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Fed's Lacker Says "Strong Case For Rate Hike... August Jobs Data Won't Change Decision"

Tyler Durden's picture




 

With just 20 minutes to go until the latest most important jobs report ever in the history of man, Richmond Fed Chief Lacker just explained why "the case for raising rates is still strong"...

  • LACKER: BOTH MANDATE CONDITIONS 'APPEAR TO HAVE BEEN MET'
  • LACKER: EXCEPTIONALLY LOW RATES NO LONGER WARRANTED BY JOB MKT
  • *LACKER: AUG. JOBS REPORT UNLIKELY TO `MATERIALLY ALTER' PICTURE

But perhaps most crucially, Lacker explains "recent financial market volatility is unlikely to affect economic fundamentals in the United States and thus has limited implications for monetary policy," removing the one last leg for permabulls to rely on (that is if you velieve The Fed is not Dow-Data-Dependent).

While "there is always a chance that this morning's report is unexpectedly weak," Lacker said, refering to the Labor Department's release of non-farm payrolls at 8:30 a.m. ET, but "it's quite unlikely that a one-month blip would materially alter the labor market picture or, for that matter, the monetary policy outlook."

Full Speech below:

Highlights:

  • Economic data suggest that an increase in the Fed’s target interest rate from near zero is warranted sooner rather than later.
  • With nominal short-term interest rates close to zero and inflation of at least one percent, real interest rates have been negative for the better part of the past six years. But with rising growth in personal consumption and income over the past couple of years, negative real rates are unlikely to remain appropriate.
  • The unemployment rate has declined nearly to pre-recession levels, and research suggests that there is little if any excessive slack in the labor market. Consistent with the Fed’s forward guidance, many labor market indicators support the case for an increase in interest rates.
  • Inflation has been below the Fed’s 2 percent target since early 2012, but has been running slightly above target over the past half year. Because inflation is a lagging indicator, maintaining low interest rates poses serious risks.
  • Recent financial market volatility is unlikely to affect economic fundamentals in the United States and thus has limited implications for monetary policy.

Good morning, and thank you for inviting me to speak with you. I think it’s fair to say that the subject of my remarks today, the Federal Reserve’s interest rate policy, has received relatively prominent media attention in recent months. But the current setting of the Fed’s policy rate dates back to the end of 2008, when the financial turmoil was worsening and the recession was deepening. That’s when the Federal Open Market Committee (FOMC) set a target range for the federal funds rate of between zero and 25 basis points. With short-term interest rates reduced to near zero and inflation of at least 1 percent since then, real, inflation-adjusted interest rates have been negative for the better part of six years.

Following other recent recessions, the Fed has typically raised interest rates within a few quarters of the end of the contraction in economic activity.1 In contrast, the Great Recession ended in the second quarter of 2009, and while many initially expected rates to rise again within a couple of years, we are now entering the seventh year of what seems like an epic waiting game.

The title of my talk today is “The Case Against Further Delay.” As that title suggests, I plan to review the main reasons to begin raising rates sooner rather than later. As you may know, the FOMC is scheduled to meet the week after next, and I expect the Committee to consider fully both the arguments for and against further delay. Earlier this year I said publicly that I thought the case for raising rates was strong, and I still think that’s true. But I should emphasize that I will not make a final decision on the question until I have had the benefit of discussions with my colleagues at the upcoming meeting and have reviewed the additional data we will receive between now and then. I should also emphasize that, as always, I am speaking for myself and the views expressed are not the official views of the FOMC.2

Consumer Spending Has Accelerated

In my view, the most significant facts supporting an interest rate increase are related to household expenditures. As I’m sure a room full of retailers is well aware, consumer spending plays a major role in our economy, constituting more than two-thirds of our nation’s GDP. Following the end of the recession, growth in real personal consumption expenditures was relatively slow as households repaired their balance sheets while coping with weak labor markets. After an initial post-recession rebound, consumer spending growth averaged less than 2 percent at an annual rate for several years. In 2014, however, household spending accelerated, averaging over 3 percent for the year, only to fall back to a slower pace early this year. But that first quarter slowdown now seems largely attributable to temporary factors, such as unusually severe winter weather in many areas of the country. Spending growth has picked up again since then, growing at a 3.1 percent annual rate over the last three months.

Household spending growth is fueled by household income growth, both current and anticipated, and real income has registered significant gains since the end of the recession, driven in part by steady employment growth since 2011. I’ll have more to say about jobs in a few minutes, but let me just say now that I believe improvements in the labor market are likely to continue to fuel healthy growth in consumer spending at between 2 ½ and 3 percent per year.

