Home » Posts tagged 'fed'

Tag Archives: fed

Olduvai
Click on image to purchase

Olduvai III: Catacylsm
Click on image to purchase

Post categories

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai III: Cataclysm
Click on image to purchase

Next Central Bank Puts QE Unwind on the Calendar

Next Central Bank Puts QE Unwind on the Calendar

The end of an era spreads.

Markets were surprised today when the Bank of England took a “hawkish” turn and announced that three out of nine members of its Monetary Policy Committee – including influential Chief Economist Andrew Haldane, who’d been considered dovish – voted to raise the Bank Rate to 0.75%, thus dissenting from the majority who kept it at 0.5%. This dissension, particularly by Haldane, communicated to the markets that a rate hike at the next meeting in August is likely. The beaten-down UK pound jumped.

But less prominent was the announcement about the QE unwind. Like other central banks, the BoE heavily engaged in QE and maintains a balance sheet of £435 billion ($577 billion) of British government bonds and £10 billion ($13 billion) in UK corporate bonds that it had acquired during the Brexit kerfuffle.

Before it starts shedding assets on its balance sheet, however, the BoE wants to raise the Bank Rate enough to where it can cut it “materially” if needed, “reflecting the Committee’s preference to use Bank Rate as the primary instrument for monetary policy,” as it said.

In this, it parallels the Fed. The Fed started its QE unwind in October 2017, after it had already raised its target range for the federal funds rate four times.

The BoE’s previous guidance was that the QE unwind would start when the Bank Rate is “around 2%.” Back in the day when this guidance was given, NIRP had broken out all over Europe, and pundits assumed that the BoE would never be able to raise its rate to anywhere near 2%, and so the QE unwind could never happen.

Today the BoE moved down its guidance about the beginning of the QE unwind to a time when the Bank Rate is “around 1.5%.”

…click on the above link to read the rest of the article…

The Fed’s “Inflation Target” is Impoverishing American Workers

Redefined Terms and Absurd Targets

At one time, the Federal Reserve’s sole mandate was to maintain stable prices and to “fight inflation.”  To the Fed, the financial press, and most everyone else “inflation” means rising prices instead of its original and true definition as an increase in the money supply.  Rising prices are a consequence – a very painful consequence – of money printing.

Fed Chair Jerome Powell apparently does not see the pernicious effects of inflation (at least he seems to be looking around… [PT]) Photo credit: Andrew Harrer / Bloomberg

Naturally, the Fed and all other central bankers prefer the definition of inflation as a rise in prices which insidiously hides the fact that they, being the issuers of currency, are the real culprit for increased prices.

Be that as it may, the common understanding of inflation as rising prices has always been seen as pernicious and destructive to an economy and living standards.  In the perverted world of modern economics, however, the idea of inflation as an intrinsic evil has been turned on its head and monetary authorities the world over now have “inflation targets” which they hope to attain.

America’s central bank is right in line with this lunacy. According to the Fed’s “May minutes”, it wants

Translated into understandable verbiage, the Fed wants everyone to pay at least 2% higher prices p.a. for the goods they buy.

Yes, by some crazed thinking US monetary officials believe that consumers paying higher prices is somehow good for economic activity and standards of living!  Of course, anyone with a modicum of sense can see that this is absurd and that those who espouse such policy should be laughed at and summarily locked up in an asylum!  Yet, this is now standard policy, not just with the Fed, but with the ECU and other central banks.

…click on the above link to read the rest of the article…

Watch Live: The World’s Top 3 Central Bankers Discuss What’s Next

Update: Powell has maintained his hawkish tone from last week’s press conference with his comments in Sintra on the labor market and monetary policy. He expressed confidence in the US economy and said “the case for continued gradual rate hikes is strong.”

According to CitiFX’s market commentary, its traders highlighted one dovish remark when Powell was speaking about the uncertainty surrounding the NAIRU: “Natural rate estimates have always been uncertain, and may be even more so now as inflation has become less responsive to the unemployment rate…as I mentioned, a tight labor market could draw more people into the labor force.”

