Kind of steep

Supposedly we are breaking records for steepness in the curve, records going back to the 70s. Most of the money gets parked in the stock market, the S&P doing the vertical climb.  The issue here is whether Ben can pump the rest of QE2 money without breaking something.

What is likely to break?  For one thing there is no reason for corporations to expand, they make more money selling their paper.

According to Bloomberg, in the week ended January 14 S&P 500 insiders sold $163 million worth of stock in 54 separate transactions. They bought exactly $0.

The market is mostly driven by this high rate Fed channel, corporations are focused on that and have stretched out any long or medium term investments. Corporation operate in a channel with established capacity. If the short term rate is very active, the long term rate drops. As long as this continues, corporations will not hoard labor, will not expand hiring.

Bernanke has figured out that he fucked this up. But in his world he has locked himself in, he cannot change course for fear of his own position.Federal Reserve officials, who meet next week to ponder monetary policy, have signaled they aim to stick with Chairman Ben Bernanke's plan to buy $600 billion in long-term U.S. Treasury bonds. But they are struggling to find a coherent way to explain that—and other touchy issues they face in coming months—to the public.

WSJ
The entire article is focused on the mis communication problem, not the policy, except for thisone sentence:

With no immediate policy decision to make at its Jan. 26-27 meeting, the FOMC—the Fed governors in Washington and the presidents of the 12 regional Fed banks—is planning to focus on long-term growth prospects for the U.S. economy.

One can see the problem, what I show up above is that all the effects are to distract the markets from the long term growth problem. hen the Fed sees that it erred, what does it do? It relies on the old role as expectations generator, it can always blame the problem on the expectations channel.

Nice to hear from Thomas Hoenig on interest rates

He wants short term rates higher.
I can be very specific. We want the banking network to encode GDP as a yield curve to a specified precision. If you are a smart economist you might go look at a 1970s paper by JP Burg of Stanford, which I have referenced many times.

Why do we want to get a fixed precision measure of the banker's yield curve? It is minimal, to the precision limit, which is what economic agents seek. Maximum entropy encoding we call it, there is no obvious low hanging fruit; as in an obviously steep portion of the curve.

How can the Central Banker help (other than dissolving itself)? Let us once again go over this with the Universal Economic Calculator. Since the last time visited maximum entropy encoding of the yield curve, things have changed.  The result of the stimulus has put us deeper in the hole.  But at the short end, we want that kink gone, we want two year rates to be about 1%.  The way for the Fed to get that is to trade in one year bills such as to move the two year rate up to 1%.  Yet again, sample at twice the frequency as the target.

What happens if we do this?  We shut out the low multiplier Keynesian impulse, and replace it with an impulse that invests in overcoming the shortages we suffer.

Should we be hysterical about doing this?  Naw, the economy will boom.   Let me remind everyone, we have an abundance of technology to solve  shortages.