Home » Posts tagged 'Federal Reserve' (Page 16)

Tag Archives: Federal Reserve

Stephen Roach is worried that the Fed has set the world up for another financial market meltdown.

Lower for longer rates and the proliferation of unconventional monetary policy have created “a breeding ground for asset bubbles, credit bubbles, and all-too frequent crises, so the Fed is really a part of the problem of financial instability rather than trying to provide a sense of calm in an otherwise unstable world,” Roach told Bloomberg TV in an interview conducted a little over a week ago.

To be sure, Roach’s sentiments have become par for the proverbial course. That is, it may have taken everyone a while (as in five years or so) to come to the conclusion we reached long ago, namely that central banks are setting the world up for a crisis that will make 2008 look like a walk in the park, but most of the “very serious” people are now getting concerned. Take BofAML for instance, who, in a note we outlined on Wednesday, demonstrated the prevailing dynamic with the following useful graphic:

Perhaps Jeremy Grantham put it best: “..in the Greenspan/ Bernanke/Yellen Era, the Fed historically did not stop its asset price pushing until fully- fledged bubbles had occurred, as they did in U.S. growth stocks in 2000 and in U.S. housing in 2006.”

Indeed. It’s with that in mind that we bring you the following excerpts from a new piece by Roach in which the former Morgan Stanley chief economist and Yale fellow recounts the evolution of the Fed and how the FOMC ultimately became “beholden to the monster it had created”.

* * *

From “The Perils of Fed Gradualism” as posted at Project Syndicate

By now, it’s an all-too-familiar drill. After an extended period of extraordinary monetary accommodation, the US Federal Reserve has begun the long march back to normalization.

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

Why the Fed Will Never Succeed

December 24, 2015

Why the Fed Will Never Succeed

The Fed will never succeed in its attempt to manage inflation and unemployment by varying interest rates.

This is because it and its economists do not accept the relationship between, on one side, the money it creates and the bank credit its commercial banks issue out of thin air, and on the other the disruption unsound money causes in the economy. This has been going on since the Fed was created, which makes the question as to whether the Fed was right to raise interest rates recently irrelevant.

Furthermore, it’s not just the American people who are affected by the Fed’s monetary management, because the Fed’s actions affect nearly everyone on the planet. The Fed does not even admit to having this wider responsibility, except to the extent that it might have an impact on the US economy.

That the Fed thinks it is only responsible to the American people for its actions when they affect all nations is an abrogation of its duty as issuer of the reserve currency to the rest of the world, and it is therefore not surprising that the new kids on the block, such as China, Russia and their Asian friends, are laying plans to gain independence from the dollar-dominated system. The absence of comment from other central banks in the advanced nations on this important subject should also worry us, because they appear to be acting as mute supporters for the Fed’s group-think.

This is the context in which we need to clarify the effects of the Fed’s monetary policy. The fundamental question is actually far broader than whether or not the Fed should be raising rates: rather, should the Fed be managing interest rates at all? Before we can answer this question, we have to understand the relationship between credit and the business cycle.
…click on the above link to read the rest of the article…

Is the US Heading for an Economic Bust

December 24, 2015

Is the US Heading for an Economic Bust

On Wednesday December 16 2015 Federal Reserve Bank policy makers raised the federal funds rate target by 0.25% to 0.5% for the first time since December 2008. There is the possibility that the target could be lifted gradually to 1.25% by December next year.

Fed policy makers have justified this increase on the view that the economy is strong enough and can stand on its own feet. “The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident the inflation will rise over the medium term to its 2 percent objective”, the Fed said in its policy statement.

Various key economic indicators such as industrial production don’t support this optimism. The yearly growth rate of production fell to minus 1.2% in November versus 4.5% in November last year.According to our model the yearly growth rate could fall to minus 3.4% by August.

Although the yearly growth rate of the CPI rose to 0.5% in November from 0.2% in October according to our model the CPI growth rate is likely to visibly weaken.

The yearly growth rate is forecast to fall to minus 0.1% by April before stabilizing at 0.1% by December next year.

So from this perspective Fed policy makers did not have much of a case to tighten their stance.

Fed policy makers seem to be of the view that the almost zero federal funds rate and their massive monetary pumping has cured the economy, which now seems to be approaching a path of stable economic growth and price stability, so it is held.

On this way of thinking the role of monetary policy is to make sure that the economy is kept at the “correct path” over time.

Deviations from the “correct path”, it is held, occur on account of various shocks, which are often seen as of a mysterious nature. We suggest that the present Fed is following the footpath of Greenspan’s Fed, which was instrumental in setting in motion the 2008 economic crisis.

