“It is not the beginning of a long series of rate cuts”: Powell.
After seven months of intense pressure by the White House, Wall Street, and the entire media establishment, eight voting members of the FOMC voted to lower the Fed’s target for the federal funds rate by one quarter percentage point to a range between 2.0% and 2.25%. But two members – Kansas City Fed President Esther George and Boston Fed President Eric Rosengren – defied those pressures and voted to maintain the current target.
No FOMC member voted for a half-point cut.
The statement and Fed Chair Jerome Powell failed to provide assurances that there would be more rate cuts. In addition, Powell explained that “it is not the beginning of a long series of rate cuts” and then, confusingly, he threw in mentions of rate hikes.
The FOMC also voted to end the taper of its Quantitative Tightening two months earlier than previously announced, namely tomorrow.
But it wants to get rid of its Mortgage-Backed Securities. It announced that it would continue to shed up to $20 billion a month in MBS, and replace them with Treasury securities, including significant quantities of short-term Treasury bills, starting tomorrow.
Powell gave three reasons for the rate cut. They were outside the classic reasons for cutting rates. Normally rate cuts happen because the economy is getting into trouble. But he emphasized that’s not the case this time.
“The outlook for the U.S. economy remains favorable,” he said. “Consumption supported by rising incomes and high household confidence is the main engine driving the economy forward,” he said. Manufacturing and business investment are weak, but consumers are 70% of the economy, he said.
The three reasons for a cut — despite a relatively strong economy and markets near record highs – are, according to Powell: to provide “a bit of an insurance” against the “downside risks” to the US economy from weak global growth and trade tensions; to “help offset the effects” of these factors, and “to promote” the speed with which the dollar is losing purchasing power.
But Powell refused to point at further rate cuts and confusingly threw the idea of rate hikes into the mix.
The Fed will be doing a lot of “contemplating” of where to take rates, and it will be doing a lot of “monitoring” of incoming information, he said. It will be “looking carefully” at global growth, and it “will see whether growth is picking up, whether it is bottoming out,” and it “will see on trade.”
Powell referred to this hike as a “mid-cycle” adjustment, such as in the past, when the FOMC cut rates in the middle of a cycle only to raise them again later. “I am contrasting it there with the beginning of a lengthy cutting cycle,” he said.
“It is not the beginning of a long series of rate cuts,” he said and added, “I did not say it was just one.” He explained:
“When you think about rate-cutting cycles, they go on for a long time. The Committee is not seeing us in that place. You would do that if you saw real economic weakness and you thought the federal funds rate needed to be cut a lot. That is not what we’re seeing.
“What we’re seeing is it’s appropriate to adjust policy to a somewhat more accommodative stance overtime, and that is how we’re looking at it.
“It is not a long rate-cutting cycle. That is what we do when there is a recession or long downturn. That is what I’m ruling out.
“When you look at other mid-cycle adjustments — I don’t know if they will be comparable or not — but you will see examples of these.”
And later he threw in rate-hike confusion:
“One of the purposes of our cut today is to support the expansion. And if it works really well and the economy gets going again” – he referred to prior rate cycles though he wasn’t “predicting” it – “the Fed raised rates after a mid-cycle adjustment.”
When challenged by a reporter that the Fed, at the next recession, won’t be able to cut as much after the current rate cut and will have less ammo, Powell said:
“But you’re assuming we would never raise rates again, that once we cut the rates they will never go back up. As a matter of principle, I don’t think that is right.
“Long US business cycles have sometimes evolved to this event where the Fed will stop hiking, and in fact cut, and go back to hiking.
“I don’t know if it will happen here. It doesn’t seem like something that is particularly likely. We don’t know that. I think by extending the cycle, you do have a lot of benefits from that, and I think we will use the tools we have – a couple of rate hikes one way or the other is not going to matter so much.”
The wisdom of a rate cut under current conditions has been come under doubt recently – not just by yours truly from day one, but also by, among others, former New York Fed President Bill Dudley, who wrote yesterday: “Even a quarter-point cut – which is what I expect – entails significant risks. What if, in hindsight, it proves to have been a mistake?”
There’s a risk “of needlessly stimulating the economy when it is already growing at an above-trend rate and pushing bond and stock prices to new and perhaps unsustainable heights,” Dudley wrote, adding:
“By focusing on downside threats such as the uncertainties of U.S. trade policy and foreign growth, the Fed might ultimately go too far. After all, the current level of short-term rates is already stimulative. If the economy maintains its momentum and inflation accelerates, the central bank could be forced to tighten again – an abrupt about-face that could burst a financial bubble of the Fed’s own creation, increasing the chances of a painful recession.”
Yup, stock markets were shocked and appalled by two dissenting votes, the lack of even a single vote for a 50-basis point cut, the total absence of indications of more cuts, and the sudden re-emergence of the suggestion, even as an aside, of a “couple of rate hikes.” The Dow fell 333 points, the S&P 500 33 points, and the Nasdaq nearly 100 points – all down between 1.1% and 1.2%.
In the US alone, the phenomenon impacts nearly $40 trillion — with consequences for the real economy. Read... The Giant Sucking Sound of Financial Repression
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And so it begins…
The thing is, do we know what’s the beginning of?
A long decline to zero.
Both T-Bill rates and the Fed rate decline during post-bubble contraction.
Haha dudley should just retire… 66 Years old and still doesn’t understand what he does for a living.
Dudley should maybe ask himself, why the US Dollar is mooning in the face of ZIRP ? Primary dealers will have to gobble up close to 600 Bil by year end cause of new big shiny debt ceiling, it’s gonna be tight as fuck, something is popping offshore and there won’t be much resistance to absorb any shock from the big boys… Sometimes I wonder, are these Central Bankers really serious or there just trolling with the old Juncker saying, when it gets serious you lie.
Hong Kong tracks US Fed, HK is in severe need of easing on rates for local economy… HK credit snap, typhoons china and rest of Asia, quickly spread to EU and last pit stop will be Americas
What happens is so many momentum leveraged long only funds and hedge funds liquidate with a reversal. This happens because the most consistent alpha these days is momentum. Can’t draw any conclusions for a little while.
It is the beginning of the the end … of painting one’s posterior into a corner .. or maybe it’s the center of the Eccles Building foyer. I can’t decide which !
But what I CAN determine … is that little Guy & Gal Mainstreet will Still • Get • Screwed !!
