Taper Tantrum Two

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.

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Fed Policy Brings Record Stock Buybacks

Just once, we’d like to post that the economy is growing like pumpkins in September, that personal income is soaring (or at least not falling), that jobs are being created, businesses are being started and capital is being invested.

Would that it were true.

Readers of this blog may thing we’re pessimistic by nature. We’re not. It’s just that the economy has been a disaster for as long as we’ve written this blog.Non-Farm Payrolls

Now, finally, the unemployment rate has fallen to 5% – just under 10% if you’re counting people who have given up looking for work or who are working part-time because they can’t find full-time work.  In addition, the U.S. Bureau of Labor Statistics reported that personal income grew 2.5% between October 2014 and October 2015.

The economy is cyclical and it could signal that the job market is finally improving.  However, the labor force participation rate remains at its lowest level in 38 years, so we’ll leave the cheery propaganda to mainstream media. We feel an obligation to tell the truth and the truth is that the economy is still in dismal shape. We’re not in a recession – at least not according to the traditional definition of one – but defining the current period of economic non-growth as a “recovery” is a stretch.

Consider what the current recovery hath wrought:

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A Way Out for the Fed

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.

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.

“Before the Fed released its policy statement Wednesday,” The Wall Street Journal reported, “traders in futures markets put about a 1-in-3 probability on a Fed rate increase this year; after the release, that probability rose to almost 1-in-2.”

In addition, nearly two-thirds of economists participating in The Wall Street Journal’s latest monthly survey believe the Fed will raise rates in December.  Of course, these ar

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