Archive for September, 2015

Abnormalization and QE4

Monday, September 28th, 2015

It seems to be a policy of the Federal Reserve Board to never use a two-syllable word when a four- or five-syllable word is available.

So we have “quantitative easing” instead of “bond buying,” “tapering” instead of “reducing,” “forward guidance” to describe announcements of future Fed activities, and “macroprudential supervision” for “we have no idea what to do, but we have to say something that sounds important.” US-economy_try-it-now-707x404

What may be the most annoying Fed malapropism, though, is the Fed’s use of the word “normalization,” as in the following quote from Fed Chair Janet Yellen after a recent Fed meeting:

“For all of us, the appropriate policy decision is going to be data dependent and all of us will be looking at the incoming data and our opinions about the appropriate timing of normalization are likely to shift as we look at how the data evolves.”

In other words, we’re currently going through a period of abnormalization and the return to “normalization” will begin when the Fed starts raising interest rates.  Although, after eight years of zero interest rate policy (ZIRP), shouldn’t we consider ZIRP to be the new normal?  (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…)

ECB: Cheap Oil Is the Problem, Not Iran’s Nukes

Monday, September 7th, 2015

If the European Central Bank (ECB) is to be believed, the biggest threat from the Middle East is not Iran getting nukes, it’s Saudi oil.

What’s the big deal?  Saudis have had a cushy lifestyle for decades, thanks to their oil production, but U.S. fracking is making the U.S. practically oil independent and that’s cramping the Saudis’ lifestyle, so the country has turned on the tap, producing more oil, which lowers prices, which makes it less profitable for American companies to use fracking techniques to drill for oil.

Unfortunately, lower oil prices have made it difficult for central bankers to increase the rate of inflation, which has this goal-oriented group in a snit.  OMG!!!

"Government debt gdp" by Jirka.h23 - Own work. Licensed under CC BY-SA 3.0 via Commons.

“Government debt gdp” by Jirka.h23 – Own work. Licensed under CC BY-SA 3.0 via Commons.

Not to worry.  Oil prices jumped a whopping 27% last week, in spite of Saudi vows to continue current production levels, in part based on the announcement that Russian President Vladimir Putin would meet this week with Venezuelan President Nicolas Maduro to discuss “possible mutual steps” to stabilize oil prices.

Apparently, central bankers missed that news, because when the ECB met last week, inflation was the focus.  (more…)