Powell etc. can bank on it …
At first I thought the US has now irrevocably surrendered to the Japanese path into recession and deflation, followed – in some future time – by hyperinflation.
Then I carefully read the reported statements once more and understood that the rate cut is a benign measure to dampen irrational exuberance over an excessively strong economy.
‘Trump tariff threat pushes up chance for Fed rate cuts as recession risks rise’
That’s an actual headline from CNBC
Trump is mad at the Fed for not helping out the stock market that Trump is hurting with tariffs. That’s what CNBC is saying not what I’m saying.
What I’m saying is: why blame the Fed for not doing enough to undo Trump’s blunders ?
The usual reason for tariffs is to protect local industry. There is no US industry to compete with the vast majority of Chinese imports.
It’s a serious question whether Trump knows that the US importer, not China, pays the tariffs. Some of his statements: ‘I’m a tariff guy’ and ‘tariffs help reduce the deficit’ suggest that tariffs are an admission fee that China must pay to enter the US market.
The IMF has announced that the tariffs are being passed on to US importers and consumers. For the most part China is able to realize its pre-tariff margins.
A big shock will come in late autumn when the US ‘Walmart Class’ ( Term is copyright) goes to buy winter clothing. There is no US industry and China’s competitors can’t fill the gap fast enough. Nor will they wish to expand when Trump may suddenly fall in love with Xi if current flame Kim jilts him.
The tariff will go straight to the consumer.
I dont think you understand that the outsourcing relationship the US has had with countries like China have gutted the US economy. Just take a drive around the US. Stay off the highways and you will hundreds of towns and cities that collapsed, not because of some technological revolution, but because of the greed of those who run the country all the way down to the consumer who wanted cheap crap to fill their homes with.
The problem with the tariffs is not the tariffs themselves. The problem is that they are not paired with a tax structure that favors goods made in the US. Chasing jobs that leave China and flee to Vietnam provides no new employment for Americans in the US.
Good question. Fed works in mysterious ways.
But it is a member of the banking business tribe, and that’s probably worth keeping in mind when divining it’s ways.
Stock markets could have been spooked by anything – “sell the news” sentiment, “wonder what Fed sees that we don’t know about”, “rate cut always predates a recession” etc. etc. Any number of reasons.
Governments always want low rates, among other reasons, to cheaply finance deficit spending. Some get it by shouting publicly, some get it by asking nicely while wining and dining.
Fed showed once again today it has faulty sensors and does insane course corrections.
If the stock market is fuelled higher mainly by corporations issuing ever more debt to repurchase their own shares, then it makes a lot of sense for the market to revolve around these rate decisions.
The big players can’t sit out, they have to invest or they’ll lose their jobs. They know it can’t last forever, and they use these decisions to try to spot when the buying power will dry out and when the stock market will turn.
Many of the institutional investors, both human and machine, play off momentum and try to gauge the next reaction. Short term algorithmic decisions start the market move by selling on bearish comments until their measures say it’s oversold and ready for pullback.
It’s a fascinating process if you think about it, endless short to medium term speculation on price movement – in a direction following the current trend until something is big enough to break it. I believe the trend is still weakly higher as stock buybacks don’t have to slow yet.
To your point though, none of this fed rate change or stock price movement matters with relation to the state of the underlying economy.
The market isn’t doing anything too exciting at the moment (just checked), just sorta floating along. But bets are still being placed and money is being made (and lost). As said, they can’t leave the table, it’s their livelihood. And yes it certainly is fascinating! I still think it will go up also, if only because their are fewer public stocks all the time. (just my dataless take) And also as said it means nothing to the underlying economy, or most people in it. Rather odd system, eh?
BIG OOPS! Suddenly seems to be shorting/selling time at the table. Very sorry about “floating along” yammer, took me a while to check it. Still fascinating action, though.
Funny you mention shorting … My bearish bets aren’t moving yet, but I just got a successful bullish bet done (options in RUN, purchased about a week ago and sold for decent gain this morning).
I’m just doing small options bets for now as I’m delving into charting to find what works.
One bearish bet I’ve got is puts in GM. You can get them cheap going out 6 months, they’ll be negativity affected by trade wars with China, and automotive is slowing anyways.
Getting puts in high-fliers like Netflix or Tesla is really expensive, they have to tank 50% in the next few months for you to make any money.
For now, I still feel the bullish bets on a decent chart formations have a higher probability of success.
I’m far from sophisticated investor. Only decided to try to learn this stuff when I had cash from a house sale ’06 and intelligence was insulted by BofA guy for me happily making 5% in T-bills and just to see if I could. But later did have margin account w TD, and pattern day trader status. Was in way over my head, shorted a lot of stuff but mostly only made money with SD, SDS. Up and down days were pretty predictable in late ’06, early ’07. Wisely quit it all after losing at TD and even bigger on Vanguard recommended “diversified” index funds. Only made some money back at tax time, and had 50K SIRI (which I believed in from travel) at avg 28 cents Sold proud as hell at .70 and .79, haha, and on T-bonds, 30 yr Tips I now wish I’d kept.
I just follow this site to learn, not to act on.
If you want to give consumers more money to put into the economy you have to offer them, not banks, rates of interest that are favorable for investing and saving, not borrowing.
How can the dollar be “losing purchasing power” when it’s growing stronger as evidenced by exchange rates against the Euro, the Pound Sterling, and other currencies?
How long is the Fed going to have to “contemplate” and “look carefully” before they will finally admit that inflation is what is really happening, and it crushing consumers who are struggling to pay for basic necessities (like housing) ?
Rents up 7% in the Phoenix metro area. How’s that for ‘little or no inflation’.
Interesting. I live in an affluent suburb of Phoenix. A large luxury apartment complex was completed in our main shopping area. It got to about 20% occupancy after two years. Recently they dropped their rents by 1/3.
I believe the 7% increase overall. The luxury market has been overbuilt and is now seeing reality. Likely that will cascade down at some point.
Sounds like something Wolf has mentioned before, most of the new development has been high end bringing the lower end price into the middle without any supply replacing the low end.
This will show a lot of discounts at the top since there aren’t any customers at the top, so the middle is getting pretty full of high quality places at a discount and low quality housing options from inflated pricing but the majority of renters are in the lower and middle brackets. Leaves the lower priced people in a tight spot fighting against people with bigger wallets.
