Tag Archives: monetary policy

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.

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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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ECRI looks at our Great Monetary Experiment: It’s Too Big to Fail

Summary: The Economic Cycle Research Institute (ECRI), who correctly predicted the slow recovery, explains the slow growth in which the US and Japanese economies are mired, and the fantastic monetary experiment waged by central banks to prevent them slumping into recessions.

Appreciate the wonders of our time.

"Machinery of the Stars" by alexiuss

Machinery of the Stars” by alexiuss at DeviantArt.

The recovery since 2008 has been difficult for predictions, both by bulls and bears. The bulls have repeatedly predicted accelerated growth and rising inflation. But the bears too-often predicted a recession (boldness is often expensive for forecasters). In September 2011 the ECRI staff predicted a recession in 2012. They repeated that call in the following months, and in November 2012 said the recession had began in July.

A few of us correctly predicted continued slow growth — no boom, no recession (e.g., see this from August 2013) — and our similarity to Japan (see this of mine from September 2014).

On balance the bears have more accurately seen the big picture than the bulls. Paul Krugman, Larry Summers, and the ECRI (me, too) saw this secular stagnation (see this from November 2013). And growth has been slow. Over the past 10 years (Q1 2006 to Q1 2016) real growth in gross domestic income (GDI) has been 2.3%/year. More importantly, growth in GDP per capita has been only 1.2%/year. As for the future, the Fed expects even slower long-term growth in real GDP — only 2%.

So we should listen to the ERCI’s perspective on the US economy, the Fed’s efforts to stimulate it, and the global economic context. The West is running one of the greatest economic experiments in history, with high stakes.

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Stratfor: Germany and ECB Face Off. Better than any WWF fight.

Summary: The monetary experiments central banks are running in Japan, Europe, and America will shape the global economy of the 21st century — no matter what the result. Here Stratfor looks at the growing tensions between the ECB and Germany. It’s a sound analysis. But note Stratfor’s top-down perspective. By “Germany” they refer not to its people, but to its corporations and elites. Stratfor provides a useful look at how the 1% (and their minions) see the world.


Germany and the European Central Bank Face Off

Stratfor, 20 April 2016


  • The European Central Bank (ECB) looks as though it will stay on the course of loose monetary policy in the coming months.
  • Germany’s insurance and banking sectors will suffer as a result, whipping up anti-ECB sentiment among German voters.
  • The frustration of German voters will increase friction between Germany and the ECB.


The ECB is gearing up to hold its first monetary policy meeting since bank President Mario Draghi announced a new package of measures that included more quantitative easing and an interest cut that will push rates, already in the negatives, even lower. During the April 21 meeting, Draghi will probably address concerns raised by German Finance Minister Wolfgang Schaeuble that loose ECB policies created and fueled the rise of the German opposition party Alternative for Germany (AfD). As Schaeuble’s statements highlight, the relationship between Germany and the ECB is antagonistic — and it is going to get worse.

Because the eurozone lacks a unified fiscal institution for its central bank, the ECB, to collaborate with, the bank plays more of a political role than peer institutions such as the U.S. Federal Reserve do. Unlike the Fed, the ECB has to balance the competing demands of the national economies under its jurisdiction. Aiding one country’s economy often means harming another’s.

Northern European countries such as Germany have historically preferred a tighter monetary policy so as to control inflation. Southern European countries such as Italy, by contrast, are more accustomed to looser monetary policy and to the economic stimulation that follows. Their confrontation over monetary policy has snowballed since the beginning of the global financial crisis, and the ECB is stuck in the middle.

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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.