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Yellen Raises A Quarter

In an interesting move this week and true to the Fed plan to raise rates three times this year, Fed Chair Janet Yellen raised interest rates .25%. It’s worth it to note that at the same time, the Feds downgraded the forecast for inflation:

The central bank now believes inflation will fall well short of its 2 percent target this year. The post-meeting statement said inflation “has declined recently” even as household spending has “picked up in recent months,” the latter an upgrade from the May statement that said spending had “rose only modestly.” The statement also noted that inflation in the next 12 months “is expected to remain somewhat below 2 percent in the near term” but to stabilize.

At the same time, the Feds up the forecast for GDP growth slightly to 2.2%, up from a 2.1% forecast. They also anticipated a drop in unemployment as well, from 4.5% to 4.3%.

The Fed vote to go up a quarter-percent was not unanimous, however. “Minneapolis Fed President Neel Kashkari on Friday said he voted against an interest-rate hike this week because he wasn’t convinced the recent spate of soft inflation readings was due to one-off factors…We should have waited to see if the recent drop in inflation is transitory to ensure that we are fulling our inflation mandate” to get inflation back to 2%, Kashkari said.  Kashari was the only dissenting vote out of nine.

Earlier this year, the Federal Reserve tentatively planned three rate hikes in 2017 and three rate hikes in 2018. So far, they’ve completed two, and seem to want to stay on that track. Time will tell if this rate hike and pathway are good for the economy.

No New Rate Hike

A couple of days ago, I wrote about my theory that as long as the interest rates stay low, the stock market will remain high — because no one has any other place for investment. The rates have stay historically low for nearly a decade now, so investors have seen little-to-no return in many usual places.

Just today, we hear the the Fed has rejected yet another rate hike, and furthermore, has “downgraded its forecast for economic growth in 2016 for the third time this year. It now projects growth this year to be 1.8%. In June it forecast growth of 2%.

As the Fed has hesitated to raise rates, there is a growing debate about its credibility. Many economists and investors say the Fed’s hesitancy to raise rates — and conflicting messages from its top leaders — has eroded public confidence in the central bank.”

It is unlikely that a rate hike will happen on November 1-2, so close to the election. If a rate hike is to happen, it would be more likely to be in mid-December. It will be interesting to see how both the markets, and the Fed, react to the outcome of the November elections.

Epstein: Will the Real Paul Krugman Show Up?


housingbubble
Recently, Gene Epstein of Barron’s made a fascinating observation about Paul Krugman, the New York Times’ darling of economics. On December 18th in the NYTimes, Krugman wrote about the film, “The Big Short”, which was about the “housing bubbles and retold lies.” In his article, Krugman stated that the housing bubble “was largely inflated via opaque financial schemes that in many cases amounted to outfight fraud.”

Unfortunately for Krugman, some folks like Gene Epstein have long memories and short tolerance. Epstein noted that, “This causal analysis is directly contradicted by an alternative view previously expressed in the New York Times: that the housing bubble was largely inflated by policies of the Federal Reserve.

First, Epstein went back to August 2, 2002, when a columnist in the pages of the New York Times, wrote that, “To fight this recession, the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”

Nearly seven years later on June 17, 2009, a few months after the crisis of 2008, the same columnist wrote for the New York Times that “What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.”

Can anyone guess who this columnist is? Gene Epstein knew: Paul Krugman.

Of course, Krugman is counting on his readers to be either a) financial morons like he is; b) short on memory; or c) both. This kind of incompetency from Mr. Krugman is a consummate example of why he should not be the time of day on economic matters.

The FORM Act, the Fed, and Monetary Policy

Congress is slated to take up the Fed Oversight Reform and Modernization Act (FORM Act) this week. The FORM Act. It includes four key policy changes. A summary from the Daily Signal:

1) Require the Federal Reserve to Operate Under a Rules-Based Framework.
Throughout its history, the Fed has operated within a purely discretionary policy framework. Rules-based monetary policy, on the other hand, gives a central bank a clear set of guidelines that credibly commit it to future policy actions.

Naturally, central banks will be hesitant to support this type of policy change because it limits their discretionary authority, but the FORM Act would allow the Fed to choose its own monetary policy rule. Furthermore, the new framework would give the Fed the flexibility to stop following its policy rule, provided that it explains its decision to Congress.

This approach would greatly reduce uncertainty concerning the Fed’s future policy actions without overly restricting the Fed.

2) Restrict the Fed’s Emergency Lending Authority.
The Fed has a long history of lending to insolvent firms, and the best approach to fixing this problem would be to eliminate the Fed’s emergency lending authority.

The FORM Act doesn’t go this far, but it would implement restrictions aimed at making it more difficult to lend to insolvent firms at subsidy rates of interest, a major problem during the 2008 crisis.

3) Audit the Fed.
Many commentators have pointed out that the Federal Reserve is already subject to financial audits, but the Fed’s monetary policy decisions are off limits to Government Accountability Office (GAO) audits. The FORM Act would remove the restrictions that prevent such GAO audits, thus allowing for a retrospective exam of the Fed’s monetary policy actions.