Lived in Tucson (09-10), GF worked at world wide private mining consulting outfit (SRK), out of S Africa. She guessed general break even on Cu for small outfits in Pima Co. area was around $2.75, maybe even $2.50 for biggies like Freeport and BHP (at that time). Wasn’t real insider, but gave me early tip on Molycorp (I ignored) and might have made “fast money” if I got in when tipped and got out at right time. Anyway, am long time watcher of ole’ Doc Copper. Not sure of it’s scale of importance in all parts of AZ now, but sure was real cheap housing/living in the area in 2009-10. Said the builders during #1 housing boom had expected 10-15M people in Phoenix-Tucson corridor and even “proved” water avail for it. Mostly expecting rush of retirees, and support folks.
Apparently you have to go to the definitions. The CPI (consumer price index) does include ‘Shelter’. In fact it is the fastest rising category in the June data on the Labor Dept website. The PPI (producer price) does not. The bankers have invented another measure called core inflation, which assumes that people don’t need to eat nor use fuel to get to work (an idea that only a banker would think rational). I would assume that this has increased a bit more than the CPI, since the CPI shows energy prices falling since Trump/Bolton have been unable to start their war in the Persian Gulf.
Of course, since the CPI now regularly uses the logic that routinely says that price rises are discounted because people eat dog food when they can’t afford human food, I’d expect that the ‘Shelter’ index is similarly underestimated since the government would assume that people can live in a cardboard box when they can no longer afford rent.
Reason Core Inflation doesn’t consider food and energy is because of their volatility. If the index spikes every time there is a hurricane, it becomes useless. It’s not because “people don’t need to eat nor use fuel to get to work “.
Regarding Middle East, it’s easier to start a war than to keep peace.
Aways wonder how much of rent increases are housing at all levels being the now increasingly popular new investing choice, as opposed to all the more traditional stuff? (at all levels of investor) Like So Cal Jim’s rags to riches and retired around 40 story, although I imagine he is still at least part time active in the biz, has data, anyway. Makes it analogous to bust #1 but with stronger hands stepping in this time?
My 500 ft sq over 55 definitely (paper wood cabinet veneer, indoor out door carpet, etc) non-luxury hotel style apt (albeit in high priced area and great location) went up 39% mid 2010 to latest increase Aug1. Don’t get me wrong, it is absolutely perfect living for me here, and likely won’t leave until carried or thrown out, but I am fixed income since 02. (Quit W-2 at 55 to finish 10yr project, lived in off grid class K house I built and have since sold) Water, elect, heat come out of wall here, and I don’t have to make it all happen. Tis’ miracle!
Anyway, if my notion holds water, bust #2 (or slow decay as opposed to bust) will hit a different bunch of folks.
Powell was against a rate cut before he was for it. We all know how that’s work out for Soooooo many people. Up next: if one rate cut is good because insurance, more must be better. Because insurance.
Thank you Wolf for getting this out so promptly. I appreciate your fairly objective summary and analysis. I really did not want to wade through gobs of media spin and blather to figure things out. This served my interest spot on.
The 3-Month T-Bill rate increased to its peak in March.
And had declined more than 40 beeps before the Fed moved.
Market rates of interest, such as for T-Bills go up in a boom and, shudder, down in the contraction.
The senior central bank follows the market action.
Of course, trying to look like it is in control.
In 1929 the Bill rate reached it highest in that fateful May and in turning down said that the boom was over.
The Fed cut its discount rate in that fateful October.
Is the Fed hamstrung because central banks around
the world have lower rates ?
Sporkfed – Fed is partially hamstrung because other Central Banks have cut rates so low. I read in a commentary (I think at IceCap Management, not sure) that with world rates so low and US rates higher, there’s a large movement of dollars into the US and out of other countries. Hence other countries and Central Banks are pressuring the Fed to lower their rates. While the Fed’s desire to keep the market floating is a big reason, this external pressure from outside the US plays at least a part in their decision, I would say.
Thanks for the insight.
Given the level of debt at all levels of society, government, sovereign, corporate, personal, I think this is the real reason as to why interest rates – in the current debt environment – cannot be increased and have to become (remain) decreased.
The pyre of debt is so large currently, that even a spark from a minute interest rate increase could unleash a debt default inferno.
Sporkfed – If US interest rates go much above the yen or the Euro interest rates, we get a whole bunch of “carry trade” money buying dollars. This is large enough that it moves the relative currency values, which causes all kind of social problems in the US. (trade deficit, unemployment, bankruptcy, etc.).
The Fed is in a bind here: They cannot optimize rates to benefit the US economy without causing a lot of damage to the global economy, and they cannot avoid currency fluctuations as long as we have free and open capital markets.
So, yeah, they are hamstrung.
@Sporkfed – yes. that’s really what this is all about. there is already a tremendous inflow of international capital to the usa. the euro is heading to near par, if not worse.
Just wait for the market to go down 1000 points and Powell will be happy to explain why they are cutting again. The rates are going to zero.
The Fed isn’t data dependent no more, if it ever was, but it’s not even pretending nowadays.
There was no data supporting a cut, rather a hike would have been appropriate.
Now they can cut on a whim and one can find countless reasons to do so.
“The pyre of debt is so large currently, that even a spark from a minute interest rate increase could unleash a debt default inferno.”
BINGO! You get the big banana! All because that makes common sense!
50 years ago, when President Nixon was interviewing Arthur Burns for the post of Fed Chairman, Nixon got Burns to commit to a policy of low interest rates to help his 1972 re-election efforts. Foreign central banks decided that they would rather own fewer dollars and more gold in this environment of loose US monetary policy. The US was forced to stop its commitment to sell gold to these banks at a fixed rate of $35 and ounce in August 1971 and inflation took off about two years after that.
All that didn’t happen in a brief time span like an election cycle.
France led the redemption of gold for dollars at the ludicrously low 35 dollars, and other countries joined in.
The US gold reserves went from 20,000 tons to about 8,000 in about 10 years or so, mostly during the ’60s; Nixon closed the gold window in ’71. Otherwise the US would have ended up with zero reserves in a couple more years.
That’s the problem when you try to fix the price of anything. Or print too much money.
Anon1970, don’t forget that Nixon instituted wage and price controls about August 1971. I remember because I had just gotten a new job the day those controls began and I used that to get myself a higher starting pay. Inflation was already a problem.
