Under tremendous pressure, the Fed sticks to its guns, mostly, and the crybabies are having a cow.
The S&P 500 index plunged 3% in two hours from its intraday peak at 2 p.m., after the Fed announced its un-dovish decision that it’s not flip-flopping. The index ended the day down 1.5%. It’s now down 6.2% for the year.
The Federal Open Markets Committee (FOMC) voted to raise its target for the federal funds rate by a quarter point to a range between 2.25% and 2.5%. This was the fourth rate hike in 2018, and the ninth baby-step in this cycle that started so tentatively three years ago. It has been the slowest rate-hike cycle in history. The range is still historically low and is barely above the rate of inflation as measured by CPI (2.2%).
But from the clamoring on Wall Street and the White House, you’d think interest rates have been propelled into the stratosphere.
Of the 10 FOMC members currently in voting slots, all 10 of them, unanimously, voted for the rate hike. This wasn’t a toss-up.
A “strong” economy needs normalized interest rates…
In terms of its assessment of the economy, the FOMC saw mostly strength. From statement:
[T]he labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly…
There was a cloud, as the impact of corporate tax cuts is fading: “growth of business fixed investment has moderated from its rapid pace earlier in the year.”
The FOMC sees stable inflation near the Fed’s target of 2%, as measured by core PCE (1.9%), which purposefully tracks lower than CPI.
Yes, “some” more rate hikes
In terms of future rate hikes, there is a minor downshift in language: a “some” got wedged into the phrase. And now “some further gradual increases” are on the table, instead of just “further gradual increases,” as in the statement of the last rate-hike meeting in September.
A piece of red meat for the crybabies
Some old language started to show up again: The Fed “will take into account a wide range of information,” including all the usual things plus: “readings on financial and international developments.”
This language is designed to show the crybabies on Wall Street, in the White House, at the IMF, etc., that the Fed is not deaf to the turmoil in the US financial markets, which are curdling, and the upheaval in emerging markets where governments and companies issued dollar-denominated debt while the getting was still good but now have trouble servicing this dollar-debt with their inflation-devalued local currencies.
A smaller increase for the banks
The Board of Governors also voted unanimously to hike by 20 basis points, rather than by 25 basis points, the interest rate the Fed pays the banks on required and excess reserve balances. At 2.40%, this rate is now 10 basis points lower than the top of the Fed’s target range for the federal funds rate. The Fed is raising this rate at a slower pace to keep a lid on the federal funds rate which has been bouncing into the upper limit of the target range.
“Neutral” edges down, becomes easier to reach
In another development, the median estimate among Committee members for the “neutral” interest rate fell to 2.75%, from 3% in the forecasts from the September meeting. In other words, if the Fed wants to lift rates slightly above neutral — as it still seems to do — it would need to raise rates only two more times. And a third rate hike would get it comfortably beyond neutral.
The QE Unwind continues as planned
The Committee stuck to its plan to unwind QE at a rate of up to $50 billion a month, despite all the clamoring from Wall Street and the White House that don’t want the drunken party to end. The Committee, as it always does, explained its decision and the mechanics to continue its balance sheet normalization it its Implementation Note.
Then in the press conference, Fed Chairman Jerome Powell, when asked about it, confirmed it:
“We thought carefully about this, how to normalize policy and came to the view that we’d effectively have the balance sheet run off on automatic pilot and use monetary policy — rate policy to adjust to incoming data. And I think that has been a good decision. I think that the runoff of the balance sheet has been smooth and has served its purpose, and I don’t see us changing that. And I do think that we will continue to use monetary policy, which is to say rate policy, as the active tool of monetary policy.”
And now it’s getting interesting…
The median projection by the FOMC members for the federal funds rate at the end of 2019 inched down to 2.9% (from 3.1% in September), which implies two more rate hikes in 2019, to a range between 2.75% and 3.0%. The median projection for 2020 inched down to 3.1%, implying an additional rate hike.
But here is the thing: A year ago, at the December 2017 meeting, the FOMC’s median projection for the federal funds rate at the end of 2018 was 2.1%. In other words, a year ago, they projected three rate hikes in 2018; and in 2018 they voted for four rate hikes — each time unanimously!
And the effective federal funds rate is around 2.4% as of tomorrow, not 2.1%, as projected a year ago.
In this light, the infamous dot plot of today’s meeting gets a new meaning. Of the 17 members (some of whom will not be able to vote next year):
- 0 members see a rate cut in 2019
- 2 members see no rate hikes in 2019
- 4 members see one hike in 2019
- 5 members see two hikes in 2019
- 6 members see three rate hikes in 2019.
So six members see three rate hikes in 2019. That is more than the four members a year ago that saw the four rate hikes in 2018 that actually came to pass (dot plot).
The remaining 12 members a year ago underestimated the rate hikes in 2018. Oh my, how they changed… and unanimously voted for four rate hikes. Today’s projections of two rate hikes in 2019 should be seen in light of last year’s projection of three hikes for 2018.
So this is not at all what the Wall Street crybabies, who’d thought wishfully that the Fed had suddenly turned super-dovish, had been dreaming about.
Powell has come under constant and withering attacks from the White House for finally doing what the Fed should have done years ago. In the press conference, he was asked if this political pressure plays a role in the Fed’s decisions. And this is how answered:
“Political considerations have played no role whatsoever in our discussions or decisions about monetary policy,” he said. “We’re always going to be focused on the mission that Congress has given us. We have the tools to carry it out, and we the independence which we think is essential to be able to do our jobs in a non-political way. And we at the Fed are absolutely committed to that mission, and nothing will deter us from doing what we think is the right thing to do.”
We’ll see. But so far, so good.