What is the link between consumer spending growth and monetary policy? As I noted at the outset, with the federal funds rate near zero and inflation running between 1 percent and 2 percent, real short-term interest rates — that is, inflation-adjusted interest rates — have been negative for most of the past six years. Conceptually, the real interest rate is the price at which people can exchange purchasing power today for purchasing power in the future. This price should depend of the relative supply of and demand for goods today and goods in the future. In general, this suggests a connection between real interest rates and the expected growth of consumption of goods and services: Higher growth should be associated with higher real rates. While this connection isn’t always tight in the data, the logic strongly suggests that a negative real interest rate is unlikely to be appropriate for an economy with persistent consumption growth at the rate we are now seeing.

Some economists argue that a secular downward trend is affecting real interest rates, driven by lower productivity growth and increased demand for the safety of U.S. Treasury securities. As a result, they say, we should expect lower average real interest rates in the immediate future and monetary policymakers should take this into account. For example, some argue that we should revise our estimate of a key parameter (sometimes referred to as the “natural rate of interest” or the “equilibrium rate of interest”) in some of the simple algebraic formulas that are often used as benchmarks to inform contemporaneous monetary policy settings.3 Because these formulas summarize the historical conduct of monetary policy and because our credibility depends on expectations that we will continue to conduct policy in a way that maintains price stability, deviating from the behavior pattern encapsulated in these simple formulas can be particularly risky. While the possibility of longer-run swings in macroeconomic variables needs to be taken seriously, for me the evidence in this case is not yet compelling enough to warrant setting aside considerations that would otherwise prescribe raising rates.

Other components of GDP are showing healthy growth as well: Like consumer spending, business investment spending weakened around the beginning of this year, but recent reports indicate that capital goods orders appear to have bottomed out last spring and have increased since then, and nonresidential construction spending has registered strong gains as well. These reports suggest that business investment is likely to contribute positively to growth going forward.

Residential investment has registered healthy gains this year. Housing starts year to date (through July) were up 11 percent over the previous year. Even though the rate of home building is rising from relatively low post-recession levels and is unlikely to return soon to a torrid pre-recession pace, the housing market has been making noticeable contributions to growth.

Labor Markets Have Tightened

Earlier this year, as it began to prepare the public for an eventual rise in interest rates, the FOMC said it was looking for “further improvements in the labor market” before an increase in interest rates would be appropriate. Those improvements have materialized: So far this year, the economy has produced an average of 213,000 net new jobs per month and the unemployment rate has fallen to 5.3 percent.4

I should note that these numbers pertain to July; the August employment report is due to be released at 8:30 this morning. While there is always a chance that this morning’s report is unexpectedly weak, it’s quite unlikely that a one-month blip would materially alter the labor market picture or, for that matter, the monetary policy outlook. After all, more than 12 million jobs have been added since the trough in payroll employment in early 2010.

These national statistics indicate a significant tightening in labor markets has taken place over the last year and a half. That conclusion is supported by the anecdotal information we have been receiving from our contacts within the Fifth Federal Reserve District. Over the last year or so, reports of difficulty finding and hiring qualified workers have become notably more widespread and persistent.

You’ll notice that I cited the number of “net” new jobs. While that’s a critical statistic, the overall number masks a significant amount of activity; every day, thousands of workers leave their current jobs or start new jobs, and thousands of employers lay people off or create new vacancies. This “churn” is an important characteristic of dynamic labor markets, as has been emphasized in research by Stephen Davis and John Haltiwanger.5 The measures that capture these flows in the labor market have all been strong as well: Year over year, vacancies are up 11 percent, the hiring rate is up 7 percent and the rate at which workers voluntarily leave their jobs, a signal of workers’ confidence in their job market prospects, is up 11 percent.

The unemployment rate, which peaked at 10 percent in October 2009, has fallen more rapidly than many people expected. That decline has been accompanied by a large decline in labor force participation — roughly 3 percentage points since the end of the recession, a steep drop by historical standards.6 Some observers have been concerned that the many people who have left the labor force represent a significant amount of “slack” beyond what is captured in the traditional unemployment rate, and that these underutilized labor resources could easily be drawn back into the labor force. Those who are concerned also point to the number of people working part time who would prefer to work full time. A broader measure of unemployment that includes these part-time workers, plus people who have recently left the labor force but would like to be working, was 10.4 percent in July, well above the official unemployment rate of 5.3 percent.

But most of the people who have left the labor force are not currently looking for work. The decline in labor force participation has been driven mainly by structural and demographic factors, such as the growing number of people enrolling in college and the large baby boom generation reaching retirement age.7 In addition, research indicates that not all people without a job have the same propensity to return to work. For example, Richmond Fed researchers have constructed a broader measure of underutilization they call a “nonemployment index.” This index counts all people who are not working, not just those who are unemployed according to the official definition, and weights them differently based on their likelihood of becoming employed in the future. For example, unemployed people who are actively looking for work are about three times more likely to become employed than people who say they would like to find a job but are not actively seeking one. Their research demonstrates that while there is more slack than is captured by the official unemployment rate, there seems to be no more now than is usual when the unemployment rate is around 5.3 percent.8 In other words, the official unemployment rate is providing a reasonably accurate guide to how the utilization of labor resources has changed over time.