Since the last few hikes look like a mistake anyway, not sure it makes much of a difference. The fact they cut this soon after the December decision tells you that one was a mistake….which is not to say assets aren’t overvalued but is the Fed supposed to lay down as the ECB and JGB try to beggar their neighbor and weaken their currency? Think bigger picture wolf
The ECB as banker to the likes of Italy, Greece, Spain and Portugal is in desperate straits. like the US was in 2008. The US has the lowest unemployment in decades, nothing like Greece or Spain.
Adopting the measures of the ECB is like going on a morphine drip because your neighbor has cancer and has one. The ECB’s negative rates are not something to import.
The largest factor in the trade imbalance with both the EU (Germany) and Japan is in autos. The lesson of the last 30 plus years, through all kinds of Fed rates, is that Americans like their cars a lot more than they like American cars.
But you could put a really punitive tariff on them and force the US to buy local (what you do with their US plants is another topic)
Whatever the merits, at least there IS a US alternative. For most of the Chinese imports under tariff, there is no US industry, beginning with consumer electronics (27%) and budget apparel (19%) and then all the Walmart stuff where neither Germany or Japan has a presence.
Yes Assets seem over-valued.This will make the Collateral over-valued in ts turn.Those who lend on Collateral may lose. In addition The Pension Funds seem to be in dire straits due to low rates.A higher rate makes it difficult to service the huge debt the USA is in.The US Federal Reserve Chief,seems to be between The Devil and The Deep Sea.
“Powell gave three reasons for the rate cut. They were outside the classic reasons for cutting rates.”
Fourth reason: I don’t have the courage to stand up to Wall Street and to defy the Tweeter-in-Chief. I buckled. Sorry folks.
If the cut’s purpose was appeasement, Powell’s remarks certainly hosed things up. What the stock market (and the President) want, is a series of rate cut’s to continue to prop up the zombie stock market. (I don’t know what their plan is once the rate hits zero.)lIt all reminds me of a B movie from 20 years ago or so called “Weekend at Bernie’s”.
More than that … the president is much more strategic. Rate cuts weaken the USD which is a tool in the trade war. When it comes to reversing the trade situation, he is pedal to the metal.
And yet the Dollar is shooting up.
The currency traders don’t believe that. The USD is at a two year high. Every time Trump opens his mouth, it goes higher. Watch for gigantic trade deficits as a result and more yapping by Trump which will – guess what? Drive the USD yet higher again. So much for strategic yapping and reversing the trade situation. Like Jon Snow, Trump knows nothing.
Best, strongest economy ever. Also so fragile that Jay Powell is within a hair’s breadth of destroying it.
If they cut rates every time the stock market goes down five percent, there will be nothing left to cut.
The Fed cannot correct unwise fiscal policy with monetary policy adjustments. We have the most debt/GDP since WWII.
Stocks fell because Mr Powell assured there would be NO further rate cuts.
Those good old days when the stock markets used to fell down five percent in what was known as healthy corrections. those were the times when the markets were controlled by humans.
The Stock Market wanted everything and more. No matter how much they are given, it will never be enough. Powell did the bureaucratic balancing thing….small cut, ending QT, but maybe we cut rates if we need to and maybe we raise rates if we need to. The market wants a mini-Trump, that is “give me everything now”, and when the money runs out print some more. How these gambling casinos called markets became the economy and the card players that live in them the new titans of industry, I’ll never know, but I do know it ain’t good for the future and average people.
It’s precisely this “ inconsistency “ in the FED’s actions that overwhelms the business investment decisions and renders them impossible!
The No Strategic clarity that has dogged the Economists and Political Elites in the US that spell the demise of confidence in the whole process of Forging a sound Economic life for the multitude!
This demise is the precursor to the downfall, you keep screwing the generation that paid their taxes and put their faith in the state to preserve their retirement savings and you’re playing with FIRE, and Fires do burn you know.
One comment here I liked a lot, the one about ( everyone, individuals and big funds) playing smart in timing the markets,
You know the drill, No Algorithms , and No Humans are able to predict what the HORDES will do and what direction they will turn.
So good luck if you think the “ governors “ have defied the WH, the Markets or even their Corporate paymasters.
They merely added to the confusion that will keep this state of stagnation until the next Election plays out, the results will be surprising, and Trump will manage to have his second term ( this time) without the abhorrent ( Russian)!!! :)
He got you as well.
QT not ended MBS still being rolled off.
Big smoke screen no more Ts being rolled off.
When Ts are below where they would be to maintain desirable balance sheet Level if there was no MBS in the mix.
Inflation is NEVER going to go up, not as long as the murky hedonics methodology allows faceless nameless bureaucrats to massage the prices in the basket of goods to whatever inflation number they want.
Now, REAL inflation, of the US based, labor intensive service industries, continues to race along at 5-10% per year, as it has all along, for the last 30 + years or so since the Federal government started cooking the books on the inflation numbers
It’s a sad day today. But I’m still in shock after the 2:30 presser. The 4-week dropped below 2. Worried.
I know. Powell stood tall. He stood tough. You cannot bully him !
Meanwhile markets fell all the way to 1% below all time highs. A rough day for poor investors.
A rough two days indeed.
Wall Street is so spoiled at this point a 20% correction would result in a mass suicide occuring on Wall Street.
As long as it was confined to the brat pack who have never seen a “real” correction in their whole careers. NO LOSS.
A few quotes that should be on the FED briefing room walls and in the Oval office:
“There are those who need to discipline their mouths at times”
― Maria Koszler
“Don’t ever say stuff just because you think you should. That’s the definition of an asshole.”
― Justin Halpern, Sh*t My Dad Says
Actually, I think today was hilarious. Powell caved and then tipped the punch bowl over when he tried to back away from the obvious; he is cowed, afraid, and doesn’t have a vision. Maybe someone forgot to give him the Plan ahead of time?
There is no plan. The Taylor Rule and Phillips Curve both broke down, so they’re winging it now.
The Taylor Rule broke down because its formula for what the ideal Fed Fund rate should be is based mainly on the rate of inflation, and both got cooked to burnt toast along with the hedonics fakery.
The new rule seems to be to keep the free money pouring in until a new debt and/or asset bubble bomb explodes. Then do some hand wringing and gnashing of teeth, rinse, then repeat cycle
Hyperinflation isn’t happening because every major industrialized country is doing ZIRP and/or cheap money. They can’t devalue each other’s currencies like Britain and France did to Weimar Getmany
The Phillips Curve is not broken according to John Hussman. The Phillips Curve has been long misinterpreted to be tied to Inflation, instead of WAGE Inflation. We had so much wage inflation slack coming out of the GFC and that Wage Inflation is just now beginning to register.
