The economic outlook can be summed up in five words: Everything’s great, except what isn’t.
We’ll lead with the “everything’s great” part, as seen through the filter of the Federal Reserve Board. As Fed Chair Janet Yellen reminds us after every meeting, the Fed has two goals—lowering the unemployment rate and stabilizing prices.
The Fed’s target unemployment rate is 4.7% to 5.8% and, if you believe the U.S. Bureau of Labor Statistics (see below re: why you shouldn’t), the Fed has accomplished that goal, as the current rate is at an eight-year low of 4.9%. The Fed’s target inflation rate is 2% and, depending on how you measure inflation, it’s close to that number.
“The Fed’s preferred measure, the personal consumption expenditures price index, rose 1.3% in January from the previous year, and so-called core inflation—which excludes volatile food and energy prices—was 1.7%,” The Wall Street Journal reported. “The consumer-price index rose 1% in February from a year earlier, but core CPI was up 2.3% for the year, the largest 12-month increase since May 2012.”
So the Fed could have logically declared its mission accomplished and begun to gradually increase interest rates, as was expected after December’s initial miniscule rate increase. So why was the vote at last wek’s meeting 10-1 against a rate hike?
261 Words from the Chair
That’s a question that even occurred to Steve Liesman, the senior economics reporter for CNBC, who typically reports on the Fed and the state of the economy as if he were Donald Trump describing his hotels. As Zerohedge reported, this is what Liesman asked Ms. Yellen:
“Madam Chair, as you know, inflation has gone up the last two months. We had another strong jobs report. The tracking forecasts for GDP have returned to two percent. And yet the Fed stands pat while it’s in a process of what it said at launch in December was a process of normalization.
“So I have two questions about this. Does the Fed have a credibility problem in the sense that it says it will do one thing under certain conditions, but doesn’t end up doing it? And then, frankly, if the current conditions are not sufficient for the Fed to raise rates, well, what would those conditions ever look like?”
As wordy as the questions were, Ms. Yellen’s response was even wordier. We could cut-and-paste the entire 261-word answer here and call it a day, but prefer not to torture (or lose) our readers. Well, maybe a little torture. Here’s a snippet:
“Those assessments of appropriate policy are completely contingent on each participant’s forecasts of the economy and how economic events will unfold. And they are, of course, uncertain.”
Zerohedge called her response “a 261-word jumbled nightmare of James Joyceian stream of consciousness interspersed with high-end econobabble that we, for one, were completely unable to follow.”
The sentence above is pretty clear, though. The Fed isn’t raising rates, because it can’t predict the future. So, apparently, we will never have another rate increase unless the Fed retains the services of a fortune teller.
Asked afterward if he understood the answer to his questions, Liesman said, “Not much, it was not precisely responsive to the question I asked.”
In other words, the Fed does have a credibility problem. And, while Madam Chair dodged the question, the answer is surely one of the following … and most likely all of the following:
- The Fed doesn’t really care about unemployment or inflation; it’s about continuing to manipulate the stock market. The accompanying chart supports this assumption.
- The economy isn’t as strong as the Fed would have us think it is. This is where “except what isn’t” comes in.
- With the European Central Bank, China and Japan all easing, the U.S. can’t compete if it raises rates.
- Keynesian economics and easy monetary policy are hurting, not helping, the economy, but changing direction would spook investors and compromise the Fed’s power.
Hints about the Fed’s actions can be found in the latest policy statement, even though the Fed makes a point of saying as little as possible and continues to simply update past policy statements.
One new line is that “global economic and financial developments continue to pose risks” (i.e., other central bankers are even crazier than we are and are adopting negative interest rates, which makes the Fed look sane in comparison).
The statement also notes that exports have been soft, which is bound to happen when the dollar strengths at a time when most of the world is weakening its currency with some form of quantitative easing. Of course, cheaper imports will provide bargains for American consumers, but that’s counter to the Fed’s inflation goals.
The statement also blames declining energy prices for continuing low inflation, even though energy prices are not included when calculating the rate of inflation.
And while the Fed statement focuses on the inflation goal not being met, we suspect that unemployment and stagnant wages continue to be more worrisome to the average American.
Rigging the Numbers
For a good read on how the Bureau of Labor Statistics jiggers the unemployment numbers, check out what David Stockman has to say about the latest job report. As just one example he provides, consider the “auto-regressed integrated moving average” or ARIMA, a seasonal adjustment factor. We wish we were making this up, but we’re not.
“Stated in plain English,” Stockman writes, “they created an adjustment factor for February which purportedly embodies average seasonal variations going back five years and projected forward five years. Then they repeat the same ten-year smoothing process for each remaining month of the year.
“As it turns out, however, the market-moving and CNBC-fooling headline ‘jobs’ print for any given month is a complete creature of the ARIMA seasonal adjustment razzmatazz. For one thing, the seasonal adjustment factor is often 5X to 12X larger than the headline delta or job gain for the month. The adjustment swamps the adjustee.”
Stockman also frequently refers to the stock market, as manipulated by the Fed, as “the casino.” Noting that it is “unhinged from any connection to fundamental economic and financial reality,” he predicts that “the naive and desperate among main street investors who still, unaccountably, frequent the casino will presently be taken out back and shot yet another time.”
So it may appear that the Fed is doing nothing, yet again, but as managers of the casino, the Fed provided yet another bump for the 1%.
Given his experience managing casinos, maybe Donald Trump should be chairing the Federal Reserve Board, rather than running for president.