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The Fed's Window For Hiking Rates Continues To Close
Submitted by Lance Roberts via STA Wealth Management,
During the last year, the Federal Reserve has hinted that the period of "ultra accommodative monetary policy" was coming to an end. The Fed started that process last October by terminating the latest "Quantitative Easing" program which induced massive amounts of liquidity into the financial markets. Subsequently, the Fed has turned its focus towards the near ZERO level of the "Fed Funds" rate.
Over the last several FOMC meetings, Chairwoman Janet Yellen has hinted on numerous occasions that the Fed will begin increasing the overnight lending rate sometime in 2015. She has been adamant that the Federal Reserve has been "watching the data" closely to determine the appropriate timing of those increases. Not surprisingly, Wall Street has also been singularly focused on this issue. The increase in lending rates is the final step in ending the extremely long period of "accommodative policy" measures that has been a primary support of asset prices.
The problem for the Fed, as I discussed recently, is that they may have already missed their best opportunity to begin increasing interest rates. To wit:
"While the Federal Reserve hopes that they can effectively raise interest rates without cratering economic growth, the problem is that the bond market may have already beaten them to the punch.
While I do not expect Treasury rates to rise very much, the increase in borrowing costs in an already weak economic environment has an almost immediate impact. The chart below shows the periods in history where Treasury rates have risen and the impact of subsequent rates of economic growth."
But it is not JUST interest rates that suggest that the best opportunity for the Fed to hike rates is likely behind them.
One of the important factors for continued economic expansion, and required to offset the drag caused by tighter monetary policy, is an increasing rate of wage growth to support an expansion in consumption. As shown in the chart below the correlation between wage growth and economic growth is very high. This relationship, of course, is not surprising given that the economy is almost 70% driven by consumption which is supported by wages.
Given that relationship, the best time for the Federal Reserve to hike interest rates is when wage growth has bottomed and is beginning to increase. As stated, the increase in wage growth leads to higher consumption that offsets the drag created by tighter monetary policy. Unfortunately, for the Fed, that window has likely already passed.
Real employment is also an issue for the Federal Reserve's ability to hike rates. Despite continued media headlines of an unemployment rate near 5%, the Fed has failed to lift rates. The question that should be asked is why?
If the economy were truly running near full employment, as the U-3 rate would suggest, then the Fed should be aggressively hiking rates. The reason for the hesitancy is due to the continued "slack" in the labor force. That "slack" can be seen in the extremely low historical levels of labor force participation of the prime 25-54 age groups which is at the lowest rate since the late-80's.
The importance of this particular age group is that they are primarily responsible for household formations which supports stronger economic growth. Of course, lower employment rates, suppressed wages, and high indebtedness has made homeownership less of a reality for most. The issue of a "renter nation" is that it does not have the same economic multiplier effect that home ownership has created previously.
Furthermore, the structural shift in employment, which has suppressed wage growth, continues to impede the ability of the economy to gain substantially stronger traction. As discussed recently at ZeroHedge, since the end of the last recession the number of "waiters and bartenders" replaced the lost manufacturing jobs. While "jobs" have indeed been created, there is a huge difference between "quantity" and "quality" when it comes to economic growth.
Lastly, the Federal Reserve's ongoing interventions, as was their intention, inflated asset prices and boosted consumer confidence. However, the Fed should have utilized that strong momentum and relative complacency in the markets as cover for beginning their interest rate increases. Instead, they allowed the markets to over-inflate and now run the risk, when combined with increasing global risks like Greece and China, of "deflating" asset prices too quickly this late in the market cycle.
For the Federal Reserve, the issue of tightening monetary policy at a point when employment and economic growth remain weak, can have an exacerbated effect. Historically, when the Fed has entered into an interest rate hiking cycle, the economy has been at much stronger growth rates. As I discussed previously:
"There have only been TWO previous points in history where real economic growth was close to 2% at the time of the first quarterly rate hike - 1948 and 1980. In 1948, the recession occurred ONE-quarter later and THREE-quarters following the first hike in 1980.
The importance of this reflects the point made previously, the Federal Reserve lifts interest rates to slow economic growth and quell inflationary pressures. There is currently little evidence of inflationary pressures outside of financial asset prices, and economic growth is weak to say the least.
Therefore, rather than lifting rates when average real economic growth was at 3%, the Fed will not start this process at less that half that rate."
Think about it this way. If it has historically taken 11 quarters to go fall from an economic growth rate of 3% into recession, then it will take just 1/3rd of that time at a rate of 1%, or 3-4 quarters. This is historically consistent with previous economic cycles, as shown in the table to the left, that suggests there is much less wiggle room between the first rate hike and the next recession than currently believed."
The Federal Reserve has a very difficult challenge ahead of them with very few options. While increasing interest rates may not "initially" impact asset prices or the economy, it is a far different story to suggest that they won't. In fact, there have been absolutely ZERO times in history that the Federal Reserve has began an interest rate hiking campaign that has not eventually led to a negative outcome.
While the Federal Reserve clearly should not raise rates in the current environment, there is a possibility they will anyway.
