Fed’s Dudley Drops Bombshell: Low Inflation “Actually Might Be a Good Thing”

QE unwind in September, “another rate hike later this year.”

The media have been talking themselves into a lather about how the less-than-2% inflation would force the Fed to stop hiking rates. But William Dudley, president of the New York Fed and one of the most influential voices on the policy-setting Federal Open Markets Committee (FOMC), just dropped a stunning bombshell about low inflation – why it might be low and how that “actually might be a good thing.”

The kickoff for unwinding QE appears to be in the can. There’s unanimous support for it on the FOMC. It appears to be scheduled for the September meeting. The market has digested the coming “balance sheet normalization.” Stocks have risen and long-term yields have fallen, and financial conditions have eased further, which is the opposite of what the Fed wants to accomplish; it wants to tighten financial conditions. So it will keep tightening its policy until financial conditions are tightening.

QE was designed to produce the “wealth effect,” as Bernanke himself explained it to the public, where those with assets get wealthier and then spend some of that wealth in the real economy. Part one worked. Part two didn’t. Now the experiment is over and will be partially unwound. Asset holders are requested to hang on – that’s the message.

In his interview with the Associated Press (transcript), Dudley confirmed this. As the Fed allows its portfolio to “run down,” he said – dropping about $2 trillion of securities over the next few years – “the private sector has to absorb somewhat larger amounts of Treasury securities and agency mortgage-backed securities, that will probably put some modest upward pressure on long-term yields.”

So bond prices, which move in the opposite direction of yields, are going to decline. But no biggie; bond holders had it so good for so long.

And rate hikes?

He expects the economy to keep muddling through with growth at “around 2%.” He said, “We’re still on the same trajectory we’ve been on for several years.” This growth is “sufficient to continue to tighten the labor market.” While inflation is “somewhat below our objective,” he expects “to see firmer wage gains, and that will ultimately filter into inflation moving up towards our 2% objective,” but “it’s going to take time.”

However, that below-objective inflation may not stop the rate hikes:

“Now the reason why I think you’d want to continue to gradually remove monetary policy accommodation, even with inflation somewhat below target, is that:

“One, monetary policy is still accommodative, so the level of short-term rates is pretty low, and

“Two — and this is probably even more important — financial conditions have been easing rather than tightening. So despite the fact that we’ve raised short-term interest rates, financial conditions are easier today than they were a year ago.

“The stock market is up, credit spreads have narrowed, the dollar has weakened, and those have more than offset the effects of somewhat higher short-term rates and the very modest increases that we’ve seen in longer-term yields.”

If the economic forecast evolves “in line” with his expectations, he said, he “would be in favor of doing another rate hike later this year.”

In other words, the market’s reaction to the Fed’s action – that stocks and bonds have risen and that spreads have narrowed since the Fed has started tightening, which is the opposite of what the Fed wants to accomplish – is a primary reason for further tightening. Low inflation, no problem.

That rate hike “later this year” would be at the December meeting, after kicking off the QE unwind at the September meeting. In this cycle, the Fed has only made policy changes at meetings that were followed by a press conference. The September and December meetings are the only such meetings left this year. The Fed is sticking to its plan.

Then he was challenged on inflation, which has been below the 2% target for a long time. What should the Fed do?

“So, I think the jury’s out of whether there is sort of structural, secular changes in place that are holding inflation lower on a sustained basis,” he said. And these changes have to do with the internet economy where price comparisons are instantly possible and the environment has become very price competitive:

“The distribution methods of how goods and services are provided have changed pretty dramatically. So this — and I think that’s probably eroding pricing power and brand loyalty. It’s possible that that could be putting downward pressure on inflation.

“But if that’s the case, that’s not really a bad thing. That means we can actually allow the economy to operate at a higher level potentially of resource utilization.

“So, I think the jury is out, whether this lags or is just going to take some time for it to show through, or whether we’re in a different regime.”

He mentioned “the big decline” in cellphone services prices which the suddenly hawkish Yellen had listed in June as a cause for the recent softening of inflation, but there could be  “something more fundamental going on” too – such as the internet economy that forces companies into more open price competition.

“So, if there are these secular forces that are pushing inflation lower, perhaps we can actually go to a somewhat lower unemployment rate. I would actually view – rather than people wringing their hands that this is so awful that inflation is low, it actually might be a good thing because it could allow you to run the economy at a little bit higher level of resource utilization, which I think would be good.

“People get employed, they get job skills, they’d be able to build their human capital over time. The productive capacity of the U.S. economy would be greater. All those things would be good things.”

Yes, the benefits of low inflation. Dudley finally discovered them.

When Dudley, one of the most influential members of the FOMC, begins airing something like this in public, it likely means that discussions at the FOMC are tilting this way, that there might suddenly be a recognition that technological improvements and efficiencies should lead to lower prices in some areas, though not all areas, and that an overall inflation rate that’s lower than 2% would be a “good thing,” for all the reasons Dudley specified, plus some.

Yellen has also pointed at the sharp drop in prescription drug prices as a cause of low inflation. This too is a “good thing,” as Dudley might say. But it caused a bloodbath among pharmaceutical companies after the government cracked down on price fixing efforts. Read…  Pharma Shares Melt Down, But Consumers Might See Relief

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  104 comments for “Fed’s Dudley Drops Bombshell: Low Inflation “Actually Might Be a Good Thing”

  1. Truth Always says:

    The Fed is run by morons who I wouldn’t let graduate 5th grade Math.

    Cell phone service falling from say $100 to $50 okay; while rents go up from $ 1500 to $2500 or food has a 30% increase – and there is no f@#$ing inflation !

    Either the Feds are completely moronic or they are deliberately misleading the public. In either case the mainstream media would run away with the narrative that inflation is low. However no one feels that way in the real world.

    Is there a Democratic or academic process to challenge the fence numbers from Real World data. I understand that the FED bases its inflation numbers on CPI which is based on a basket of items handpicked by them but how do we create an alternate CPI that reflects reality?