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

The Political Consequences of Financial Crises

December 23, 2015

The Political Consequences of Financial Crises

LONDON – I may not be the only finance professor who, when setting essay topics for his or her students, has resorted to a question along the following lines: “In your view, was the global financial crisis caused primarily by too much government intervention in financial markets, or by too little?” When confronted with this either/or question, my most recent class split three ways.

Roughly a third, mesmerized by the meretricious appeal of the Efficient Market Hypothesis, argued that governments were the original sinners. Their ill-conceived interventions – notably the US-backed mortgage underwriters Fannie Mae and Freddie Mac, as well as the Community Reinvestment Act – distorted market incentives. Some even embraced the argument of the US libertarian Ron Paul, blaming the very existence of the Federal Reserve as a lender of last resort.

Another third, at the opposite end of the political spectrum, saw former Fed Chairman Alan Greenspan as the villain. It was Greenspan’s notorious reluctance to intervene in financial markets, even when leverage was growing dramatically and asset prices seemed to have lost touch with reality, that created the problem. More broadly, Western governments, with their light-touch approach to regulation, allowed markets to career out of control in the early years of this century.

The remaining third tried to have it both ways, arguing that governments intervened too much in some areas, and too little in others. Avoiding the question as put is not a sound test-taking strategy; but the students may have been onto something.

Now that the crisis is seven years behind us, how have governments and voters in Europe and North America answered this important question? Have they shown, by their actions, that they think financial markets need tighter controls or that, on the contrary, the state should repudiate bailouts and leave financial firms to face the full consequences of their own mistakes?

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

No Courage, Feckless Experiments and the Deep State

December 23, 2015

No Courage, Feckless Experiments and the Deep State

Hosannas and Hat-Tipping

Today’s post is about you dear reader… and the world you live in. That world got notice last week that henceforth short-term interest rates would be more than zilch. From all over the planet came hosannas and hat-tipping.

Some commentators congratulated the Yellen Fed on its careful stewardship… others applauded the strength of a U.S. economy that permitted a “return to normalcy.” But some fretted, too…

hat tipping An overenthusiastic outbreak of hat-tipping Photo credit: Jeremy Daniel

Perhaps it is too soon, they thought. What if the economy failed to reach “escape velocity”? And what if the Fed – like has happened to so many other central banks around the world – was forced to beat a retreat?

The first few hours of trading after the Fed’s move seemed to confirm its wisdom: U.S. stocks traded higher. But over the following two days, the Dow lost more than 600 points. Then on Monday, it found its feet with a 123-point increase.

A quarter of a percentage point rate hike is piddling. But supposedly, it signals a new regime – a recovering economy that can afford to pay rates of interest more closely connected to the real world.

At the Diary, we never claim to know what is true… what is right… or what the future will bring. The best we can do is to try to recognize error. And then, only big ones. But here we need no careful regard for the details.

Here, big as life, we see George Armstrong Custer riding to the Little Big Horn. We see the Titanic headed out of Southampton harbor. We see Lenin headed back to Russia… Napoleon back to France… and another Bush or Clinton headed back to the White House…

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

What Fresh Horror Awaits The Economy After Fed Rate Hike?

December 23, 2015

What Fresh Horror Awaits The Economy After Fed Rate Hike?

There is one predominant reality that must be understood before a person can grasp the nature of the Federal Reserve and the decisions it makes, and that reality is this: The Fed’s purpose is not to defend or extend American markets or the dollar; the Fed’s job is ultimately to DESTROY American markets and the dollar. I have been repeating this little fact for years because it seems as though many otherwise intelligent people simply will not accept the truth, which is why they have trouble comprehending the actions that the Fed initiates.

When analysts make the claim that the Fed has positioned itself “between a rock and a hard place” in terms of policy, this is not entirely true. The Fed is exactly where it wants to be in terms of policy; but the central bank has indeed positioned the U.S. ECONOMY between a rock and a hard place, by design.

Globalists see the U.S. dollar and the U.S. economy as expendable (for the most part), and this sacrifice is meant to create distracting chaos as well as geopolitical advantage towards a new fully centralized world economic system. You can read the considerable evidence for this agenda in my article ‘The Fall Of America Signals The Rise Of The New World Order’.

If you believe the Fed is the sole purveyor of the global economic crisis and is at the top of the internationalist pyramid, then you probably predicted that the privately controlled central bank would “never in a million years” raise interest rates (many prominent people within the alternative economic scene did). If you believe that the Fed’s primary goal is to prolong the life span of the “American empire,” again, you probably predicted that the Fed would never raise interest rates.