Nothing wrong with the Phillips Curve, just the way it’s been interpreted.
Most of these economics variables are highly simplified for the general public. If you qualify/correct the variable, it can still be useful- just not in the way you originally thought it was useful…
wkevinw, except that in the case of the Phillips Curve, it’s the Econ profession that has fooled itself. Hussman describes the history of the error and it’s absolutely not about dumbing things down for the public, or even for first-year Econ students.
Hussman hasn’t been real successful lately as an investor (although he did great up until 2009), but his economic analysis is by far the best you will ever see published for free IMHO.
The ZIRP rates in Europe and Japan are possible because they are accompanied by QE. Given that the Treasury is about to unleash an auction shock (record amount coming), who will be there to buy at lowered rates? The FFR and Treasury rates might not agree with each other.
Today’s EFFR and SOFR only dropped by one bp. IOER was reduced to 2.1% effective tomorrow. Since EFFR is now above IOER, I wonder how they will trade tomorrow. The repo market will also be interesting. We will see if liquidity actually improves. Wonder what the 30y mortgage rate will be.
Blah,Blah,Blah . Job #1 for the fed is fiat money. Job #2 is keeping the electorate ignorant and off the back of Congress. Congress created those idiots and their insular world,not the Constitution. Gold standard makes the the fed useless. What the hell are we waiting on? Getting paid in script written on toilet paper? 90% of the value of money has already been taken by them. No matter whether you are dealing with a child or a corporation 5% is a natural interest rate for the time value of money and no enterprise can exist that is not solvent enough to either take it or pay it. We humans have been using this rate before we had a name for it. We know what fair looks like and feels like .The honest world does it all the time . The Feds is a dishonest institution contrived and foisted upon us by a Weasel called Congress.
Yes on both accounts!
Congress not only created the Fed, but they also gave the Fed immortality, an unending existence, in 1927.
And while the European Central Bank and the Bank of Japan have declared that capital in their fiat currencies should cost nothing to borrow, the Fed is following along to make the dollar’s forward value virtually static.
I have a bit of money saved up, but I’ll be damned if I want to lend it out for free. Yet, that’s what the Fed is doing. Between a mandated 2% inflation and federal funds rate of 2.0% to 2.25%, the Fed has said tomorrow’s dollar will worth less, and those holding dollars today will not benefit tomorrow.
The rich have so much money that it cannot earn interest anymore, the supply is too large. For cash and near cash it must be spent, invested, given away, or taken from you. Everyone is afraid of investing with asset prices so high, the powers that be want you to spend it or take it away from you. The best thing might be for the rich to give it away.
I told you the trend on rates could only be down. The interest on the debt is unsustainable with increasing rates. The debt limit has now been eliminated which will surely increase the debt. Something had to give and it was the rate. How much they continue to decrease rates will depend on how much they borrow to spend. The more they borrow the lower the rate has to go to keep it going.
Here’s the dilemma.
1.The Pension System has been destroyed by very low rates.
2.The huge US Debt needs a low rate for servicing the same.
Let me get this straight. When the Fed lowers rates, that makes US Treasuries less attractive. Yet that is being accomplished at a time when there is diminishing interest in Treasuries outside the US, if memory serves on your most recent article on who is buying.
Yet on the same day they “lower” the appeal of Treasures, they announce an end to QT, meaning they’ll be printing money to buy more Treasures.
Is that accurate? Or am I high?
Thanks for the brilliant article. I understand everything. And nothing.
Please keep in mind that treasuries are cash equivalents and are accepted collateral anywhere in the world. The demand for treasuries will not go down because the rate is unattractive. On the contrary, the rate is very attractive if you are in a country with negative rates, any rate above zero is great.
Thank you, yes, true.
It was just that I had this earlier article in mind. It was written more than a month prior to today’s cut.
How to explain why China and sometimes Japan have bought LESS Treasuries?
China wants to have a respected and accepted currency of its own, they are trying hard to decouple from the west and are unloading treasuries. They would rather use gold to trade because it is a sanction free mechanism.
Japan is buying their own debt and equities, they don’t need to invest in the west as they once did. The Yen is also a respected and acceptable currency around the world.
Disagree, T bonds are no longer cash equivalents or cash will have to reset. Bonds are not liquid, as Wolf points out SSN holds a ton of them, orphaned. The trade sterilization genie may be out of the bottle, and a couple trillion of orphaned bonds have lately been released to the secondary market, where they are likely repatriated through a surrogate. How is it something is cash when you can’t trade it? Corporate bonds maybe, because they have their basis in stocks, but the role of monetary surrogate goes to stocks. Stocks are closer to cash. They are liquid, and they ride on a solid global monetary base, which will not easily hand them over to deleveraging. (see Doug Noland on that) On the other hand the prez has promised to default on T bonds, but he likes stocks.
It’s news to me you can’t trade US treasuries and probably to the rest of the world as well. How do you think China got out of their position in UST, they sold it in Europe. Gov’t bonds for all western nations are huge markets.
The repo market may also have a quibble with your comment, as UST are repo’ed all the time for fee income.
Let’s not get confused between Marketable (the ones we people can buy and sell) versus Non-marketable government security (the ones government institutions and Sates have).
They are not interchangeable.
Rates on UST notes is way better than any other foreign government bonds which are at o or negative…. money flowing here from overseas..
“Is that accurate? Or am I high?”… I hope the latter :-]
“Yet on the same day they “lower” the appeal of Treasures, they announce an end to QT, meaning they’ll be printing money to buy more Treasures.”
No. End of QT means that they replace all maturing Treasuries with new Treasuries. So this means no QE, and no QT.
They will also replace MBS with Treasuries at a rate of up to $20 billion a month. That’s not QE for sure. But it does shift demand away from the MBS market to Treasuries, in particular short-term Treasury bills. So this might have a slight (minuscule) tightening effect in the MBS market and might nudge up mortgage rates, but probably not in a noticeable way.
That’s the technical adjustment Powell did not want to explain further. But the end of QT means the Fed’s balance sheet does not shrink and the SOMA add-ons explode next month just in time to give the Treasury TGA account money as the debt limit is gone. I smell a rat.