Peak “Everything Bubble?” The data is piling up. Read… THE WOLF STREET REPORT
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Who owns the fed?
Read “The Creature from Jeckle Island”
Is that where the Bankers got together a century ago and had a COW?
The meeting in November 1910 laid the groundwork for the Federal Reserve Act of 1913.
But not all of the power-players of that era were in favor of the plan. Three men were opposed: Benjamin Guggenheim, Isidor Straus and Jacob Astor. These men were aboard the Titanic, and on what is today’s tax day, April 15, they died in 1912. It’s doubtful if they could have stopped the Fed from being created, but their deaths eased the pathway to its birth.
For those who were on the Titanic and died, it was so much the worse.
And when Congress passed the McFadden of 1927 which removed the 20 year charter from the Federal Reserve Act of 1913, and gave the Fed permanence, I say, “tant pis.”
“Is that where the Bankers got together a century ago and had a COW?”
More like a Minotaur.
You know, with a Dual Mandate.
if you’re a taxpayer you do
JP please continue to lead the way.
Soon the B of England and ECB will reluctantly have to follow
The ECB was supposed to announce the end of easing during 2017 already: they have held off for another year and conceded very very reluctantly. In January 2017 the odds of a rate hike in Q1 2018 stood at 67%, so much the cost of the USDEUR hedge plateau’d at 2% on hope alone. Look where we stand right now.
The big budget deficits France and Italy have already negotiated for 2019 (Belgium was on the same track before the government collapsed… again) rest in large part on getting a big hand from Frankfurt in keeping debt servicing costs under control, and too large parts of the European economy have become dependent on financial repression, from commercial real estate to tourism.
Nobody really wants “normalization” of any kind, unless he’s ready to oversee a massive purge of bad calls, zombie companies and assorted frauds. Nobody wants that as well, but we’ve reached a point where the needs of these unproductive activities are starting to be a drag on the rest of us. We can buy some time with another round of stimulus, but that’s what we’ve been doing all this year as well: until December 31 the party goes on as before. Bigger stimulus may buy us one year of artificial growth and leave us shorter on breath than we are right now.
For me the choice is simple, but I am not a real estate speculator nor a politicians who need to keep ridiculous promises.
I think it is maybe until March 29, 2019. At least it’s until the Brexit plan vote in January 2019.
They will pin everything on Brexit, then use the excuse that this is a “special, unique, event that never happens again, one that nobody possibly could have foreseen” – to directly write off lots of stranded investments and somehow bail out whatever needs bailing. It will be especially fun if we see nationalisations again.
Won’t be pretty at all but it won’t be the end of civilisation (or the EU, or the ECB) either. More like an inflection point, the rules and the regime changes. Then it’s a new game.
At last check there were €900 billion in Non Performing Loans (NPL) still on the books of European banks. These things have a bad habit of popping up all of a sudden: in late November Unicredit, the only official (nudge nudge wink wink) systemically important Italian bank announced they had carried out a revision of their assets and found a further €2.75 billion in NPL: last week European regulators ordered Unicredit to get rid of these latest tranche of toxic assets by the end of Q1 2018 “or face the consequences”, most likely being told to behave in a very serious tone.
Remember: these are the good times, the European economy as a whole is still high on the extra-loose monetary conditions introduced in 2015 and which took full hold in 2016, albeit it’s cracking at an alarming pace.
How are you going to blame Brexit, the “Trade Wars” or les gilets jaunes for festering assets that go back in many cases to before the 2009 Financial Crisis? Much more critically how do you avoid such a crazy buildup from happening again and how do you make sure banks aren’t back at hiding financial toxic waste in their virtual basements? How do you punish those responsible and whom do you hold accountable?
Since 2009 France, Germany and even Italy have made significant improvements to their outdated bankruptcy codes. It’s still far from perfect but it’s a laudable step in the right direction, especially considering politicians don’t like their names associated with the word “bankruptcy”. The concepts of “debtor in possession” and swapping securities for equities are still relatively new concepts and may not even work in practice on a large scale, but you never know until you try.
Much more critical is the concept of establishing both a fair order for creditors in a bankruptcy and reintroduce the idea of rewarding those taking higher risks adequately which the Draghi-led ECB willingly destroyed.
Accountability only comes with sane monetary policies.
“They will pin everything on Brexit, then use the excuse that this is a “special, unique, event. . .”
Agree. That’s the answer.
Kind of like how the Atomic Bomb gave Japan a good excuse to surrender.
Wow! The first comment on the topic.
The issue at hand is whether the Fed should be attempting to normalize interest rates AND the source, qualifications and standing of the vocal opposition to this attempt.
Here is the bandleader in full cry:
‘Rich people won’ — Cramer says Fed rate hikes widen the wealth gap by hurting working Americans
Apparently, CNBC has decided that stock market shill Jim Cramer is some kind of serious economic theorist. How about getting his thoughts on Dark Matter (this does not mean the Fed) or gravity waves?
In the weeks preceding Cramer’s promotion to Chief Economist, he was sounding like someone in need of, at least, some time off for rest and relaxation. His frantic spinning in the wind with each market swing resembled a weather gauge about to break.
Some version of: ‘This market is oversold, buy now’ would be followed within 24 hours by: ‘This market is treacherous’
Of course, nearly all his recommended stocks are down, so he has to blame someone. But could it be that Dow components built on advertising are just overpriced? Speaking of normalization, didn’t the Dow normally contain outfits that made stuff?
But even CNBC probably wouldn’t promote Cramer to Chief Economist just because he’s upset. More likely this is a bow to the Head Cow. the Whiner-in-Chief. .
The most serious threat to the US economy is out of control budget deficits. These are flaws in fiscal policy not the Fed’s monetary policy.
