Modern-hawkish, not Volcker-hawkish.
By Wolf Richter for WOLF STREET.
Fed Chair Jerome Powell lobbed some choice nuggets in his press conference on June 16 after the FOMC meeting, some of which I dragged into the foreground when I discussed the FOMC’s decisions that then jostled the markets. The others I left sitting there, stewing in their juices, because they weren’t directly relevant to the FOMC’s decisions, including what came at the end of the press conference when he appeared to let down his hair a little. So here we go.
“We will taper” even if there is a “market reaction.”
This was in response to a question about the possibility of a Taper Tantrum, and about the Fed’s current efforts to jump through hoops to avoid it. The original Taper Tantrum was the Treasury market’s reaction in 2013 to the Fed’s suggestion that it might actually “taper” QE infinity out of existence. The 10-year yield jumped from 1.70% to 3.04% in eight months before it started actually tapering. So here is Powell:
“We will taper when we feel that the economy has achieved substantial further progress, and we will communicate very carefully in advance on that. And that’s what we’re going to do, and we will follow through on that. We’ll do what we can to avoid a market reaction. But ultimately when we achieve our macroeconomic goals, we will taper as appropriate.”
If inflation goes on longer than expected, “we would not hesitate to use our tools.”
Inflation has been red-hot in recent months. What if the Fed is way behind the curve, and inflation continues to exceed expectations and doesn’t back down?
“We don’t in anyway dismiss the chance that it [inflation] goes on longer than expected. And the risk would be over time that it does begin to affect inflation expectations. And if we see inflation expectations, or inflation, moving up in a way that is materially above what we would see as consistent with our goals and persistently so, we would not hesitate to use our tools.”
“Turns out it’s a heck of a lot easier to create demand” than supply.
We’re all learning something here, even Powell. When he was asked about raising interest rates too far and triggering another recession, given that this is what happened before, Powell said among other things:
“Turns out it’s a heck of a lot easier to create demand than it is to bring supply up to snuff.”
“That’s happening all over the world, there is no reason to think that that will last indefinitely. We’re going to watch carefully the evolving inflation, and that our understanding of what is happening is right. And in the meantime, we’re going to conduct policy appropriately.”
A higher neutral rate “would be a good thing,” and why the Fed avoids negative interest rates. Pointing at the ECB: “We don’t want to be in a place where we can’t react.”
In the Summary of Economic Projections from the FOMC meeting, the “longer run” federal funds rate was projected to be 2.5%, compared to 0.1% for 2021 and 2022. This projection would be something like a neutral rate that the Fed eventually wants to get back to. During the press conference, Powell was asked specifically about the longer-run neutral rate, or R-star (r*). Here’s what he said:
“A higher neutral rate would mean interest rates would run higher by that amount. And that would be a good thing from the standpoint of the economy because it would give the Fed more room to cut rates.
“The problem with interest rates being close to the lower bound [near 0%] is that it really cuts into our ability to react to a downturn, for example to a pandemic.
“And you can look, for example, to the European Central Bank; their policy rate was well below zero when the pandemic hit. So we don’t want to be in a place where we can’t react.
“A higher neutral rate, from that narrow standpoint, would be a good thing for us. It would give us more room, and that would result in better outcomes for the economy over time.
“You can’t estimate it [r-star] with great precision. Studying r-star is a whole industry unto itself. We would look to factors that might raise the neutral rate of interest. We try to keep up with that, and we’re all thinking about that, and the possibility of that.
“There are many stories right now that could lead to higher productivity growth and higher r-star. We don’t know which of those stories come true. I’ll give you an example: There are a lot of startups, a lot of early stage companies; will that have an effect? We don’t know. But we’ll be watching those things carefully.”
This was another confirmation of what the Fed has been saying for years: Negative interest rates are off the table even during a Pandemic. Zero is the lower bound. And higher interest rates in the good times would be “a good thing” for the Fed and the economy because, when there is a problem, the Fed has more room to cut rates. All of this added to the “hawkish” nuances – by the modern meaning of “hawkish,” not Volcker-hawkish – now emanating from the Fed.
One of the big Fed doves, St. Louis Fed President James Bullard, is making “hawkish” noises, projecting higher inflation and pulling the first rate-hike into 2022. Things are tightening up quickly here. Read… When Fed Doves Turn Hawkish, it Gets Real: Fed Dove Bullard Gets Antsy about Inflation, Pulls Rate Hike into 2022, Sees Quicker Tapering with MBS amid “Threatening Housing Bubble”
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Will communicate in advance. But not before everyone is broke.
Well poor people.
Not his friends.
As much as possible, don’t play the game.
Live beneath your means.
Stay out of debt.
Get out of the dollar.
Etc.
What do you use instead of dollars? I am honesty curious.
Me too, we kind of need our dollars at the moment.
crickets . . .
Is your life up to snuff to be paid or pensioned in Treasury based currency?
Notice I don’t say Federal Reserve or mention a country. But I do say two other no things.
Thanks Wolf, for that gemsicle Powell quote.
Pretty much a given, own assets don’t sit on cash. Say you have a mil in an MM acct and the rate goes negative? You want to bail but so does everyone else in your position. Nowhere to go.
Gold and silver.
Hi Ho Silver!
They might be broke
But it ain’t no joke
That my name J-Pow
I’m a rob ya now!
And it all because
All the congressmens
Pimpin’ all them hos
While they spends and spends!
When Mark Carney left the B of Canada to head Bank of England, it wasn’t too long before the North American was told, sometimes in the press, that the UK would be looking for ‘a good deal more decorum’
Meaning the UK was not used to, and did not want to get used to, weekly ‘fireside chats’ from the BOE.
But even if a Governor of the BOE was yappy, in the UK there isn’t the equal of the Fed posse riding behind Powell.
Or is it alongside Powell? Is there a member of the posse getting uppity, out of line, or is he a Powell whisperer, speaking policy that can’t speak its name?
(Tightening)
Can’t all these people just shut up for a few weeks in summer? Just think, members, if you don’t give guidance, no one can say it was misleading.
What is the point of even listening or reporting on these Central Bankers, they either lie or mis-lead. Serious financial Commentators say that there is no way they can taper as they have trapped themselves…this is all dust in the wind.