I’m not sure the MBS will be replaced at all, I think they want to get rid of all of it.
New MBS can get pushed back to the agencies or banks if it defaults, this can create nasty problems. If defaults rise, it is possible the fed creates a crisis at the agencies and/or lenders, by making them take back bad collateral. You know they always protect their own, so another backdoor bailout will be in order.
What I have never been too clear on, and never looked into, was what really happened to the original MBS that defaulted. Was it written down or is it still on the books. If the value of the underwater houses didn’t cover the mortgage and fees, did they write down their assets on the fed balance sheet?
The really bad MBS that the Fed picked up from Bear Stearns (from JPM actually) and others were put into separate accounts under the various “Maiden Lane” names and disclosed on the balance sheet. Some of them turned out to be ok and others lost a lot of value. The Fed sold the ones it could sell. It also got the pass-through principal payments that paid down the MBS it had. And it took losses on the rest. I think last year was when it finally got rid of the remaining pieces.
I think the Maiden Lane stuff was also thought to be illegal by some observers. The Fed (read US taxpayer) lost money on some of the stuff they got in the financial crisis.
@ wkeinv –
yes the Maiden Lane and other MBS transactions were blatantly illegal under the law of the time, since the Fed is legally constrained to only purchase full-faith-and-credit guaranteed obligations of the US government, and the MBS bond documents at the time stated point-blank on page 1 that they were NOT such guaranteed obligations. I know because I read some of the prospectuses, and the Fed’s obligations are plain in the law and described in many places as well.
There must have been some strong reasons (or at least valuable considerations…) for Congress to tolerate the Fed’s rescue policy during the crisis.
This issue is probably why the Fed is anxious to shed the MBS’s and get the legal/policy ambiguities behind it. At least until the next crisis?
As yields fall, the underlying treasury bill/bond/note prices increases…
Institutional Investor’s do not buy a 10 year bond to secure a 2% return over 10 years.
Institutional investors purchase 10 year bonds yielding 2% when they know/expect that the fed will soon drop yields to 1% which will ensure they receive a 50% – 100% return on their underlying security/investment.
The “Institutional Investors” you are describing are hedge funds and the like. But the biggest institutional investors, such as pension funds, insurers, etc. are buying Treasuries for yield, stability, predictability, and they hold them to maturity.
“Yet on the same day they “lower” the appeal of Treasures, they announce an end to QT, meaning they’ll be printing money to buy more Treasures.
Is that accurate? Or am I high?”
Why does an announced end to Qt mean More Qe ?????? what happened to the neutral spot in the center??
He got you as well.
QT not ended, MBS still being rolled off. Seeks to dispose of MBS by means other than roll off.
Big smoke screen, no more Ts being rolled off.
1) The Fed is swinging in the central banks infantile playground :
All rates up to 5Y are down today. The 7Y, 10Y, 30Y are up.
The 3Y is the lowest, leading the charge down, aiming at the
2) USD big jumped.
3) SPX monthly candle is the smallest on the chart, for a year and a half, with Multi bearish divergence, signaling a potential trend
SPX could not breach the resistance line coming from
Jan 2018(H) to Sept 2018(H). If buyers cannot be found, the
market will turn down.
4) Trump will not sign a trade deal with China before Oct 2019, the
70Y anniversary of communist victory.
If the DOW goes down, Xi wait for comrade Joe.
5) Buyback & dividends in US, but Iran spent billions on Capex.
Bush installed a democracy in 2003, but Iraq became an Iranian logistic hub and ballistic missile bases.
Iran long term project is their health care, a Shia dominated
region. Iran surround our allies & friends from every direction.
6) The Fed most important job, since president Wilson, is serving US
national interests. But the Fed is out of ammunition.
Xi will wait for comrade Joe in any case. They have no intention, and haven’t had any intention, of reaching an agreement – especially with the US electorate’s lurch leftward in the 2018 mid-terms.
The FED has been bullied into a rate cut whether they thought it was prudent or not. We’ve all seen Trumps comments regarding Powell. To him 25 bps wasn’t nearly enough. He’s worried how do we compete when all of the other major global powers are continuing to stimulate like there’s no tomorrow. At the same time the economy continues to crater no thanks to Tarrifs he’s put in place.
Regarding the USD – “to promote” the speed with which the dollar is losing purchasing power- that’s far from truthful. The USD is higher than it’s been since April 2017.
What their really scared of is massive deterioration of global growth & Deflation. It’s starting to set in. Fundamental data is weak. The end is near but there is nothing they won’t do to keep the party going on for as long as possible. That includes eventual 0% or negative interest rates & more QE. Today was the beginning of that process.
Thanks for the summary.
The big loser today is the ECB. Mario is out of ammo and was hoping and praying that the Fed would carry the water for him.
One and done. Market now has another excuse to get a correction underway.
Remember, Mario’s about to be out of the job and Lagarde will be the new face of the ECB.
Remember shes even easier, and just as bent (corrupt) and incompetent, if not more so, than him.
Silly me. I thought the Fed mandate was to manage inflation/deflation threats and maybe counter unemployment in there a bit. When did it become their job to keep the asset bubbles that they create inflated just a bit longer … or forever? Wolf has already pointed out so well the hardships and negative consequences of too-low rates. Don’t the Fed governors ever read what Wolf has to say?
Don’t the Fed governors ever read what Wolf has to say?
I’m sure they do, but he’s just not writing what they want to see.
The world would be a better place if only they’d take Mr. Richter’s kindly avuncular advice to heart. You’d think they’d at least drop a few quid into the tip jar now and then, just to pretend they’re paying attention, but nooooooo.
They don’t listen to me either, the willful ninnies, not until it all blows up in their faces. Then they come round, hat in hand, and all I can tell them is that they’ve made a proper mess of things and there’s nothing for it, and that just pisses them off. Kids these days, ya know? Can’t even clean up after themselves.
Its an election year and the Fed chose to go global. Not sure why prez should be upset as long as US rates remain higher than ROW. We have the best economy. JP took some credit. The market was overbought and pulled back. simple enough. Nobody voted for 50? Booyah!
what Manufacturing.. dildos in van nuys? and business investment are weak.. buying back their stock?