Correction: Advertising giants like Facebook etc, are mostly dragging down the NASDAQ not the Dow, in what many have labelled Dot. Com 2.0
>>>>>>>JP please continue to lead the way.
Soon the B of England and ECB will reluctantly have to follow
Yup…… they’re following through and actually doing the right thing this time. Hopefully they keep raising well into next year and asset prices completely implode and the whole thing comes crashing down in a inflationary–deflationary hybrid spiral.
Today, Jay risked himself getting fired to win some respect for the FED. And the arsonist Greenspan came out and “Warn” everybody about fire. I just want to spit on his face.
Really, I can’t see anything objectionable in Greenspan’s comments today. Basically he warned of further downward pressure on equities, a correct view considering the fact that we’re almost certainly toward the end of the longest market expansion in 100 years. Warned about a period of stagflation if a run up in commodity prices coincides with the next recession. And cautioned the current Fed chairman to ignore politicians, especially the president, when determining interest rate adjustments. In particular with respect to the last item he said:
“The best thing you can do if you are in the Fed is put earmuffs on and just don’t listen.”
I doubt the Fed is as concerned about the equity markets as they are the bond market. The latter dwarfs the former and has absorbed rate increases thus far.
Bernanke went helicopter because of Greenspan engineered the wealth transfer. Greenspan did the wealth transfer because he could. Greenspan was the one started this bubble/bust cycle and normal people get hurt. Why normal people get hurt? Because normal people do NOT have accounts in the FED. Fed’s friends do. Fed’s friends have access to 0% money while the normal people have 5% mortgage. Why do we even listen to him talking? Because we want the wealth gets transferred into our hands as opposed to being transferred out. This is pure corruption of common people. Everybody should focus on wealth creation, building better products and services as opposed to thinking about buying neighbors’ house and rent squeeze the new comers. Greenspan started widening inequality and he has the nerve to come out saying “ I am just the squirrel, saw the crime happened, but it wasn’t me! and guess what? based on what I have SEEN, I am warning you it is getting dangerous.”
“Hi JT , DT here. Look this hike business. You’ve put me in a bit of a corner. I know I agreed when I appointed you that rates really had to go up. The problem is that things are beginning to fall apart quicker than I thought.
I need to think politically at the moment . I think you’re 100% right with the hikes and Balance Sheet reduction, but give me a break and back off for a while please.
I know, because we’ve already discussed it, that an equity and bond crash is almost certain anyway, baked in the cake, you’ve already told me. But I’m in a Catch 22. If this thing turns sour regrettably I’ll have no choice but to use you as a scapgoat.”
Before Jay came out today, Greenspan, Trump, Yellen, Drunkenmiller, Jeff Gundlach, all cane out and saying “sky is falling, dangerous, let’s pause!”. Especially Drunkenmiller, he was saying “Oh, I felt so bad for Jay Powell because the P45 twits and he market price put him in such a difficult spot” and yet himself came out and shouting to the crowd that “sky is falling and Jay should pause”. He does NOT care what Jay does, he just care about the 500 point move become 1000point move and he will transfer money from who ever freaks out. These guys basically throw Jay under the bus and if bad things happen, it is ALL Jay’s fault. These guys do NOT care to inform you any usefu information, they only care about hangs your behavior into what they wanted, in this case, PANIC and blame JAY!
sorry but the Fed chair can’t be ‘fired.’ Once nominated, by the President, and confirmed by the Senate, that’s it. That’s the rules. Powell ain’t going no where for awhile.
I love what JP is doing. He’s doing what should have been done years ago. The fact that so many are whining about it, just shows how spoiled the markets have become, and actually rather complacent.
Remember all of those years where when the Fed spoke, the markets just rocket fueled higher ? It was absurd. The market got addicted to the heroin of Fed easy money. Its still totally addicted, and hasn’t faced the music yet.
The market isn’t anywhere close to it’s ‘come to Jesus’ moment. show me AT LEAST another few thousand dow points down, and then we can discuss it.
If tomorrow, or next month, Trump gets some kind of a deal with China, and tariff’s are removed, this market would absolutely scream higher. No doubt about it.
For how slow they have been going, and for how extended this has been with tiny little baby step increases, that is very nearly QE like, with rates well below long term averages. Its still VERY accommodative policy. Thats what makes these whiners and everyone screaming doom, so absolutely off their rockers, and unhinged from reality.
The dollar, ironically despite these increases, still looks like its about to roll back over, and continue its multi-year downward trend again. As far as that is concerned, it shows the Fed is still way behind the curve. Thats going to give a ‘tail wind’ to the stocks of firms who sell internationally. But inflation is going to increase on imported consumer goods. looks like stagflation is the order of the day as to whats brewing. Fed simply has to keep raising rates. no two ways about it.
Oil drops because the evonomy is weak – this is not just a US phenomenom, but global. Also, can’t base any fed decision on some future hope of a chiba trade deal. Just flawed logic –
“sorry but the Fed chair can’t be ‘fired.’ Once nominated, by the President, and confirmed by the Senate, that’s it.”
Mike, I hope you’re right about that. I’ve heard some differing opinions, and Mr.Powell did look a little nervous yesterday. But maybe that’s just because he has to say the economy is in good shape when he knows it isn’t. That’s gotta be uncomfortable to do.
In any case, I feel bad for Powell even though I’m an anti-Fed person. It seems he’s trying to do the best thing for the country and getting a lot of flack from dirtbags in the msm, low life economic talking heads (Wall St pimps) and of course our darling president. I sure hope he can follow through on QT and the planned hikes. Actually I think he ought to be even more hawkish, but it’s too late for that now.
For the present I support Powell.