    • cdr says:

      The Fed is a tool of the Establishment. This is not a bad thing, necessarily. The problem occurs if the Establishment is controlled by people with agendas that are contrary to the 99%. Until recently, the Globalists (called Robber Barons in the 19th century) were in ascendance. They wanted low rates, low wages, and flexible labor sources. In the US, monetized debt was the icing on the cake. The Fed supported them and promoted goofy theories that said low rates and monetized debt was good.

      Other central banks use low rates and monetized debt to support different Establishment agendas. The ECB uses it to keep the Eurozone in existence. The Japanese do it out of habit and fear of change. The Swiss do it to manipulate equity prices for profit. The Chinese do it to retain social order. Also, negative rates are an alternative form of taxation for socialist economies.

      Had the 2016 election gone the other way, there would be little Fed policy difference today as compared to 2016. The Fed apparently sees a structural change that needs to be accommodated, or so they appear to state.

      Me, being doubtful and cynical, will wait and see if Dudley follows through and normalized much of anything. I hope the Fed does because low rate cause more problems than they cure. Money should go on sale, temporarily, just like retail goods go on sale when a boost in demand is needed. A 10 year sale on money where only a few reap the benefits is conspiracy and collusion.

      People need to earn interest income once again. This will boost the economy more than any monetary experiment could have ever achieved.

      • andy says:

        Agree people need to earn interest income again – Bernanke forgot the other side of the “wealth effect” coin – those with assets get a lower return and have to reduce spend, and those seeking to grow assets have to save more to achieve a desired level of income.

        Both these traits reduce GDP.

    • Brett says:

      The FED Knows there is Inflation, it only has to glance at the Housing Bubble and rents to know that, but not in its own carefully crafted basket.

      So it knows it can quite happily continue to raise rates while at the same time putting forward a bogus case of why low inflation is not a problem.

      That being said, if Hillary had won the election the spiel from them would be very different, this is essentially about strangling Donald Trump Fiscally .

      • joie says:

        And doesn’t sweet little grandma Yellen sometimes put you in mind of those dear little auntie’s portrayed in “Arsenic and Old Lace”? You just want to jump up out of your seat and call out ” Don’t drink that Donald ” !

    • Kf6vci says:

      Hear, hear! People who buy groceries (and mind shrinking sizes), need medical insurance and pay kindergarten or university fees… or rent… will appreciate this article: https://www.theburningplatform.com/2016/03/04/lies-damn-lies-bls-statistics/

      The FED has been doing a wonderful although self-serving job: screwing the public, aiding the 0.01%. They shaft savers with silly rates and want “official 2.0% inflation”. Yeah, helping the debt makers, screwing the taxpayers. But what do you expect from a private banking cartell?!?

    • Mike says:

      I think that they are misleading the public. Notice that the banks (which truly control the allegedly ‘Federal’ reserve because it’s leaders are selected from their cronies due to contributions to politicians) have profited enormously from the Fed’s actions: with QE they got huge commissions from transactions of the Fed to buy treasuries with tax payers’ money and low interest loans from the Fed (since 2008) that they could then lend out at huge increases in interest rates to customers.

      Now, with interest rate increases induced by the QE unwinding, stock prices will come down sharply as investors go from company stocks earnings low sums in EPS for their price to perceieved riskless treasuries with yields that will be higher. Why invest in risky stocksif they will then pay less than “riskless” treasuries?

      After stock prices plunge, the banksters controlling banks can then buy the stocks whose prices plunged at pennies on the dollar. The Fed is doing stuff that used to be done to manipulate stock prices before the SEC was formed.

    • joie says:

      Fire the 1000+ PHD researchers at the Fed. and replace them with 5th grade math teachers ? Sounds sensible to me !

  2. Steve C. says:

    When I listen to him talking, for some reason all I hear is “buy silver, and bitcoin, some liecoin, and a few alt coins”

    • Frederick says:

      I’m still sceptical of Bitcoin If the powers that be wanted to control this alternate to the dollar who on earth is naive enough to believe they couldn’t and wouldn’t I’m thinking those who buy into the hype late will get hurt badly when they pull the plug

      • joie says:

        The $64,000 ? When is “late” ? In my reading on this and other crypto- currencies Bitcoin ATM’s are mentioned. Who would be swinging for those do you suppose? Why would the inventor of Bitcoin be such a secret? We all know that Al Gore invented the Internet don’t we ? Hmmm….

    • cdr says:

      Bitcoin and tulips. They aren’t spelled the same yet they’re almost identical.

      All we need are bitcoin default swaps and bitcoin margin with collateral using real assets for some fantastic financial fun.

      • GSH says:

        No one talks about the inherent problems with blockchain algos. While secure transfer of assets without a central authority is great in theory (e.g. Bitcoin), today’s implementations are not scale-able at all. There are only a few thousand Bitcoin transactions per day today vs. millions of legacy payment transactions. But each Bitcoin transaction already takes the equivalent of four average household’s daily power consumption in the verification network, i.e. consumed by the miners that verify the blockchain. There are some scalability proposals on the table but no silver bullets.

        • cdr says:

          I never thought of that side of the equation … limits to growth, aka decreasing economies of scale. Wicked vulnerability. This makes bitcoin even more of a joke. Suckerbait.

        • d says:

          “But each Bitcoin transaction already takes the equivalent of four average household’s daily power consumption in the verification network, i.e. consumed by the miners that verify the blockchain.”

          You still have the chain, and the “fraud coin”, linked.

          Take the “fraud coin” out of the system, and the chain, is fine.

          The chain, as a transaction method it is in use in PHYSICAL international commodity settlement transactions. Fast efficient and stable. the fact that it is irreversable appeals to the seller’s and shippers.

          The buyer just has to be happy BEFORE he put’s in, as you cant get it back. Just like Western union, but way safer.

          As the NSA cant have somebody waiting with a guided missile at the pickup point when you go to collect. YET. Which is probably why its usage is being limited, currently.

      • Kf6vci says:

        Go on, trade Bitcoin as a CFD with 1:500 leverage :–)

      • joie says:

        Stay tuned cdr, they have already begun testing in China with tea !

  3. OutLookingIn says:

    File this under…

    There is a great deal of propaganda and distorted information spread by the money master’s.

