This page has been archived and commenting is disabled.
The One Phrase That Actually Matters In Yellen's Speech: "Nominal Interest Rates Cannot Go Much Below Zero"
While many are focusing on the latest attempt by Yellen to restore some Fed confidence, even if it means confusing the market even more and sound far more hawkish than last week's FOMC statement, which showed once and for all that the mandate of the Fed is the stock market and global risk pricing stability, and is written by Goldman Sachs, with an emphasis on the circular assumption that inflation is under control because, well, it is under control...
Wow - Yellen Speech Word Cloud pic.twitter.com/Dxl2SkMWtC
— Not Jim Cramer (@Not_Jim_Cramer) September 24, 2015
... which naturally is something to be expected from a speech titled "Inflation Dynamics", the one phrase in the quite massive speech of 5531 words, had nothing to do with inflation, and everything to do with the Fed's deflation "reaction function", i.e., NIRP.
This is what Yellen said in her speech dissecting the theory, if not practice, of inflation:
...the federal funds rate and other nominal interest rates cannot go much below zero, since holding cash is always an alternative to investing in securities.
So just a "little" then? Which is what exactly: -0.25%? -1.0%? -2.5%? Or, as Albert Edwards suggested earlier today: -5%? Yellen explains:
... the lowest the FOMC can feasibly push the real federal funds rate is essentially the negative value of the inflation rate. As a result, the Federal Reserve has less room to ease monetary policy when inflation is very low.
Well, no: not less room - more room: negative room! What is the most negative inflation, pardon deflation, can get? Very:
This limitation is a potentially serious problem because severe downturns such as the Great Recession may require pushing real interest rates far below zero for an extended period to restore full employment at a satisfactory pace.
Just in case it was lost, here it is again, from footnote 9:
Because of the inconvenience of storing and protecting very large quantities of currency, some firms are willing to pay a premium to hold short-term government securities or bank deposits instead. As a result, several foreign central banks have found it possible to push nominal short-term interest rates somewhat below zero
And there you have it: while Yellen is desperate to regain some of the Fed's lost credibility with the September rate indecision, what she is really doing is reciting Bernanke's Nov 2002 speech: "Deflation: Making Sure "It" Doesn't Happen Here." Only, the US already has deflation. Which is why it is better to call Yellen's version: "Depression: Making Sure "It" Doesn't Happen Here" and just like Bernanke's 2002 speech hinted at LSAP, aka QE, so Yellen's speech, academic in its discussion of theoretical inflation, is really a warning that the Fed is now actively considering negative rates as its primary "reaction function."
After all, it's not like Kocherlakota would come up with negative dots out of the blue.
* * *
As for the big picture from Yellen's speech, Pedro said it best:
The Fed seems to be losing confidence in its own confidence.
— Pedro da Costa (@pdacosta) September 24, 2015
»
- 25443 reads
- Printer-friendly version
- Send to friend
- advertisements -
so -.5 or -2 or -10 define much cause we no you can never raise rates
It depends on what your meaning of the word "much" is.
Forget nailing the doors to physical cash shut... they are going to weld them. Just not too much.
Long thermite...
watch the language trap. here, guys
rates cant go much below zero IF the continued shift of capital into equities is the cosmic imperative.
But the cosmic imperative of the fed is to ensure the survival and prosperity of its shareholding banks
Derivatives dwarf equities. Positions could be taken to reduce equities to rubble while the next round of bailout legislation prioritises certain classes of derivatives. Only the merchant banks arise from the ashes.
But good luck with the social order
Just watch the money velocity drop even further if the try NIRP...........will backfire far worse than any QE ever could.
People love these marxist market smoothing experiments, every month the numbers just keep getting better!
MUCH, the operative word.
....."the Great Recession may require pushing real interest rates far below zero for an extended period to restore full employment at a satisfactory pace."
Translation: lets's punish savers, insurance products and bond holders some more to inflate bankster bubbles even more.
The Fed tries to legitimize insanity in order to perpetuate perfidy. If a lie is repeated enough.....etc.
Marxist? Quite the opposite.
Marx writes: "With the development of interest-bearing capital and the credit system, all capital seems to double itself, and sometimes treble itself, by the various modes in which the same capital, or perhaps even the same claim on a debt, appears in different forms in different hands. The greater portion of this 'money-capital' is purely fictitious. All the deposits, with the exception of the reserve fund, are merely claims on the banker, which, however, never exist as deposits." The expansion of the credit system can, in periods of capitalist expansion, be beneficial for the system; but in periods of economic crisis and uncertainty, capitalists tend, Marx argues, to look to the security of the "money-commodity" (gold) as the ultimate measure of value. Marx tends to assume the convertibility of paper money into gold. However, the modern system of inconvertible paper money, backed by the authority of states, poses greater problems. Here, in periods of crisis, "the capitalist class appears to have a choice between devaluing money or commodities, between inflation or depression. In the event that monetary policy is dedicated to avoiding both, it will merely end up incurring both".
