Don’t Bet On It

 “ … 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.”

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Just In Time for Christmas

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? 

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Nothing Lasts Forever

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.”

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The Big Disconnect

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.

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