Here are the headlines:

  • POWELL SAYS CASE FOR CONTINUED GRADUAL RATE HIKES IS `STRONG’
  • POWELL: JOB MARKET TO STRENGTHEN FURTHER, SUPPORT WAGE GROWTH
  • FED’S POWELL REMARKS IN TEXT OF SPEECH AT ECB FORUM IN PORTUGAL
  • POWELL: INFLATION HAS MOVED UP CLOSE TO FED’S 2% GOAL
  • POWELL: U.S. ECONOMY PERFORMING VERY WELL
  • POWELL SAYS GRADUAL RATE-HIKE CASE `BROADLY SUPPORTED’ ON FOMC
  • POWELL: YET TO SEE INFLATION STAY NEAR GOAL ON SUSTAINED BASIS
  • POWELL: U.S. FISCAL POLICY TO ADD TO DEMAND OVER NEXT FEW YEARS

* * *

European Central Bank President Mario Draghi, Fed Chairman Jerome Powell and Bank of Japan Governor Haruhiko Kuroda will appear on a policy panel Wednesday that’s set to begin at 15:30 CET (that’s 10:30 am ET). They will be joined by Philip Lowe, the Governor of the Reserve Bank of Australia. The panel is the last big event of the 2018 ECB annual forum on central banking, which was held in Sintra, Portugal and featured the theme “price and wage-setting in advanced economies.”

Of course, there is likely to be disagreement among the 4 (or 3 big guys) as Kuroda remains pedal to the metal on his easing policies (despite the stealth tapering), Draghi has started to adjust to a tightening regime, and Powell is in full normalization mode.

All of which is ironic given that all three  face notable demises in their recent economic data…

 

Watch the panel live below:

America’s Debt Dependence Makes It An Easy Economic Target

America’s Debt Dependence Makes It An Easy Economic Target

There is a classic denial tactic that many people use when confronted with negative facts about a subject they have a personal attachment to; I would call it “deferral denial” — or a psychological postponing of reality.

For example, point out the fundamentals on the U.S. economy such as the fact that unemployment is not below 4% as official numbers suggest, but actually closer to 20% when you factor in U-6 measurements including the record 96 million people not counted because they have run out of unemployment benefits. Or point out that true consumer inflation in the U.S. is not around 3% as the Federal Reserve and the Bureau of Labor Statistics claims, but closer to 10% according to the way CPI used to be calculated before the government started rigging the numbers.  For a large part of the public including a lot of economic analysts, there is perhaps a momentary acceptance of the danger, but then an immediate deferral — “Well, maybe things will get worse down the road, 10 or 20 years from now, but it’s not that bad today…”

This is cognitive dissonance at its finest. The economy is in steep decline now, but the mind in denial says “it could be worse,” and this is how you get entire populations caught completely off guard by a financial crash. They could have easily seen the signs, but they desperately wanted to believe that all bad things happen in some illusory future, not today.

There is also another denial tactic I see often in the world of politics and economics, which is what I call “paying it backward.” This is what people do when they have a biased attachment to a person or institution and refuse to see the terrible implications of their actions.

…click on the above link to read the rest of the article…

Kass – Risk Happens Fast

Risk Happens Fast

  • Risk happens fast – Trump trade policy whacks futures this morning
  • We remain in a trading sardine market – not an eating sardine market
  • Hastily crafted policy that conflates politics is dangerous in a flat and networked world
  • The return of an untethered Orange Swan is market unfriendly … brace yourselves
  • The Supreme Tweeter will likely “Make Uncertainty and Volatility Great Again” (#MUVGA)

The First Half of 2018

The first half of 2018 has been a tale of two markets. Maybe three markets.

January brought a market fervor – in which global equities rose dramatically, likely in response to the expected stimulative contribution and impact of the Administration’s reduction in statutory tax rates.

As interest rates began to climb in January, bullish investor sentiment crested and the risk parity trade went array.

Stocks fell violently in February and the new regime of volatility commenced – in a market revealed as increasingly illiquid.

The S&P Index fell from nearly 2900 and successfully tested the 2550 level twice. Several meek rallies commenced but the S&P had 2-3 more successful tests at about 2600 and stocks recently closed in on 2800 (S&P Index).