A dead body can’t go much below ambient temperature, either.
Ah yes, confused by the gold standard I see.........sorry, emperor still has no clothes.
NIRP is a modern version of old marxist theories, what's yours is now mine.
Be honest, was Marx (or ghost writer) really writing about real, actual capitalism(ists) or was he writing about banksters?
Yeah, the whole truth matters.
+1 exactly.
Cash is evil !!!
It must be outlawed ..... do it for the children and all that.
These fuckin' people...... jfc.
I fail to see how STEALING Munny from Savers via NIRP is gonna lead to full employment!
If you cannot save then you must work.
Simple.
If you cannot save you must hire?
Um....no. Bailouts, Buybacks and Bonuses Bitchez!
Dammit. They have foiled the Fed and USG again. However do they do it?
Tune in next week to see how the DC Puppets fair against the Harlem Globetrotters.
*If you don't get it you ain't gonna get it.*
I finally figured out what the definition of the word "is" is.
It's ISIS! Get it?
IS IS ...a CryptoFacistMetaphor For Islamic War (Finaced by the US Taxpayer)
I'm sort of afraid to find out what the definition of "Was" is.... and "Will be" is definitely out of the question!
Unfortunately the Internet says "Was" means Wait and See... and "Will Be" means it is out of my control...
"I knew it was the wrong week to stop snorting coke"
Leslie Nielson Airplane
At least he only had to deal with the week. This was the wrong decade to stop snorking coke and every other thing that could be ground to powder.
"much" ? what a fucking mind blowin' notion . just make sure ya take a 100 of "them" with ya.
"not much below zero". That shit doesn't even register in my mind. Sorry.
It's like saying you can't be much less alive than dead.
Which is true, except for zombies, which is pretty much all you need to know about our economy.
Does that mean I need to buy some Zombie Ammo? I heard it was stacks of "Gold and Silver" Bullits!
You must not be a Jewish banker then.
Oh oh oh Mr Kotter!
"A boy stands on a station platform as a train is about to leave. Should he go with his mother or stay with his father? Infinite possibilities arise from this decision. As long as he doesn't choose, anything is possible. "
http://www.imdb.com/title/tt0485947/
NIRP
Nope. Not gonna accept it.
This is a concept too far.
Piss on'em
we've already been there for years, what do you think QE means when translated to plain language?
QE is not NIRP ... but ... quite frankly I take issue with this being a liquidity issue.
This is a case of insolvency on the part of those who are being handed liquidity. It is strictly a way to maintain the status quo under the freakin lie that they are saving us.
No more.
Why do I ever bother to sober up?
I'd think that drinking heavily might assist in comprehending Fed-Speak
Yellin passed out at the end because she probably needed a big cocktail, a double or triple. Did you see Boehner behind the Pope today on the podium? Talk about needing a drink. He was smacking and licking his lips like a bum waiting for the liquor store to open..................
Cannot honestly think of a reason to suggest.
Just when you thought the Fed couldn't fuck up the economy any worse.
NIRP to push mom and pops all into this Ponzi market? WTF is wrong with these people? What can possibly be accomplished by pushing harder on a string?
Hopefully allowing many of those who caused this crisis to drop and stop at the end of a rope.
Government Repair Kits work...if you use them.
The sheeple may never notice, but the nations who sell us oil and imported goods will.
Once the dollar is kicked out as the global reserve currency the sh*t will hit the fan.
^THIS^ Though I tend to think while they might play with a negative .25 or so NIRP, the results would be so disastrous as they would have to quickly retreat or the end of Reserve Currency status would be nigh. I would think that NIRP at the retail banking level is a political impossibility. Obviously when factoring in inflation we're pretty much there already, but for "open" NIRP on people's savings???
I don't think we're Greece just yet. NIRP would have serious electoral consequences...
The dollar is a global brand, no different than Nike or Apple. The majority of its value is in the logo. I think of companies like Adidas or Kodak, propelled by the notion that their logo and legacy would carry the day, regardless of the pieces of shit they produced.
The FOMC doesn't even have a product, all it has is the logo, and with each consecutive turd they smear on it without consequence, it simply reinforces the idea that smearing more shit on it will cause no harm.
