Summary and comments on the Fed minutes from Nov 3-4

The full minutes can be found at the Federal Reserve's website. Since the fed in its attempts to record and explain their actions is still confusing to most, I'll summarize, comment, and extrapolate upon these minutes.

Ability to reverse its policy

One of the most important things for the Federal Reserve is the ability to be able to reverse its policy. Right now the fed has an "accommodative" stance on the economy. The people in charge are doing whatever they can to foster growth and get money moving. The fed is just about as accommodative as its ever been, with interest rates near 0 and a $2 trillion balance sheet. The famed $2 trillion balance sheet contains U.S. Treasury bonds, various forms of corporate and public debt, and other instruments I will not attempt to explain. The fed believes, if needed, they could reverse their policy by raising interest rates, selling some of these "assets," or letting the U.S. Treasury and other entities repay their loans. Remember, the Federal Reserve is just a giant bank. The "assets" of the fed are for the most part loans it gives out to various entities at various interest rates. Since the Fed is the largest bank, it gets to set its own interest rates. Oh, and the Fed can create its own money too, so if you wonder where the $2 trillion came from.......

The Fed's summary of the economy

The Fed rehashes a lot of what we know. The labor market is bad, but its not getting as bad as fast as it did before. Here they use the term "albeit", a word Jim Cramer featured in a Mad Money show on CNBC. Good job Cramer, you identified a buzz word, which is even used by the Fed now. The Fed says "The length of the average workweek for production and nonsupervisory workers decreased, and the index of aggregate hours worked for this group fell, albeit more slowly than earlier in the year." One can sum up the labor market in much the same way: getting worse, but not as fast as before.

Businesses, however, are having a whale of a time. CNBC mentioned this morning 25% of S&P 500 companies reported record profits in the 3rd quarter. Industrial production is expanding, retail sales are strong. Seems businesses, especially large businesses, are doing quite well. After cutting 3 million workers and much excess fat, businesses are thriving. Except, when they want to expand and need to borrow money for expansion. Consumers are finding it equally hard to borrow money. One can look at this as a bad thing in the short term, because it hinders economic growth now, but good in the long run. With consumers and businesses carrying less debt, the economy will have less of a burden in the future. In fact, businesses and consumers have been shrinking their debt load for many months now. My guess is this is due to tight credit markets and job losses which shut the door on consumers seeking credit.

Inflation is pretty much non existent. Makes it easier on consumers, but a bit harder for businesses to grow profits. Some inflation is good for businesses. Pricing power means more profits. The Fed seems very subdued in its forecast for inflation over the next few quarters.

My opinions of these statements

Despite the crazy run in gold recently, the supper accommodative policy of the governments around the world, oil which is back to expensive levels relative to just a few years ago, and health care costs which will continue to hinder consumers with or without government intervention, the fed sees little risk to high inflation any time soon. The low inflation stance may be missing the mark. Oil could easily take off back to $100 and we could have hyper inflation. Oil prices are not controlled by the U.S., but rather the world. The high population centers of the world are still growing and still consuming more fossil fuels, while the amount of oil the world pumps out of the ground is back to declining. The situation is ripe for inflation. So the fed reports a relative lack of inflation pressure and an outlook for relatively low inflation, but I disagree in this regard.

The fed's ability to pull money out of the economy and therefore stem the tide of inflation dwindles as the months go by. As the U.S. becomes less of a percentage of the global economy, the prices we pay for items are less influenced by the supply and demand picture naturally occurring in the U.S. and created by our governments. The government has no ability to just turn on an oil spigot if prices should sky rocket again. No government has the ability to adjust oil supply in large ways in the short run. So while the government may have the ability to adjust the inflation picture to some degree using instruments such as the money supply (print money or just delete it quite literally with one mouse click) and interest rates, the U.S. government does not have the ability to adjust the global economy quite like it could just ten years ago.

I agree with Cramer and his rants on the word "albeit." The economy is still shrinking, albeit at a slower rate. Year over year the new estimate for real GDP change was -2.4%, released this morning. That's not as bad as it was last quarter or even the quarter before. But, we are not growing. The consumer is just about dead in the water and the Fed will not come out and say so, but instead danced around saying so again in this release. They remain worried about the consumer and they tell us the consumer has less and less credit, less and less income, less and less of everything, but they won't wrap it up in one succinct statement. I'll give it a shot

     "The consumer is in bad and worsening shape. Consumers are getting worse much more slowly, but there are no indications the consumer will be getting better any time soon."

And that, my friends, is my summary and comments on today's fed minutes release. They were a lot less revealing as in, say, their August minutes, but still very insightful.