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

The Keynesian Recovery Meme Is About To Get Mugged, Part 2

December 23, 2015

The Keynesian Recovery Meme Is About To Get Mugged, Part 2

Our point yesterday was that the Fed and its Wall Street fellow travelers are about to get mugged by the oncoming battering rams of global deflation and domestic recession.

When the bust comes, these foolish Keynesian proponents of everything is awesome will be caught like deer in the headlights. That’s because they view the world through a forecasting model that is an obsolete relic—one which essentially assumes a closed US economy and that balance sheets don’t matter.

By contrast, we think balance sheets and the unfolding collapse of the global credit bubble matter above all else. Accordingly, what lies ahead is not history repeating itself in some timeless Keynesian economic cycle, but the last twenty years of madcap central bank money printing repudiating itself.

Ironically, the gravamen of the indictment against the “all is awesome” case is that this time is different——radically, irreversibly and dangerously so. High powered central bank credit has exploded from $2 trillion to $21 trillion since the mid-1990’s, and that has turned the global economy inside out.

Under any kind of sane and sound monetary regime, and based on any semblance of prior history and doctrine, the combined balance sheets of the world’s central banks would total perhaps $5 trillion at present (5% annual growth since 1994). The massive expansion beyond that is what has fueled the mother of all financial and economic bubbles.

Owing to this giant monetary aberration, the roughly $50 trillion rise of global GDP during that period was not driven by the mobilization of honest capital, profitable investment and production-based gains in income and wealth. It was fueled, instead, by the greatest credit explosion ever imagined——$185 trillion over the course of two decades.

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

The Keynesian Recovery Meme Is About To Get Mugged, Part 1

December 23, 2015

The Keynesian Recovery Meme Is About To Get Mugged, Part 1

Yellen said at least one thing of importance last week, but not in a good way. She confessed to the frightening truth that the FOMC formulates its policies and actions based on forecasts of future economic developments.

My point is not simply that our monetary politburo couldn’t forecast its way out of a paper bag; that much they have proved in spades during their last few years of madcap money printing.

Notwithstanding the most aggressive monetary stimulus in recorded history—-84 months of ZIRP and $3.5 trillion of bond purchases—–average real GDP growth has barely amounted to 50% of the Fed’s preceding year forecast; and even that shortfall is understated owing to the BEA’s systemic suppression of the GDP deflator.

What I am getting at is that it’s inherently impossible to forecast the economic future, but that is especially true when the forecasting model is an obsolete Keynesian relic which essentially assumes a closed US economy and that balance sheets don’t matter.

Actually, balance sheets now matter more than anything else. The $225 trillion of debt weighing on the world economy——up an astonishing 5.5X in the last two decades—– imposes a stiff barrier to growth that our Keynesian monetary suzerains ignore entirely.

Likewise, the economy is now seamlessly global, meaning that everything which counts such as labor supply and wage trends, capacity utilization and investment rates and the pace of business activity and inventory stocks is planetary in nature.

By contrast, due to the narrow range of activity they capture, the BLS’ deeply flawed domestic labor statistics are nearly useless. And they are a seriously lagging indicator to boot.

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

A Free Market in Interest Rates

December 22, 2015

A Free Market in Interest Rates

Unless you’re living under a rock, you know that we have an administered interest rate. This means that the bureaucrats at the Federal Reserve decide what’s good for the little people. Then they impose it on us.

In trying to return to freedom, many people wonder why couldn’t we let the market set the interest rate. After all, we don’t have a Corn Control Agency or a Lumber Board (pun intended). So why do we have a Federal Open Market Committee? It’s a very good question.

Someone asked it at the recent Cato Monetary Conference. George Selgin answered: no matter if the Fed stands pat or does something, it’s still setting rates. This is a profound truth, which brings us to a fatal flaw in the dollar.

In our irredeemable currency, interest cannot be set by the market. There’s literally no mechanism for it. To understand why, let’s start by looking at the gold standard.

Under gold, the saver always has a choice. If he likes the rate of interest, he can deposit his gold coin. If not, he can withdraw it. By withdrawing, he forces the bank to sell an asset. That in turn ticks down the price of the bond, which is the same as ticking up the rate of interest. His preference has real teeth, and that’s an essential corrective mechanism.

Unfortunately, the government removed gold from the monetary system. Now you can own it, but your choices have no effect on interest. If you buy gold, then you get out of the banking system. However, the seller takes your place, getting rid of his gold and thereby taking your place in the banking system. The dollars and gold merely swap owners, with no effect on interest rates.