Measures of slack or underutilization are often compared against a normative benchmark, that is, some assessment of what a normal amount of slack would be. Such an assessment takes into account that there will always be some people who have left the labor force because they’re discouraged about the likelihood of finding a job, or who can only find part-time work even though they’d like to be working full time. Such an assessment should also take into account the considerable uncertainty about what exactly constitutes normal at the present time. Economists have taken a range of different approaches to estimating the level of the relevant benchmark, which of course is not directly observable. My sense is that the current unemployment rate is statistically indistinguishable from plausible normative benchmarks, such as estimates of “full employment” or “the natural rate of unemployment.”

Some argue there must be excessive slack in labor markets if wage rates are not accelerating. But real wages are tied to productivity growth, and productivity growth has been slow for several years now. Wage growth in real terms has at least kept pace with productivity increases over that time period, which is perfectly consistent with an economy from which labor market slack has largely dissipated.

Overall, I believe the evidence indicates that labor market conditions no longer warrant continuation of exceptionally low interest rates.

What About Our Inflation Goal?

Although it is easy to overlook, given the intense focus on labor markets in recent years, the Federal Reserve, as our nation’s central bank, is responsible for controlling inflation. At the beginning of 2012, the FOMC announced an explicit long-run inflation goal of 2 percent, confirming what had been widely viewed as our implicit target. Inflation has been below that goal by varying amounts since the middle of 2012. Since January, however, the price index for personal consumption expenditures — our preferred inflation measure — has grown at an average annual rate of 2.2 percent. The core index, which excludes the more volatile food and energy components, has grown at an average rate of 1.7 percent. (You may have heard that inflation over the 12 months ending in July was 0.3 percent, but that 12-month span included the period from July 2014 to January 2015 in which inflation averaged negative 1.5 percent.) These numbers, which have been seasonally adjusted by the U.S. Department of Commerce, provide strong evidence that the transitory effects of last year’s energy prices and exchange rates are behind us.

The second condition the FOMC laid out for raising interest rates was that it would have to be “reasonably confident that inflation will move back to its 2 percent objective over the medium term.” The last half year of data show that inflation already has returned to our 2 percent objective. Thus both conditions that the FOMC stated earlier this year would make it appropriate to raise the target range for the federal funds rate appear to have been met.

The return of inflation to 2 percent should not be surprising. First, the deviation from the committee’s inflation goal during the past few years was not especially large. Research by economists at the San Francisco Fed and the Richmond Fed suggests that the deviation is not statistically significant once you factor in the volatility of monthly inflation rates. The fact that we have undershot our inflation goal could easily be the result of bad luck, rather than a systematic failure of monetary policy in pursuit of its target.9

Second, our best measures of inflation expectations have held reasonably steady at rates consistent with inflation returning to the FOMC’s goal. Survey measures have remained within the narrow bands within which they have fluctuated for some time. While measures derived from U.S. Treasury securities — the so-called TIPS inflation compensation figures — have declined of late, they are not unusually low and could well be dampened by movements in the premium investors place on the superior liquidity of nominal Treasury securities.

As a result, I believe we can be reasonably confident that inflation will continue to gravitate to 2 percent as long as we do not depart from conducting monetary policy in a manner consistent with continued expectations of price stability.

Should the Recent Financial Market Volatility Give Us Pause?

No discussion of macroeconomic conditions at this moment would be complete without mention of recent financial market volatility. Developments in China appeared to have heightened uncertainty regarding future economic growth and macroeconomic policy there, which seems to have prompted higher financial market volatility in developed market economies. At times of market turbulence one must maintain a deep respect for the divergent ways in which events could conceivably unfold, and thus I will not pretend I can foretell the future.

Nevertheless, it is worth observing that the direct implications of recent developments for economic fundamentals in the United States appear to be quite limited. If so, then recent market developments will have only limited implications for the appropriate path of monetary policy. This might seem to contradict widespread conjecture about the Fed delaying liftoff due to market turbulence. But I would point out that the Fed has a history of overreacting to financial market movements that seem unconnected to economic fundamentals. The events of 1998-99 are a case in point, when financial developments in emerging markets generated substantial U.S. market volatility despite limited identifiable implications for U.S. growth. The FOMC cut rates three times but ended up taking back those cuts the following year.

Is Now the Time?

