Tag Archives: federal reserve

Trump forced the Fed to raise rates. The results could be ugly.

Summary: Trump’s unexpected election forced changes in the forecasts and plans of the Fed’s leaders. Today’s decision to raise rates is their first result. Janet Yellen was quite candid about this. The implications of the rate rise are complex. The effects might prove calamitous.

Janet Yellen

Brendan Smialowski/AFP/Getty Images

Janet Yellen’s remarks at the press conference

She clearly pointed to Trump’s plans for a combination of tax cuts plus large increases in infrastructure and military spending. The Fed’s leaders have obviously been thinking about the effects of the resulting massive deficits — and decided to preemptively strike against them.

“…We’re operating under a cloud of uncertainty at the moment, and we have to wait and see what changes occur and factor those into our decision-making as we gain more clarity,”

“…Changes in fiscal policy or other economic policies could potentially affect the economic outlook. Of course it is far too early to know how these policies will unfold. Moreover, changes in fiscal policy are only one of the many factors that can influence the outlook in the appropriate course of monetary policy.”

“…There may be some additional slack in labor markets, but I would judge that the degree of slack has diminished. So I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment. But nevertheless let me be careful that I am not trying to provide advice to the new administration or to Congress as to what is the appropriate stance for policy. There are many considerations that Congress needs to take account of and many bases for justifying changing fiscal policy.”

“…Our decision to raise rates should certainly be understood as a reflection of the confidence we have in the progress the economy has made and our judgment that that progress will continue. …It is a vote of confidence in the economy.”

“…We want to feel that if the economy were to suffer an adverse shock that we have some scope through traditional means of interest rate cuts to be able to respond to that.”

From Reuters. Also see Yellen’s opening statement at the press conference.

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Today’s mythbusting: the Fed is not suppressing interest rates

Summary: Here’s another in my series of economic myth-busting articles, explaining that the Fed is not suppressing rates. It is a follow-up to Ignore The Bond Bears, The Fed Will Not Raise Rates.

The Federal Reserve Monster

Part of the magical, even divine, powers attributed to the Federal Reserve is their ability to set interest rates — both short- and long-term. Since the quantitative easing ended we have seen this taken to the logical extreme — with the Fed suppressing rates without visible action! In physics that’s quantum mechanics. In finance it is mythology.

Economists, both Left (e.g., Paul Krugman) and Right (e.g. Tyler Cowen) acknowledge that the post-crash low rates do not result from the Fed’s action. They do so for good reason.

The Fed is not buying bonds — their most effective (almost the only effective) means of depressing interest rates. QE3 ended on 29 October 2014. Two years ago. On that day total Federal Reserve assets were $4,487 billion. As of 19 October 2016 they were $4,467 billion. See the graph.

In theory the Fed could affect prices by buying and holding a substantial fraction of the $64 trillion in outstanding US debt and loans. Taking the fraction they own from 3% to 6% over 7 years (2008-2014) did not seriously change the bond market’s structure. Perhaps the structure of credit spreads differs from what it might have been if the Fed had not added the Treasury securities and government-guaranteed mortgages. It’s difficult to determine such things. But it the effect on credit spreads, if any, is unlikely to have affected interest rates.

If the Fed is not suppressing rates, why are they so low? Fed Vice-Chairman Stanley Fischer explains in this speech on 17 October.

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Move evidence the Fed will not raise rates on our slow-mo economy

Summary: On Thursday I posted “Ignore The Bond Bears, The Fed Will Not Raise Rates“. Many on Wall Street disagree — most of whom since 2012 have expected a cycle of rising rates to begin really soon.  Such as J. P. Morgan’s prediction of a rate increase in December. Friday’s data confirms my forecast in a big way.

Slow Economic Growth

First, yet another in the almost endless series of economic indicators showing the US economy stuck in “slow”. Retail sales — critical in our consumer-driven nation — is up only 2.9% YTD YoY, with September +3.4% YoY (NSA) — see the report. We should be at peak growth in this expansion; instead growth faded in Fall 2014 and has remained slow since then.

Retail Sales - September 2016

Click to enlarge.

Second, with this data the Atlanta Fed’s GDPnow model lowered its prediction for Q3 real GDP to +1.9%. The forecast on August 5 was for 3.8% growth. On October 28 we get the advance estimate from the BEA. The average GDP growth since the trough in Q2 of 2009 has been 2.1%. The data for Q3 shows no change in that slow growth.

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The Fed Will Not Raise Rates In The Foreseeable Future

Summary: Since 2010 I have said that the economy is locked in slow-mo and the Fed will not start a new rate cycle. It’s even more true today than in 2010.

  • Many investors and economists are convinced that the Fed will soon end its near-zero interest rate policy and begin raising rates – “normalizing them”.
  • As I and others have said since the crash, these times are not normal (i.e., the post-WWII era has ended).
  • Most economic indicators show flat or slowing economic growth.
  • The developed world has fallen into secular stagnation.
  • The next event is not a boom requiring higher rates, but a recession.

Slow Economic Growth

Short-term riskless US rates are set in the world’s largest market:
when will rates return to normal?