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

Bank Counterparty Risk Surges To 4-Year High

December 21, 2015

Bank Counterparty Risk Surges To 4-Year High

The TED Spread is the difference between the interest rates on interbank loans and on short-term U.S. government debt and as such offers a proxy for how banks themselves perceive the relative creditworthiness of the financial system. The last time TED spread was surging to this level was late 2011, as Europe’s crises was exploding.

Which makes one wonder whether The Fed rate hike was – as we detailed here – an implicit bailout for foreign (read European) banks?

But the pace of increase is extremely worrisome historically

The Fed just hiked into this massive two-week surge in TED spreads; as opposed cutting by 75 bps in 2008 and unleashing more QE at Jackson Hole in 2011! That hike seems akin to what happened in Sep-08 when Lehman went Bankrupt.

(h/t Brendan Ferro)

US financials credit risk continues to push wider (with stocks remaining cognitively disssonant for now).

With the Fed’s own National Activity Index tumbling, its own Financial Stress Index soaring, and now major concerns about the US financial system’s stability looming, one has to ask, how long before Janet unleashes the next QE?

The Confidence Game Is Ending

December 21, 2015

The Confidence Game Is Ending

Immediately after the Fed hiked interest rates last Wednesday – after sitting at 0% for 7 years – markets acted pretty much as one might expect. The Fed tightens monetary policy when the economy is strong so rising stock prices, rising interest rates and a strong dollar are all things that make sense in that context. I am sure there were high fives all around the FOMC conference room. Too bad it didn’t last more than one afternoon. By the close Friday, the Dow had fallen nearly 700 points from its post FOMC high, the 10 year Treasury note yield dropped 13 basis points, junk bonds resumed their decline and the dollar was basically unchanged. Not exactly a ringing endorsement of the Fed’s assessment of the US economy.

I’m not saying the Fed’s rate hike is what caused the negative market reaction Thursday and Friday. The die for the economy has likely already been cast and right now it doesn’t look like a particularly promising roll. Raising a rate that no one is using by 25 basis points is not the difference between expansion and contraction. And a bit over a 3% drop in stocks isn’t normally much to concern oneself with; a 700 point move in the Dow ain’t what it used to be.

The pre-existing conditions for the rate hike were not what anyone would have preferred. The yield curve is flattening, credit spreads are blowing out and the incoming economic data is not improving. Inflation is running at a fraction of the Fed’s preferred rate and falling oil prices have been neither transitory nor positive for the economy, at least so far. The Fed is not unaware of this backdrop – they may not like it or acknowledge it publicly but they aren’t blind – but seems to have decided the financial instability consequences of keeping rates at zero longer are greater than any potential benefit. A sobering thought that.

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

The Fed’s Risk to Emerging Economies

December 21, 2015

The Fed’s Risk to Emerging Economies

MILAN – The US Federal Reserve has finally, after almost a decade of steadfast adherence to very low interest rates, hiked its federal funds rate – the rate from which all other interest rates in the economy take their cue – by 25 basis points. That brings the new rate up to a still-minimal 0.5%, and Fed Chair Janet Yellen has wisely promised that any future increases will be gradual. Given the state of the US economy – real growth of 2%, a tightening labor market, and little evidence of inflation rising toward the Fed’s 2% target – I view the rate rise as a reasonable and cautious first step toward normality (defined as a better balance between borrowers and lenders).

However, other central banks, particularly in economies where the output gap is larger than in the United States, will not be keen to follow the Fed’s lead. That implies a coming period of monetary-policy divergence, with uncertain consequences for the global economy.

On the face of it, a tiny change in the US rate should not trigger dramatic shifts in global capital flows. But, as US monetary policy follows the path of interest-rate normalization, there could well be knock-on effects, both economic and financial, especially in the form of currency volatility and destabilizing outflows from emerging economies.

The reason we should fear this possibility is that the world’s economic equilibrium is both fragile and unstable – and could wobble dangerously without determined and coordinated policy intervention. A Fed rate hike might not tip it over, but some other seemingly innocuous event could.

One doesn’t need a long memory to understand how even relatively modest policy shifts can trigger outsize market reactions. Consider, for example, the “taper tantrum” that roiled financial markets in the spring of 2013, after then-Fed Chair Ben Bernanke said only that policymakers were thinking of gradually ending quantitative easing.