Critics paint these policy audits as harassment of the Fed, but the GAO is an independent, nonpartisan congressional watchdog that regularly investigates federal agencies. Several former GAO officials have even pointed out that critics of “Audit the Fed” are maligning the GAO. No aspect of what the Federal Reserve does should be off limits to the GAO.

4) Establish the Centennial Monetary Commission.
The FORM Act’s Centennial Monetary Commission is a bipartisan congressional commission based on the one proposed in the Centennial Monetary Commission Act of 2013. The goal of this type of policy would be to “establish a commission to examine the United States monetary policy, evaluate alternative monetary regimes, and recommend a course for monetary policy going forward.”

The commission’s recommendations would not bind Congress to implement any legislation, but it would provide Members of Congress with information they need to fulfill their constitutional responsibilities for monetary policy. Moreover, such a commission would provide a public venue for both critics and supporters to discuss the Fed’s past operations and the appropriate role for the central bank going forward.”

Both President Obama and Fed Chairwoman Janet Yellen vehemently opposes the monetary reforms. “In a letter Monday to House Speaker Paul Ryan and Minority Leader Nancy Pelosi, Yellen called the proposed law a “grave mistake,” that would undermine Fed policy and the greater U.S. economy.” Yellen further claimed that the FORM Act could cause “millions of Americans to suffer” and would “politicize monetary policy.” Likewise, President Obama threatened to veto the bill if it passed because “the proposal would politicize the Federal Reserve’s monetary policy decisions.”

Peter Wallison from AEI provided some perspective on the FORM Act; he contends that the FORM Act is a positive bill that will bring greater information to financial markets. “Indeed, lack of information on something as important as monetary policy can be harmful to investors and to the economy as a whole, because investors and businesses deploy capital based on what they think will happen to interest rates in the future. The less information, the riskier these deployments are; the riskier they are, the more costly they are to make — which is why they may not be made at all. In addition, lack of information introduces unnecessary market volatility, as investors and businesses have to buy or sell securities — or even cancel contemplated transactions — because facts about the Fed’s policies have now come to light that show investors or businesses were operating on the wrong assumptions. This volatility is also costly for the economy.”

Congress has not yet voted on the FORM Act, and it is unknown whether it has the ability to pass. Nevertheless, the conversation about financial reform, and the role of the Fed — who has not always acted independently in recent years — is worthwhile.

Fed Official is Incorrect About Delaying an Interest Rate Hike


The recent Wall Street Journal article discussing the pitfalls of raising interests rates in near future was so utterly fully of incorrect information and assumptions, that I felt compelled to call out the author, Mr. Narayana Kocherlakota, for his pomposity. He contends that raising the interest rates — we’re talking .25% here — would “create profound economic risks….given the prevailing economic conditions.” Though Mr. Kocherlakota recognizes the fragility of our current economy, he fails to recognize that Obama’s economic policies and the Fed’s meddling are the chief sources of the malcontent.

So here we have the current president of the Federal Reserve Bank of Minneapolis blathering on and on as if his point of view — that very low interest rates are necessary and good — is a foregone conclusion. But it’s not. Any economist worth his salt knows that the problem all along is one that Mr. Kocherlakota has not even considered, because it is the exact opposition of his world view. Low interest rates have been the problem all along, not the solution. Yet we have this Fed chief who can’t even understand basic economics and has the audacity to pontificate from the Wall Street Journal on a point that is incorrect.

These sustained low interest rates have been harmful to our recovery. The assertion that inflation is merely 0.3% (and therefore well under the “target 2% rate”) is laughable. Ask anyone who has purchased food or paid energy costs in the last several years, and they will tell a different story. Everything is more expensive than it was a few years ago. Compound that with soaring healthcare costs, rising taxes (at all levels of government) and stagnant wages, and the result is an anemic economy.

For Mr. Kocherlakota to suggest that a .25% rate hike, therefore, would “discourage spending” and “create a drag on economic activity” is a slap in the face to all the Americans who diligently saved for their retirement golden years — only to watch their investments and savings shrink because of the non-existent interest rates and loss of Return On Investment (ROI).

These Fed officials are just out of touch with reality. For instance, QE1, 2, and 3 were miserable failures. The open-endedness of floodgate printing left consumers and investors unsure of what to do with their money for a very long time; now that quantitative easing has ended, with no measurable positive results, we have prolonged, and thus weakened, our ability to recover satisfactorily. But officials like Mr. Kocherlakota believe otherwise.

Case-in-point: Mr. Kocherlakota suggests that, “when the public comes to doubt a central bank’s commitment to its goals, the economy can land in a permanent low-interest-rate trap. The central bank is then much less able to fight recessions effectively.” This is patently untrue. The public doubt stems from ineffective policy by the Fed, which creates market uncertainty and a reluctance to invest. Smart Americans know that the best way to fight recessions are curbing government spending, promoting entrepreneurship, and letting the market correct itself without excessive, unconventional tinkering by a central bank. The public doubt is mainly about the Fed leaders — like Mr. Kocherlakota — who fail basic Economics 101.

What Mr. Kocherlakota and many other Fed officials and Washington bureaucrats fail to recognize, is that artificial monetary policies do not create jobs or businesses, which are the greatest source of expanding an economy. This is achieved by a free market and private capital, with minimal government regulation and reduced government spending. Anything else than that, such as prolonged low interest rates, is a recipe for failure.