    The Fed policy is attempting to force price inflation, when there is no wage inflation! Fiscal and monetary stimulus policies that were supposed to be temporary, are now permanent. Tightening? I don’t think so.
    The majority of the population is experiencing wage deflation, with attendant shrinking demand. Stagflation is the result. The culprit? Money supply and a higher debt rate.
    The bottom 90% struggle with stagnating incomes and that is a structural reality going back four decades. This is the first “recovery” that has been worse than the recession!
    We are in the ninth inning and the bases are about to be loaded, with Casey warming up in the batters cage!

    • cdr says:

      “The Fed policy is attempting to force price inflation, when there is no wage inflation!”

      Inflation is caused in two ways

      1) Excessive demand over supply
      2) Currency debasement

      One is a function of supply and demand. The other is abnormal. Unfortunately, a rising price is a rising price so, to the ignorant and/or stupid, they both look the same.

      Normal economies that function well use #1. #2 is in theory easy to do but in practice hard to accomplish. Currency is backed by the wealth and productivity of a nation. It also needs to circulate. It also need to be used on things over and beyond a normal lifestyle to be inflationary. Thus, too much currency will have little effect on the prices of a country that is wealthy and needs little. Nor will it have much effect on prices if it does not circulate well. US QE created massive money printing but policies basically buried most of it in the back yard or gave it to the 1%.

      This also means in 100 years some new goofball Fed will notice this and run a new monetary experiment where they flood the US with cash and force people to use it. (I’m personally expecting this to happen via the ECB in a couple of years.)

      • cdr says:

        I said “It also need to be used on things over and beyond a normal lifestyle to be inflationary.”

        Oops. Once the economy has been ruined, it’s just paper. Forgot to mention that.

      • Kf6vci says:

        What will the Dollar’s 11% fall vs the Euro mean for inflation? Importers won’t keep sacrificing their margins ad infinituzm. Look at the UK and inflation over there!

        • cdr says:

          if prices rise, people shop elsewhere. A strong currency makes imports cheap and exports expensive to other countries.

          If the UK currency falls, it’s exports will rise.

          Changes in currency valuations are a self-balancing problem. No biggie except to the hysterical who scream when anything changes – or currency traders who took the wrong side – or people who don’t understand fundamental international trade theory.

          Excessive imports / exports are also self balancing. All the Chinese with lots of dollars now must hold US debt or make US investments to spend said dollars. All that remains is the hysterical screaming that the Chinese own too many US assets (which they probably paid too much for but don’t care because the average Mandarin needs to launder cash out of China)

      • joie says:

        Very well said cdr. I will keep these points in mind. Thank you!

    • Petunia says:

      In the 70’s and 80’s Americans could still outrun inflation because they still had savings and access to another job to make up the expenses. Now inflation has outrun labor, the race is over. Almost one million people dropped cable tv last quarter. Retail is dead. There is no extra job out there. The only thing going up is crime.

      • cdr says:

        No disagreement with anything you wrote.

        My personal belief is that once rates normalize and regular people can earn a decent amount of interest income again, these problems will slowly reverse. People save and spend interest income. Stock gains just sit there enriching the advisor with management fee income. I plan to spend my interest income once I get some. Now, I’m hunkering down and so are lots of others, I believe.

        Also, hence my belief the Fed has served the 1% while paying lip service to me and my group. My ‘theory’ about interest income is stupid simple common sense. No econometrics required.

        • Petunia says:

          Your theory is relying on the assumption that the credit quality of your bonds is good and will remain that way.
          There is no good reason to assume that. In a deflationary period the bonds usually default due to a lack of money or decline in price.

          During the depression of the 30’s, first the stock market went down, then the bonds went down 30-40%. The bond crash was what really killed the economy.

        • cdr says:

          Petunia, if bond prices fall due to liquidity problems, then good for me. Low prices = high rates. This is why I’m waiting to buy. Capital loss risk is likely otherwise.

  4. mick says:

    There’s no way in the world the market would “absorb” 2 trillion. The very idea is laughable. This either will not come to pass due to an “unforseen shock” or the FED will do what it always does…Lie.

    Yes, say they’re doing something, like selling, when in reality they’re buying it through back channels like dealers. Don’t trust a word the FED says, their data is one big ball of manipulated, massaged and fake propaganda.

    Anyone in the industry with half a brain would know this is ridiculous. Who would be buying when they know the value can only go down? And 2 trillion?

    Gimme a break.

    • Kent says:

      I don’t believe the expectation is to sell 2 trillion worth of treasuries to the market. I believe the intention would be to stop buying new treasuries as old short-term securities held by the Fed reach maturity. That really just means 2 trillion less dollars sitting in excess reserves at banks.

      • Wolf Richter says:

        We have double-entry bookkeeping in the US (and globally). Every transactions has two entries, a credit and a debit. When the Fed creates a credit, it also creates a debit of the same size in its books. When it removes a credit, it also removes a debit of the same size. So yes, during QE, the excess reserves have been the other entry when the Fed created the money and credited its primary dealers’ accounts with it. So when the Fed unwinds QE, it will destroy the money it created and at the same time lower its excess reserves by the same amount. This time, it will be a debit and a credit.

        Here’s is an explanation of how accounting works at the Fed:

        I have posted this before, but it’s important, so I post it again. How the Fed will reduce the size of its balance sheet by letting securities “roll off”:

        When securities are redeemed at maturity, whoever holds them gets the money. The securities become void and disappear. This is what the Fed will be doing: When the Treasuries it holds mature, the US Treasury Department redeems them, that is it exchanges money for those securities that then become void and disappear. The Fed gets the money. If it doesn’t buy anything else with it, that money disappears too. Now both the Treasuries and the money have disappeared.

        Since the Treasury Dept doesn’t have the money to pay off maturing bonds (the US government runs a big deficit), it raises this money in advance by selling bonds. So the market gives the Treasury Department the money to redeem the old bonds. By redeeming the bonds that the Fed holds, the Treasury Dept gives this money to the Fed. At the Fed, this money disappears. In this manner, the Fed drains liquidity (money) from the market.

        This is the reverse of what happened during QE.

        • cdr says:

          You forgot about the velocity of money. When new money sits in interest bearing reserves and is not lent, the velocity of money falls and so does inflation. Slow velocity ==> low lending ==> low job creation ==> low spending ===> low inflation.

