Until now, about the only thing good you could say about the Federal Reserve Board in recent years is that it hasn’t followed central banks in Europe and Japan by lowering interest rates below zero.
But that may be where we’re going next.
Fed Vice Chair Stanley Fischer told Bloomberg Surveillance last week that he and his Fed colleagues believe that negative interest rates are a legitimate tool for central bankers to use in their efforts to achieve full employment and economic health.
If by Fed colleagues, he means his imaginary friends, we should be okay. But if he means his gal pal Janet Yellen et al, look out below. Over the cliff we go.
Negative rates would be doubling down on failed policies. If you’re a political figure, like Fed Chair Yellen and her Fed brethren, it would be anathema to admit that you’re wrong about anything, so if something doesn’t work, you rationalize that you just didn’t pour enough gasoline on the fire and you pour more.
Anyone who has to pay for health insurance will recognize the doubling-down approach being used in the coming election by the Democrats who gave us Obamacare. The Affordable Care Act, to the surprise of no one who is not a Democratic member of Congress, has become unaffordable, with a majority of exchanges shutting down because they are losing money. But, with premiums increasing by about 30% this year in some states, Democrats believe the answer is more government control of healthcare. The insurers, of course, are the bad guys, because they are no longer willing to lose billions propping up Obamacare.
Curiously, Fischer’s comments were sandwiched between the Fed’s Jackson Hole retreat last week and Friday’s jobs report, both of which led U.S. economic experts first to conclude that interest rates will increase any time now, then to conclude that they may not increase just yet.
In other words, politicians aren’t the only folks who double down when they’re wrong.
Concurrent with Ms. Yellen announcing at Jackson Hole that the case for increasing interest rates has “strengthened,” the estimate for second quarter growth in gross domestic product (GDP) was being revised downward to 1.1% from 1.2%. In these days of lowered expectations, you can get away with saying the economy has strengthened, since GDP grew by a measly 0.8% in the first quarter.
Still, the dollar strengthened last week on expectations of a rate hike in the near future.
Then came the ho-hum jobs report. Economists had predicted 170,000 new nonfarm jobs in August. The U.S. Bureau of Labor and Statistics reported that only 151,000 jobs were created in August. That’s about as close as economists ever seem to get, but, as MarketWatch noted, the numbers are “slowing sharply from earlier in the summer” and that could mean a continued delay in increasing interest rates.
The Fed has been touting the U-3 rate, which remained unchanged at 4.9% in the latest report. Based on that number, Fischer said last week that the U.S. is “very close to full employment.”
And yet the U-6 rate, which includes those who have given up looking for work, is stuck at 9.7%. As The Wall Street Journal reported on Friday, about seven million American men between the prime working ages of 25 and 54 have made a career out of not working. Full employment? As The Journal concludes, “Not even close.”
The Destruction of Capitalism?
While Fed policy statements are almost always opaque, economic conditions and the pending presidential election would lead anyone who isn’t a paid expert to conclude that a rate increase will not take place until December at the earliest.
Given the embarrassingly slow growth of the U.S. economy and Fischer’s comments about negative interest rates, we’re more concerned that the Fed will head in the opposite direction, which will only lead to a worsening economy.
Discussing zero interest rate policy (ZIRP) and negative interest rates this week, Janus bond king Bill Gross noted that “not only do they fail to provide an ‘easing cushion’ should recession come knocking at the door, but they destroy capitalism’s business models — those dependent on a yield curve spread or an interest rate that permits a legitimate return on saving, as opposed to an incentive for spending.”
About that incentive for spending and the destruction of capitalism’s business model … The Wall Street Journal last week quoted Peter Singer, founder of Elliott Management, as saying that “the entire developed world is insolvent.”
The op-ed piece noted that nearly $16 trillion worldwide in government bonds are now offering yields below zero. It quotes Richard Sylia, author of “The History of Interest Rates,” as saying, “There were no negative bond yields in 5,000 years of recorded history.”
What happens when a 5,000-year-old bubble bursts? We will soon find out.