The Fed understands that economic cycles do not last forever, and we are closer to the next recession than not. While raising rates would likely accelerate a potential recession and a significant market correction, from the Fed's perspective it might be the 'lesser of two evils. Being caught at the "zero bound" at the onset of a recession leaves few options for the Federal Reserve to stabilize an economic decline. The problem is that they may have missed their window to get there.
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How can an imaginary window close? The Fed routinely lies to keep dollar strong
"No Rate Normalization During My Lifetime" BernankeThis article is circular reasoning.
Printing money does nothing in terms of the real economy - it is a fraud to suggest that it is a way to address the economy.
Yes, banking/finance no longer involves any real risk now that there are no longer any real collateral requirements and everyone gets a fucking bailout.
Yep, as usual, the Fed has painted itself into "lose/lose" corner. But we, the serfs, are the ones who are going to lose.
The Fed will continue boiling the frog till it croaks.
Respect what they are doing ("I have a printing press and i intend to use it") but also UNDERSTAND what they are doing (not lending any money into the goods economy.")
So yes...enjoy the asset inflation, but understand the entire thing appears to be based on an accounting gimmick (QE.)
"Failure to lend means failure to reward" as well however.
Those who have been simply lending to the Federal Government and clipping coupons here have missed out on one of the greatest market rallies in history...
I have enjoyed selling peaks and buying dips sure, but the key word there is sell. It isn't a profit until you actually sell. Aside from my solid dividend bitchez, I can wait. So long as the Caymans do not get "Cypus'd" anyway...
Banking (and finance in general) has become a way to boost aggregate demand. Period. Incomes/returns not enough to pay back the loans/liabilities? No problem. The Fed buys the loans/liabilities at 100 cents on the dollar from the intermediaries after the Fed raises rates and credit tightens. They'll do what it takes to pump enough credit creation into the system and then deal with the mess on the backend through bailouts.
So long as the paper is accepted, yes. It's been like this in earnest since 1971...
everyone gets a fucking bailout.
except citizens. citizens get bailed in.
Easy, a window with zero-pane glass.
^^^this. more to the point, if you are going to insist on doing this, then allow every business/person with good credit access to money at the same RATES!!!!
We all know how the current "let the majority eat cake" monetary experiment turns out already.
The move lower in energy and international ETF's today has been absolutely ASTOUNDING.
I have been calling out solvency risks due to the zero bound all year now so folks getting "taken to the woodshed" here deserve ZERO sympathy...and no I ain't talking Greece either!
If the Fed does fully normalize you don't want to be anywhere NEAR the stuff getting annihilated right now...and that sounds like a problem for folks "other than the Fed" and the Fed itself.
A lot of "speculative bets" sure look to be unwinding as Germany and "the euro" start to Unwind here.
Interest rates in the USA could fall MUCH further from the epic rally they are having today....
True. Oil (WTI) off about 7.5% today. If that was the Dow dropping 7.5% it would have lost more than 1300 points today.
It's harder to fake oil demand than it is to dummy-up reported EPS numbers using mark-to-unicorn and share buy-backs, however.
Maybe if they quitely opened the valves on some of those tankers sitting offshore....
I was thinking of starting a company that would store the oil underground. By pumping it back down the same drill pipes it came up out of. Since the infrastructure already exists, it only makes sense.
Your idea, however, has the added advantage of creating an environmental catastrophe, which we could spend billions of Keynesian/government-works dollars cleaning up. So, I would say that's probably the better way to go.
I'm glad you got your 3:30 ramp, by the way. Everyone needs a little pick-me-up in the afternoon.
I don't know, I like your idea - then you could start an exploration company to 'discover' the oil you'd pumped into the ground, and pump it back out again. Plus you'd have super-low discovery and production costs, so you could probably undercut even the Saudis - thinking about it, we probably deserve a joint Nobel prize in economics for this.
Window? You mean the one that's been bricked up with steel bars on it?
There will be no increase there will be mega printing and there will be negative rates. It will all explode in thier banker/government corrupt asses.
...said my father in 1971...
Much like comedy, timing is...
They ain't raising shit. Still waiting for 2% mortgage rates .
The stock market rallied today from yesterday's futures drop, so that means Greece does not matter and that the Fed should still keep their word and raise rates... otherwise they are LIARS.
what you read about on ZH are all but symptoms of a fundamental problem, when ordinary people lose connection to their governmennts and yield full control of the socio-political and economic destinies of humanity to media and big corporations.
the Greeks have spoken, but who else has heard the ringng sound of freedom which speaks to existing status quo power structures.
who has a dream?
https://www.youtube.com/watch?v=3xPqiBd_xIw
how's this for something new and original? consider the carbon sequestration benefits...
STUYVESANT, N.Y. — It started with Hurricane Katrina: the flooded houses in New Orleans festering with mold, many uninhabitable to this day. Then came the earthquake in Haiti: thousands dead, crushed by homes that should have been their sanctuaries.
James Savage, then a Wall Street analyst living on Central Park West, grew disturbed about the conditions he saw on television and in the newspapers.
“There has to be something better we can do than this,” he recalled thinking last week as he sat at the kitchen table inside his new home here on a cliff overlooking the Hudson River 120 miles north of New York City.