Marco,
They will taper, just like they did last time, and they will raise rates, just like they did last time. “Serious financial Commentators say that there is no way they can taper as they have trapped themselves…” Folks may say that, but they’re either clueless about the Fed or have an agenda to promote.
Ignore the Fed at your own peril (don’t fight the Fed). I’ve been through this many times.
I bet they will raise rates in December.
Wolf let’s just end the fed and fractional reserve banking. Except, wait, the fed already ended fractional reserve banking because they no longer require reserves. So let’s just end the fed and end fantasy banking.
The best way to end it is just end their monopolies. Allow everyone to digitally create as many USD as they want to buy assets or fund as many loans as they want.
Wolf,
My guess is that there is probably an established economic literature out there concerning gvts’ manipulations/ultimate destructions of their own currencies (gvts historically being weak/corrupt and currency manipulation being far too “easy”/tempting in the initial stages).
Being able to pinpoint this economic history (Library of Congress classification code, authors, etc.) would be helpful because I get the sense we are all somewhat blindly groping our way to understanding the means and implications of DC’s economic manipulations but that a lot of issues we collectively debate have long been discussed in the economic literature (there is nothing new under the sun).
I’m sure we collectively have the issues/outcomes broadly right, but a greater historical grounding would provide a framework for more specific discussions of the Fed’s tactics (I’m sure the Fed reads the histories and if they are, we should…).
Bottom line, what authors/books should we be reading? And specifically why?
I’d open that question to the blog at large.
Cas:
You already know what the books are going to say:
“They printed money (took the easy way out that most benefited the ‘elites’) till exigency happened, then there was a disorderly collapse”.
You know the gen’l pop can’t help itself. This is written in the “human nature” (stone) tablet which serves as humanity’s head.
I suggest – in addition to doing the prudent and thorough literature search that you’ve recommended – that we focus on what the moves are @ HH or village level. Zero in at the scale where a few smart people can actually have impact.
Thx for being proactive. Let me know how I can help.
C127
I floundered through the 70’s trying to ‘self teach’ in the middle of it all. I did a DMS late 70’s and found out I knew more by then than some paid lecturers. One guy didn’t even know the country was running a deficit, I had to show him proof!
All my problems were solved in the early 90’s when I stumbled across a remaindered Lipsey, Steiner & Purvis 8th edition in a second hand bookshop for £3. Shows how many folks care about economics!
It’s been my Bible on the subject ever since and I wish I had got it as a teen. I would guess it’s still the textbook for everything Govt economists do, but with an intense overlay of MSM PR which probably didn’t exist when my edition was written.
I’ve recently been very interested in Steve Kean’s ‘Debunking Economics’ which is a critique of Lipsey in respect of how they theoretically deal with debt as a factor in managing the economy.
If I was younger I would search out a newer edition of Lipsey, if there was one, but I’m so old now I just look at the view and drink whisky.
ISBN 0-06-350427-8
How is this tapering when they are still doing QE at annual rate of 1.2
Rcohn,
Tapering = reducing the monthly amount of QE.
They haven’t started tapering yet. They haven’t even announced the plan yet. Be patient. They’re going to announce the tapering plan this summer. Last time it took them nearly a year to go from $80 billion a month in QE to $0 a month in QE. But last time, they didn’t have 5% CPI inflation either. So this time, there is more motivation.
I see the damage the FED is causing since Greenspan and I would not believe anything they say. Interest rates are too low and resources are wasted in an enormous amout.
How should I know when the FED will raise rates? I will know it soon enough once it happens.
Sure, Wolf, and the second they begin to taper there’s a “taper tantrum” and they stop. Nobody believes the FED will ever taper in earnest again, and certainly won’t shrink their balance sheet to anywhere near historic levels. This bloated pig has taken over the entire economy.
Depth Charge,
They tapered last time just fine. Then they raised rates. Then they started Quantitative Tightening (unwinding QE). People said the same thing every step along the way. The Fed didn’t U-Turn until the market started blowing up and Trump was hissing down Powell’s neck. But there was little inflation back then.
Now this is a different song – with lots of inflation.
The balance sheet well never go back to where it was because everything in the US has grown over the past 20 years, and the balance sheet reflects that. And expecting that the asset level will go back to $900 billion as in 2007 is nonsense.
The balance sheet has assets on one side and liabilities and capital on the other. The biggest liabilities are cash in circulation (paper dollars), bank reserves (cash the Fed owes the banks), and reverse repos. The assets MUST equal liabilities plus capital. So there will always be enough assets for the amount in liabilities.
Cash in circulation is based on market demand – how many paper dollars people around the world want to hold. Banks must stock enough paper dollars to meet demand. This amount is already $2.2 trillion. Banks buy those paper dollars by posting Treasury securities, MBS, etc. at the Fed, which are then assets on the Fed’s balance sheet. They can also pay with reserves. So total assets will always at least equal currency in circulation = $2.2 trillion at the moment, plus reserves plus capital. So there is no chance that the balance sheet, even under Volcker 2, could drop below $3 trillion.
Spot on Wolf and don’t you also think there is no point in them taking money out to reduce their balance sheet by re-selling second hand QE stuff if the Treasury is still taking money out selling new stuff which, in my opinion, they always will be for years to come?
Assume when the economy returns it returns where it was in 2019 after the labor market got tight, and the Fed hit the gas after recession warnings were posted. Historically interest rates do not correlate with economic activity, so they could raise either way. The market just punched the Fed in the nose, so go figure.
Note what is not defined.
Longer than expected
Inflation expectations
moving up in a way that is materially above what we would see as consistent with our goals
Literally – could mean anything
“We don’t in anyway dismiss the chance that it [inflation] goes on longer than expected. And the risk would be over time that it does begin to affect inflation expectations. And if we see inflation expectations, or inflation, moving up in a way that is materially above what we would see as consistent with our goals and persistently so, we would not hesitate to use our tools.”
2banana
Yep.
We set the fire….why would we put it out? Let it burn for a while…
Promote “stable prices”
Promote “moderate long term interest rates”
The Fed does neither.
just words….noise
Mr Snuffleupagus is real!
“Turns out it’s a heck of a lot easier to create demand than it is to bring supply up to snuff.”
Gee, maybe someone should tell Powell about Supply Side economics.
You see, if we would just cut taxes on the rich and corporations, we would remove the road blocks to production and out put and we’d be drowning in supply and cheap stuff.