After the FOMC reduced interest rates to near zero, we included qualitative language indicating that we thought exceptionally low interest rates would be appropriate “for some time,” and then for “an extended period.” In August 2011, the FOMC altered this “forward guidance” language to specify a date before which an increase in the federal funds rate was unlikely. The date was moved forward several times thereafter, eventually stating that low rates were likely until mid-2015. At the end of 2012, this date-based forward guidance was replaced with a statement that the Committee anticipated that low rates would be appropriate “at least as long as the unemployment rate remains above” a threshold of 6.5 percent. The FOMC also stated at the time that this guidance was consistent with previous, date-based guidance — that is, with low rates persisting at least until mid-2015.10

So here we are, just past mid-2015, with robust employment growth and an unemployment rate that has fallen rapidly over the past few years — more rapidly than many people expected — and is now more than a full percentage point below the committee’s forward guidance threshold.11 Moreover, inflation is arguably running just above the FOMC’s objective of 2 percent, not below.

Some might argue that as long as inflation is close to 2 percent we have a free pass — we can keep supporting the real side of the economy with low rates until inflation rises. But if, as I’ve argued, the real side of the economy calls for a higher interest rate, then there is a real danger associated with this strategy. Inflation is a lagging indicator, and the forces that lead to rising inflation can build up before they are apparent in the data. We saw this in the mid-1960s, when inflation began increasing after six years of holding steady around 1 percent. Policymakers kept interest rates low in pursuit of low unemployment, in the belief that the unemployment rate consistent with full employment was lower than modern research has shown that it was at the time.12 This set off the period known as the “Great Inflation,” which lasted until the early 1980s and was quite difficult and painful to reverse.13 Waiting too long to begin raising rates could require a more dramatic increase in rates to restrain inflation pressures once they have become apparent in the data.

The case for raising interest rates that I have described has actually been true for some time; I could have made the same arguments in June, or even April. But I’ve been willing to wait so far this year. In part, that’s because the FOMC conditioned the public not to expect liftoff before June, and deviating from the expectations we’ve actively fostered should require a significant departure from the economic conditions we anticipated, which hasn’t occurred. In contrast, the Committee has been clear since June that an increase is possible at any remaining meeting this year.

I was also willing to wait for confirmation that the factors holding down real growth and inflation late last year and early this year were transitory. It is now clear that those factors, which included harsh winter weather, the strengthening dollar, and the steep decline in energy prices, have dissipated. It was not unreasonable to seek more definitive evidence that these impediments to growth and price stability had passed, but that question has now been settled.

Progress has been slow and uneven, but the economy has worked its way back from the dislocations of the Great Recession. Unemployment is close to pre-recession levels, real GDP growth has been slow but steady, and inflation is tracking our objective. I am not arguing that the economy is perfect, but nor is it on the ropes, requiring zero interest rates to get it back into the ring. It’s time to align our monetary policy with the significant progress we have made.

*  *  *

However, just as a reminder, we have heard this before from lacker...

April 2011:  Fed's Lacker: Rate Hikes By Year-End 'Certainly Possible'

 

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Fri, 09/04/2015 - 08:21 | 6508356 I AM SULLY
I AM SULLY's picture

Probably 25 Basis Points?

(Yeah ...)

(I'm going to go out and open a savings account)

Fri, 09/04/2015 - 08:23 | 6508370 Haus-Targaryen
Haus-Targaryen's picture

Meh.  So.  #DGAF 

Fri, 09/04/2015 - 08:25 | 6508377 I AM SULLY
I AM SULLY's picture

Things just keep getting better buddy!

(now go get back in line at the food bank)

https://www.youtube.com/watch?v=VlVmdGiAH2A

Fri, 09/04/2015 - 09:08 | 6508586 VinceFostersGhost
VinceFostersGhost's picture

 

 

Strong Case For Rate Hike

 

Go ahead.....shoot the dummy.

Fri, 09/04/2015 - 09:12 | 6508610 Son of Captain Nemo
Son of Captain Nemo's picture

Things just keep getting better buddy!

Well done Sully.  Now if we could just get Jim Cramer and the rest of the Que card readers on Squawk Box to repeat that wonderful episode from Boardwalk Empire we can consider it a "start"...

Fri, 09/04/2015 - 08:25 | 6508378 Fahque Imuhnutjahb
Fahque Imuhnutjahb's picture

All the people who matter are out of the building.   Pull it.

Fri, 09/04/2015 - 09:50 | 6508781 orez65
orez65's picture

LACKER: Bond bubble burst? no problem
LACKER: Student bond bubble? Republicans are so mean!
LACKER: Massive bond selling, we'll buy all comers
LACKER: Hyperinflation? Never in my watch
LACKER: Long live Keynes! Down with Hayek!
LACKER: Yes I live in an alternate universe, also known as "Academia"

Fri, 09/04/2015 - 08:21 | 6508360 whitelivesmatter
whitelivesmatter's picture

I call BS.