Powell will outlast Trump, Fed chiefs always outlast their presidents.
Does anybody believe this “strong economy” meme? If I increase my income by $50,000 but take on $50,000 in debt at the same time, am I better off?
Roddy667… thanks for your ‘strong economy meme’ comment. Look around our community, the concerned expressions along with vibes of bottled up private tensions. We’re kept in Fear, Ceased to Reason and Believe in Everything to Examine Nothing.
Western version of Lysenkoism. Was QE merely implemented to ramp China production and commensurate the loss in population growth 1959-61?
If it was, then there is good reason to keep us blind, dumb, and earbuds in.
Yes declare bankruptcy and flee with da loot.
Which housing markets are in Bubble, is Portland, Oregon stable, safe to buy house?
Check this (it has a chart for Portland) and decide:
how much will housing drop according to rate hikes
which banks will be standing and which ones will go down
is this the revolution time
Trump will be blamed for this mess, even though it did not start from him, how will the new president fix this QE shit
“…which banks will be standing and which ones will go down…”
None, or very few. Banks have doubled their capital (thanks to ZIRP and QE) and have limited mortgage lending, partly due to Dodd-Frank. Problems, if they come, will not come from the banking system.
So what? Trump made the choice to become a politician.
Politicians will get blamed for everything that goes wrong, whatever they had a hand in it or not (and the meaning of “wrong” being a perpetual subject of inflamed discussion).
Donald Trump does not get to fix QE, the FED is doing that and Donald Trumps part of the work is to be blamed for the effects.
He bought the ticket, now he gets to enjoy the ride :).
In only 50 years he may be remembered as the great, courageous, president that tamed the financial bubble.
Are these rhetorical questions, or do you always bark questions at people like this demanding information from them without any ‘please’ or thanks for their input..?
Powell is already fixing it, despite steady criticism from Trump.
Its called “critical thinking”
and Easy E thought he was the only gangster ever lived.
Its nothing but gangster party
“how much will housing drop according to rate hikes”?
Well, the available evidence suggests that the price of houses drops around 4-5% for every 1% rise in interest rates. (Mind you, that is a SWAG, and there is some evidence that the relevant elasticity is not linear.)
This suggests that a rise of the mortgage rate to 8% from 4% would cause house prices to drop something like 16-20%.
(Note the regulated interest rate between 1946 and 1970 was 8%. Old folks like me may remember the 5-8-3 Club. . .)
These numbers sounds about right, and a 20% drop is likely built into the current housing price bubble.
Two final points:
-It is not certain that the Fed is going to increase interest rates by another 4%.
-Not all of the price reductions from the 2018 interest rate increases have arrived in the Real Estate market: These thing usually take 6-9 months to ripple through.
The Fed raising rates by 4 % would cause housing to drop by 20 % ?
Historical data from before 2008 means nothing to the bubble RE centers. Check the ratio of incomes to prices in SF in 1970.
Since then housing has become financialized: a place to invest and store wealth.
These markets are most likely going to drop 20% with the new rates now. Bake in 2 more .25 bumps in 2019 and this looks near certain. The market has ALREADY turned.
16 more bumps (4 %) ?? On the million dollar shack that only sold for a million because the guy was sure it would appreciate just like always?
8 percent mortgage money to bubble country might as well be 18%.
At 8 % a 50% drop in prices might produce nibbles.
So , can we expect interest rates on deposits to rise?
To just below the rate of inflation.
Actually, my Kanasa Cash checking account interest has gone up, to 3% – a bit above the official (questionable, IMO) inflation rate.
That is what I am waiting for…. maybe in vain.
Yes, but you need to shop around.
I am thinking of buying very short duration (4 weeks) T-bills via treasurydirect, hold to maturity and reinvest. Read about this on Peak Prosperity – they said it was like 30X compared to CD. Interesting to hear your opinion.
I think it’s a good move. There are many other good moves. Brokered 1-year CDs probably pay more than 30-day T-bills but are less liquid. You should check brokered CDs at your broker or other brokers. Also check into the tax situation with T-bills. There may be tax benefits for you.
We opened our Treasury Direct account last year and moved our savings to it and to Vanguard and Fidelity (no commission on Treasuries).
I can tell you that T.D. is so much easier. Now the wife and kids (who really never invested before) are in Treasury Direct. You can invest in $100 multiples instead of $1000. You can set it to auto reinvest for 2 years. You can even withhold tax to IRS. The auctions in TD appear so much earlier. You don’t have to wait till after 11am on announcement date. You can schedule to invest. Youe asked to rate it after each use so we always say it’s excellent.
Andrei, do the math. If you roll over the treasuries monthly you are compounding the interest 12 times in a year, earning interest on your interest. If the CD pays the same rate and compounds quarterly you would be earning less. Compare the rates and the compounding intervals.
Great Article, Thanks for listing the past voting pattern and rhetoric of the Fed, puts the noise in perspective. Maybe there’s a reason after all for Powell to double the Fed live meetings in the upcoming year.
Yes, rates have been rising steadily, but you will need to shop around. Vanguard’s GOVT MMA has a 7 day yield of 2.24%, but you will be hard pressed to find many banks that pays a rate that high except on longer term CDs.
One exception …Ally Bank pays 2.3% for a 11 month “no penalty” CD and they probably will add 30 BPs or more for a regular CD of similar duration.
You sure Italy is NOT one of the government?
Vanguard Settlement Fund is invested in VMFXX the govt money market fund. But it is partly State taxable. It pays better than the sweep accounts advertised on TV.
However, 4 week Treasury Direct beats it. Teasury Direct is 100% State tax free whereas the money market is only 66% tax free in my State.
Remember money in the Treasury does need FDIC insurance either.