And after all, every time in that distant past when we taxed the rich and corporations, everybody knows it was you and I that really paid those taxes, not them.
That’s why we need to cut the taxes on the taxes the rich and corporations aren’t paying. Because our taxes on them they aren’t paying are the highest in the world.
Don’t worry yourself that after 50 years of cutting taxes on the rich and supply side economics we have record shattering deficits. That’s all because $300/wk stimulus checks and Jan 2021. Deficits never happened before then especially when we cut taxes on the rich and corporations.
Total Government Spending:
1948: 17.3% GDP
2020: 41.8% GDP
2021: 47.0% GDP (estimated)
Source. WH.gov
2B
2030 80.0% GDP (predicted)-Green Deal???
Timbers:
I see a beaver in your future!
Our deficits have nothing to do with cutting taxes on the rich, and everyone to do with our bloated entitlement and defense spending. Period.
Except for one or two, politicians don’t even think about thinking about cutting spending. Period.
clearly not true – Regan, the king of supply-sidcers cut taxes on the rich expecting them to work harder (ho ho) and hence pay more tax than before, and the defecit went through the roof.
Again, the deficits went through the roof because spending increased exponentially. You could tax the top 1% at 100% of their income, and still not even make a dent in the deficit.
85% of the budget is Social Security, Medicare, Medicaid, defense, and debt service. Without cutting those, you will never come close to balancing the budget.
Period.
RightNYer,
Totally with you on defense. But…
“…of the budget is Social Security, Medicare,…”
SS and Medicare should be REMOVED from the budget altogether and set up as independent funds.
They have their own revenues and their own outlays. SS has had more revenues than outlays for many years; hence the Trust Fund. Then the only time this becomes an expense in the budget is if the government has to step in (with small amounts) because the entities used up their accumulated surplus and now need a little to cover the remainder. At that point, folks can rage about the relatively small amounts, if any, that would show up in the budget as outlays.
Here’s an excellent, simple and credible one-page graph of Federal expenditures.
https://datalab.usaspending.gov/americas-finance-guide/spending/categories/
Excluding SS and Medicate, you’ve got income assistance (transfer pmts), health care, defense, and interest on debt as targets for reduction in order to balance the budget.
Also there’s a category called “commerce and housing credit” for $500B a year. Not exactly sure what that is.
Ever wonder why we need to spend $1.3T annually for income assistance?
Wolf, I agree with you in principle, but, for much of the lower middle class (and even some of the middle middle class), FICA taxes are basically the only federal taxes they pay (excluding excise taxes and such). Most of them don’t make enough to pay substantially more, but the fact is, the large amounts of their income (relatively) they are paying in FICA is money they are not paying in regular income taxes.
Ultimately, the federal government takes in an amount of money, and spends an amount of money. 85% of that amount spent are the things I listed below.
RightNYr,
You say “You could tax the top 1% at 100% of their income, and still not even make a dent in the deficit.”
I think you make a good case for a wealth tax.
But how would a wealth tax be implemented? Much of the uber rich’s “wealth” is in assets what are being inflated by ZIRP and QE. Removing those, and bringing assets back to earth would do more to equalize than any wealth tax would.
The deficit had nothing to do with tax cuts. In fact tax revenues went up as a result of the tax cuts. The problem is that Congress, who spends the money, rose spending much, much, faster than tax revenues increased. The Federal Budget doubled in 9 years.
FY1988 $909 billion
FY 1987 $854 billion
FY 1986 $769 billion
FY 1985 $734 billion
FY 1984 $666 billion
FY 1983 $601 billion
FY 1982 $618 billion
FY 1981 $599 billion
FY 1980 $517 billion
FY 1979 $463 billion
Are you a billionaire? Or just the temporarily embarrassed non-billionaire?
Supply-side economics has been refuted in economics for over 40 years, never has a major economy cut taxes on the rich and corporations, resulted in a net-increase in revenue due to supply-side stimulus tax cuts.
Yes tax cuts for the 1% greatly expand the deficit. The Trump gift to the 1% have cost $4 Trillion all ready, The Dubyah gift to the 1% cost over $3.5 Trillion…. (You can google this information very easily)
As Wolf stated, SS is self-funded, and could last forever if the $139k cap were removed. Medicare is expensive… but that could be cut drastically if the US finally adopted single payer like the rest of the first world to negotiate as a single payer. Yes, I lived in England, the NHS was a fine replacement for the non-billionaire class; better to have access to slightly slower care in the UK vs no care in the US.
Entitlements as you call them have been continuously cut since Reagan. While the military budget has ballooned to the extent the Pentagon can’t track Trillions of it over the last few decades.
Why do you care what the bottom 50% pay in taxes? They benefit the least from society and we ask them to do the hardest most menial work. While, you have bought into the ‘job creator’ myth that someone like Bezos can work hard enough some how to make thousands an hour… while most American’s live pay check to pay check.
Billionaire’s live in a different reality. The fact they benefit the most from a stable, healthy society, and their decedents will never have to work a day of their lives until the end of time… is exactly why they should pay the most.
What you should be asking yourself is, If the bottom 50% contribute less than 5% to Federal tax revenues… Then why do we have them pay at all? Not making the bottom 50% pay taxes would be a huge economic stimulus because they spend what they earned, they do not offshore it. Why force them to pay a substantial % of their disposable income to the Fed, and then have to go through the time and expense of filing taxes?
I can give you one reason, empathy. The 1% want the bottom 50% to pay income tax, so people like you will empathize with the 1%. If the bottom 50% didn’t pay income tax… the 1% argument’s that make them temporarily embarrassed non-billionaire’s would fall on deaf ears.
“Supply-side economics has been refuted in economics for over 40 years, never has a major economy cut taxes on the rich and corporations, resulted in a net-increase in revenue due to supply-side stimulus tax cuts.”
I never claimed that supply-side economics would lead to an increase in revenue, so I don’t know why you’re putting forth this strawman.
“Yes tax cuts for the 1% greatly expand the deficit. The Trump gift to the 1% have cost $4 Trillion all ready, The Dubyah gift to the 1% cost over $3.5 Trillion…. (You can google this information very easily)”
No, the 2017 tax cuts will cost $1.5 trillion over 10 years. That was less than half of our deficit last year alone.