‘who needed leading and got gamblers instead’
Fed is a corporation. ECB is a corporation. I assert that behind both are the same human directors, the same families of privately owned corporations. Two limbs of the same body. To stay balanced as a body while political leaders are persuading that the purpose of a political leader is to tame corporate games, is not an easy task. To contemplate a world with no war is a challenge. Tools such as big pharma produce to slowly manage global population growth down is integral to balancing limbs of the body. Climate rhetoric as spread by Yoda (deceased in 2019 allowing a sea change) to cover tracks left by Tom Bearden’s Oblivion scalar waves is also bearing down on perceptions of corporate activity by Gen Z. A corporation and its activities must be seen to be socially acceptable to continue existence. Managing corporate persona in this age of info overload and multiple programming streams is a delicate and subtle action plan. To be seen to be bowing to a political leader is preferable at this time in the march towards global peace and blockchain age of trust. Security clearance is under threat as too much is being hidden falsely thus the leaks on the increase. A leaky bucket has to be maintained to continue to hold the status quo lest it empty to reveal purposeless resource extraction for 50 years instead of the available but suppressed free non polluting energy of zeropoint field.
Interesting, Bowing. Read it twice! How about writing it so that it can be understood.
The Fed is going to drag us into a recession to make sure Trump loses. Deep State gotta deep state. These people are repugnant.
Yes. Keep it up. If people keep saying “deep state”, there will be a deep state.
If enough believe in the deep state, we’ll no doubt have anti-deep state martyr, an anti-deep state messiah, and anti-deep state Armageddon, led by the anti-deep state warriors, priesthood, angels and saints. The GOP will form an Anti-Deep State Activities Committee and attack it.
Unfortunately, the Anti-Deep State Bureaucracy will inevitably follow.
You need to be careful with those things otherwise you end up like Bloomberg where “Jew” gets stopped but “Muslim” dosent and only a few see an issue with that.
There is an MIC in America is there such as thing as the deep thingy.
I hope all the people here (and you know who you are, don’t try hiding behind a finger) who acted as cheerleaders for this fiasco will be happy and feel proud about themselves.
Now start slamming your fists on the table and threaten to hold your breath until you turn blue so you can get more.
You’ll get it, don’t worry. Do you want even more? Throw your milk around the kitchen, break the cup on the floor and start screaming like a banshee. Mature behavior for the mature times we live in.
Yes, I am not a pleasant person and I don’t care one bit about it but let’s be honest about it: it’s useless to blame the mollusks at the Federal Reserve, the “elites” or the “banksters” when the call for such idiotic measures starts from the bottom.
Now start slamming your fists on the table and threaten to hold your breath until you turn blue so you can get more.
It’s important to set boundaries and you have to stick to them, even if you’ve had a hard day at the office and you’re tired. You don’t want give in because that rewards their tantrums and then they’ll just keep doing it. They won’t understand it now but someday when they older they’ll thank you for being firm with them.
I hear a CSNY tune coming on. Do turn it off. I’m not in the mood.
I enjoy a good rant, could you be more specific. You sound like you had an unpleasant day in the markets.
In my defense, I don’t care what the interest rates are, mine are 25%+, but I knew the F’ers were in a bind and would save themselves with cuts. Wolf doesn’t like politics spoken here, but all the markets now are extensions of politics.
Not just domestic politics, tho that plays a big role. Also int’nl politics, which is “war by another name”.
There are massive econ war forces engaged, and they are in gear 4 of 5. I believe that a significant motivation for the Fed’s premptive cut is to keep the pressure on EU and the China-Russia-Iran team…and that requires our economy to operate at the highest possible gear.
May I preach also for a moment? Thx in advance, you are gracious.
Here goes: “Keep in mind that the top 1% is most definitely not the only beneficiary of low rates. Those low rates are financing transfer payments, military expenditures, ag support, and health care, in addn to FIRE components of our economy. That’s most everyone. ”
While it’s fun to bash the Fed, make sure you keep the mirror handy to help us all participate in the glory of our errors.
Lastly, it’s mighty hard to keep exports humming while your currency is rising .vs. trading partners. Hence competitive devaluations (another great feature of printing money) during the export-market-share wars. Japan was first-in, everyone else followed soon thereafter.
I keep wondering when some bright light is going to discover how to fund a society without depending upon war or exports.
Didn’t hear much of that sort of thing last nite @ debates, tho.
Maxine Waters heading the banking committee makes me weep for my country, ungracious but true.
“Consumption supported by rising incomes and high household confidence is the main engine driving the economy forward,”
A highly disingenuous statement from a man who must be fully aware that the consumption of which he speaks is driven by increasing debt, not rising incomes.
These folk seem to live in a world of delusion they have created so that they can convince themselves their ‘no alternative’ fiscal and economic policies are working.
And that’s dangerous for all of us.
From what I understand for the top 50% and especially the top 10% of households income is rising nicely. It is the bottom 30-40% where the real stagnation comes. There will be better clarity on debt when g19 comes out next week. For credit card debt May was hot, but Q1 was very subdued.
Your statement – “the consumption of which he speaks is driven by increasing debt, not rising incomes” — is a numberless meme that, once you put numbers to it, becomes silly. So here are the numbers, as of July 30:
Personal Income: $18.7 TRILLION annual rate, up $880 billion from prior year.
Disposable income: $16.5 TRILLION annual rate, up $730 billion from prior year.
Consumer spending: $14.5 TRILLION annual rate, up $550 billion from prior year.
Consumer savings: $1.3 trillion annual rate.
Consumer credit (debt) increased by $200 billion over the same period.
You see, there are a lot of consumers who are doing very well, and they are making a lot more than they spend, and they’re saving money.
And there are also a lot of consumers who are not doing very well, but they’re not borrowing a lot for consumption because borrowing for consumption, when you don’t make a lot of money, is difficult, and credit cards, auto loans, and student loans have limits.
Of course, I made a lot more income last year and maybe this year (already earned) from Treasury since the yields were better for 2018 and 2019 and I don’t even have a job. I am retired and on Medicare. In the respect, I am doing well. Thanks Mr. Powell and Mnuchin. I also paid lower taxes. Thanks Mr. Trump. More Earnings from Savings = More Consumption. I worked my behind off and saved while I could. America is Great compared to other nations.
I reckon the next big thing to go down is private pensions. If, more likely when, that happens deflation will follow. Just my opinion.
For some reason I don’t think flattening the curve was the plan for this.