Don’t forget the 3% on checking and savings offered by RobinHood this week. Sure, your money wont be FDIC insured but its mobile. So mobile, it might even run away.
The SIPC that it won’t insure RobinHood’s “checking” account, since the insurance only covers funds intended to purchase securities.
That is highly misleading. SIPC only covers customer accounts (up to defined limits for cash & securities) in the event of broker default.
SIPC does not cover customer investment losses of any kind.
Old Chinese proverb: if you want a bank account, go to a bank (why do you think they call it a BANK account?).
Pretty disturbing if they won’t insure uninvested balances against broker default….
Lee Bank offers a Kanasa checking account currently paying 3% and it IS FDIC insured. I have no interest in Lee Bank other than as a customer and there may be other banks offering Kanasa accounts.
Why the hell will anyone lend anything to some outfit named “RobinHood” after the fictive leader of a highway robbery gang!?
The name already gives it away like with MF-Global!
Check the small print. I’d bet that investments are pooled and the mothership registered in some location where it is allowed to use customer accounts as collateral. Like London.
3% yield on checking, at Robin Hood. easy money. SPIC insured. cant find ANY money market remotely close to that. Ya gonna buy a 10 year T bill instead ?
Not true. SIPC CEO has come out saying he was not told anything about the Robinhood accounts and has zero plans to cover these accounts. Look it up.
You can do better than 3% by paying down your debt.
But there are opportunities from time to borrow advantageously, even if one could pay cash.
For example, some automakers recently offered zero down, zero interest rates on their new vehicle purchases.
The advantage: loan principle payments in the out years were made with deflating dollars.
Would be interesting to know how this affects the price of the auto. Maybe nego a cash deal with one dealer and a 0% deal with another?
Free $ and repaying in deflated $ sounds certainly sounds appealing ….I could also buy a greater % of a company I have ownership in.
They have been rising. A year ago average online bank interest rates were 1%. Now they are at 2%. I think the highest FDIC insured rate is about 2.4% right now on a savins/mm account.
A 1 year CD is around 2.7%. 5 year hasn’t changed much though.
Traditional banks only have higher interest for teaser rates or for large new accounts. My citibank was offering a 3 month 2.5% teaser for a new account with $25k+. Probably are realizing people are just using them to deposit and move cash….
Capital one 360 where my cash is, is sitting at 2%.
It’s a shame Mr. Powell wasn’t at the helm instead of Yellen back when. If so we wouldn’t be heading for this shipwreck now .
Holy crap, Trump actually managed to pick the right person he can’t just get rid of. Too funny. It’s all Jerome’s fault that Trump picked him…. hahahahaha
Trump is a real estate guy and real estate guys do not have any reasons to like Powell.
It is deliciously funny isn’t it? The best decision the President has made so far, by far his best appointment, and he rues the day he made it, and complains incessantly about it. I love the irony.
How you you KNOW Trump “rues the day he made it”? You don’t have access to his mind, do you? All you really know is that someone in media wants to you think that he said that. If it’s media friendly to Trump, maybe he even wants you to think that, but then you have to ask, why?
Rule #1: Don’t believe everything you hear.
Rule #2: If it’s an elected person talking, don’t believe anything you hear.
Rule #3: If it’s a politician talking and being filtered by mainstream media, consider believing the opposite of what you hear.
Rule #4: And always focus on what they do, not what they say.
You betcha, Tom. So much trouble could have been avoided had the Fed started normalizing back in 2013.
Unfortunately too many seem to think that interest rate errors only occur on the high side, that lower is always the safer option. And that inflation only happens in consumer prices. Ironic that Powell winds up in the media doghouse for trying to do damage control for the mistakes of his predecessors.
Au contraire, the target Chinese fertility rate wasnt nearly high enough in 2013 to warrent a Powell at the helm.
Still floggin the demographic head and shouldr pattern, i know! but after 500 years i figure i figured out Horses.
Haha @ Rosebud
“So looks like we’re slow roasting in the year of the pig, how long till there’s meat on the table” – Bloomberg
That almost flushed out all the canaries in the mind field. Next week the rest will go and things will look up!….for a week or two… then a good bottom near Febucanary.
Good information ..I didn’t see this anywhere tell i turned
down Wolf street!
For over two years I have repeatedly and vociferously expressed doubts, on this blog, that the Fed would have the courage to resist political pressure to quit raising rates. Well I owe them an apology. The pressure they’ve been getting has been loud, insulting, and obnoxious. And they unanimously resisted it and did the right thing. I’m impressed, even if they did weasel word the future.
But, as you said: “We’ll see. But so far, so good.”.
Well before you fall completely in love with the Fed, examine their other bedfellows. I agree in principle, but celebrating getting above 2% or so, ignores the fact that they have consistently created larger bubbles and robbed a lot of people in the process.
Setarcos, you’re right no one should be in love with the Fed, or forget the damage they’ve done to the economy, but at present we have a Fed board that seems to be wanting to do the right thing. I think that should be supported…for as long as it lasts anyway.
It seems that during the very early 1930’s – as the we plunged into the depression, slightly higher rates of interest existed when compared to the interest rates today (and during the last 8 years or so) during this “strong” economy….how is that possible….? Also, I can’t believe Trump took credit for the stock market last year when as a candidate he said “this is a big fat ugly bubble”. Now he owns it and is going to pay for the Fed protecting Obama during those horrible 8 years and artificially running up the indexes on the hocus pocus of QE…not real growth so we will pay a great price. Folks, I think we are looking at Great Depression 2.0 – I hope I am wrong!
Although I recognize that a lot of good things, particularly deregulation and nominations to the Federal courts, have occurred under this president, based on the record I have no trouble at all believing that his statements are impulsive and inconsistent, to say the least.
