New York – An article in today’s Wall Street Journal (The Fed and Liquidity, June 28, 2007) discusses current Federal Reserve policy and the relation to ubiquitous liquidity in the financial markets. The primary citation is Arthur Laffer (Laffer Associates) who was the inventor of the Regan era Laffer Curve. The Laffer curve was one of the tools used to justify tax cuts, on the basis that a reduction in taxes could in fact increase tax revenue.
Laffer is one of handful of well-heeled economic policy advisories, which assess the impact of policy on the economy, corporate profits and the business cycle. These shops assess the current fiscal and monetary stances and how they can be expected to impact the economy and financial market valuations in the coming months. Among the leaders in this space are:
- Medley Global Advisors
- Washington Analysis
- Laffer Associates
- PRS Group
There are between 20 and 30 significant economic policy shops in existence, which we have categorized as policy research providers. Of course, one could define every economist as a policy analyst, but Integrity has a more refined approach to distinguishing among the various strengths of economic research shops to arrive at their greatest value-add.
Much of the time, policy analysis, as a hotly followed discipline, is deemphasized by other factors in the economy, but at times likes these, where folks are looking for indications that we may be heading towards a period of tighter credit, the analysis moves into the spotlight. At issue, of course, is the loose credit of recent years, characterized by the sub-prime mortgage defaults and the access of private equity firms to covenant-lite bonds and subsequent reevaluation on recent weeks.
Laffer rightly suggests that real prices have disconnected from the fed funds rate in the past one to two years. Further, Laffer suggests that the Fed has maintained a solid grip on the monetary base over this timeframe. Laffer has found that the velocity of money has been soaring over the same timeframe. In this environment, Laffer says that the Fed is acting appropriately and that the current policy is non-inflationary from a policy standpoint.
There is one other concern for policy makersï¿½one that reared its ugly head in the Greenspan years. Credit spreads, or the difference between corporate and government bond yields escalated sharply in the run up and through the Long Term Capital Management event. When credit spreads widen, it tends reflects growing concerns about the credit quality. Yet today, these spreads are low by historical standards. Even so, a careful vigil by the economic policy crowd is being held.
As developments in the credit markets continue to evolve through the summer and into the fall, we anticipate that the economic policy research groups will be in hot demand.