Market yields on 3-month T-bills

We have been told for six years that soon interest rates will rise. During that time, the right-wing’s inflationistas have predicted rising inflation, or even hyperinflation (remember the 2010 “Obama will turn America into Zimbabwe” scare?). Incredibly, many experts still believe this despite…

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The Fed sees years of slowing growth. Prepare for years of political turmoil.

Summary: Slowing economic growth and rising inequality are the unmentioned elephants in Campaign 2016. While inequality gets the headlines, slowing growth is more important. The Fed forecasts show that they see it. Do we? Are we preparing for the resulting political or social turmoil, or trying to restart the engines of growth? Time is not our friend. {1st of 2 posts today.}

“Our real problem, then, is not our strength today; it is rather the vital necessity of action today to ensure our strength tomorrow.”
Eisenhower’s State of the Union address on 9 January 1958.

We imagine that we’re fast. That’s no longer true.
Fast Snail

Today the Fed released the governors’ and presidents’ new forecasts of economic growth (real GDP). Here we see one of the primary forces driving Campaign 2016, one almost invisible to  well-paid journalists and political gurus — but obvious to most Americans. Look at how their expectations for each year’s growth have shrank over time. Real GDP grew 2.4% in 2014 and 2015.

  • In Sept 2013 the Fed expected 2016 GDP growth of 2.5 – 3.3%; they now expect 2.1 – 2.3% (note the large drop in the high end forecast).
  • In Sept 2014 they expected 2017 growth of 2.3 – 2.5%; they now expect 2.0 – 2.3% (just starting its long slide).
  • In Sept 2015 they expected 2018 growth of 1.8 – 2.2%; they now expect 1.8 – 2.1% (the most distant forecasts fall slowly).
  • In Jan. 2011 they expected long term growth of 2.5 – 2.8%; they now expect 1.8 – 2.1% (note the large drop in the low end forecast).

This has been pattern for economists’ forecasts since the crash: optimism about the future several years out, with each year’s forecast slowly ratcheted down as the grimmer truth becomes obvious — to be replaced with new optimistic forecasts about the distant future. Worse still is the fall in expectations for long-term growth — the great background against we shape our plans.

Perhaps the most important measure of growth is that of real per capita personal income. This is national power in its purest form. Our memories of good and bad decades do not well match the facts. Rather we have had a long slide down, slowing growth, decade after decade. For more information see the interactive graphs at the Regional Economic Analysis Project (REAP). The bottom line…

  • 1960-69: 3.5% — The golden years,
  • 1970-79: 2.3% — The terrible 1970s (not so terrible).
  • 1980-98: 2.2% — The Reagan Revolution (Tax cuts! Didn’t work!),
  • 1990-99: 2.0% — The tech boom (Didn’t work, even before the bust!).
  • 2000-09: 1.2% — The Bush Jr. years (Tax cuts! Didn’t work!),
  • 2010-14: 1.4% — First half of the Obama years (Small uptick from the recovery and partial reversal of Bush Jr. tax cuts).

We have tried various nostrums to restore growth; none have worked. Worse, these are mean growth rates. Median income growth is much lower — less affected by rising inequality (as the 1% skims off more and more) and so better reflects life for average Americans.

Look to the futures shown on the graph below. America’s fate depends on which line we take. The top line means prosperity, if equitably distributed. The bottom line (secular stagnation) probably means a new America will arise, especially if unequally distributed (i.e., like the past 40 years, with most Americans’ real income stagnant — and some getting much less).

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The Government Has A Clip Full Of Ammo To Fight The Next Recession

Summary: It’s time to prepare for a possible recession in 2016. The manufacturing slump continues to deepen. A toxic combo: high inventories in November and weak retail sales in December. In February this expansion will tie for the 3rd longest expansion. {2nd of 2 posts today.}


The Atlanta Fed’s GDPnow model just lowered its est for Q4 real GDP from +0.8% to +0.6%. It is not better than carbon-based economists, but provides a different perspective. The *average* revision of real GDP is 1.2% from the advance announcement (coming Jan 20) to the final. The standard deviation is 1.0 — so a 2.4% revision is commonplace (roughly once every five years). Q4 real GDP could easily be red. We might already be in a recession.

Many people believe that the “government is out of bullets” to fight the next recession. We can take reassurance in the fact that they are wrong, and that the government has powerful tools to fight the next recession. We are not back in the horrific late 19th century, with its frequent and deep recessions — and no government counter-cyclical action.

See my latest report at Seeking Alpha: “The Government Has A Clip Full Of Bullets To Fight The Next Recession“, describing what actions we can expect to see. Post your comments there.

Why did the Fed raise rates? For the opposite of the reason they gave…

Summary: The Fed Governors told us they planned to raise rates, and months ago told us when they would do so. But their explanation of why they raised rates makes little sense. We can see their thinking by looking at the economic projections released at the Open Market Committee meetings. They raised rates not because the economy was accelerating to “take-off” speed, but because it was not.


After a year of waffling and flip-flopping, the Fed finally decided to raise rates, a decision that had the surprise of a sunrise. Yet there is a behind-the-curtain drama of clashing hopes and fears by the Fed’s governors and staff. This conflict does not appear in their statements or press conferences, but in their economic projections. Let’s start with their hope for continued economic growth: the predictions released yesterday for GDP and the fed funds rate.

See my analysis at Wolf Street.