Archive for the ‘Interest Rates’ Category

Hard Landing

Monday, February 1st, 2016

The Federal Reserve Board’s Open Market Committee met last week for the first time since raising interest rates in December and then published its usual policy statement full of mush.

It could have been written by Russia’s politburo.  It’s loaded with statements like this one: “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

In other words, if we’re not already in a recession, we’re pretty close to one, so the Fed is not going to raise rates to normal levels anytime soon. 20160128_policyerror_0

We’ll spare you the rest of the policy statement, which can be summed up as follows: “Blah, blah, blah.”  If the Fed were being honest, here’s what the latest policy statement would have said:

Well, that was a disaster.

We’ve been hearing for years that it was time to raise interest rates.  Virtually every economist on the planet, not to mention all of the journalists who think they understand the economy, had been predicting that the Fed would raise interest rates in December.  (more…)

Happy New Year: Meh.

Monday, January 4th, 2016

Well, it’s a brave new world for us cynics. Somehow, we all survived another year, but it wasn’t easy.

It was a good year for terrorists (Paris, San Bernardino), despots (hello Cuba, Syria, Iran, et al.) and hackers (any repercussions from China’s hacking of government records, federal employees sharing classified documents on unsecure servers, etc.?).

It was a bad year for investors.  Or, if not bad, not so good.  Heck, even Warren Buffett lost money, although he can afford a nick more than the rest of us. 2015

It would be generous to say that stocks ended the year “sideways,” as the year was volatile and the beginning was much more forgiving than the end.  Overall, though, the year was as flat as Twiggy in Nebraska.  As The New York Times put it:

“Name a financial asset — any financial asset.  How did it do in 2015?

“The answer, in all likelihood: Meh.

(more…)

Don’t Bet On It

Monday, December 28th, 2015

 “ … human beings have a natural tendency to manage risk after the fact.”

                              Michael A. Gayed, Pension Partners

 If I were betting on the ponies, Janet Yellen (or any Federal Reserve Board member, for that matter), would not be my first choice to bring along for consultation.

As we’ve previously pointed out, the Fed’s forecasting record is pretty lame.  The Fed has consistently projected a higher level of growth for the economy than we’ve actually seen (although even Fed projections are consistently well below the 3.3% average growth the economy enjoyed in the years between the end of World War II and the financial crisis). Fed Forecasts

The Fed projected growth rate for 2015 was 2.6% to 3%. While it’s too early to tell what the final numbers will be, the just-released latest estimate from the Bureau of Economic Analysis (BEA) for the third quarter of 2015 was 2.0% (down from its previous estimate of 2.1%), which isn’t too far off from the 1.5% growth rate for the first half of 2015.

As David Stockman noted, “Notwithstanding the most aggressive monetary stimulus in recorded history – 84 months of ZIRP and $3.5 trillion of bond purchases – average real GDP growth has barely amounted to 50% of the Fed preceding year forecast; and even that shortfall is understated owing to the BEA’s systemic suppression of the GDP deflator.” (more…)

Just In Time for Christmas

Monday, December 21st, 2015

Even if it were wrapped in shiny paper with a big red bow on it, virtually everyone would have guessed at this year’s Christmas present from the Federal Reserve Board.

For most of us, the rate hike will be the equivalent of coal in our stockings, but for the economists, analysts, stock pickers, pundits, talking heads and other assorted Fed groupies, the rate hike was essential, because it validates their existence.  After inaccurately predicting a rate hike throughout 2015, they finally got it right! 20151217_BAML1

The hike of 25 to 50 basis points in the federal funds rate is an insignificant increase (the Fed’s Board of Governors will raise the interest rate paid on reserves to 0.5% and the Federal Open Market Committee will offer a rate of 0.25% on reverse repurchase agreements), except that it represents the end of an era.  ZIRP, or zero-interest-rate policy, has now been replaced with ZIRP+ or maybe Near ZIRP, Almost ZIRP or A-Tad-Above ZIRP.  It’s still as close to ZIRP as you can get without being ZIRP.

Questions Raised

Regardless, after 84 months of ZIRP, it’s worth noting that interest rates have changed direction and are now heading up.  ZIRP was already old when this blog was started in January 2010.  Now what are we going to write about?  (more…)

Nothing Lasts Forever

Monday, December 14th, 2015

If the Federal Reserve Board has used all of its policy tools during the current expansion, what happens when there’s a recession?

That’s a question worth asking, even as the Fed appears ready to raise interest rates, albeit by just a smidgen, based on the pretext that ZIRP (zero interest rate policy) is no longer needed, given today’s allegedly booming economy.

On course, the economy’s not booming and we may even be heading into a recession, assuming we aren’t already in one (it’s hard to tell in today’s slow growth-no growth economy). Average Recovery

Just one sign that the boom is an illusion is the length of the current expansion.  The average recovery since the end of World War II has been 58 to 61 months, depending on whose numbers you use.  The current “recovery” hit the 58-month milestone in April 2014 – 20 months ago. As David Stockman pointed out this week in his “Contra Corner” blog, “the only expansion that was appreciably longer than the present tepid affair was the 119 month stretch of the 1990s.”

Nothing lasts forever and even Larry Summers, the former Treasury secretary and current Harvard professor, recognizes that the current expansion may be nearing an end. As he wrote last week in a Washington Post op-ed, “U.S. and international experience suggests that once a recovery is mature, the odds that it will end within two years are about half and that it will end in less than three years are over two-thirds.  Because normal growth is now below 2 percent rather than near 3 percent, as has been the case historically, the risk may even be greater now.”

(more…)

The Big Disconnect

Monday, December 7th, 2015

Imagine being stuck in a blizzard.  You look out your window and can see the snow piling up outside, yet the meteorologist on your TV is forecasting continuing sunshine and near tropical weather.

That level of disconnect is similar to that shown by some members of the Federal Reserve Board, who are preparing for liftoff, even as the economy implodes like a SpaceX rocket. The difference, though, is that the SpaceX failure was an unmanned flight; when the Fed acts, we’re all on board, like it or not.Fed Meteorologist

We recently reported that a couple of members of the Federal Open Market Committee had spoken publicly in favor of a rate hike. But this past week, they were no longer the outliers, as even Fed Chair Janet Yellen joined in during a speech before the Economic Club of Washington.

USA Today reported, “Federal Reserve Chair Janet Yellen signaled Wednesday that the Fed is all but certain to raise interest rates this month for the first time in nearly a decade, saying that gains in the economy and labor market have met the central bank’s goals.”

If you read on, though, that’s not quite what she said.  Given that inflation is nowhere near the Fed’s 2% goal, she couldn’t say that the central bank’s goals have been met. (more…)

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.

(more…)

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.

(more…)

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…)