Wednesday, April 20, 2011

New Favorite Test of US Monetary Policy Limits

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:


#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

colnames(fedpolicytest)<-c("US10yTIPInflationDivByUSDollar (new favorite)","US10yDivByDollar (old favorite)")
    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


  1. I tried your code. But it got wrong results since this line:

    > fedpolicytest<-merge((DGS10-DFII10)/DTWEXB,DGS10/DTWEXB)
    1.#SNAN0, 1041472800.000000

    The mistake is in the merge.xts:
    merge.xts(e1, e2, all = FALSE, retclass = FALSE, retside = c(TRUE, :
    'NA' not allowed in 'index'

    Any ideas ? Thanks.

  2. I am struggling to understand why there would be NA in the index. Unfortunately I am of no help right now, but I will keep thinking about it to figure it out. Thanks so much for reading though, and hopefully, I can get an answer.