Archive for the ‘Interest Rates’ Category

Taper Tantrum Two

Monday, November 16th, 2015

Call it Taper Tantrum Two.

Two of the 12 members of the Federal Open Market Committee suggested on Thursday that it’s time to raise interest rates, causing the Dow Jones Industrial Average to drop 254 points.

To get a better idea of how ludicrous this is, consider the following:

  • The two hawks represent a sixth of the board. The hawks will need to more than triple their numbers to represent a majority.
  • Stock ChartThe two Fed members were speaking at a Cato Institute event called, “Rethinking Monetary Policy.” The event was not called, “Seven More Years of ZIRP,” “Zero Everlasting” or “Bring on QE4.”  Why would anyone be surprised that they spoke in favor of a rate hike?
  • One of the two, St. Louis Federal Reserve President James Bullard, is an alternate member of the FOMC and has long been advocating for a rate hike. This is the guy who caused the Dow to drop 100 points when he suggested in June 2014 that interest rates might be hiked in the first quarter of 2015.  We tried to determine the role of an alternate member, but the Federal Reserve Board’s description is about as clear as a Fed policy statement.  The page says there are 12 members of the FOMC, but lists 10, as well as four alternates.  So how do they come up with 12?  These are the people who are managing our economy.


A Way Out for the Fed

Monday, November 2nd, 2015

The economy grew at a tepid rate of 1.5% during the third quarter.  More than 100 million Americans aren’t working.  And the inflation rate is near zero.

That’s after seven years of the most radical monetary policy in history, which was supposed to lower unemployment while boosting the inflation rate to 2%.  If you’re the Federal Reserve Board, do you:

  • Conclude that keeping interest rates near zero isn’t helping the economy and abandon that policy.
  • Keep doing what you’re doing, hoping things will change next year, so you can take credit for it.
  • Conclude that the economy is still a mess even after you bought a few trillion dollars’ worth of bonds, so maybe you need to buy more bonds.

    When economists think rates will rise.

    When economists think rates will rise.

The correct answer, at least last week, was b., as the Fed voted to continue its zero interest rate policy (ZIRP), “surprising no one,” as The Wall Street Journal noted.

That means the Fed will keep on zirping, at least until December, but more likely into 2016.

Subject to Interpretation

The Fed’s policy statement, which has changed about as much as Fed policy over the past seven years, was interpreted by many to imply that the Fed “might” increase interest rates by a whole 0.25% when it meets in December.


ZIRP Everlasting

Monday, September 21st, 2015

Some things never change.  Apparently, the interest rate for Federal funds is one of them.

To the surprise of no one – except the “experts” and journalists who have been writing about an anticipated rate increase – the Federal Reserve Board voted last week to keep interest rates flatlined at about zero, which is where they’ve been since 2008.

The Fed may not have raised interest rates, but it at least raised interest this time. The International Business Times called it, “one of the most widely anticipated Federal Reserve decisions in decades.”

Really?  Why was this meeting any different from previous Fed meetings where interest rates remained unchanged?  Because the media-academic-pundit intelligentsia decided that it was time to increase rates.Yellen

In a Wall Street Journal poll of economists in August, 82% of economists thought the Fed would raise rates in September.  The week before the Fed met, 46% picked September as the most likely time for the Fed’s rate hike, 9.5% said the Fed would wait until October and 35% predicted that the Fed would wait until December.  Just 9.5% predicted the Fed would wait until 2016 to raise rates.

The economists polled don’t have seats on the Federal Open Market Committee, but everyone assumes they must know something. (more…)

Place Your Bets

Monday, September 14th, 2015

“What mighty Contests rise from trivial Things … ”

                            Alexander Pope, The Rape of the Lock 

Let’s put this in perspective. If the Federal Reserve Board raises interest rates at its meeting this week, it will likely raise them by 0.25%.

