New Favorite Test of US Monetary Policy Limits

April 20, 2011
By

(This article was first published on Timely Portfolio, and kindly contributed to R-bloggers)

After a little additional thought, I discovered that my Death Spiral Warning Graph post can be improved through the isolation of the expected inflation component of US 10y yields provided by the US 10y yield – US 10y TIP yield.  Unfortunately, it more accurately reveals the cost of aggressive US Fed monetary policy, and I think offers a more dire assessment of the limits of this policy.

From TimelyPortfolio

The gains we have experienced seem much more transitory and spurious than a simple chart of the S&P 500 reveals.

R code:

require(quantmod)
require(PerformanceAnalytics)

#get data from St. Louis Federal Reserve (FRED)
getSymbols("DGS10",src="FRED") #load 10yTreasury
getSymbols("DFII10",src="FRED") #load 10yTIP for real return
getSymbols("DTWEXB",src="FRED") #load US dollar
getSymbols("SP500",src="FRED") #load SP500

#new FED monetary policy limit monitor
#US10Y TIP Breakeven Inflation divided by the US Dollar
#old favorite is US 10y Nominal divided by the US Dollar

fedpolicytest<-merge((DGS10-DFII10)/DTWEXB,DGS10/DTWEXB)
colnames(fedpolicytest)<-c("US10yTIPInflationDivByUSDollar (new favorite)","US10yDivByDollar (old favorite)")
chart.TimeSeries(fedpolicytest["2003::2011"],legend.loc="topleft",
    main="US Monetary Policy Test-Does Bernanke Have a Limit?",colorset=c("cadetblue","darkolivegreen3"),ylab="",
    event.lines="2008-07-02",event.labels="July 2, 2008")
#add label to denote new recent high
text(NROW(fedpolicytest["2003::2011"])-15,fedpolicytest[NROW(fedpolicytest),1]+.001,"New High")
#label previous high
abline(h=fedpolicytest["2008-07-02",1],col="cadetblue")

To leave a comment for the author, please follow the link and comment on his blog: Timely Portfolio.

R-bloggers.com offers daily e-mail updates about R news and tutorials on topics such as: visualization (ggplot2, Boxplots, maps, animation), programming (RStudio, Sweave, LaTeX, SQL, Eclipse, git, hadoop, Web Scraping) statistics (regression, PCA, time series, trading) and more...



If you got this far, why not subscribe for updates from the site? Choose your flavor: e-mail, twitter, RSS, or facebook...

Tags: , , ,

Comments are closed.