“As Wolf stated, SS is self-funded, and could last forever if the $139k cap were removed. Medicare is expensive… but that could be cut drastically if the US finally adopted single payer like the rest of the first world to negotiate as a single payer. Yes, I lived in England, the NHS was a fine replacement for the non-billionaire class; better to have access to slightly slower care in the UK vs no care in the US.”
If you remove the $139k cap without increasing benefits on the top end, what you’re doing is transforming it from a retirement insurance program to a welfare program, which is not how it’s supposed to be run.
Regarding single-payer, no, that has been refuted many times. What makes our costs expensive is that we don’t ration it at all and that we pay for drug development for the whole developed world.
“Why do you care what the bottom 50% pay in taxes? They benefit the least from society and we ask them to do the hardest most menial work. While, you have bought into the ‘job creator’ myth that someone like Bezos can work hard enough some how to make thousands an hour… while most American’s live pay check to pay check.””
Because a society where half the people pull no weight but get to determine how much taxes are levied on other people is fundamentally unsustainable.
Your tripe about billionaires doesn’t even merit a response.
Entitlements have been cut since the 80s? You mean the massive Medicaid expansion? The explosion of disability payments for non physical ailments? Student loans? Health insurance subsidies? Increased SNAP benefits? Free cash to everyone during the pandemic? Extra unemployment payments during the pandemic? Child tax credits, EIC, the list goes on and on.
There is more cost sharing for Medicare, sure, and phony inflation adjustments for Social Security, but entitlement spending has gone bananas and is the driver of costs for overall government spending, and the idea that there have ever been substantial “cuts” of any kind is flat a farce.
And now it’s a Green New Deal porkstravaganza and free community college and cradle to grave “free” childcare and elder care. Who do you think will be paying for that?
Happy1, they consider a reduction in planned increases to be a cut.
nice
The Fed should pull back and see where the REAL market is….
then pull back some more.
Husking corn futures?
Eliminating the FED altogether, might be the best option. It never really worked well anyways. If you create a powerful, public private hybrid, with only the ability to create and loan money. It will probably spend most of its time, creating and loaning money; whether that is a good idea or not. You cannot really expect rich and entitled people to run a powerful organization with limited options as to what the organization can actually do, and expect them to only use those limited abilities when wise. Especially, when considering that over-using that ability can make them rich.
Hey, welcome to 1929 – have fun!
Fed predates the Great Depression, and by most accounts, contributed to the depression by elevating interest rates.
It’s worth remembering that in the 2008 recession, despite the existence of a federal bank, the government, still had to bail out the big banks to prevent them from collapsing. A controlled collapse of the big banks would have been desirable though.
With the extended unemployment ending almost everywhere early, inflation is going to die a terrible death. People living on the streets are not big spenders. People already not paying rent are not going to start paying more to mega landlords.
The democrats are real dirtbags. They provide an unemployment program for an extra 29 weeks and then kill it a few weeks after it starts. The infrastructure bill is another big lie, just a bunch of payoffs to rich donors.
You really believe the trillions in QE and stimulus went to the “people?”
Here is a hint.
Those first in line get obscenely wealthy for doing nothing.
Those last in line get $800,000 crack shacks and $75,000 tuition bills for a communications major.
With Blackrock running the White House, the rich no longer need to leave any crumbs for the poor!
Real Inflation has nothing really to do with how many unemployed there are but on how many people are chasing goods that they actually need and can’t live without, such as food and, in the USA, a car to get you to work because of the longer distances you all travel (and the oil to keep them going.)
I’ve lived through 20%+ inflation in the 1970s, when we had high unemployment (here in sunny England) and it is an evil beast but you have to buy what you have to buy, whatever the cost.
Exactly materials going down corn soybeans going up which do people need more
Well, not necessarily.
The price indexes are manipulated and the cooking of the books may now turn back on the chefs. “Inflation”, that is rise in price indexes has been supressed by different methods. Hedonic adjustment is one, substitution is another.
The last one, substitution of cheaper products when there is not sufficient purchasing power to keep buying the same quality may now work the other way. As more people get really poor, they have no purchasing power and get substituted out of the consumer base. Those left have a different spending pattern and the price index rise.
Unintentionally have a mean to supress a price index from rise, turned to unleash the same index, creating “inflation”.
Wolf, do you feel that we have had back-door Socialism via the Federal Reserve since 2000 ?
Socialism for the rich, maybe. The Wealth Effect is precisely that. And that is part of the Fed’s express doctrine.
Thatcher said Socialism doesnt work because “you eventually run out of other people’s money.”
Well, Maggie never envisioned the antics of today’s central bankers who make certain the tap is always wide open.
The record job openings with the unemployment numbers can be, IMO, traced right back to “free money” borrowed by the federal govt courtesy of the Fed.
So, in effect, the zero borrowing costs provided by the Fed to “promote maximum employment” had exactly the opposite effect.
Thus, the Fed is 0 for 3 honoring their mandates of max employment, stable prices, moderate long rates.
For those keeping score at home….
Socialism is when you transfer wealth to people who have already accumulated it, and the more wealth you transfer to people who have already accumulated it the socialister it is
Thanks for the analysis Wolf.
It’s comforting to know the FED is looking out for us Little People. /s
One more thing you all missed. He stated 1.5 million people retired during the pandemic. Admitted the feds may not be able to ever get a control on rates or the economy due to not being able to obtain real labor numb. This may be as good as it gets
Matthew Brandley,
“Retired” is a funny thing. When you’re 65 and get laid off, and you realize you’ll never get another job again in your field because of your age, you might call it “retirement.” Meanwhile, you’re working on starting your own thing. 24% of the people over 65 are self-employed, the most of any age group — in part because they know stuff but can’t find a job, and so they’re striking out on their own. Until that gets going, it’s called “retirement.” And when they got it going, it’s called “self-employed.”
“Turns out it’s a heck of a lot easier to create demand” than supply.
With that kind of insight, Powell will voluntarily step down next year and become New Zealand’s Fed Chairman. That way he gets to watch the fireworks from somewhere safe.
I mean what’s next? Will he commission a study along “will people spend if you give them free money every month?”
The guy is a God Tier Tr*ll
A better way to say it.
It is a easy to print a fiat dollar.
But you can’t print a side of beef, a roll of copper or a design engineer.