1Q-2018 corporate revenues and profits didn’t disappoint but the complexion of the market had clearly changed – and valuations (the S&P Index’s price earnings ratio expanded by almost 3 points in 2017) began to contract. Wall Street, which outperformed Main Street in 2017 – reversed roles in the first six months of 2018.

While the stock market reeled with volatility since January 1, the FAANG stocks generally stood tall throughout the year as the market narrowed and investor interest focused on the 5-10 anointed stocks.

The first half of 2018 was also characterized by a series of questionable and controversial presidential policies (the most recent being trade/tariff decisions) at the same time the Federal Reserve was pivoting on monetary policy. By overtly playing to his base, having little sense of economic history, Trump has contributed to even greater volatility in a market without memory from day to day.

…click on the above link to read the rest of the article…

Living Dangerously

Regular readers of Goldmoney’s Insights should be aware by now that the cycle of business activity is fuelled by monetary policy, and that the periodic booms and slumps experienced since monetary policy has been used in an attempt to manage economic outcomes are the result of monetary policy itself. The link between interest rate suppression in the early stages of the credit cycle, the creation of malinvestments and the subsequent debt dénouement was summed up in Hayek’s illustration of a triangle, which I covered in an earlier article.[i]

Since Hayek’s time, monetary policy, particularly in America, has evolved away from targeting production and discouraging savings by suppressing interest rates, towards encouraging consumption through expanding consumer finance. American consumers are living beyond their means and have commonly depleted all their liquid savings. But given the variations in the cost of consumer finance (between 0% car loans and 20% credit card and overdraft rates), consumers are generally insensitive to changes in interest rates.

Therefore, despite the rise of consumer finance, we can still regard Hayek’s triangle as illustrating the driving force behind the credit cycle, and the unsustainable excesses of unprofitable debt created by suppressing interest rates as the reason monetary policy always leads to an economic crisis. The chart below shows we could be living dangerously close to another tipping point, whereby the rises in the Fed Funds Rate (FFR) might be about to trigger a new credit and economic crisis.

 

living danger 1

Previous peaks in the FFR coincided with the onset of economic downturns, because they exposed unsustainable business models. On the basis of simple extrapolation, the area between the two dotted lines, which roughly join these peaks, is where the current FFR cycle can be expected to peak. It is currently standing at about 2% after yesterday’s increase, and the Fed expects the FFR to average 3.1% in 2019.

…click on the above link to read the rest of the article…

Is Draghi Really Ending QE?

Mario Draghi said the euro-area economy is strong enough to overcome increased risk,  and therefore this justifies the European Central Bank’s decision to end bond purchases bringing to an end a decade-long failed experiment. The truth behind this statement is starkly different than being portrayed in the press. Draghi also pledged to keep interest rates unchanged at current record lows until his personal term is finished next year. There is the contradiction for if the ECB stops buying debt, who will do so at artificially low rates of interest?

Draghi knows full well that he has utterly destroyed the bond markets in Europe. The ECB has also made it clear that they will REINVEST when the bonds previously purchased mature. The Federal Reserves has taken the opposite position and will NOT reinvest allowing their balance sheet to shrink.

If the economy is that strong, then why not end the QE right now? The fallacy here is that this has nothing to do with the economy. The ECB has simply had the member states on life-support. Interest rates will soar in Europe on long-term debt or there will be no buyers. Pension funds cannot buy 10-year bonds at even 3% when they need 8% to cover liabilities.

The statement by Draghi is creating a total paradox. You cannot keep short-term interest rates where they are and charge negative rates for deposits and simultaneously end QE and expect to sell bonds to the public at insanely low levels.

The press interprets this as the ECB with ending QE because they are “betting that the euro-area economy is robust enough to ride out an apparent slowdown amid risks including U.S. trade tariffs and nervousness that Italy’s populist government will spark another financial crisis” reported Bloomberg.