          The printed money used to finance mortgage backed securities probably was spend directly in the economy. This may be what fueled equities.

          As I wrote above to Petunia, I believe raising interest rates will increasing spending. This will increase velocity which will counteract the reduction to the cash in circulation. The 1% will scream about it though.

          I’ll certainly spend my share once I can get a decent yield from a bond fund without major risk of capital loss (falling share price) when rates rise.

        • Wolf Richter says:

          I agree that when yields (and bank interest rates rise), all kinds of good things could be happening in the real economy.

        • Ambrose Bierce says:

          Since the Treasury Dept doesn’t have the money to pay off maturing bonds (the US government runs a big deficit), it raises this money in advance by selling bonds. So the market gives the Treasury Department the money to redeem the old bonds.
          Its the same old check kiting scheme with the Fed and Treasury switching roles.
          There is no way the GOP/POTUS/Congress is going to go into more debt to pay for the stock market rally that occurred during Obama’s term. You saw what happened to ACHA. War is more likely here than in Korea. Those of you who say End the Fed, get your popcorn.

        • Dan Romig says:

          For the 2017 fiscal year, the US will run a $0.503 Trillion deficit on a $4.147 Trillion budget. But here’s where an interest rate rise gets to be tricky:

          Current US GDP = about $19T. Current nation debt = about $20T. The CBO forecasts that the US nation debt will be about $30T at the end of fiscal year 2026, and GDP growing at 2% per year would be around $23T at that time.

          As of yesterday’s close, the 1 year Treasury yield was 1.23%. 2 year was 1.33% and 5 year was 1.77%. This averages close to 1.44%, and this is, I believe, about the interest paid to carry the nations debt. Twenty trillion at 1.44% is $0.288T. Turn the clock forward to see a hell of a lot more cost to carry Uncle Sam’s deficits and debt I reckon.

        • Steve says:

          Read your prior article but have to ask, how much of the $2T is bad and will never be paid off? There is no way 100% of that $2T will ‘roll-off’ since a bunch of what they bought was supposedly junk.

          Also as they unwind and reduce member bank reserves, how in the hell will they pass the CCAR? They all passed this time and look at their behavior. Stock buybacks and dividends. Like a kid with a nickle in his pocket burning a hole. Most just barely passed and now that they burned through much of their capital base and with the Fed’s further shrinking it, what’s next?

          Granted, I may not be up to speed on this ‘new’ math but something doesn’t add up.

        • Wolf Richter says:

          I’ll just respond to the 2T in securities question….

          All the securities the Fed has left on its balance sheet are US Treasuries and Agency mortgage backed securities (issued by Fannie Mae and Freddie Mac). All of them are good.

          The toxic stuff the Fed took on during the Financial Crisis (like the $30 billion in toxic securities from Bear Stearns) have been sold for cents on the dollar or written off. They used to be in the “Maiden Lane” accounts on the balance sheet, but those “Maiden Lane” accounts were whittled down and are now gone.

          So I don’t expect any problems with the securities it still has. When the Treasuries mature, the Fed will get the money from the Fed. The MBS work a little differently (since mortgages are paid off all the time and the proceeds flow through to the holder of the MBS). But I don’t expect any big hiccups either, unless there’s a major housing crisis over the next couple of years, which I think is unlikely.

        • Sam Thomas says:

          Wolf… it the Treasury has to sell new bonds to raise the money to redeem the old ones, does the net amount of bonds outstanding actually change?

          But I can see how the money supply would contract and rates be forced higher as a result. Seems like a huge potential negative for any rate-or-liquidity-sensitive market: stocks, bonds, and real estate.

        • Wolf Richter says:

          The Treasury routinely sells new bonds to redeem maturing bonds. So yes, this alone doesn’t impact the debt outstanding. But the Treasury also sells new bonds to finance current budget deficits. This makes the debt outstanding grow.

        • d says:

          “The Treasury routinely sells new bonds to redeem maturing bonds. So yes, this alone doesn’t impact the debt outstanding.”

          Further if the fFED redeems its bonds to treasury, then uses the cash received to reduce it’s balance sheet. Instead of swapping them for new bond’s.

          The bonds will be brought (SNAPPED UP) by others. Seeking safe Haven. Slowly reducing the excess liquidity in the US system and or repatriating Cash held off shore, back to the US but outside the US tax system.

          Which ever Occurs it is still a net positive for the US and SLOWLY reducing the Excess liquidity in the Entire Financial System

      • Willy2 says:

        – There’s no need to sell those securities to the market. When those T-bonds mature then the US government has to come up with the (tax payer) money to redeem those bonds. and the money goes to the FED. The government needs to pay off its debt to the FED.
        – QE was inflationary (increase of money & credit) and therefore the “unwinding” QE is Deflationary (decrease of money & credit)

        • Kent says:

          I think it will be an interesting topic down the road as to whether QE was inflationary or deflationary. Certainly it was meant to be inflationary, especially in asset prices (RE & financials).

          However, sense the money didn’t really go into the real economy, all it did was lower interest rates. Those lower interest rates reduced the income of those who get some substantial portion of their income from savings. Which of course, reduces overall demand in the economy. Which cdr alludes to above.

          On the inflationary side, it makes certain business investments attractive that wouldn’t be at higher interest rates. So that might create employment that would otherwise not exist.

        • Willy2 says:

          – Inflation is defined as an “Increase of money & credit”, NOT rising (asset) prices. Rising prices (houses, oil, iron ore, stocks, etc.) are required to create (credit) inflation.
          – As a result of QE the FED extended (more) credit to the government (=inflation). So, when the FED decreases its assets (e.g. T-bonds) it decreases the amount of credit to the government and that is Deflationary (=decrease of money & credit).
          – And falling prices (stocks, bonds, oil, iron ore, etc.) are required to create (credit) deflation.

          – When Dudley is talking about “low inflation” then he means “Prices haven’t risen too much” (using one particular inflation gauge).
          – But here Dudley doesn’t “get it” because – in general – rising prices is good for producers and bad for consumers. Conversely, falling prices is good for consumers and bad for producers.