Governments should never be allowed to borrow near zero….
because they will, and in large amounts.
“promote moderate long term interest rates”, the forgotten third Fed mandate. And the wisdom behind …. to prevent current generation from emptying out future generations, to keep balance between lender and borrower.
This is why the “dual mandate” game which carves out this all important mandate.
Politicians have never given a damn about interest rates, and the Fed has no mandates, it is not accountable to Congress or anyone else.
Forgotten Third Mandate. As the last clause in the Fed’s written mandates it seems to have been forgotten. Maybe it should be rephrased as the “promotion of moderate long term interest rates that allow for optimal investment and savings”
With his CV, he wouldn’t get a look in. We do have special work visas for people with skills that NZ requires, but obviously Mr Powell has none of these.
It will be interesting to see how this plays out.
I own a rental in a low income area.
A tenant just left my rental house and I was only raising rates about 2% per year the past 5 years. So over a 5 year time frame the rent I was charging was up about 5%
Well I was checking out what nearby rentals were priced at now. A rental house a few doors down is charging 60% more than I am. 5 years ago they were only charging 10% more. (The house was more updated than mine) This other rental had a new tenant move in 5 months ago and raised the rent big time.
I am updating the bathroom and a few other things and I am going to be raising rent 65% for the next tenant. From $665 to $1100.
Granted, my property tax is up 30% over these past 5 years ($1000 to $1300 per year) and insurance is up about 10% to $780 per year.
Basically, every landlord in this neighborhood will be raising rent.
As I am working on the house, I get a lot of people walk up and ask if they can rent the house even when I tell them the amount they are not fazed.
At 2% a year increase, your rent would be up at least 9% over 5 years. Still a very modest increase! Good job!
Do raise that rent and get yourself compensated. People forget that when one renter leaves you are sans rent while you fix up, repair, upgrade and list and find suitable renters for the property. Mortgage payment, taxes and all the utilities you manage never stop collecting.
Good for you doing the homework and finding the value of your property
You clearly live in some ivory tower and have no idea how tough this nightmare is for people. You are no better than the Fed or Marie Antoinette with your “let ’em burn” attitude.
America’s War of Independence was a waste of time as you have turned out to be every bit as bad as the Ancien Regime.
“As I am working on the house, I get a lot of people walk up and ask if they can rent the house even when I tell them the amount they are not fazed.”
That is surprising, since in your comment you also said that your property is in a low-income area.
So these low-income renters are unfazed by a rent hike of 65% from $665 to $1100? Really?
Sorry, but something doesn’t add up here. Perhaps a renter’s strike is on they way eventually.
Inflation. Just some more info. I bought this home for $58k just over 16 years ago. After the HB1 the houses in this area dropped to $45k. I was charging $650 before HB1 and $550 in 2010 after HB1. I slowly got it back to $650ish over the past 10 years.
Maybe I held onto this house too long as mentioned above as I was waiting for the house value to at least get back to $58k. I get the Marie Antoinette comment but as the other poster pointed out, it takes a lot of work. Several years I was basically subsidizing my renters. What do I mean by that. I was a good landlord. I kept the place fresh with new paint and carpet and appliances.
But many renters moves out and trash the house. I put in new carpet, paint, appliances that cost me $10k. Next renter moves into a 3 bedroom house that looks brand spanking new. I maybe clear 4k a year but on the 4th year the tenant moves out and the place is trashed and I have to spend another $10k. So one bad tenant can pretty much wipe out 3 to 4 years of profit.
Anyway…IMHO…..low income single detached homes will eventually be a thing of the past. Homes in this area are being bought by investors and a higher class of owners. The U.S. had it glory days after WW2 but prior to WW2, many people were living in multi generational homes. I think that is where we are going. 75% of people making under $55k are renters and not homeowners.
FYI….the price of the house has doubled in the past 5 years and still it is a 3bd house on a big lot that only sells for $120k.
The reason the people do not balk at the rent increase as I did some research. There is only one 3 bedroom house in a city of 100k that rents for less than $1000. It rents for $990. There were only 4 house available under $1500. 4 years ago you would be able to find 100’s of houses renting under $1000.
I can’t say I blame you but your town may find that it’s workforce is moving out. Labor may become scarce, especially if you’re in a colder climate. There is going to be an incredible increase in homelessness at some point. That may crash it. Or not.
Total wealth of U.S. billionaires:
1990: $240 billion
2021: $4.56 trillion
Total wealth of bottom 50%:
1990: $380 billion
2021: $1.01 trillion
Tax the rich and take your country back from the FED!
Stop giving the uber wealthy more wealth with QE, stimulus, ZIRP, pork and bailouts.
It’s a big club. You, and me, ain’t in it.
The issue isn’t the taxation of the billionaire class, it is the subsidization of their enterprises by low rates from the Fed.
It’s both. Probably more comfortable in the long run for billionaires to be taxed than eaten. It could come down to that. It could be a matter of pride rather than feeling sorry for oneself. Certainly a happier state and nation.
We are hearing from some market technical analysts that according to their work, there is a possibility of a market correction in the fall.
As we are long overdue for a correction, and the excesses in the markets in both IPO’s and margins are at record levels they may not be wrong. Given that possibility, coupled with inflation pressures driven by worldwide shortages, the Fed probably does not feel very confident with what they have currently in their tool box to deal with such a event. Not that they have a stellar record at stopping recessions with 18 of them on the books since 1913, but they probably do not want to look completely impotent…
Heard a guy say after the next crash the Fed will be buying a $Trillion a month. Seems impossible now, but US households net worth is $120 T or more. That’s a lot of assets to buy to prop up (fake) wealth.
I see now, print up fake money, to buy real assets. Nice con job!
Central bankers accrue more power on each systemic event….one usually created by themselves.
That household net worth is based on grossly inflated asset values.
That wealth could easily be cut in half in a serious correction.
Does Powell ever discuss the elephant in the room – about 28 trillion national debt? Social Security trusts are the largest owner: 2.9 trillion. Other major holders of U.S. treasury debt: Japan 1.15 trillion, China 1.1 trillion).
Looks like consumer culture will prevent politicians from ever getting the country out of debt in a legitimate way. The core original sin is self-indulgent consumerism. If one lives in other countries, you would see something entirely different. The Fed is merely an enabler and protector of the rich.