…click on the above link to read the rest of the article…

America’s Greatest Crisis Upon Us…Debt to GDP Makes It Clear

America’s Greatest Crisis Upon Us…Debt to GDP Makes It Clear

America in the midst of its greatest crisis in its 242 years of existence.  I say this based upon the US federal debt to GDP (gross domestic product) ratio.  In the history of the US, at the onset of every war or crisis, a period of federal deficit spending ensued (red bars in graph below) to overcome the challenge but at the “challenges” end, a period of federal austerity ensued.  Until now.  No doubt the current financial crisis ended by 2013 (based on employment, asset values, etc.) but federal spending continues to significantly outpace tax revenues…resulting in a continually rising debt to GDP ratio.  We are well past the point where we have typically began repairing the nation’s balance sheet and maintaining the credibility of the currency.  However, all indications from the CBO and current administration make it clear that debt to GDP will continue to rise.  If the American economy were as strong as claimed, this is the time that federal deficit spending would cease alongside the Fed’s interest rate hikes.  Instead, surging deficit spending is taking place alongside interest rate hikes, another first for America.
The chart below takes America from 1790 to present.  From 1776 to 2001, every period of deficit spending was followed by a period of “austerity” where-upon federal spending was constrained and economic activity flourished, repairing the damage done to the debt to GDP ratio and the credibility of the US currency.  But since 2001, according to debt to GDP, the US has been in the longest ongoing crisis in the nations history.

But what is this crisis?  The chart points out the debt to GDP surges in order to resolve the Revolutionary war, the Civil War, WWI, and WWII. But the debt to GDP surges since 1980 seem less clear cut.  But simply put, America (and the world) grew up and matured, but the central banks and federal government could not accept this change.

…click on the above link to read the rest of the article…

The Federal Reserve: Public Enemy Number One

The Federal Reserve: Public Enemy Number One

When currency was backed by gold, a central bank’s main function was to maintain the value of the issued currency in terms of gold.  For example, if a central bank created too much money against the gold reserves in the banking system, an increasing number of people would begin to exchange their currency for gold.  To combat this, a central bank would be forced to raise interest rates and decrease the money supply.  The higher interest rates would incentivize people to exchange gold for larger savings on deposit that earn interest.  Banking reserves – gold – would return to the banking system and the economy would return to balance.  The prime reason for insisting on defining currency in terms of a precious metal was to provide a self-correcting braking mechanism to the creation of money.  As expressed by the great Wilhelm Röpke:

If in the production of goods the most important pedal is the accelerator, in the production of money it is the brake.  To insure that this brake works automatically and independently of the whims of government and the pressure of parties and groups seeking “easy money” has been one of the main functions of the gold standard.  That the liberal should prefer the automatic brake of gold to the whims of government in its role of trustee of a managed currency is understandable.”[1]

The US dollar was backed by gold as recently as 1971.  Any central bank in the world could present the Federal Reserve $35 and receive 1-ounce of gold in exchange.  However, on August 15, 1971 – blaming it on the “gnomes of Zurich” – President Nixon “temporarily” broke the dollar’s last link with gold.  Nixon closed the “gold window” and reneged on the promise to exchange an ounce of gold for $35.  Since then, the system of credit in the US has been under the Fed’s complete control.

…click on the above link to read the rest of the article…

Weekly Commentary: The Great Fallacy

Weekly Commentary: The Great Fallacy

A big week in the world of monetary management: The Federal Reserve raised rates 25 bps, the ECB announced plans to wind down its historic QE program, and the Bank of Japan clung to its “powerful monetary easing” inflationist scheme. A tense People’s Bank of China left rate policy unchanged, too weary to follow the Fed’s path.
The renminbi declined a notable 0.5% versus the dollar this week. More dramatic, the euro was hammered 1.9% on Draghi’s game plan. Also on Thursday’s dollar strength – and even more dramatic – the Argentine peso sank another 6.2% (down 34% y-t-d). The session saw the Brazilian real drop 2.2%, the Hungarian forint 2.6%, the Czech koruna 2.2%, the Polish zloty 2.0%, the Bulgarian lev 1.9%, the Romanian leu 1.9% and the Turkish lira 1.7%.