This is lunacy. There is no reason to lower rates. 3-4 % is historically moderate rates for the Fed. Wall St. has become addicted to rock-bottom rates and has mostly used the money unproductive stock buy-backs. This proves that Powell and the Fed are scared of Trump, and are servants of Wall St. Fed independence? Up in smoke!
that the FED serves wall street should come as no surprise. one need look no further than who its shareholders are.
Well, “El Presidente” dictating interest rates, exchange rates and stock prices worked out so well for Turkey and Pakistan so The Donald must copy these greatestly countries :).
Oh yeah, your social-capitalist buds on Wall Street had nothing to say on the matter.
Give the TDS a break and try to look at the whole picture.
Janet Powell is no Paul Volcker
Powelly want a Volcker?
LMAO! A short easy to read comment/rant. Thnx.
Why do u need a big saving account with 1.9%, if u know that
JP will mumble and stumble.
Give him a mic for half an hour and wall street traders will
find the right reasons to send the market down.
Red became green, within minutes, for those who prepared positions.
At least he is not a screaming mad old man, waving hands, sticking finger in in your face, in fake prophet. He just suck his lips.
JP is strait & linear. A good market signal.
This year this saver already got about a 10% pre-tax income cut and it’s only the beginning of August. I’ve bought all the hard assets I needed and I am ready for the recession. I don’t plan on shopping for anything except for food and meds. If the consumer is 70% of the economy, then someone just took away my shopping allowance. Good luck Mr. Economy.
Those who were born in the last decade will drink the Cool Aid.
The different between the ones who come from the inner cities, dreaming about reparation and those from the wealthiest families, will be the color of Cool Aid.
1920’s in repetition.
If the dollar is too high because of foreign investors buying Treasuries, why doesn’t the US tax their interest income?
I have to pay taxes on my US Treasury interest and so should they.
When challenged by a reporter that the Fed, at the next recession, won’t be able to cut as much after the current rate cut and will have less ammo, Powell said:
“But you’re assuming we would never raise rates again, that once we cut the rates they will never go back up. As a matter of principle, I don’t think that is right.”
NO, he’s most likely correctly assuming that you won’t raise rates again before the next crash. That has nothing to do with your ridiculous “never” timeline. And, as a matter of principle, based upon the track record of your serial bubble blowing Fed, I don’t think you have any idea what you are actually doing using your simplistic garbage economic theories and the simplistic garbage economic models developed from them fed with garbage data (like inflation) manipulated for political reasons. Stop pretending your specialty is a “science.”
The Treasury just auctioned $35B today (issued tomorrow) for a 45-day CASH MGMT BILL at 2.110% high. They need money badly. Yesterday’s rate cut successful. Think of what the Government could be paying more.
I think sometime next year I’ll buy a really expensive house and only put 15% down. Low interest rates, my payment won’t be but a couple thousand over my rent. The writing is on the wall. They will relentlessly destroy paper currently. Nobody wants to buy at the all time high but with fiat currency you can always go higher.
Careful. I am in the inflation camp, for sure, but going big into debt because you think your debts will be inflated away is a HUGE gamble. People have been calling for the fall of the dollar since 1971. And for extreme falls in the exchange rate ever since 2008. “Some things take longer / than you think they will. Some kinds of things / you can never kill” (Bob Dylan)
Im positioned for a dollar collapse because its the only thing that makes sense to me. But the kind of timing you are talking about would require extreme luck. And if inflation REALLY picks up to the point where your house payment is the same price as feeding your family… Is that actually a cheap payment? In real terms the payments become MORE difficult in serious inflation. Just another angle to ponder.
if your house payment becomes the same price as feeding your family, you need to make sure you have a big enough backyard and some gardening skills. problem solved.
JP begged prez for a reason to cut rates (trade wars) . He is apparently the only one who didn’t get it until today.
Yesterday’s rate cut does look much different in light of today’s renewal of the trade war! One wonders who knew what, when, and whether that informed the rate cut decision although no one could say so.
I learn a lot by reading the primary-source transcripts behind any major media story. The media get the story badly wrong almost all of the time so it’s clear truth isn’t part of their agenda. Regarding the Powell press briefing, I like the guy’s way of thinking about and discussing things, and how he totally derailed Wall Street’s groupthink insanity yet again. Of course we don’t know if the next rate move will be up or down.
I’m pretty sure that those claiming Powell is Wall Street’s or Trump’s lap dog haven’t got a genuine clue, although perhaps they love hearing their own voice repeating others’ speculation. One wonders how people can talk so much without giving ever giving the actual point a moment of serious consideration.
But the best thing I read today was this line of Wolf’s re-framing the concept of the Fed’s “inflation target”: “…and ‘to promote’ the speed with which the dollar is losing purchasing power.” That was priceless!!
You caught it! Yes, I had some fun with it. I decided yesterday that from now on, that’s how I’m going to phrase it. Maybe I can start a trend. I’m so sick and tired of the media presenting inflation as if it were “growth” — something to be aspired to — and lamenting the Fed’s “failure” to reach this target.
Sadly I massacred the quote by using angle braces to try to wrap around your quotation marks: ‘ “to promote” the speed with which the dollar is losing purchasing power ‘
P.S. After today’s events, I think Powell had some other interesting statements yesterday:
(1) “Trade is unusual. The thing is there isn’t a lot of experience in responding to global trade tensions. So it’s something that we haven’t faced before and that we’re learning by doing it. … trade tensions … do seem to be having a significant effect on financial market conditions and on the economy … They evolve in a different way and we have to follow them.”
This is dead on and should unnerve the market and the trade warriors. The Fed can manage rates around business cycles (sometimes…), but they have no experience with trade tensions and are learning-as-they-go. That’s refreshingly honest but brings back memories of the Fed failing to learn-as-they-go (until it’s too late) with MBS and CDOs too…
“We play no role whatsoever in assessing or evaluating trade policies other than as trade policy uncertainty has an effect on the US economy in the short and medium term. We’re not in any way criticizing trade policy.”
My take is that they didn’t know if they’d need the rate cut, because they’re learning as they go, but it seemed like a good defensive measure because trade and overseas growth are starting to push down on US economic outlooks.
And the policy outlook is now murkier because it is trade-dependent in a new way, rather than the traditional business-cycle dependence.
One is even tempted to speculate the the whole media / wall-street cheerleading for a rate cut may have been pre-orchestrated to give Powell cover to preemptively cut in advance of the next round of trade disputes?