  5. wkevinw says:

    The Fed is just like any organization: human nature applies. It doesn’t require willful action to get things wrong, it just requires neglect. Neglect/passive “errors” will occur, e.g. inflation will be of poor quality (i.e. doesn’t reflect consumers’ real lives) if there is not a consequence to Fed higher-ups when the data are “bad”. If it confirms their bias and fits their needs, blissful ignorance will be tolerated.

    Anyway, don’t expect miraculous actions by the Fed.

    • Frederick says:

      ” The FED is like any organization” Did you really think that out before commenting because I can’t imagine you could have

  6. MC says:

    It seems the US Federal Reserve is once again using the financial instruments so widespread nowadays: jawboning, hinting at things that will happen in the distant future and using those combinations of key words the sophisticated trading software used nowadays will translate into “buy”.

    The US stock market has been on a wild ride year on year but, here’s the not-so-extraordinary thing, over half these gains were thank to just ten megacaps whith just five of those accounting for a massive 37% contribution.
    In late July however the usual Summer selloff arrived. “Sell in May and go away” has always held true, even in times of booming stock markets: Summer months are always favored by several classes of investors to cash in their chips.
    Note this wasn’t a “crash” by any mean, but given the dizzying valuations reached by those ten megacaps, led by the usual FAANG (FaceBook, Amazon, Apple, Netflix and Google/Alphabet) even that selloff dip was enough to hurt, and nobody is hurting more than a slew of huge hedge funds, which had bought heavily into the FAANG and the handful of other market drivers.

    William Dudley is hence trying, merely by “hinting” and providing the modern day successors to Etruscan and Roman haruspexes with entrails to be scrutinized, to reverse that selloff. If it doesn’t work, Janet Yellen herself may drop a few words of wisdom.
    All of those who believed the Fed will change course and start “easing” again merely because of this dip are in for a disappointment: the pace may be the same as a funeral procession advancing through a snowstorm but the course isn’t changing.

  7. Lee says:

    Well the markets have been ignoring everything the Fed has done so far.

    Rates up – dollar down. Rates up – stocks up. Rates up – bonds prices barely move.

    So why not increase rates now? Nothing negative has really happened as a result of the recent rates increase.

    Who cares what happens at the bottom end of socio-economic pile – they don’t count.

    I guess the markets could care less about what the Fed is doing.

    Even here in Oz the A$ ignores all the bad news and goes up. Chinese data out the other day missed across the board and the A$ went up.

    The current government in office is in a heap of trouble and should by all normal standards be out on its rear – ineligible people holding office. Again basically ignored by the markets.

    Sort of like NK keeps pushing the USA – launch, steal tech, buy this, launch another, get slapped with a piece of kimchi – repeat again…………….

    Maybe one of these days people will wake up and then watch out below.

    • Meme Imfusrt says:

      See, the same guy that run our show, run your show…all the same.
      This program has been brought to by the makers of Geroge Soros and son.

    • JZ says:

      Tell u a secret, the market is the FED.

  8. d says:

    We all know the “Inflation” # the fed quotes, is BS. So do they.

    Factor this unspoken into Dudley’s spoken.

    And things become much clearer.

    Which is why more rate hikes, and shrinking of the balance sheet, have to be the path forward. To reduce excess liquidity in the market place.

    What the FED has to be careful of, is that the brake is only on a one wheel apple cart, which is very overloaded, and VERY easily upset.

    Gentle hands, with MUCH forward guidance is the way. Only an imbecile would ignore that forward guidance.


    There are many financial imbeciles in America, and on the rest of the planet. Many of which, have never in the adult lives, experienced FED tightening.

  9. Plumas One says:

    This is so disingenuous. Without the meddling of the BLS, inflation has been running 8-9 % annually for the last five years. Low inflation is the BIG LIE that props up the markets…here and abroad.

    • Frederick says:

      Not in the energy markets that’s for sure

    • Kent says:

      I don’t necessarily buy into the massive inflation story, outside of health insurance and housing prices/rent. Not that those aren’t hugely important. But here is a little story.

      For years I shopped at Walmart for non-food items. One of those items is Caffeine-Free Diet Coke, which my wife likes. I’d buy a 2 liter bottle once a week. For years, the price was $1.48. It would drop to $.99 around Christmas and shoot back up again. It stayed at that price for probably 8 years.

      Then, last year, the price went up to $1.50. Not a big deal, but around that time I stopped shopping at Walmart altogether. Last weekend I went back for kicks. The price, in one year, went up to $1.56 for their 2 liter Coke products, and they stopped carrying my wife’s favorite type. So the price is up and the product is gone.

      I read a while back that Walmart was going back to “low, low prices” as part of its campaign to beat Amazon. Seems like they lied.

      • Kraut says:

        The reason for this is coke raises prices no matter what. So does Pepsi. Walmart is only passing on their price increase. They may have a year or two contract in place but even if input prices go down, they will not lower prices. Much like high end apartment rentals. They would rather not rent, than adjust the price.

  10. Mark B Spiegel says:

    But if the Fed now feels lower inflation is permanent the implication is “lower rates for longer” as it’s less afraid of overheating the economy. This negates the “hawkishness” that the first part of this article seems to imply.

  11. Bobby Dale says:

    Is there a function in Macroeconomics, akin to Worker Productivity for Consumer Efficiency?
    Deflation is occurring in areas where massive low cost investments were made over the past two decades and where there is competition.
    If there is deflation in pharmaceutical costs, please someone, send the message to my local stores and my health insurance company.

    • Petunia says:

      You could say that Adam’s Smiths invisible hand theory might lead to efficient consumerism, but it doesn’t. There is actually more economic theory about the opposite behavior. Thorstein Veblen wrote about conspicuous consumption and other related topics. Totally inefficient spending.

  12. Gershon says:

    More dissembling by Yellen’s flying monkeys. The Fed’s sole purpose since its clandestine 1913 founding by the robber barons of the era has been to concentrate all wealth and power into the hands of its oligarch patrons. QE-to-Infinity enables Yellen’s kleptocrat accomplices to snap up the distressed assets of the increasingly pauperized middle and working classes on the cheap, while maintaining artificially low interest rates bilks savers out of interest income and forces yield-seekers to play in Wall Street’s rigged casino. Rackets this lucrative will not be “tapered” irregardless of how the Keynesian fraudsters at the Fed try to masquerade as a responsible central bank. As long as there are unlooted deposits of wealth for Yellen’s Goldmanite handlers to sink their blood funnel into, the Fed’s monetary malpractice will continue unabated.