The FOMC, raising rates and adjusting “dot plots” higher, was viewed more on the hawkish side. The ECB, while announcing plans to conclude asset purchases by the end of the year, was compelled to add dovish guidance on rate policy (“…expects the key ECB interest rate to remain at present levels at least through the summer of 2019…”). Blindsided, the market dumped the euro. The Fed and ECB now operate on disparate playbooks, each focused on respective domestic issues. Anyone these days focused on faltering emerging market Bubbles, global contagion and the rising risk of market illiquidity?

June 13 – Financial Times (Sam Fleming): “Jay Powell put his personal stamp on the Federal Reserve on Wednesday, as the new chairman vowed to speak in plain English and hold more regular press conferences as he fosters ‘a public conversation’ about what the US central bank is up to. The Fed’s statement after the Federal Open Market Committee meeting, which detailed its decision to raise rates 0.25% and set a course for two more increases this year, also bore his imprint, as Mr Powell stripped away some of the economic verbiage that cluttered its communications in recent years. Mr Powell’s break from the approach of his predecessor… was more a stylistic one than a radical change of monetary policy strategy.”
…click on the above link to read the rest of the article…

Nomi Prins: The central banking heist has put the world at risk

“The 2008 financial crisis was the consequence of a loosely regulated banking system in which power was concentrated in the hands of too limited a cast of speculators,” Nomi Prins tell me. “And after the crisis, the way the US government and the Federal Reserve dealt with this corrupt and criminal banking system was to give them a subsidy.”

Such strong, withering analysis is, perhaps, unexpected from someone who has held senior roles at Wall Street finance houses such as Bear Stearns and Goldman Sachs. But Prins is no ordinary former banker.

Prins has chronicled the closed and often confusing world of high finance through the 2008 crisis and beyond

The US author and journalist left the financial services industry in 2001. She did so, in her own words, “partly because life was too short”, and “partly out of disgust at how citizens everywhere had become collateral damage, and later hostages, to the banking system”.

Since then, Prins has chronicled the closed and often confusing world of high finance through the 2008 crisis and beyond. Her writing combines deep insider knowledge with on-the-ground reporting with sharp, searing prose. Alongside countless articles for New York Times, Forbes and Fortune, she has produced six books – including Collusion: how central bankers rigged the world, which has just been published.

Her main target in the new work is “quantitative easing” – described by Prins as “a conjuring trick” in which “a central bank manufactures electronic money, then injects it into private banks and financial markets”. Over the last decade, she tells me when we meet in London, “under the guise of QE, central bankers have massively overstepped their traditional mandates, directing the flow of epic sums of fabricated money, without any checks or balances, towards the private banking sector”.

…click on the above link to read the rest of the article…

NY Fed President Dudley Complains Unemployment is Too Low, Rate Hikes Needed

NY Fed President William Dudley is worried about the low unemployment rate. He thinks the Fed needs to be above neutral.

New York Fed President William Dudley will retire Monday. Current San Francisco Fed chief John Williams will take over.

“The federal funds rate will probably have to climb a little bit above neutral, because the unemployment rate is already — from most people’s vantage points — below a sustainable level of unemployment consistent with stable inflation,” Dudley told reporters Friday. “So, I think the move will be eventually to a slightly tight monetary policy.”

“I’m sort of expecting that the peak in the federal funds rate in this cycle will be lower than in past cycles, but I have quite a bit of uncertainty about that,” Dudley said during a conference call.

The unemployment rate is too low now, so we need to hike.

Last year he said consumers should “unlock” housing equity to boost the economy.

“The previous behavior of using housing debt to finance other kinds of consumption seems to have completely disappeared,” and people are leaving the wealth generated by rising home prices “locked up” in their homes.

“A return to a reasonable pattern of home equity extraction would be a positive development for retailers, and would provide a boost to economic growth.”

Dudley is a real gem. He will be missed for the comedy he provides.

Free Money Calculation: Fed Will Give $36.93 Billion of Taxpayer Money to Banks

The Fed upped the interest it pays on excess reserves to 1.95% today. This is free money (taxpayer funded) to banks.

The Fed bumped up the interest it pays on excess reserves today to 1.95%. Currently, excess reserves sit at $1.894 trillion.

The math is simple enough. At the current rate, the Fed will hand over approximately $36.93 billion of taxpayer money to banks. That assumes the status quo, but things will change.