Nothing like deregulation for clean air, water, food and consumer protection
Anyone who scoffs at Trump’s “America 1st” policies while simultaneously believing or expecting the FED to have America 1st policy should consider the obvious inconsistency.
Where you stand depends on where you sit – if you sit in a Fed chair what is “the public interest” you are charged with serving? The interest of American citizens? Hmmm.
There’s no inconsistency – the guy at the Fed is acting with a view to the longer term and not caving to speculators, whilst USA’s Berlusconi is merely talking because he’s a demagogue who [quote] “loves debt”..
IE one’s a doer and clearly has some conviction, the other’s an infantile greedy windbag who’s fooled his way into authority saying what people want to hear with no intention of acting on false promises (how’s that wall coming along..?)
No inconsistency whatsoever.
MD, I happen to like what the Fed is doing and agree it is long view positive, however the Fed kept rates at zero year after year, which clearly was not long view positive. Why???? Just because the deck chairs were rearranged at the Fed does not mean we have a totally new Fed. Trump is simply a President, which is like a horsefly for the Fed – Annoying at worst. I am simply interested in how people assume the Fed is America 1st while simultaneously discounting America 1st. Your talking points ignored the concept.
After more than a decade of financial repression, I’m very happy to see rates rise.
While much attention has been lavished and ink wasted on the impact this might have on the housing market, I haven’t heard a peep about the positive impact it will probably have on pension plans, insurance companies and savers. Twenty five basis points is a drop in the financial ocean, but every little bit helps.
I do hope rates rise further as they’re still historically low. Would it be too much to expect potential homebuyers to use this increase as an opportunity to save more towards a down payment so that some of them might actually have something approaching the 20% down that Zillow and similar sites assume when estimating payments in their listings?
“I haven’t heard a peep about the positive impact it will probably have on … savers.”
Savers are unorganized individuals and one must look outside the establishment media to find much discussion of the macroeconomy as it affects their individual microecomomies. One such place: LenPenzo.com
When the emperor wants people to gather round, he gives out money. When he wants them to go away he takes it back – Old Chinese saying.
Unfortunately in the modern west there is not much escaping to be had, such is the complexity and depth of management. At least they pay you a fraction of a percent to return the money on loan ?
Saudi Arabia ?
Great analysis, Wolf. Wall St has been trying to put pressure on Powell by misquoting him (the infamous barrage of mis-quoting his Nov 29 speech).
What Powell said: “Interest rates are still low by historical standards, and they remain just below the BROAD RANGE OF ESTIMATES of the level that would be neutral for the economy”
How WS and MSM (main-stream media) quoted him: “Interest rates are just below neutral”.
Big difference, and today’s action by FOMC was decisive. Moreover, Powell’s effectively re-explaining what is meant by “broad range of estimates” at the presscon shows he is quite aware of what WS/MSM was trying to do him: Make it sound like he promised something that he actually did not promise, and then use the falsified promise against him. Bunch of jackhole crybabies, they are.
Arthur Burns behaved like a lackey to President Nixon and helped set off one of the worst periods of inflation in US history. I am pleased that the Powell Fed has not buckled under Trump’s rants.
Trump has zero fear to provide. He Trump is the fearful one as Mueller has destroyed all who have been indicted. Trump is the lamest duck in the pond – hence the FED doing what the FED should do irrespective of a lame duck indictable bankruptcy expert who could not manage a 7-11 on a good day. GO FED!
There are $100s of billions of bad spread products, derivatives etc. in the system nearly all of which were developed in response to the fact the pension funds could not get a 7% return in bonds due to QE. Much of this stuff is now blowing up given QT. I hated QE and respect Powell, but if he leans too hard and blows all of it up simulataneously he will just be back with a bigger problem. You need to unwind aware to liquidity problems. China is imploding and that does matter. All of this will get in the real economy. The paper Oil market is 800x bigger than physical oil. That was 1st to blow and will lead to lay-offs; lower investment etc.
Because the stock market is probably the greatest transfer of wealth upwards to the 0.01%, as painful as it will be, equities NEED to come down, so that savings present a reasonable alternative.
When people talk about “historically low” interest rates, shouldn’t that be measured against the contemporary level of debt?
In an economy saturated with debt, even a small interest rate increase might just push things over the edge.
To change our frame of reference just a bit:- The benchmark interest rate in Central African Republic was last recorded at 2.95 percent. Interest Rate in Central African Republic averaged 3.38 percent from 2009 until 2018, reaching an all time high of 4.25 percent in July of 2009 and a record low of 2.45 percent in July of 2015. Central African Republic is a member of the Economic and Monetary Community of Central Africa (CEMAC). In CEMAC, interest rates decisions are taken by the Bank of Central African States’ Monetary Policy Committee. The Bank of Central African States’ official rate is the prime lending rate. Rate of exchange has also been stable since 2009. Bank represents a population of about 50 million. Libya would likely have been part of this collective, had it not been bombed, pillaged and plundered by the Anglo-American Banking Mafia in 2011 & 12.
Surprising to see such unanimity. Makes me wonder what their internal models are telling them about employment and wage pressures. We’re already halfway through the boomers’ retirement cycle. If the tea leaves point to unrelenting wage inflation, it would make sense to try to get ahead of it now.
Another surprise was seeing Powell’s pronouncement that QE is no longer considered a policy tool. To state it so flatly is almost as good as saying “The economy will have less money permanently. Prepare your business plans accordingly.”
Their models have never, ever been reliable. I like JP and what they are doing, but have zero confidence they can fix the price of money effectively to achieve their stated goals. They have a success rate of zero and a very long track record. Now if their real goals are not stated, then one could argue their success rate is very good. Ignore the tree, taste the fruit.