Fri, 09/04/2015 - 08:41 | 6508457 hal10000
hal10000's picture

Wait until the jobs report actually comes out before using the term BS.  It doesn't really matter what the ultimate data is.  That stuff is no longer relevant.

Fri, 09/04/2015 - 08:44 | 6508482 101 years and c...
101 years and counting's picture

why?  the Fed called the longs a bunch of "feral hogs" 2 years ago and have warned them.  you think wall st or the banks would lose if stocks crash at this point?  

Fri, 09/04/2015 - 08:22 | 6508362 Kolchak
Kolchak's picture

Yeah right you peice of dung.

Fri, 09/04/2015 - 08:23 | 6508367 Dr. Engali
Dr. Engali's picture

Listen to us..... the eCONomy is strong..... the eCONomy is strong........, the eCONomy is strong. Your chocolate rations have increased from 80 grams to 70 grams. Have a good day citizen.

Fri, 09/04/2015 - 08:26 | 6508381 I AM SULLY
I AM SULLY's picture

CHOCO-RATIONS ARE GOING UP! THAT'S DOUBLE-PLUS-GOOD!

https://www.youtube.com/watch?v=VlVmdGiAH2A

Fri, 09/04/2015 - 08:26 | 6508368 Handful of Dust
Handful of Dust's picture

More jaw boning. If they do raise, it will be an inconsequential .25 or less. The stawk market and housing market will respond as if it's a 5% hike and turn down sharply.

 

They ain't going to do it.

Fri, 09/04/2015 - 08:41 | 6508438 saints51
saints51's picture

You and everyone else feel they will not do it. Thats exactly why they will do it. You see them as losing power where they will actually gain more power from chaos. This is way bigger than the Federal Reserve.

Then the FED makes speeches saying they may raise rates and everyone says you are not going too. So when they do, they will tell us all were warned. The whole telling us their plan is the plan. They put out little coded messages that are feelers to see how we react. When majority believe one way they do the opposite. Thats how they are rich and powerful. These guys fleece muppets daily.

Fri, 09/04/2015 - 08:44 | 6508481 Mr Poopra
Mr Poopra's picture

If they raise rates even a quarter point, it will be like a controlled demolition.  Wouldn't it make sense to line up a scapegoat first?  We need a war, or guilty party to blame for collapsing what was a "booming economy". 

Fri, 09/04/2015 - 08:53 | 6508527 saints51
saints51's picture

Well let's look at a few headlines yesterday. USA is blaming Chinese hackers, China off coast of Alaska and Russia in Syria. So they are directly messing with US and Israel and let us not forget the US is even messing with Israel with the Iran nuke deal. War is pretty much a go when you think about it. There is the cover needed with many capable folks who can be blamed. I think not only is the US looking for a scapegoat but so is China. They have serious issues. Just my 2 cents.

Fri, 09/04/2015 - 09:14 | 6508620 atomp
atomp's picture

The dead kid on a beach may start yet another push to invade Syria

Fri, 09/04/2015 - 09:17 | 6508628 Mr Poopra
Mr Poopra's picture

With the Russians in Syria now, it wouldn't take much to blow this powder keg into WW3.  

Fri, 09/04/2015 - 08:25 | 6508376 polo007
polo007's picture

http://www.reuters.com/article/2015/09/04/us-markets-global-bonds-analys...

Investor flight from U.S. stocks fails to lift bond market

NEW YORK | By Gertrude Chavez-Dreyfuss

The "flight to safety" into bonds many expected when U.S. stocks slumped last week never took off, making big losers out of prominent fund managers and further confusing investors at a volatile time in the market.

Stocks plunged in the second half of August, largely on fears of China's worsening economy, but U.S. Treasury yields did not see the kind of safety bid that many were expecting and has been typical in times of stock-market stress in the past.

Strategists link the lack of a move to bonds to a number of events: Hawkish rhetoric from Fed officials even as the equity market stumbled; a bout of selling by hedge funds that had expected a rally in the bond market that they didn't get; and bond sales by central banks in China and other emerging market economies trying to protect their currencies from depreciating.

Reduced appetite from overseas, along with the outlook for the Fed, will be crucial in coming weeks if equities fall again and bonds don't respond. The Fed decision on September 17 could mark the first rate increase in almost a decade, and uncertainty surrounding that decision is likely to keep many in the bond market on the sidelines.

"The correlation between bonds and stocks is more situational now because it's the central banks calling the shots," said Robert Vanden Assem, head of developed markets investment grade fixed-income at PineBridge Investments in New York.  

During the recent U.S. stock market sell-off in the third week of August, for instance, the S&P 500 .SPX dropped 9 percent, but U.S. 10-year Treasury yields, which move inversely to prices, fell by only 12 basis points.