    • joie says:

      And here is how they will accomplish it. Recently the Chinese bought an initial $50,000,000 of, what else, tea ! This tea was put into a warehouse and a digital coin was created to represent its value. Digital coins can be reduced to infinitesimal valuations and traded, and so investors can trade the tea without ever having possession ( sound familiar). Anyone know more about “Serene Country Homes” a global builder based in Singapore? Reportedly they have purchased land in Dallas and digitalized its value. Anyone but a citizen of the United States can invest in the project. TITLE is always held by the original coin owner. Can you see where this is going? Any hard asset can ( and will be ) digitalized as a source of liquidity. For instance, equity in a home could be held in a digital coin. No 2nd mortgage needed to add on a west wing, or see a movie. or buy some beans, just draw down on your digital credit. That is until it is all gone and abracadabra, you are a renter ! These people are so far ahead of ordinary folks it’s like taking candy from a baby. Got to go now and run up to the top of that hill to warn the millennials. Poor babies, they won’t even see it coming.

  13. Drango says:

    The “wealth effect” is yet another version of trickle down theory that establishment “economists” like those at the Fed use to justify policies that only help the chosen few. Like all academic economists, these people have no idea how a functioning economy works. I would call them bozos, but that would be an insult to the clown profession.

  14. John Higgins says:

    Dudley’s talk is an admission that they never understood the structural deflationary dynamics of the new world – aging demographics, technology, global competition and excess debt. His talk sounds like an admission of Fed failure on the reflation goal. Aging and arrogant economists using models they developed in the 1970s & 80s for a different world is a ridiculous recipe. So now, “failure” is painted as a “welcome” thing. We need Central Banks OUT of policy. They should only supply liquidity in a crisis. Let the bonds run off and then stay out. They have destroyed the capital allocation process and created all sorts of false markets and unintended societal problems through arrogance.

    • Petunia says:

      Yep, couldn’t agree more.

      I saw Alan Greenspan last week talking about how the interest rate is below the all time historical lows of 3%. He finally realized that going below the all time historic floor and keeping it there for a decade has created a crack in the system.

      It seems our experts wanted to test the limits of the known banking world and landed up falling off.

      • d says:

        “He finally realized that going below the all time historic floor and keeping it there for a decade has created a crack in the system.

        It seems our experts wanted to test the limits of the known banking world and landed up falling off.”

        They could fall off, they haven’t.

        They FED has realized that if everybody uses the same methods as the Japanese they will all fall off.

        THE ECB has yet to get the message.

        The PBOC DOSENT CARE as long as the west falls off first.

        Japan may finally be achieving lift off, 27 + years after it’s QE infusion. which has cost it 1 probably 2 generations. Economically permanantly trashed.

        The US has 3+ X Japanese population. It is only 9 years into this Cycle.

        Larger Population will lengthen not shorten the Cycle.

        Plus teh US has china deliberately Inflicting more damage on its Economy than china could inflict on Japan in the 1991 2004 period.

        So 3 decades away you might get some improvment.

        JAPAN is your base model of QE, a fact of life, like the conception cycle, you cant only change, by gross outside interference, like Abortion, Sterlisation, Abstinence.

        The economic equivalent, large wars, A massive FEd tightening creating what QE! sought to avoid Asset price implosion /Correction and Huge depression.

        The last huge depression was ended by Abortion, AKA The 1939-45 world tour.

        Wars BIGLY, Seem to be the cure, Trump seeks, to the Issue, all he has left in his box of tricks, besides impossible promises, and more lies. As he is now almost at war with his own Republican dominated Congress.

        And just like FDR, Congress may not be able to stop him starting one.

  15. mvojy says:

    Technological improvements will lead to lower prices in the SHORT RUN. Over time as there is less competition the prices will rise. Step 1 is to knock out your competitors by either buying them or undercutting their prices (like Walmart and now Amazon). Step 2 is to be the only game in town which the FTC has little problem with (i.e. big banks got even bigger). Low inflation is because inputs are cheap (interest, oil, commodities and no shortage of cheap labor).

  16. Willy2 says:

    – When I look at the 3-month T-bill rate (today) then Mr. Market’s message is quite clear. No ratehike and no rate cut (anytime soon). Seems Mr. Market “didn´t get the memo”.

    – If/when that rate drops below 1% then I shift to the “Perhaps a ratecut” position.

    – Yeah, sure. Here Dudley is promulgating the usual nonsense: Inflation is the driver behind movements in interests rates. Yeah, sure and I was born yesterday.

    • Kent says:

      If you read his memo closely, it is not inflation, its unemployment. In his world, unemployment is the driver of inflation, which then drives interest rates.

      He believes we are near full employment, and, because of market dynamics, that will drive wage gains which will drive inflation. What he doesn’t appreciate is that humans aren’t widgets, and the supply/demand characteristics that might drive prices (wages) are very different between widgets and humans. Human prices can be very sticky.

      • Willy2 says:

        – Ah, indeed. If wages would rise across the board then indeed inflation would rise significantly and interest rates with it. But employers are keen on keeping wage costs under control. Think e.g. the (ab)use of H1B1 visas. And we all know unemployment statistics are a joke (think: U6 & U3)
        – I could be wrong of course, but that’s why I still don’t believe inflation will rise dramatically.

  17. Ron J says:

    Assume the Fed is part of the “Deep State” and the Deep State is hellbent on destroying Trump..

    Quantitative Tightening may be useful to crash the markets and by doing so, crush Trump. He’ll be blamed for a popping bubble which (unfortunately) he has been taking credit for lately.

    QE could then be used to reflate assets once Trump is taken care of.

  18. Ambrose Bierce says:

    The main one is that I think that the asset prices are pretty consistent with what we’re seeing in terms of the actual performance of the economy.

    this guy is in tinfoil hat country

  19. Nicko2 says:

    Look at the glacially falling value of the USD$…. down 10% since January. Even Trump has stated he wants a cheap dollar. They’re going to deflate the debt away.