Factors

  1. The Fed is shrinking its balance sheet slowly. That reduces excess reserves the Fed pays interest rates on.
  2. When the Fed hikes interest rates, it also increases the interest it pays on excess reserves.

The first point acts to reduce free money, the second acts to increase free money.

Note to ECB

If you want to recapitalize Italian banks, just give them free money instead of your profit-reducing policy of holding rates negative.

Taxpayer money?

Yes! Otherwise the Fed would return this money to the US Treasury.

Some claim free money is paying banks to not lend. The claim is fallacious. Banks do not lend from excess reserves.

That was the amount I calculated on April 17, 2017. Interest then was 1.0%.

Even though the Fed’s balance sheet is lower, the increased rate bumped up the free money calculation to $36.93 billion.

No Outrage!

Why isn’t $36.93 billion in free money to banks an outrage?

Blain: Will The Fed Hike Unleash The “Swing” Moment When Suddenly Balance Is Lost?

Fed, Stratospheric dangers, US corporate leverage and the greater competition to manage funds.

“Of all extinct life-forms, dinosaurs are the most popular. Why that should be is not clear… ”

All eyes on the Fed today. They will hike by 25bp to 2% – the 6th hike in 7 quarters. Slow and gradual. This is something of a one-off in terms of the economic environment – unconventional being the word. Easy financial conditions in terms of growth, inflation, jobs and the ongoing fiscal spending and tax boosts. Plus, we’ve got the positive sentiment effects of strong equity and real estate markets – when folk feel rich they feel positive! Plus plus, with the rest of the world still on negative or zero interest rates, then money continues to pour into Treasuries making the ballooning deficit a SEPT (Someone Else’s Problem Tomorrow). Asset prices are inflated, but still weakness in consumer prices and wages. This remains an “interesting” space in terms of the potential policy pitfalls, and the “swing” moment – when suddenly balance is lost and the centre cannot hold…

Perhaps the writing is already on the wall? I was slightly concerned to read the National Federation of Independent Business (the US SME organisation) believes: “Main Street optimism is on a “stratospheric trajectory” thanks to recent tax cuts and regulatory changes”. Stratospheric is often confused with ballistic. Stratospheric could mean its’ going into orbit, or simply that a ballistic launch will reach the stratosphere. Sadly, ballistic means the kind of trajectory Kim Jong Un claims to no longer be interest in…`

(Last time someone was talking “stratospheric” it was in relation to Bitcoin, and that’s not ending well. Final comment on ballistic trajectories….I note a headline about Telsa slashing salaried staff.. )

…click on the above link to read the rest of the article…

Supply v Demand-Side Economic & What is Never Discussed

COMMENT: Usury, first the Fed starves we savers for return for 18 years with their zero percent interest rates and gave us two giant stock market crashes in that intervening period.
The lack of return caused us to cannibalize our savings and trillions of savings lost thru the stock market crashes and ditto home equity. Then property taxes explode.
Now even the cost of funds is still at historic lows credit card rates move from 8/9% to 12% in a matter of months.

What are Grandma and Grandpa to do? Knowing what the Feds original charter was is not an answer because they have become the master manipulator for the wealth transfer from the people to their greedy cohorts.

Have followed your public work since well before your legal problems and greatly appreciate your cycle work but the wealth transfer must stop and some jail sentences applied and claw back enacted.

Or is the wealth transfer already accomplished and the taxpayer/consumer left holding the bag?
Martin, thank you for your efforts.

LL

REPLY: I fully agree. This is the battle between Demand v Supply-side Economics. This age of “New Economics” that was ushered in by Marx and Keynes, justified that government had the power to manipulate society to achieve their goals. The idea of raising and lowering interest rates to influence demand has utterly failed. The 800-pound gorilla in the room is the $200 trillion+ of sovereign debt around the world. Demand-Side Economics cannot possibly work when the biggest debtor is government and the raising of interest rates only increases their deficits that come back as tax increases reducing the net wealth of the people and lowering economic growth.

…click on the above link to read the rest of the article…

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai III: Cataclysm
Click on image to purchase