That’s 25 basis points … a quarter of a percentage point … a hair’s breadth. In the 1980s, U.S. long-term interest rates approached 20%, which is 80 times higher than the post-increase Fed rate would be.Interest-Rates-US-Fed-Funds2

So what’s the big deal?

The big deal is that any rate increase, even one as slight as a quarter of a point, would signal a change in direction for the Fed. It would mean that the easy money days are over. The stock market would no longer be artificially inflated by Fed policy. Yields would rise. The Keynesian bubble would burst. (more…)

Correct Yourself

Monday, August 31st, 2015

Last week was a tough week for investors, given that the market dropped for six consecutive days. It was an even tougher week for financial advisors and investment managers who have been advising clients to keep a heavy allocation of stocks in their portfolios.

Advisors who are telling their clients to invest a greater percentage of their portfolios into stocks should be able to answer clients’ questions about why they are so optimistic that stock prices will continue to increase.Exp_2013_11_21_0

Investors, likewise, should ask why they are following that advice.  Investors need to be accountable for their future.  If their advisors are wrong, they will pay the price, not their advisors.

Answer These Questions

Given the state of the world economy – and stock markets throughout the world – many questions need to be answered.  Here are some of them:

Where is future growth going to come from? Don’t look to China, which may claim to be growing at 7% this year, but few believe it. Don’t look to the U.S., where baby boomers are retiring and millions of people in all age groups have stopped looking for work.


Yellen’s Soliloquy: To Raise or Not to Raise

Monday, August 10th, 2015

To raise, or not to raise – that is the question:

Whether ’tis nobler in the mind to suffer

The barbs and insults of outraged pundits and journalists

Or to raise rates in spite of a sea of troubles

And by raising rates extend them. To stagnate, to grow —

No more (than 2%) – and by a flatlined economy to say we end

The headache, and the thousand natural shocks

The stock market is heir to.

We could go on imagining Fed Chair Janet Yellen in the role of Hamlet, another famous person who met with tragedy due to procrastination.  We could make note of “the law’s delay, the insolence of office, and the spurns that patient merit of th’ unworthy takes,” even if we don’t know what “spurns” Shakespeare was talking about when he wrote Hamlet.

We could go on, but “conscience does make cowards of us all,” so we’ll leave it at that and turn instead to last week’s comments by Dennis Lockhart, president of the Federal Reserve Bank of Atlanta.  Lockhart said “the economy is ready for the first increase in short-term interest rates in more than nine years and it would take a significant deterioration in the data to convince him not to move in September.” Yellen as Hamlet

The experts will tell you that anticipation of increasing rates is built into current stock prices, but if that’s the case, why did stock prices drop to their lowest levels since February after Lockhart’s remarks?  Maybe it was the disappointing earnings reports for the quarter, or the still-not-there employment numbers, but the most direct correlation appears to be with the fear of rising interest rates.

Keep in mind, too, that the statement didn’t come from the chairwoman.  Granted, Mr. Lockhart is a member of the Federal Open Market Committee, but he’s not Janet Yellen.  Perhaps the idea was to see what impact his comments would have so the Fed as a whole would still have the option to not raise rates in September.  Mr. Lockhart apparently drew the short straw at the last FOMC meeting.  (more…)

Maybe the Fed Is Just Lazy

Monday, August 3rd, 2015

Just last month we reported that the Federal Reserve Board’s policy statement was almost identical to its previous policy statement.  Now the Fed has issued another policy statement – and it’s almost identical to the last one.

Granted, there’s not much to say.  The economy has flatlined, the Fed has run out of policy tools and it’s mid-summer … a time when many people spend more time avoiding work than actually working.  But this is the Federal Reserve Board we’re talking about – the people who are in charge of our economy, since neither President Obama nor Congress want to do much about it.