  20. breamrod says:

    look folks it’s simple. The fed raises rates until something breaks. Then private equity swoops in and buys all distressed assets( homes) at .40 on the $. Happened big time in Atlanta. Will happen again.

  21. mean chicken says:

    Too bad USGDP is comprised mainly of consumer spending! Ha!

  22. raxadian says:

    So Wolf, how long it will take the FED to get rid of this illusionary money?

  23. Wilbur58 says:


    How do you make sense of “low inflation” data when we’re clearly in an era of massive asset inflation? Does the low inflation data exclude asset exchanges (real estate and equities)?

    • Wolf Richter says:

      It’s important to distinguish between consumer price inflation, asset price inflation, and wage inflation.

      The Fed deals with them separately too. It’s really worried about wage inflation. It wants around 2% consumer price inflation (based on PCE). And it likes asset price inflation and generally pushes it, but now it seems the Fed is worried that it pushed asset price inflation too far. Assets are used as collateral for debt. Banks own this debt. If asset prices go too high, they tend to implode … as we have seen, causing huge problems for the banks.

      The risks associated with asset price inflation have been raised by many Fed heads, including Dudley. So that’s one reason they’re tightening. They want to stop asset price inflation – because they don’t want to bail out the banks again and go through another Financial Crisis.

      • Wilbur58 says:

        “Assets are used as collateral for debt. Banks own this debt. If asset prices go too high, they tend to implode … as we have seen, causing huge problems for the banks.”

        Doesn’t that go more like this?:

        Assets are the conduit through which banks create money from thin air. The money is created with interest attached to it. Therefore, the banks’ goal is to keep inflating assets and create as many receivables as possible, interest income?

        Last I checked, most bank income is still from interest, despite their best efforts with fees and Wall St. gambling.

  24. stephen says:

    I don’t think they will do it. I think they are trying to talk the market down.

  25. aldo di says:

    don’t fall for the double speak… or the resulting anger!

    wolf, thank you for your great work… including facilitating civil discussions…

    contributors, thank you for the many insightful thoughts, laughs & civility…

    together we get to the truth, but not until we overcome the double speak & anger that often ensues….

    when i was in business school, amar bhide, my accounting professor proffered that debt was good because it instilled discipline. my immediate visceral response was, discipline to whom and for what purpose…

    decades later and much deeper down the rabbit hole of reality i proffer that excess debt, like the current norm, instills discipline to the point it distorts behavior and degrades ethics.

    in order to service debts people must do what the system requires to earn capital, even when it goes against common sense, decency or just what is right.

    i have chosen to live below means so that i could make choices that are less influenced by $$ and more in line with my conscience, beliefs, desires, etc… to me this is part of living free…

    that being said, i recognize that many do not even have this option.

    hopefully we will wake up from this so distorted reality before it is too late.. & collectively decide to climb out of the rabbit hole to a reality that is more comfortable for a majority…

    hope this is helpful.

    many thanks & blessings!

    • Winston says:

      “hopefully we will wake up from this so distorted reality before it is too late.. & collectively decide to climb out of the rabbit hole to a reality that is more comfortable for a majority…”

      Those in a position to do anything about it benefit from it, so don’t hold your breath. Why else do you think these economic “experts” weren’t long ago dethroned by being laughed out of the room.

  26. Winston says:

    So, the Fed might be able to unwind QE without negative consequences. I seriously doubt it, but even if they managed, what can be done about this?


    • Kent says:

      I’m not sure that we need to do anything about it. Lots of people carry a mortgage that is 3 times their annual income and get along just fine. That can go even higher at lower interest rates.

      But if it is me, I’m going sell as much short duration bonds as I can and use the proceeds to pay off longer duration bonds. Then just pay the short duration bonds to maturity.

      Of course that assumes we’re not planning on any more wars, jacking up the DOD budget, building a 3000 mile long wall, or spend another trillion on infrastructure projects.

    • Wolf Richter says:

      I think there will be serious consequences. My guess is that they will not happen all at once but that they’ll drag out over time, in many ups and downs. My guess is that it will spread over many years.

  27. c smith says:

    Just as long as we don’t have deflation where it might hit the bankers and bureaucrats – asset prices and tax revenues – then TPTB can live with it!

  28. Nicko2 says:

    From Reuters:

    “Total U.S. indebtedness is about 14 percent above the trough of household deleveraging brought on by the 2007-2009 financial crisis and deep recession, a pull-back that interrupted what had been a 63-year upward trend.

    Mortgage debt was $8.69 trillion in the second quarter, up $329 billion from last year, the report said. Student loan debt was $1.34 trillion, up $85 billion, while auto loan debt came in at $1.19 trillion, up $55 billion. “

  29. QQQBall says:

    Has it been two 25 bp increases in a decade?

    The game of musical chairs is the UST issues debt, the Fed creates money and buys the debt, the USA pays interest to the FED (bondholders) and the FED promptly hands back the interest (less expenses) back to the US Treasury… The net interest expense to the USG is almost zip rleative to the debt load. The chance of FED ceasing to buy new UST issuance and selling its holdings is ZACTLY ZERO. When the SHTF it will be austerity and privatization – assets stripping. Look at Grease, they were ready to tell the EU to stuff it, but magically that never happened.

    I’d like one of these a-holes to address the harm to savers over the past decade. That is the real story…

    • Plumas One says:

      Neither the Fed, the WH nor the mainstream media are motivated to
      address the fraud taking place…that is, banks cutting back interest on depositer accounts to increase profits, jack up salaries and bonuses,
      buy back shares and support unrealistic stock and bond valuations.

  30. Kf6vci says:

    What does the 11% lower Dollar do to imports and exports? The former get more expensive, the latter get cheaper. Now which impact should such a development have on inflation? The U.S. has been running frightful trad deficits for decades.

    Sit back and wait for Obama-Care prices to keep rising. Until something breaks. Then what?

    The orchestra kept playing on the Titanic. I have a deep concern about something dreadful happening quite soon. Some “Black Swan” event coming… Silly monks kept debating questions like the “sex of angels” while the Heavens were at the gate.