Long term Employment and wage trends disconnected years ago. Some great people just cleared my yard. Their employment and wages are not counted in any numbers we see, but they greatly affect the numbers that we do see. Meanwhile, look at how the idea of legal immigration is framed. BTW, I am hypocrite for employing them, but my choice is the result of a system that was broken intentionally a long time ago.
Good point about employment vs. wage trends. And, if they’ve truly decoupled, it’s very unlikely the Fed doesn’t realize it. So I agree we should ignore their PR and think it through.
If wage pressures are unlikely as a motivating factor, something else is — and it’s very compelling (unanimity).
So what could that compelling factor be? The Fed is a financial corporation, run by financiers. Their primary concern is TBTF financial institutions. What assets need higher interest rates, even if it means lower GDP prints, ballooning deficits, and a long term bear market in stocks and housing? The only things I can think of are bonds and other types of cash substitutes. If bank execs have flipped from greed to fear, it would make sense that they’d want to hoard cash and get a “proper” return from it.
I think we will be seeing more of the “Dark Economy” in the longer term future. We can’t avoid it with the continuing global corporate efforts to dismantle organized labor. Immigration is really “refugee” status. People all over the globe are fleeing the political/financial destruction of their own countries by more corporate/warlike ones. More and more of the unemployed will be working “off the books” for cash.
I’ll be happy to vote for J. Powell in 2020. What a refreshing guy in Washington. He talks clear English and appears to be quite honest. We need more guys like him.
>He talks clear English and appears to be quite honest.
I’ve read that when Greenspan proposed Andrea Mitchell initially had no idea what he was talking about.
When Andrea Mitchell talks I have no idea whats she’s talking about either. They’re a match made in heaven.
To get a real good picture of AP you have to read his autobio “The Age of Turbulence”.
It is quite hilarious when he describes how he prepared for the annual “before Congress testimonies”……how he stayed up into the wee hours writing words that he KNEW most of the Congressional hearing members wouldn’t even understand. He admits to hiring women because they came “cheaper”. He was actually in his younger years a concert clarinetist. He had his own band.
Most spectacularly he admits before Congress in 2009 or 10: “I Was Wrong”…..on how he interpreted markets to work. And what a payday for this country!!
Iamafan I agree, Powell is the right guy to have at the Fed now. Mainly because he will not follow the Greenspan philosophy of helping bail out Wall Street. You must admire his courage and moving against all the harsh talk from those outside the Fed.
I could care less about what Greenspan says now. Where was his testosterone when he was at the Fed? He was a fraud.
I think Powell follows the Volcker philosophy as doing what is needed even though many are fighting against him. All I can say is J keep moving on.
I noticed the NASDAQ has a oscillatory pattern, in the last 4 months. It goes up and then down…up and down every month almost like clockwork. I guess the term financial engineering does not mean the same like it used to.
Talking to a few business people lately, a common theme:
1. Hard to get good employees.
2. Very uncertain about the next year’s sales (trump unpredictability not helping), so not willing to expand for now.
So a shortage of workers and an uncertain business outlook, leads to paralysis, and then onto a recession as everyone pulls back at the same time.
Note: they could raise wages, but with a shortage of good workers, will that really help … and if the new person gets more, then all employees will need more … so better to hold off.
In terms of raising wages, for a business the problem is this: It’s OK to offer 20% more to bring someone in, and thus fill a slot, but often it means eventually having to raise the wages of everyone already on the payroll (word gets around) to bring the entire scale up. So to hire a couple of people by offering them 20% higher wages, you might eventually have to raise the wages of the 1,000 people you have already on the payroll. And businesses are VERY afraid of that.
In may businesses, payroll expenses are well over 50% of total expenses.
That’s why they complain that it’s so hard to find good help — at the wages they currently pay their own employees.
Or, if you work in a fair environment everyone is paid to a negotiated scale, fully transparent, and there are no special and private deals for select individuals.
The reason for a company not disclosing renumeration is ALWAYS about repressing wages.
I have worked in a variety of situations, both union and non-union, and have known what I was going to be paid before beginning work, and just how that pay stacked up with others in the industry as a whole as well as in that particular company. Usually, a company that pays well and treats employees fairly never has a problem attracting workers. In fact, there is a waiting list to hire on.
Other employees always find out if there is pay disparity and the result is bitterness, usually followed by a job search. There is a reason why loyality has disappeared from the workplace. Long gone are the days when someone stayed with an employer through thick and thin, because they know full well they’ll be tossed as soon as it is convenient/necessary to do so.
Just look at GM :-) In case anyone is wondering about my work attitude, I have volunteered to wait for pay cheques when my employer was behind in his receiveables. If your boss is a ‘good guy’, you’ll go to the mat for him/her. It is a shared mission…success. I have also worked for organizations that existed solely to feather the owner’s nest and the turnover was prolific and unending. It always has to be win win.
I would say the majority of people would like to be loyal to the company they work for,and I’ve always found it hard to see those people used badly and discarded without a thought.
The central banks of the world only have two choices … a huge bust at low levels of QE, or moderate inflation at moderate levels of QE. QT is just not possible as that would trigger a collapse.
Clearly, one or more of the worlds central banks will chose moderate inflation at moderate levels of QE. The politicians will force the hand. Once one central banks fires up the QE, others will be forced to follow.
Eventually, this whole game ends when people lose faith in the currencies of the world. But, that will take a decade or so.
All you can do is invest for moderate levels of inflation.
Jay Powell’s answer to the CCyB question –
I was wondering if you could comment on governor Brainard gave a speech where the countercyclical buffer be activated. Do you agree with her analysis and do you think that’s something the Fed should look at?