Further, given inflation, the real interest rate of treasuries owned by Social Security is negative. This is robbing the social safety net. Sure, there is a lot of deplorable waste and indulgence the Medicare and disability programs. But a major measure of any government is how well it takes care of it’s older population.
Everyone gets old. The U.S. culture definitely has a “winner” mentality component (me / my group are #1, better than you). So if someone isn’t a winner in their old age, or have family support, they can enjoy struggling with destitution or something near to that.
The elephant in the room isn’t what you think it is, and that’s why he doesn’t talk about it.
Please, tell me what happens if the government zeros out their books and sucks up all the money they’ve spent into the economy.
Where will any outstanding USD come from, if it isn’t from the state?
How will anyone pay their taxes if the state isn’t supplying them the funds, through one avenue or another?
Will you even want to live in a nation with no infrastructure spending?
Or are you unwittingly making the argument in the immediate before times of paying off the debt, where private banks are holding a large portion of the money supply, and then can print at will based on fractional reserve lending practices?
I’ve never seen a nation last very long when debt collectors run the economy rather than the tax collectors.
davie – I might agree with you if you could put together some logical, comprehensible paragraphs using well-known concepts.
Size 11 steel toed work boots doing that can kickin’ is what he is doing. A great leap forward to push America to the top of the world by a leap and bound
The even bigger elephant in the room is unfunded liabilities. And much of that cannot “inflated away”.
We just have to prepare for a much lower standard of living.
Exactly. That’s the bottom line that no one on either side is willing to accept. The standard of living people have come to expect in the developed world is not sustainable given the actual productivity of the economy. So the remainder is financed through debt and monetary games.
For much of human history, most of what we consider today to be standard, like 40 hour weeks, leisure time, paid vacations, and so forth, were luxuries. At some point, the population grows beyond the ability of the economy and the underlying resources to provide these luxuries. I think that point was some time in the mid-90s.
People just haven’t accepted it yet.
Furthermore, we would need 4 earths to supply the same standard of living to the rest of the world we think is normal (north america). Reopening after Covid, the highways are now filled with massive RVs towing quads, boats, or toy trailers, even an extra car.
Rigs most likely bought on credit.
Going camping. Full plug ins and sewer hookups. If you tow a Prius, is that okay? Or have a kayak on the roof?
I told my sister yesterday that I had never bought any thing or any vehicle on credit, ever…..no credit besides our house (which we paid off as soon as possible many moons ago; decades ago). She couldn’t believe it because she (family) had been in debt their entire lives living the north American dream (WA).
Live below your means and get out of debt. No debt=no worries, or at least fewer worries. No treadmill, no irritating bosses you have to listen to, etc etc. Watching this current train wreck is almost academic, worrisome, but not unexpected.
Yup.
Now, the question is how to prepare.
In a comment above, someone asked “how do you get out of dollars?
I’m converting dollars to income-producing assets, which produce things people will always want.
That’s one way to do it. Another way, as Paulo has suggested many a time, is to use your talents to build the things you consume @ your household.
House, greenhouse, machine shop, small mfg’g facility, forest…lots of outlets for your skills and intellect.
Use your head, and learn to capture the benefits of _your_ productivity for _yourself_.
All this applies doubly to young people. You have very few assets you can invest in @ this stage that aren’t vulnerable to major downward corrections. If you get on the wrong side of those corrections, it can take decades to recover the lost ground.
Invest in yourself – skills, tools, materials, business processes.
If you’re going to buy land – and land offers many advantages – buy it where it hasn’t appreciated as much, so it has less distance to fall. Look for a place where near a university / tech school, where there’s plenty of talent and motivated strong backs.
And remember to get water on or right near your land. You’re going to need water.
That is not correct. The standard of living is very sustainable, and even could be much higher. What is lowering the standard of living is the disparity in wealth. It is not that we do not have enough wealth, it is that the socialism practiced by the government and the corporations funnels all the wealth to the top tier and makes it impossible for small business to compete.
Lack of competition and free markets is what is killing the US economy.
drifter…
“This is robbing…”
Not only that, it is premeditated and arranged THEFT.
The Fed exists under several understandings, agreements, directives, mandates.
Stable Prices is one…….and how can a Fed openly promote inflation when they are allowed to exist with the understanding that they will promote stable prices, ie fight inflation?
Ok I can forget the last quarter century. This time they really mean it: all those Fed doves will plug their ears, now deaf to the cries and moans on Wall Street.
The bond market is where I look, and right now the 30Y is back under 2%.
I think the realization is hitting that the taper has already started, it just taking a different form this time around in order to “avoid” a taper tantrum. The Fed is doing it with the RRP- a big giant ass taper every single day that reverses and then is put back on.
With manufactiring moved/moving abroad, education for plebs in a poor state, cæn there be enough with decent paying bluecollar jobs? In addition, Empire costs a lot, devouring resources.
The debt in America is the main reason for the high cost of doing business. A worker has a mortgage, car payments, student loans, credit card payments, etc that need to be factored into how low of a paycheck he can accept. Asian workers have little debt, and can enjoy a decent blue collar lifestyle for much less money. If the jobs come back, the companies will go bankrupt quickly.
Younger folks: read roddy’s comment 3 times, and commit it to memory.
There are several structural, durable reasons why jobs ain’t coming back – not the way they were.
The biggest reason is that U.S. workers _cost too much_.
Your cost structure has to get ruthlessly squashed so you an afford to invest in yourself.
Then you need to invest in yourself.
The best way to invest in yourself is to pick a great project that will teach you many things as you do it, and go do it.
Ask the old-timers that are sittin’ pretty right now. Those old salts are some crafty, resourceful, willful dudes.
I’m 73 and retired. Debt-free since 2004. Debt is cancer.
We need deflation of housing prices and we need socialized medicine before worker costs can come down. Even then, wage values to basic cost of living has gone down drastically since the 70’s. If it weren’t for government support most minimum wage earners would be food insecure and homeless. Labor has been devalued a great deal for corporate profit. Once people become homeless some tend to function less effectively (to put it mildly) and it becomes a vicious cycle- no one wants to hire them.
It’s different than Europe and maybe Canada- squatters here are not as organized, there is no state medicine and for some, things do become hopeless and desperate. Or violent.
The need for housing deflation has some people actually hoping for a large stock market crash so that housing costs will go down. Myself included. I figure the bottom half has already crashed, let the top burn.
