Posts filed under “Federal Reserve”

To Figure Out What the Fed is Going to Do, Just Ignore the Fed

After almost seven years, the beginning of the end of ultralow rates is here.

What’s that you say? The Fed is going to raise rates?

Remember the so-called taper tantrum in 2013, when some traders dumped Treasuries to express their ire at the Federal Reserve for having the temerity to suggest that rates can’t stay at zero forever? Today it’s hard to imagine anyone left who doesn’t understand a rate increase is coming, most likely sooner (2015) rather than later (2016). Still, there’s a whole generation of traders who have never seen a rate increase, the last of which was a 25-basis-point bump in the fed funds rate way back on June 29, 2006.

Regardless, normalization of interest rates can’t get here soon enough for me, if for no other reason than to end this incessant game of “Will they or won’t they?” Higher borrowing costs are a small price to pay to shut up the ninnies who feel compelled to engage in the semantic game of parsing each and every word of every speech, Q&A session, and most especially the latest Federal Open Market Committee statement.

Instead of hanging on every Fed utterance, let me suggest you take a different approach. Take one phrase from the Fed as your mantra: data-dependent. The rest of the Kremlinology over the incessant communications from, by or about the Fed should be ignored with prejudice. Instead, step back and take the 30,000-foot view to understand what is happening today, and what is most likely to occur in the future. That does a far better job communicating what is likely to happen than anything Fed Chair Janet Yellen will say in a news conference.

The big picture is simply this: The Fed has a dual mandate to keep inflation under control – check! – and to increase U.S. employment –check! When the Fed says any interest-rate decision is data-dependent, this is what it’s talking about. If you want to put some flesh on those bones, let’s consider a few bullet points about the present environment:

  • Employment: The U.S. labor market is the healthiest it has been in many years. During the past year, almost 250,000 new jobs were created each month. During the past four years, the average has been almost 210,000. Unemployment has come down dramatically from its peak of 10 percent in 2009 to 5.3 percent.
    When the Great Recession officially ended in June 2009, there were 130.9 million people employed in the U.S. As of the latest employment report, 141.8 million people had jobs. The July nonfarm payroll data, due next week, should show that the economy has added more than 11 million jobs since the recession ended. That is a reasonably robust employment picture.
  • Inflation: It’s modest, running at less than the Fed’s 2 percent target. The dollar is the strongest against a basket of major currencies in almost 12 years, and gold is down almost $800 an ounce from its 2011 peak. Forget hyperinflation; even those who have been forecasting modest inflation have been wrong.
  • Stock: Major indexes are either at or within 5 percent of record highs. I believe the Fed overemphasizes this measure, and misunderstands the wealth effect’s impact on the economy. Still, balance sheets of U.S. corporations are the healthiest they have been in decades, as are profits. Stocks have been a reliable forward indicator of growth and demand for capital, and as such, are also supportive of more normalized rates.
  • Economy: During the past five years, the U.S. economy has grown — more slowly than is ideal, but faster than most have expected.
  • Financial system: It has been stabilized thanks to new rules that reduce or eliminate some of the most risky behavior.

I don’t want to paint too rosy a picture. There are certainly plenty of negatives:

• Gross domestic product: Growth has been erratic, with weakness in winter months far greater than what can reasonably be blamed on weather.

• Prices: Those for key industrial commodities, including copper, oil and iron, have tumbled. Oil might be under pressure due to huge increases in supplies, but the same can’t be said of the industrial metals, which suggests declining demand.

• Home ownership: This is at the lowest level in almost a half century; millennials continue to live in their parents’ basements in disproportionate numbers.

• China’s economy: Growth is slowing and its stock market bubble is popping. The world’s most-populous country might be in trouble.

• Europe: The euro zone is an endless debacle; even as there are signs that the Greek debt crisis may be resolved in some manner, nobody (myself included) truly believes this isn’t going to erupt again in a year or two.

But the bottom line remains this: On balance, the data remain far stronger than anyone in the midst of the financial crisis would have imagined at this point. And many key economic indicators are stronger than the Fed had earlier suggested would be the threshold for ending its zero-interest-rate policy.

You can parse each utterance of every Fed governor, or you can look at the data. I prefer the latter — and it tells me interest-rate normalization will start before Christmas.


Originally published as: Pay Attention, Ignore the Fed



Category: Data Analysis, Economy, Federal Reserve

Three forces driving US long rates

From Deutsche Bank: A striking feature of my ongoing discussions with clients is that many still believe that as a result of secular stagnation “long rates will never go up”. The problem is that holding onto that view has been expensive for the past seven weeks. Long rates in the US are driven by 1)…Read More

Category: Federal Reserve, Fixed Income/Interest Rates, Markets, Think Tank

Dissent: No Stranger in the History of the FOMC

Click for a ginormous infographic. Source: Federal Reserve Bank of St. Louis

Category: Digital Media, Federal Reserve

Bring Back the Drachma!

The never ending sturm und drang over the state of Greek debt, membership in the euro zone and the potential shocks of a debt default have moved from tragedy to comedy to monotony. The solution is simple. It won’t be fast, it won’t be easy, but it will be a huge improvement for all concerned….Read More

Category: Bailouts, Currency, Current Affairs, Federal Reserve

NFP: Is Good News Bad News?

Over the years, I have spilled far too many pixels on how overhyped the monthly nonfarm payroll report is. What matters isn’t any single month, given how noisy and subject to future revisions the provisional release actually is. The recency effect makes you place a greater emphasis on what just occurred in a data series, a sign of the evolutionary leftover code hanging around your wetware….Read More

Category: Employment, Federal Reserve, Philosophy

The Fed Raising Rates?

The Fed Raising Rates? David Kotok Cumberland Advisors, May 26, 2015       It’s not about when; it’s about the path to get there. Suppose the Fed lifts rates on the short end of the yield curve by a quarter point in September. Or December. Will it really make a difference? Suppose the Fed’s…Read More

Category: Federal Reserve, Fixed Income/Interest Rates, Think Tank

Why Are Interest Rates So Low?

Why Are Interest Rates So Low? Marco Del Negro, Marc Giannoni, Matthew Cocci, Sara Shahanaghi, and Micah Smith Liberty Street Economics, May 20, 2015     In a recent series of blog posts, the former Chairman of the Federal Reserve System, Ben Bernanke, has asked the question: “Why are interest rates so low?” (See part 1, part…Read More

Category: Federal Reserve, Fixed Income/Interest Rates, Think Tank

Unsteady Footing

Source: WSJ

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Category: Economy, Federal Reserve

Fed Dove-Hawk Scale

Source: Reuters

Category: Digital Media, Federal Reserve, Inflation

The QE Era

I am on the road this week in San Francisco, but I wanted to share this wonderful collection of charts from Jim Bianco of Bianco research:






There’s much more after the jump

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Category: Bailouts, Federal Reserve, Markets