” In terms of the CCYB, so the CCYB is a countercyclical buffer, it allows us to build capital at a time when vulnerability — financial stability vulnerabilities are meaningfully above normal. That’s a tool I would be absolutely willing to use, and happy to use at such time as that test is met. We meet and discuss that and evaluate it on a — roughly an annual basis. We haven’t done it since early this year. I think we will be doing it early next year and we will be reaching that judgment then. I will tell you I recently gave a speech that I said I believe financial stability vulnerabilities were roughly at a moderate level but I would want to leave open — my mind open on that and have that discussion with my Board colleagues when the issue arises.”
Simply stated: That’s a tool I would be absolutely willing to use.
Banks won’t be happy. Leveraged loans beware.
It’s certainly good to see a CBer who appears to have a bit of ‘common’ and maybe [gasp] even believes that an economy should be run for the greater need of a nation rather than the desires of speculators, and that decisions need to be made that look further than next Thursday.
Someone needs to tell Carney and Draghi, fully paid-up members of the ‘debt is wealth’ club (‘cos it is for people of ‘their type’ who are collecting the interest on the debt…).
Powell seems to be an honest broker but I sense that he is trying to manage the economy of today like the economy of the 70’s through 90’s.
If I am correct, he will crash the economy. Slowdown has started and once it gains speed, will be impossible to turn around, save massive policy reversal.
The 10 year Treasury is telling all. Yields continue to drop. They will not be going over 3% again or if they do, it will not be for long.
“Slowdown has started and once it gains speed, will be impossible to turn around, save massive policy reversal.”
True, as in 1929 through 1941, but inevitable. If it were not now, later and probably even more dislocating.
Too much of what we are doing is unsustainable.
Ignoring rates might not be a bad idea. The real consequence is reduced government spending, today Syria, tomorrow the world. Lots of jobs and spending attached to the global war on T. And like the end of Nam when the boys come home and can’t find jobs things get tight. The global meltdown paused to see yesterday if the Fed had anything and they didn’t so the selling continued.
Maybe we’ll start to see more business closures in the financial industry and hedge funds. Lots of fat needs to be cleared out there. They should start with the know nothings that are writing the mindless articles we see every day.
Wolf, what do you think about what’s happening with the 10 year bond in the midst of the FFR hikes and the selloff in the market? Do you think the rate starts heading north after outflows from equities reallocate into treasuries and cash?
I think the yield will be heading back up. Right now, the 10-year is overvalued (low yield).
There are a lot of reasons though — including the immense amount of debt that the Treasury is issuing that is concentrated on 5-year and shorter maturities, which drives up yields at the shorter end and puts downward pressure on yields at the longer end of the curve (lower supply).
If the Treasury wanted to raise long-term yields and steepen the yield curve, it could start issuing more 10-year notes and fewer bills and 2-year and 5-year notes. These decisions are made months in advance. So this his highly orchestrated.
Powell himself mentioned that in his press conference. He is clearly aware that the Treasury is doing all it can to invert the yield curve to pressure the Fed to stop raising rates.
Wolf, thank you for that wonderful analysis. That is a super insightful observation that I would never have made on my own. Your website rocks dude.
Wolf, great article and an accurate reflection of what is really going on at the Fed. Also, a keen observation of Steve Mnuchin’s tactical approach of engineering the treasury curve.
You’re insinuating Treasury and Fed are not on the same page? That’s heresy. This cannot continue, this is a working symbiosis, monetization, off balance sheet shenanigans, checks written for all things legal and not. Say it ain’t so
Rates should go up to the 5%-6% range where they used to be. Will appeal to retirees now. And that retirement money will no longer be chasing stocks or options. Bring sanity back.
Will the real welfare queen please stand up, please stand up!
Wonder where are all the cries about welfare now? It is not welfare when the top dogs are doing it?
Someone better tells those fund managers they can’t buy lobsters whenever their funds are losing money and the fed is not feeding them welfare, made up fiat money anymore.
Liquidity must be really bad for all the hedgies to scream the sky is falling. They know if they try to sell their positions the market will cave bigly.
So much Trump Derangement Syndrome. Powell is doing exactly what Trump wants – restoring the real economy and killing off the past 2-3 decades of financialization and cannibalizing of the middle class. Enjoy the show.
Mortgage rates hot a 6 month LOW today.
The fact is that the Fed does not set rates, it adjusts to what is already happening in the bond markets, it is bond markets that set the rates.
What the Fed does do is provide liquidity. By ending its purchasing (“QE”) it has changed the supply demand dynamic and liquidity is drying up which is creating more demand and less supply. So long as they continue to allow their prior purchases to roll off and not repurchase, the bond market will continue to tighten and the asset markets will continue to correct.
The Fed sets the rates for excess and required reserves. And its trading desk works the market to keep the federal funds rate within the target range. Via this arrangement, the Fed has pretty good control over short-term rates, and short-term rates follow more or less the direction the Fed gives well in advance. For example, this 4th rate hike in 2018 had been well telegraphed since earlier this year when I first started writing that’d we’d get a fourth rate hike, based on the signals coming from the FEd. But markets remained in denial for until a few months ago. The markets eventually followed and priced it in mostly before the actual announcements.
Long-term yields have a life of their own and are more influenced by what the Treasury Dept does (issuance) that what the Fed does.
I continue to believe Fed only has access to blunt instruments and trailing indicators.
Armed with these, handful of ‘smart folks’ try to ‘balance’ the economy and everyone seem largely fine with that. Unbelievable!
Just last decade we saw how Fed steadily kept increasing rates until sky started falling and dropped rates to near zero. Now asset bubbles are everywhere. Comes across as set of very thoughtful and smart decisions