@Tom Pfotzer
It’s not quite that simple. You have to look at PPP (purchasing power parity). In some respects the cost gap has sharnk to almost nothing.
The real issue is the “capability gap” for America vs. Asia. Manufacturing competencies are disappearing, infrastructure is lagging, etc.
Economists generally only analyze the costs of things – not everything else required to implement them.
The inflation is in the PEG ratios of stocks.
There is no reality where having interest rates below inflation works with fiat currency. It’s common sense.
Fed prints money, treasury disperses money, money goes into market, PEG ratios go haywire with people trying to make more money. Money doesn’t function as a streamline for trade if the money has no value of work or goods attached. Helicopter money and MMT and really the entire out of sight out mind environmental issues caused by the green movement (battery production, solar panel production) cause this havoc.
And for all the tax the rich people, they can take loans against appreciating assets at next to no interest rate and never pay taxes. They just take profit up front.
BECAUSE THE INTEREST RATES ARE LOWER THAN INFLATION AND THE RATE OF APPRECIATION.
+1,000, comment if the day, artificially low rates are a sop to the billionaire class.
it is funny to see what we can see on the yield at the moment, you know those bonds that would be supposed to have a tantrum any time soon? And what about the inflation in Japan? I agree about the mess but i see the Fed in it’s own made trap and furthermore I keep thinking we will end with the usual massive deflation rather than stagflation. Why? Because the real mess of this “dovish”, I would day foolish really, monetary policy it showed pretty well by the M2 velocity collapsing. Let’s just wait and see what will happen in the Repo market in a few weeks time or maybe let’s see what happen if they really stop buying MBS. I see a bomb called debit ready to detonate way more than any CPI inflation but I just cannot see the Fed detonating it itself on purpose despite the usual mediatic show. Anyone willing to bet?
“Turns out it’s a heck of a lot easier to create demand than it is to bring supply up to snuff.”
Isn’t this statement by Powell/Fed more or less admitting QE since 2008 was not in actuality to create demand in the real economy instead there was another purpose?
The other purpose was more than likely to delever the derivative bubble inside banks that built up from 1998 to 2008 in an orderly fashion.
1) USD @92 jumped above the daily cloud.
2) T&K flipped and T entered the cloud.
3) But on the weekly chart, USD have a lot of work to do, because it
reached a heavy red cloud, from below.
4) A test on the daily chart will indicate whether USD is going up,
strengthening, or keep deflating. Meanwhile ==> a lot of volatility.
5) The 2H chart shows that USD dropped and entered the space between T&K, after a bearish divergence.
ME, dead cat bounce in the Dollar since the flow of Dollars is exponential at this time. Higher rates, as in junk bonds, will not forever attract buyers when the prospect of payment default grows by the day. A measly 3% coupon will not balance out a 30% to 40% principal loss. Oversold market, nothing else. Greenback is toast in the long run.
There will never be a payment default on treasury bills. They’ll just be paid back with much weaker dollars.
The U.S. Treasury will FIRST default by extending maturities on all outstanding debt, the 10-year goes to a 15-year and ON, AND ON, AND ON. Defaults come in many flavors. Allowing the Dollar to devalue by 30% to 40%, in a very conscious campaign, is another way to default on your obligations. Lilliputian yields is the Fed’s method, at this point, for devaluing the Dollar; run-amok Federal Spending is the U.S. Government’s method of devaluing the Greenback.
Headline at the “other” site:
Fed tightening might over before it began…
Love it. Years out, and it’s maybe already being shot down. So cool.
As Aretha Franklin might have said “Who’s Zooming Who?”
Yeah, so much BS floating around out there, astounding amounts. Anybody gets to say anything. They did that last time too. Always the same.
Are you that convinced the Fed will actually taper? The market’s reaction today makes me think that the Fed has become the boy who cried wolf and no one actually believes it.
The market goes through a phase of denial. Then minimization (oh, it’s nothing). And then realization. That’s always that way. It comes in different formats and flavors though.
Fair enough. Thank you.
Swedish PM Stefan Lofven was ousted in non confidence.
That was because of the disastrous Covid response in addition to scrapping rent controls.
quote: Economists have said they do not expect the political uncertainty to weigh on the economy because of the strict fiscal rules under which Sweden operates.
This is what happens when we let academics and retired banksters run the once greatest and freest economy and financial system in the world. These jokers are so far behind the on-the-ground inflation situation that they are breathing the exhaust from this now runaway machine. Kicking and screaming, they will begin to raise rates in the Fall of 2021. They have no choice but to defend the U.S. Dollar which has a very shaky position as the world’s primary reserve currency for the moment.
There are believable statistics that suggest that U.S. inflation can reach a sustained level of 7% to 8% going forward, and that is from this minute forward. Who could have imagined that oil would be north of $70 per barrel in an economy that nominally would be doing super in 2021 to reach 5% GDP growth. The year-to-year pops in economic comparisons are fading into the rearview mirror. The U.S. and global economies are still basically very sick puppies, and were getting ill by the 3rd Quarter of 2019.
The price of building materials is having a direct effect on not only Housing Starts but also sales of New Homes. Several months of negative month-to-month comparisons as the price to build a structure from the ground up and then sell it to a Woke Affordability Prospect is an task made more compromised by the week. Eventually, Sticker Shock has its effect, and buyers delay purchases until some semblance of sanity returns, even builders strolling the aisles of Home Depot and Lowes are affected. I feel sorry for those mislead buyers who have purchased bloated-price homes over the last 5 months; 2005 Deja Vu if you ask me, but on steroids.
The Fed will raise rates well before today’s liquidity drunk investors ever expect. When the inevitable craters happen in the economy and financial markets, they will just say: “WE WARNED YOU IN JUNE, 2021.”
Not everyone is capable of starting their own business in forced retirement; and just wait until the lawsuits flowing through the courts on Mortgage and Rental Forbearance Programs dictate an early termination of an Unconstitutional and illegal breach of contract edict spewed out of America’s Swamp. No precedence in American jurisprudence for this gross overreach of Government upon Lenders and Landlords.