That's not typical. According to Bank of America Merrill Lynch, the relationship between stocks and bonds that has held since 2009 suggests 10-year yields should have declined by 22 basis points.

Bond yields since then have drifted higher and buying interest has been minimal. The lack of a rally in the U.S. Treasury market made big losers out of notable hedge funds, including Bridgewater Associates' All-Weather Fund, which fell 4.2 percent in August.

These funds borrowed heavily to augment their returns, but as things became turbulent, that leverage generated losses that forced them to wind down that borrowing.

Strategists say part of what kept Treasury yields from reflexively falling through a run to safe-haven debt were hawkish signals from the Fed, particularly Fed Vice Chair Stanley Fischer.

At last week's central bank gathering in Jackson Hole, Wyoming, several Fed officials, including Fischer, seemed to boost the odds on a rate increase if not in September, then certainly in December. The message the Fed delivered over the weekend came between a Friday and Monday that saw the U.S. Standard & Poor's 500 lose 7 percent of its value.

Leading brokerages, including Citigroup and Bank of America, commented that though it's a close call, the odds favor an increase in the next few weeks.

"Unless the U.S. economy shows signs of slowing, the bond market is likely to keep yields relatively firm," said Alan Gayle, director of asset allocation at RidgeWorth Investments, even if the S&P 500 falls in the weeks ahead on concern about growth in China and other emerging market economies, he said.

Interest rate futures this week saw a more than 50 percent chance of a rate hike in December FFZ5 and a 28 percent probability in September FFU5, according to CME Group's FedWatch program.

If that happens, bonds won’t look as attractive. Higher interest rates diminish the value of an investor's bond holdings, resulting in lower portfolio returns.

"Treasuries have been a good diversifier to portfolios, but their benefit as a diversifier has been reduced because yields are already extremely low and the Fed is starting to normalize rates," said Rick Rieder, chief investment officer of fundamental fixed income at BlackRock in New York.

CHINA, CURRENCY INTERVENTIONS

Further supporting yields on U.S. Treasuries was the sell-off in reserves by China and other emerging market economies to shore up their slumping economies. U.S. Treasuries represent the bulk of the Chinese and emerging market reserves.

Fears over weakened growth prospects and plunging commodity prices in some emerging markets have taken a toll on their currencies. As China sold currency reserves in recent months, real yields have moved higher since the beginning of the year, while inflation expectations have declined.

China and emerging markets led the build-up in global foreign exchange reserves following the 1997 Asian crisis to a peak of $12 trillion last year. This cash pile shielded them from the 2007-08 crisis, and it looks as if it is once again being deployed.

It's not clear whether China has sold U.S. Treasuries over the last month, or if so, how much. Bank of America Merrill Lynch speculated in a research note that if China sold between $7 billion to $10 billion a day of U.S. Treasuries in the three weeks since the Chinese yuan devaluation on Aug. 11, it might have dumped as much as $150 billion in U.S. government bonds.

These are large numbers given the fact that the total net issuance of Treasuries this year will only be about $500 billion, said Bank of America Merrill Lynch in its research note. As of June 2015, China held $1.27 trillion in U.S. Treasury securities, according to capital flows data from the U.S. Treasury Department.

"The presence of central banks within our markets is over-riding and it's all-encompassing and has driven the activity since 2008," said PineBridge's Vanden Assem.

Fri, 09/04/2015 - 08:26 | 6508379 franciscopendergrass
franciscopendergrass's picture

Will the Fed raise rates or will it not?  This makes for some great reality TV.  wait a second, this is reality.

Fri, 09/04/2015 - 08:26 | 6508380 Infinite QE
Infinite QE's picture

How does one know if a Fed Lackie is lying? Their lips are moving.

 

Fri, 09/04/2015 - 08:26 | 6508383 Omega_Man
Omega_Man's picture

raising rates 25 bps on a bankrupt debt note means nothing.

their goose is already cooked. big fucking deal... much to do about nothing , keep buying gold

Fri, 09/04/2015 - 08:29 | 6508397 I AM SULLY
I AM SULLY's picture

Bingo! +1

Fri, 09/04/2015 - 08:26 | 6508384 katchum
katchum's picture

He's crying wolf again.

Fri, 09/04/2015 - 08:28 | 6508390 Secret Weapon
Secret Weapon's picture

Just another turd stuffed into a suit. 

Fri, 09/04/2015 - 08:28 | 6508391 I AM SULLY
I AM SULLY's picture

"Everbody's got a plan until they get punched in the mouth." - Mike Tyson

Fri, 09/04/2015 - 08:30 | 6508400 Silverhog
Silverhog's picture

So Lacker is in the driver's seat? Bus accidents are common on steep mountain roads. 