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

Dan Amerman: Financial Repression & The New Interest Rate Hike

December 21, 2015

Dan Amerman: Financial Repression & The New Interest Rate Hike

You have to understand one to make sense of the other

Financial repression authority Daniel Amerman returns this week to discuss the ramifications of the Federal Reserve’s first interest rate hike in nearly a decade:

The key to understand the situation here is that this is not normalizing, and we don’t have a precedent. We really don’t. We’re kind of all being soothed and reassured by the Wall Street Journal and Bloomberg and the financial authorities that we’ve been down this path before, we’ve been down it many times, more often than not we’ve had rising markets as a result and, really, there’s nothing to worry about. The issue with that is there are many things this time that are entirely different, and what is presented as ‘normalizing’, for instance, is going back to say a projected interest rate cycle like we saw in the 2000’s or the 1990’s. What’s completely different, among many other things, is that we’ve never had rates forced so low before, and they’ve never been so low for so long. So, if you look, say at a long-term graph since 1954, what’s been going on with the Fed funds rates, we’ve had plenty of reversals in interest rate direction, but they’ve been these brief little dips that look nothing whatsoever like this.

The other big issue, and this goes back to our prior conversation on financial repression, is that I don’t think you can take any interest rate increases from the 2000’s, 1990’s, 1980’s, 1970’s as being comparable. Because, we have the greatest degree of national debt outstanding that we’ve had since the 1940’s and the 1950’s. So, you have to go much further back in time to see how a rate increase works when you have a country that’s just absolutely massively in debt. And, it’s a very different process than these recent historicals they’re talking about.

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

Who’s right, commodities or the Fed?

December 21, 2015

Who’s right, commodities or the Fed?

As the U.S. Federal Reserve Bank raised interest rates last week for the first time in 10 years in response to what it said was strength in the U.S. economy, economically sensitive commodities such as industrial metals and crude oil continued to plumb new cycle lows.

Either these commodities are about the turn the corner as renewed strength in the United States–the biggest buyer of commodities next to China–revives industrial metal and crude oil demand–or the Federal Reserve is misreading the tea leaves and crashing commodity prices signal a world and U.S. economy in distress.

Market analysts like to say that copper is the metal with a Ph.D. in economics. Because of copper’s central role in the modern economy, it often reliably forecasts the direction of the economy. Since copper reached its peak at the beginning of 2011 above $4.50 per pound, it has swooned to near $3 in 2011 coinciding with a crisis in Europe, bounced back to near $4 once the crisis passed and then settled above $3 by the middle of 2013 where it essentially traded sideways until this year. After trending down since May copper hit $2.05 a pound last week, only three cents above the low for the year registered on November 23.

And, it wasn’t just copper. Nickel started the year above $7 a pound and finished last week at $3.90 a pound. Aluminum began the year above 90 cents a pound and settled last week at 67 cents. Zinc peaked near $1.10 a pound in May and now sells for 66 cents. Iron ore prices, which dropped almost 50 percent last year, this year dropped from $68 per ton to $47 as of last week, another 31 percent decline.

Crude oil, which dropped about 50 percent in the last half of 2014, has dropped another 35 percent so far in 2015.

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

Christmas Present

December 21, 2015

Christmas Present

Theory du jour: the new Star Wars movie is sucking in whatever meager disposable lucre remains among the economically-flayed mid-to-lower orders of America. In fact, I propose a new index showing an inverse relationship between Star Wars box office receipts and soundness of the financial commonweal. In other words, Star Wars is all that remains of the US economy outside of the obscure workings of Wall Street — and that heretofore magical realm is not looking too rosy either in this season of the Great Rate Hike after puking up 623 points of the DJIA last Thursday and Friday.

Here I confess: for thirty years I have hated those stupid space movies, as much for their badly-written scripts (all mumbo-jumbo exposition of nonsensical story-lines between explosions) as for the degenerate techno-narcissism they promote in a society literally dying from the diminishing returns and unintended consequences of technology.

It adds up to an ominous Yuletide. Turns out that the vehicle the Federal Reserve’s Open Market Committee was driving in its game of “chicken” with oncoming reality was a hearse. The occupants are ghosts, but don’t know it. A lot of commentators around the web think that the Fed “pulled the trigger” on interest rates to save its credibility. Uh, wrong. They had already lost their credibility. What remains is for these ghosts to helplessly watch over the awesome workout, which has obviously been underway for quite a while in the crash of commodity prices (and whole national economies — e.g. Brazil, Canada, Australia), the janky regions of the bond markets, the related death of the shale oil industry, and the imploding hedge fund scene.

As it were, all credit these days looks shopworn and threadbare, as if the capital markets had by stealth turned into a swap meet of previously-owned optimism. Who believes in anything these days besides the allure of fraud?

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

Tag Archives: Federal Reserve

Content

Post categories

Economic Links

Energy/Resource Links

Environmental Links

Geopolitical Links

Liberty Links

News Links

Other Links

Survival Skills

Post Archives by Category

Post navigation

Latest Posts