As a Social Security recipient, having paid $100’s of thousands into the system being self-employed for 30 years, a sum I likely will never see due to an expiration date on me, I am rolling on the ground laughing at the annual benefit adjustment coming in 2022. BUT WASHINGTON MAY STILL SCREW US SENIORS IN THE END, STAY TUNED. Pitchforks and hoes at the ready.
David..
remember the Fed is still buying MBSs at rates well below the inflation rate…so the home buyers are borrowing below inflation rate…..seems remarkable doesnt it?
The Fed doesnt lift a finger when 5% inflation is in the system…..
seems remarkable doesnt it?
and the Fed is STILL easing with the 120,000 MILLION (120 billion) purchases each month….seems remarkable doesnt it?
And now the emergency meeting at the White House to make sure the market that seems way too high…..STAYS THERE…. seems remarkable doesnt it?
Everything changed in 2009…….and with the change came free money an d $20 Trillion plus in new national debt.
David
“This is what happens when we let academics and retired banksters run the once greatest and freest economy and financial system in the world.”
And the great flaw in the entire system is Congress turns a blind eye to the Fed, as the Fed goes off the rails, because Congress loves the free money for their vote buying programs.
The Fed DOES NOT look out for the People of this nation. If they did they would squash this inflation which punishes the working families.
And Congress thinks they are looking out for the People as they run up the national debt with over generous outflows.
Doesn’t it makes sense to make the entire US richer to improve the top 1%. Like a forest they don’t want to clear cut but rather rotate around to maximize their yield
Spot on, historicus! We need to rent out billboards with this info on it, to try to educate many clueless Americans.
Wolf,
Do you think we will end up like Japan buying stocks, I think J yelling did mention that once. J. Powell going in front of congress again. All that cash seems logical. That’s what Japan came up with.
John,
Why do you even bring it up? Now??? When the Fed is trying to pull in the strings??? The Fed didn’t even suggest it during the crash in March 2020. But they have a long history of saying that they’re into “credits” (debt) not equity (stocks).
Ask me again when the market is down 70% for 20 years, or something, like the Nikkei was when the BOJ started doing this.
“Do you think we will end up like Japan buying stocks . . ?”
Well, I keep going back to the speech that made Bernanke famous and guaranteed his future as the Chairman of the Fed.
Google this: Deflation: Making Sure “It” Doesn’t Happen Here -Bernanke
There used to be a term called “Crowding out”.
Not used for years. If a 6 trillion dollar infrastructure bill is passed we may be using it again.
FF
I remember it well. QE consigned it to the ‘dust bin’ of history, at least for now.
Other great quotes from JP.
The sky is blue except when it rains.
The grass is green except when it’s dry.
The grass is always greener…..when you water it.
Birds fly….until they land.
This man really missed his place…….just imagine walking onto the car lot looking for a Lexus and ending up in a Chevy……with the Lexus price.
I think Powell is sending all of the right signals. But I have to say that I doubt he has the time to do all that he wants to do. Historically the Fed HATES to raise rates during an election year… so 2024 is the outer bound. But we are halfway through 2021 and the Fed still thinks inflation is “transitory” and will be letting it run a bit to see if that is the case.
That leaves them with just two years to shrink their Balance Sheet AND raise interest rates. It took them two years to dispose of a mere 17% of their assets the last time… and they barely touched interest rates before Wall Street started squawking. That was in a 2% inflation rate environment.
As Wolf keeps saying… the Fed is way behind the curve right now. I think Powell and the rest of them are about to “learn” a lot more lessons about what is easier to achieve… and what is harder.
Much easier to create demand for Treasuries, yeah! Take 120B or more off the market, and then Treasury shrinks new supply. Yields fall and roll over the old debt at a lower rate? Rates won’t go negative but we will sell our paper at a discount.
1) If SPX plunge ==> JP don’t care.
2) Fred : New Housing Start, Total : the 2020 “event” was a blip: bubble up/ bubble down, back to the uptrend.
3) During 2000/03 NDX plunged 90%, but the new housing start didn’t care.
4) The new housing start is 5% – 7% of US GDP. A severe recession might shave 2% – 3% of the GDP, due to the housing start component alone.
5) The housing start was in a trading range between the Dec 1998 buying
climax @1.8 units and Apr 2003 with a spring in July 2000 @1.5M.
6 ) This TR is resistance.
7) In Mar 2021 the new housing start was : 1.725M units.
8) The new housing start will pump muscles for several years, before a jump. 2021 isn’t an opportunity to buy.
9) In 2003 1.8M new units were built. // 2004 : 1.9M. // In 2005 : 2M condos and McSheets.
10) Between Jan 2006 peak @2.273 the housing start plunges 1.795 to 478 units in Apr 2009.
11) Mar 2021 @1.725. // (1725 – 478) : 1795 = 1247 : 1795 = 70%.
12) The trend is strong, but with 350M all kind old and new Americans, it’s NOT in bubble territory.
13) 2020 bubble up / bubble down might be a new TR. Mar 2021
high an UT.
14) Buy when Loans : Deposits will be < 50%.
Weimar Powell….master of really read between the lines talk and Jawboning. If this guy ever needs a TV career after this, maybe VH1 can create a show for him. Instead of the “The Pickup artist”, I can see him hosting or being the star of the “The Jawbone artist”
If inflation goes on longer than expected, “we would not hesitate to use our tools.” – tells you everything you need to know, except I see the tools statement is more inline with what he will end up doing, if market falls off the cliff, not so much with inflation, especially since that target just get move higher and higher up anyway.
Powell would not raise interest rate but for mere show.. they may taper little bit or raise 25 basis points or more couple of times.
Supposedly CA plans to extend the eviction moratorium and make landlords whole.
That should support demand for a while.
I just hope when they raise rates it’s reasonable. Not an opposite extreme measure once again further pricing out everyday people from buying homes or affording rent.
Funny how mantras come in threes.
Govt:-
1) Tax (they’ll throw us out)
2) Borrow (as much as we can get away with)
3) Print (if we can hide it from them)
Neo-lib Economists:-
1) Low Rates (Lead to more investment)
2) 2% inflation (leads to more production)
3) Output gap minimisation (leads to jobs for all)
Did Powell just hint that his beliefs were wavering when he said “it seems easier to create demand than supply”? Is there an inkling of hope for the World?
There is nothing said by Powell and Williams that indicates tapering any time soon at all.
Rather they insisted on kicking expectations further down the road.
That’s what the market reacted to.