this number? Actually, I know why. Because the media survey us on this forecast. And we don’t have the courage to tell the media that this is an exercise that is a waste of everyone’s time.

Paul L. Kasriel (post April 30 contact email: econtrarian@gmail.com)


Minutes of March FOMC Meeting – Concerned, But Not Enough to Ease Monetary Policy Soon
by Asha Bangalore

The minutes of the March 13 FOMC meeting suggest that the Fed remains concerned on several fronts, see excerpts below.


“Nonetheless, a number of factors continued to be seen as likely to restrain the pace of economic expansion; these included slower growth in some foreign economies, prospective fiscal tightening in the United States, the weak housing market, further household deleveraging, and high levels of uncertainty among households and businesses.”

“With the economy facing continuing headwinds, members generally expected a moderate pace of economic growth over coming quarters, with gradual further declines in the unemployment rate. Strains in global financial markets, while having eased since January, continued to pose significant downside risks to economic activity.”


“Despite signs of improvement or stabilization in some local housing markets, most participants agreed that the housing sector remained depressed.”

Labor Market

“Labor market conditions had continued to improve and unemployment had declined in recent months, but almost all members saw the unemployment rate as still elevated relative to levels that they viewed as consistent with the Committee’s mandate over the longer run.”

The Fed’s level of concern about the economy is not severe to justify a near term consideration of asset purchases. However, the FOMC noted that it stands ready to act, if necessary, and two members noted the factors that would trigger additional monetary easing:

“The Committee also stated that it is prepared to adjust the size and composition of its securities holdings as appropriate to promote a stronger economic recovery in a context of price stability. A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate consistent rate of 2 percent over the medium run.”

There are bullish and bearish elements about economy in the minutes of the March meeting, but one seems to offset the other. Therefore, the possibility of another round of quantitative easing remains on the table and carries a non-negligible probability.

Speaking about the nature of recent economic data, auto sales numbers for March show a small decline to an annual rate of 14.4 million units from 15.1 million units in February. But, the first quarter average is 14.5 million units, up from 13.5 million in the fourth quarter and 12.5 million in the third quarter. The recent sequential quarterly gains of auto sales are impressive.

Chart 3 - 04 03 2012












The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.