So, for those of you who remember what a “carbon copy” is, the latest policy statement is a carbon copy of the last one.  Maybe we should just re-run our previous blog post. Yellen, Janet

“The most notable change,” as Goldman Sachs’ Chief Economist Jan Hatzius wrote, “was the addition of the word ‘some’ in the committee’s description of desired progress in the labor market.  Specifically, the June FOMC statement said that it will be appropriate to raise interest rates ‘when it has seen further improvement in the labor market’ (and is reasonably confident that inflation will move back to two percent).  Today’s statement said that rate hikes would be appropriate after ‘some further improvement in the labor market.’ ”

So “further” became “some further.”  (more…)

Why Worry About Climate Change When You’re $18 Trillion in Debt?

Monday, April 13th, 2015

Which crisis scares you more – climate change or our growing debt?

Climate change certainly receives a lot more attention in the media and a lot more attention from politicians, even if they’ve done little about it.

Last week, as one small example, President Obama said in an interview that his push to address climate change was influenced by an asthma attack his daughter Malia had when she was a four-year-old.  Asthma is a medical condition that has no connection to climate change.  It would be as logical to suggest that climate change cured her asthma, since she no longer has it and the climate has continued to deteriorate since she was four. National Debt and Interest 1 Wallace

We’re not suggesting that climate change doesn’t merit serious attention, but even if it’s as big a deal as environmental activists would have us believe, the U.S. is going to have little impact unless China, India and other ozone-busters get on board, too.

Debt, though, which President Obama and most members of Congress rarely talk about, just keeps rolling along.  (more…)

Bubble Busters

Monday, March 30th, 2015

“I had a stick of CareFree gum, but it didn’t work. I felt pretty good while I was blowing that bubble, but as soon as the gum lost its flavor, I was back to pondering my mortality.”                                                                                                                                                                             Mitch Hedberg

When the news about U.S. markets and the U.S. economy is depressing, I usually read about Europe and feel better about the U.S.

I spent a lot of time reading about Europe this week, but it didn’t do much good – even with Greece continuing to defy logic by pretending that it’s OK to live off of someone else’s money.

The problem is that easy money policy is not so easy anymore.  It never did prop up the U.S. economy, in spite of Keynesian enthusiasm, but at least it created the illusion of economic health by propping up the stock market.  Now, it’s unable to do even that. burst-your-bubble

U.S. markets fell throughout the week, but especially on Wednesday, which saw declines of more than 2% in the Nasdaq and Russell 2000. The Dow dropped nearly 300 points, or 1.6%, while the S&P 500 finished the day about 1.5% lower.  The New York composite stock exchange is now back to where it was last July and the S&P 500 is approaching November levels.

And there’s likely to be more trouble ahead, as a 4% drop in the biotech and semiconductor sectors showed a “classic parabolic reversal,” according to Peter Boockvar, chief market analyst at the Lindsey Group.  A parabolic reversal is a technical indicator that signals a change in an asset’s momentum.


No Animals Harmed in Drafting Fed Policy Statement

Monday, March 23rd, 2015

Thousands of years ago, Roman soothsayers would visit the oracles and interpret the entrails of slaughtered animals.  We haven’t advanced much since then.

Fortunately, no animals are slaughtered today, but many brain cells seem to die in the reading and interpretation of policy statements of the Federal Open Market Committee.  Like the soothsayers of old, today’s economists, journalists and pundits interpret the news and report it as fact – even though they generally haven’t a clue about what’s being said.  We’re not even sure the FOMC has a clue about what’s being said. Animal

The policy statements themselves are an anachronism.  In today’s world, most news is immediate.  By the time a newsworthy event ends, it’s been tweeted, blogged and reported on by anyone and everyone who is interested.

Yet the Fed issues policy statements on its Federal Open Market Committee meetings two months after the meetings take place.  Apparently, it takes the FOMC that long to agree on language that says nothing and can be interpreted however the reader would like it to be interpreted.

Many well-paid experts make a living off of these interpretations.  They will tell you, with certainty, that the Fed will definitely maybe raise interest rates sometime this year – or maybe next year – but they’re just guessing.