  31. andy says:

    “QE was designed to produce the “wealth effect,” as Bernanke himself explained it to the public, where those with assets get wealthier and then spend some of that wealth in the real economy.”

    But Bernanke forgot the other side of the coin – those with assets get a lower return and have to reduce spend, and those seeking to grow assets have to save more to achieve a desired level of income.

    Both these traits reduce GDP.

  32. Gershon says:

    Definition of chutzpah: The Fed, which has lavished $16 trillion in financial crack cocaine on its bankster patrons to cover their gambling debts and reckless speculative binges, piously warns the increasingly pauperized proles that their debt loads are getting out of hand. Having created moral hazard on a gargantuan scale, the Fed now seems belatedly concerned that millions of debt donkeys may not be able to satisfy their financial obligations to her bankster cohorts. Kind of like the schoolyard crack dealer scolding the kiddies who develop an addiction that impedes their ability to buy more crack.


  33. Castor says:

    I’m beginning to think all economics is pure crap. The below link has a chart for the 10 yr treasury vs the Fed Funds Rate.

    From 7-2004 to 7-2007 the Fed funds went from 1% to over 5% yet the10 year treasury did not budge.

    Why should it be any different this time? You think a 0.25% will put fear into the markets?


    Expect the markets to rally for years to come like it’s 1999!

    Not sure if anyone believes that QE will be unwound. The entire civilized world is near zero percent! Any GDP growth is the result of asset bubbles.

    Please explain where all this discipline to starve the bankers of easy profits will come from in a Trump administration?

  34. Willy2 says:

    – it seems that the US 2 year yield “didn’t get the memo” from the FED either. Because the 2 year yield already started to rise in the 2nd quarter of 2013. And the FED started to raise interest rates only in december 2015, more than 2.5 years before the FED “raised” the FFR.
    – Or was the FED whispering in the ears of the 2 year T-bond yield.

    • Wolf Richter says:

      “Taper Tantrum” happened in 2013.

      • Willy2 says:

        – Agree. But from 2013 onwards the yield curve (30 year vs. 5 year yield) started & continued to flatten every year. In other words: Mr. Market completely ignored/neglected both the “Taper Tantrum” (2013) and the “Tapering” (2014) altogether.
        – Currently Mr. Market still has to make up its mind. Because this year the yield curve “has gone nowhere”, didn’t steepen or flatten in any meaningful way.
        -Today the 3-month T-bill rate dropped below 1%. Unless that yield rises above 1% again, I have moved to the position called “FED rate cut coming” and will stay there.

  35. Gershon says:

    More Kabuki theater from the Fed. Bilking savers out of an estimated $500 billion a year in interest income and forcing them to seek yield in Wall Street’s rigged casino, where they can be fleeced at will by the Fed’s accomplices, is far too lucrative a racket for the Fed to ever voluntarily give up. The Fed will not hike until the bond vigilantes force its hand. These supposed FOMC minutes are nothing but smoke and mirrors.


    • Wolf Richter says:

      Gershon, why don’t you read the ACTUAL minutes rather than just reading and misinterpreting the headlines of MSM articles. So try this (it’s a little longer than the CNBC headline, but it’s worth a read):


      • Gershon says:

        Wolf, I don’t read the minutes because, as I’ve stated, I view these FOMC meetings as pure Kabuki theater where the Fed tries to pretend it’s a responsible central bank instead of a rapacious private banking cartel set up solely to concentrate all wealth and power in the hands of its oligarch patrons. Once I understood this, all of the Fed’s actions became completely predictable.

        The FOMC minutes to me are more meaningless jawboning and dissembling – Yellen and her flying monkeys will keep doing what they do, which is perpetuating the transfer of wealth and assets from the middle and working classes to a corrupt and venal .1% in the financial sector by rigging the game in the latter’s favor.

        It’s a Big Club, and I ain’t in it (RIP, George Carlin).

        • Gershon says:

          George Carlin: It’s a Big Club, and you ain’t in it.


        • d says:

          “Wolf, I don’t read the minutes because, as I’ve stated, I view these FOMC meetings as pure Kabuki theater”

          Oh dear

          “Keep you friends close, and your enemies, closer”

          “Friends do not need a common language”

          “you must perfectly understand. What your Opponent says, and what his speech means, to him, and his people”

          If you dont read what is being said , in small does if large ones can not be tolerated (A problem I have with leftist Propaganda) You miss any important information there.

          Trying to make people like you see sense, or facts, is like beating your head against a brick wall.

          It fells good, when you STOP.

  36. Gershon says:

    Trump the candidate called out Janet Yellen and the Fed for creating a “big fat bubble” with created-out-of-thin-air “stimulus,” but once in office he boasted about the stock market hitting new highs. Taking ownership of this doomed Ponzi scheme was a huge mistake that Trump is going to bitterly regret when the Fed’s financial house of cards, built on make-believe valuations, non-GAAP accounting, and corporate buy-backs with ultra-cheap credit, comes crashing down – as it’s going to on his watch. Trump doesn’t realize it, but he is now the perfect patsy for taking the fall for the Fed’s grotesque monetary malpractice since 2008.

    • d says:

      “Trump doesn’t realize it, but he is now the perfect patsy for taking the fall for the Fed’s grotesque monetary malpractice since 2008.”

      I have been saying that since before he got the nomination.

      08 happened under Baby BUSH. Big ears only got the blame, as he made such a hash of the recovery attempts.

  37. Kevin Beck says:

    How is it that “the best and the brightest” people in the room have finally figured out the truth about the disaster they were trying to inflict upon us peons?

    The members of the Fed constantly whine about deflation. Let me describe another type of deflation for them: The deflating value of the dollar.

    They yap about deflation being bad for the economy, because it causes too much saving and too little spending. Or something equally stupid as that.

    However, the same Fed issues more and more currency units into the economy, causing the value of each outstanding unit to shrink, thus deflating the value of our savings. (I know this is not the economically-correct definition of deflation, but bear with me here.) Their argument is along the lines of “production will decline, because no one’s buying anything.” Yet they add more currency units, causing the value of each to shrink, and that’s a good thing?

    The problem: They’ve been looking through the same windshield for too long, and there’s too much bug spray on that windshield.

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