The solution he has come up with is not some space-age polymer or recycled composite but a material that has been in use for millenniums, though it is more often demonized than venerated on these shores.
Good post, however:
I do not have a dream, as I am fully awake.
I do not dream of Liberty, as I already have her. I demand Liberty, as she is already mine.
I have a demand backed by arms that is deeply rooted in the American country.
I have a demand. A demand for the end of the tyranny that sullies my Liberty.
Liberty is a demand. tyranny is submission.
"I have a demand that we Americans, on the continent their Fathers conquered, will one day rise up to put to the guillotines the tyranny that now occupies us. The banksters and their grift dissected. The venal heads of the tyranny, the pols and crats, now heading from a basket. The spying and robbing, the murdering and treasonous henchmen of tyranny, continuing their spying and glaring from atop the pikes they decorate. Dual-citizens asked to partake in 'return' or too face the the mighty blade powered only by gravity and Liberty.
Be a productive part of the American country, or be a productive fertilizer to it".
"While raising rates would likely accelerate a potential recession and a significant market correction, from the Fed's perspective it might be the 'lesser of two evils"
Now there's a mouth full! LOL
In 4 months the SGE starts "setting" the price of ( physical ) gold.
The FED has been dragginf their feet pretty much doing everything
they can to convince everyone not to upset the apple cart.
And its worked! Even China ( and Russia ) actively collude
with the FED to stave off the end of the US$.
But... even the Chinese can see that this game has no
legs. When the price is set in Shanghai... the US$
is pretty much done. Only interest rate hikes can
delay this... at best given the foot dragging.
Aintagundewit.
"While the Federal Reserve clearly should not raise rates in the current environment..."
Why is now such a bad time Lance? You can't polish a turd and therefore shouldn't be shy about shoveling it up and cleaning the mess left behind.
Chrome dome Yellen has a hot potato in her hand. How do you raise US Rates without doubling down on ECB NIRP times two?
/hahahahahaaa. Ph.D economic retards are running the asylum. They cannot balance a checkbook.
The Good, The Bad And The Ugly
Starring Janet Yellen
I've been looking to raise rates for 8 months. Whenever I should have raised rates with my right hand, I thought of you. Now I find the economy in exactly the position that suits me. And I've had lots of time to learn to raise rates with my left...
*BOOM*
When you have to shoot, shoot! Don't talk.
The window for raising rates ACTUALLY closed in March or April.
We're just waiting for the subsequent revisions to confirm it.
"the economy is almost 70% driven by consumption which is supported by wages."
Um, how is that possible?
Everyone has said it for decades. But how is it physically possible?
How can consumption comprising 70% be supported by wages?
Don't people have to earn money in order to spend it?
Pardon me, but monetization and subsequnt inflation don't change the nature of that beast, only redistribute it.
Isn't that EXACTLY like saying that 20% of the transactions are one-sided? Because one entity's "Consumption" spending is simply another entity's labor budget? So, isnt that the same as saying "We're borrowing 20% per year"?
Alternatively, it could mean that exports are huge enough to bring a 20% nationwide...and that clearly isn't so!
So...if the money one entity's "consumption" money - their earnings, whether spent now or later - is simply another entity's "labor" budget... THEN HOW IS IT POSSIBLE FOR 70% OF THE ECONOMY TO BE CONSUMPTION?
Saying this is PRECISELY saying that 20% of the economy was conjured from a hat!
where's the other 10%?
Window to raise rates is closing? That's like saying the window for pulling out of the AIDS victim you are fucking is closing...
She will not raise rates until she is told so by her new boss: Goldman Sucks !!
So let me guess, the Fed rate goes to .25% and mortgage rates go to 8%.
Just like oil going from $45 to $60 sends gas to $3.00+
"In fact, there have been absolutely ZERO times in history that the Federal Reserve has began an interest rate hiking campaign that has not eventually led to a negative outcome."
Every cycle has a down phase, so that would be correct. Every rate cutting campaign also eventually leads to a negative outcome. The 2008 rate cutting campaign is leading into the next recession, just as much as a FED rate hike campaign will. A number of recessionary indicators are in play, without a rate hike having happened yet.
6/6/2016 - Windows have been deemed too inexpensive. Cathy Zoi's "Efficient Window SWAT teams" appointed to replace multi-paned glass with telscreens so the LCD repair woman can be enriched. This has the additional benefit of creating more STEM jobs. Due to the expected improvement in mood, the chocolate ration has been reduced 5g.
Everyone everywhere is being totally faked out! What is the REAL reason the federal reserve has been threatening to raise rates?
Answer: The federal reserve has known the world economy is very close to the edge for months. They know what remains of the market will force rates higher when the market realizes how much risk government bonds really involve (the EU providing some hints).
And so, the federal reserve wants to be able to pretend THEY are still in control of rates when rates rise. So now, when rates are pushed higher because people don't want to receive even more negative returns as inflation takes off (due to foreign dollars running back home) and the real risk involved dawns upon them, the federal reserve can claim they adjusted rates higher.
All about pretending they are in total control, and that whatever they want, they get.