Fri, 09/04/2015 - 08:30 | 6508401 buzzsaw99
buzzsaw99's picture

:sigh: the good cop bad cop routine continues

Fri, 09/04/2015 - 08:30 | 6508406 Kolchak
Kolchak's picture

Only thing "raising" in Sept. will be sharp blades hooked to ropes.

Fri, 09/04/2015 - 08:32 | 6508413 MFL8240
MFL8240's picture

Don't believe anyone from this Jewish crime family!

Fri, 09/04/2015 - 08:36 | 6508423 Not if_ But When
Not if_ But When's picture

If it's not obvious.

The FED has abandoned its dual mandate in favor of the new(er) one:

Maintain stock market stability with an upward bias.

Fri, 09/04/2015 - 08:41 | 6508458 MFL8240
MFL8240's picture
  • LACKER: EXCEPTIONALLY LOW RATES NO LONGER WARRANTED BY JOB MKT

Correct statement!  All they had to do was remove 1/3 of the people of the country no longer looking for work and the jobs picture looks great.  This is fucking insane!!

Fri, 09/04/2015 - 08:41 | 6508459 Fukushima Fricassee
Fukushima Fricassee's picture

Every FED shit = complete liar ass holes who need STFU.

Fri, 09/04/2015 - 08:44 | 6508486 Omega_Man
Omega_Man's picture

I want to lend my hard earned money to the FED for some kopecks over 30 years, and on maturity I will get back a pittance - to buy a happy meal. 

And in 30 years when I eat my happy meal I will think how great the USA is.

Fri, 09/04/2015 - 08:45 | 6508489 Mick Shrimpton
Mick Shrimpton's picture

Who cares?  This is the most irrelevant news story regarding the equity markets.

Fri, 09/04/2015 - 08:52 | 6508517 NoPension
NoPension's picture

Am I typical?
All I have, at 52 yo, is my life experiences, and a driving need to understand how things work.
Since childhood, I have been fascinated with mechanics, building thing, and fixing things. Some people fish or hunt. Some read. Some are engrossed in sports. I can only find satisfaction in building something or fixing a broken thing.

I have worked for others. Auto repair. HVAC. Electrician. The last 25 years has been either building or owning an auto repair, self employed .

And lately, (10 years) this world is not " normal". Things are askew. Technology has not passed me by. I read and study profusely, ( it's a passion) , to stay current with cutting edge methods, especially construction.
What's differant is demand. Private sector demand has dried up. All demand seems to now eminate from the " state". Government. The ONLY clients we are even talking to, with respect to commercial real estate, are government contractors. Suppliers, military industrial, or health care. I'm classifying health as government. That's the driver.
The overwhelming source of good jobs, with respect to my circle, is government. I know a handful of people, doing well, that are not deriving pay from government or government contract.
Police. Firefighters. Teachers. Road construction manager. GS employees. All the demand seems to eminate from the government. What private demand is there, would dry up if not for the .gov employee demand.
Here in Maryland, we were once rich in manufacturing. Steel. Coal. Chemicals. Cars and trucks. Ship building and repair. All those big dirty industries, where thousands of hard working middle class and blue collar went every day to earn a living wage, making products and creating value. It's ALL gone. Two weeks ago, I tried in vain to find a shop to chome plate a part. To ultimately find they have all been run out of the state! Enviro regs.
Replaced with NSA, Amazon, Fed ex, and huge numbers who go to the many military suppliers who dot the region.
When it ALL seems to come from .gov, that can't be healthy. That's all your eggs in one basket. And on top, .gov is paying, with pensions or welfare, a huge number of people who need to eat.
There are jobs. But the labor jobs go primarily to Hispanic " immigrants". There is no middle ground job creation for the average Joe or Jane.

They can babble and blab all they want. My eyes and experience don't lie.

Fri, 09/04/2015 - 08:51 | 6508523 messystateofaffairs
messystateofaffairs's picture

Lacker is a slacker, an expensive suit filled with shit, an irrelevant dina-sour, pretending to be relevant.

 

Fri, 09/04/2015 - 08:59 | 6508554 WillyGroper
WillyGroper's picture

The Fed can do nothing. They fucked themselves.

The oil hedges/deriviatives have blown up catching the criminal banksters in their own crosshairs to the tune of a $1T per month backdoor bailout by Ol Yellen.

 

Fri, 09/04/2015 - 09:01 | 6508558 yogibear
yogibear's picture

Federal reserve's fantasyland.. Keep saying your going to raise rates when people are realizing you'll have to announce a new larger QE4. It's QE to infinity while keeping rates at 0%.

Fri, 09/04/2015 - 09:13 | 6508618 Son of Captain Nemo
Son of Captain Nemo's picture

I think Mr. Lacker is suffering from "shellac breath"!...

Fri, 09/04/2015 - 09:17 | 6508634 orangegeek
orangegeek's picture

Rate increase would rocket the USD - not something that is desired.

 

Lacker knows this.  As a result, "fuck off and die Lacker you fucking liar".

 

Good of the Chinese to sell US bonds into an illiquid market - erases the possiblity of a yield spike and a USD spike.

 

Funny, that's just what the Fed ordered and opposite to what the Fed is saying.  Mission accomplished Fed, for now.

Fri, 09/04/2015 - 09:38 | 6508722 Son of Captain Nemo
Son of Captain Nemo's picture

Rate increase would rocket the USD - not something that is desired.

Lacker knows this. As a result, "fuck off and die Lacker you fucking liar".

Which is why the dress rehearsal called Jade Helm is getting the house in order for the next big move...

What did you say?... "9/11" is booked because of the 14th Anniversary?!!!...

Fri, 09/04/2015 - 09:25 | 6508672 Raul44
Raul44's picture

Yes you fools told us couples of time already. Now how about you actually do it?

Fri, 09/04/2015 - 09:28 | 6508689 Keltner Channel Surf
Keltner Channel Surf's picture

It's no surprise that the FOMC's only true hawk is also the most ruggedly handsome (while Dudley is Don Knotts w/ glasses)

Fri, 09/04/2015 - 09:33 | 6508704 NRGTDR
NRGTDR's picture

With a world rapidly heading towards WW3, this will hardly matter at all. DGAF.

Fri, 09/04/2015 - 09:47 | 6508764 JailBanksters
JailBanksters's picture

Uh ha, gawd talk about changing the rules to match the data !!!

What ever happened to, it's about the economy, the jobs. Now all that is tossed out the window and just it's all about saving the banks.

Fri, 09/04/2015 - 09:51 | 6508786 TheAntiProgressive
TheAntiProgressive's picture

Raise rates, I dare ya, I double dare ya.  Bunch of counterfeiting asswipes should be dealt with like back in the old days.

Fri, 09/04/2015 - 10:00 | 6508834 withglee
withglee's picture

Richmond Fed Chief Lacker just explained why "the case for raising rates is still strong"...

  • LACKER: BOTH MANDATE CONDITIONS 'APPEAR TO HAVE BEEN MET'
  • LACKER: EXCEPTIONALLY LOW RATES NO LONGER WARRANTED BY JOB MKT
  • *LACKER: AUG. JOBS REPORT UNLIKELY TO `MATERIALLY ALTER' PICTURE

They are so totally clueless. The reason for interest collections is to recover defaults left circulating (and devaluing valid in process trading promises). There's no mention of defaults whatever ... anywhere. How can they know how much interest to collect if they don't know how much money has been orphaned in circulation through defaults?

INFLATION = DEFAULT - INTEREST = zero. 


Fri, 09/04/2015 - 10:00 | 6508847 Quinvarius
Quinvarius's picture

The truth is the labor market never mattered.  Everything they did was about getting free money to the banks.  They don't need the smokescreen anymore, so they are telling you it doesn't matter anymore.  As long as the Fed is buying Treausries, rate hikes don't affect the Treasury market.  The Fed pays all interest back to the governmnet on what it earns from Treasuries.  There is no downside to rate hikes for banks and government.  

Fri, 09/04/2015 - 10:10 | 6508921 withglee
withglee's picture

 There is no downside to rate hikes for banks and government. 

"All" taxes collected by the Federal government go to paying interest. Raise rates and they don't even have enough taxes to pay interest. And then come the COLAs.

Interest collections in a properly managed MOE process are to recover defaults. That's all!

INFLATION = DEFAULT - INTEREST = zero.

That's the controlling relation.

They don't have any clue what defaults are so how can they know what interest collections should be?

Fri, 09/04/2015 - 11:32 | 6509502 the grateful un...
the grateful unemployed's picture

whats important here is that Lackey has laid their policy groundwork, but as we have seen if the fed sets a target (like employment) they dont necessarily follow their own policy. if the fed backtracks this time they will lose a lot of confidence that can create and follow policy. but i think everyone here understands they are another vestige of the presidents cabinet, and dont deserve the attention they draw

Fri, 09/04/2015 - 11:57 | 6509637 fowlerja
fowlerja's picture

Wow..that was alot of information to digest..he is analyzing a rate increase very carefully..he has alot to think about...what crap..how about a clear and simple explanation of what a .25% increase would do to the economy! if oil goes from $40 dollars to $80 dollars..people can understand in their pocketbooks what is happening..if the Fed raises the interest rate by the smallest of amount..well financial armageddon crushes the world..why? if that is the case...then raise rates by .01% and see what happens..then raise rates again by .01%..too much is being made over the correct and strategically precise amount of a rate increase..

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