The brand has already been sullied, to what degree who knows.
Hard to have neg rates have much influence when there is cash currency. No cash, then they can haircut your e-dollars
But, but I thought we were already at full employment with the unemployment rate of 5.1%, which is basically the churn of people between plentiful jobs. I don't get it? :rollseyes:
I've been watching this and when she said what was quoted, I nearly fell over.
What so far has not been mentioned here is she ALSO said something about "a problem will be that people can withdraw their money from the bank when interest rates are negative and this will undermine the Fed objective."
Ummmmm, can you say that is a broadside warning of electronic money so people can't do that?
Don't worry, King. They got that covered. Cash withdrawals/deposits in excess of $10K are automatically reported to the FBI . . .god bless the war on drugs and money laundering, eh?
Cash withdrawals/deposits less than $10K are assumed to be for the purpose of skirting the reporting requirements unless proven otherwise.
So, when asked the purpose of cash withdrawals the correct answer is not "the fucking bank is charging me money to hold my money" or simply (a la Dennis Hastert) "I don't trust the banks with my money".
Say hello to the wacky world of civil asset forfeiture.
Try 500 or less if it 'seems suspicious'
Totally agree but more than likely the use of "US bitcoins" will only serve to drive up other assets (ie I may not be able to take out cash but I can sure use it to buy stuff that won't get affected by NIRP)
LOL, what a clownshow.
I dont want to upset Cramer or anything, but the speech had Inflation in the title. This was an academic speach about the Fed's handling of inflation. Did he even read the speach?
What a maroon.
I was marginally listening to this bullshit, but did she mention something about hurting our bubbalicious housing market or did my ears deceive me?
At least she choked on all that BS at the end.
In theory they could go to -100% or the point where fiat finds its true value
What a choker!
Forget about QE we got NIRP up to bat
Well that was not market friendly as not one mention of QE or helicopter money
I keep hearing folks talking about a ban on cash. I assure you it WILL not happen. Go spend some time around the check cashing convenience store that is next to the industrial district around five o'clock on a friday. People can't even get bank accounts. Large amounts of people. That tile setter or carpet installer that just finished your job? He took your check to your bank and cashed it with an expired ID. Not to mention, I shudder to think of what would happen to hookers and the black markets. Though, I don't blame them for dreaming.
Pfft, Obama gave everyone health care, I'm sure he can give them all bank accounts even easier.
Not like it really costs anything for banks to manage a few extra accounts, anyways.
Good point. I think low energy and import prices are going to persist, in which case there will be no rate hikes. Rates are going negative!
So she will drop it -1, then raise it .5. There: fixed.
You mean the chocolate ration?
Was that a standing ovation ?
When you pass out from lying so much everything looks like a standing ovation. Man, if that don't make you want to get the hell out of Dodge. Like a Spooky Omen or something. Is she OK?
That's why The Hildebeast is sick too...................lying and deceit on a daily basis for years have severe psychosomatic consequences...............
Hildebeast, Boehner and Yeller? WTH is going on today? Maybe a disturbance in the force has made the amalgamation of the demons and hosts become unstable. Has anybody seen Kissinger?
Inflation / price increases are necesary to maintain the whole scheme behind the financial system. It is very simpel create more $s in order to have too much money chasing too few goods (assets, equities, etc) so the banks can lend more money against them and earn the interest spread. "Whatever it takes" to make sure the value of the underlying collateral does not go down, since that would create inconceivable losses (what happens everytime money is loaned for unproductive means). The only way debts are being paid off now that the debt has shifted to the sovereign level is by priniting money.
They are so focused on that mathematical number of "monetary velocity" they will do the craziest things to get us where they think we need to be.
Gosh, who is telling them what and how to do this? Is NIRP the best way they can come up with to get the "velocity" they desire?
Go ahead, Jellen, do it. Go from a 6 month threat to raise rates to NIRP. She is so clueless.
sschu
No one has a clue what they are talking about. They've passed through "being confused about being confused" a long time ago. The CB and UST are making things up as they go along. Clueless. Totally unaware of the future negative consequences they are creating. Hubris to the max. They continue forward with their experiments because they know full well they won't be held accountable. They are also taking advantage of their positions to line their own pockets for the future. And when they leave office they make millions writing books and giving keynote speeches. This government is a total circus freakshow. Unfortunately we the people are the rats being experimented upon and will be the collateral damage. We're all on a runaway train that no one can get off of until it hits the cast iron wall at the end of the line at 250 mph.
When the shit hits the fan, the very last thing I will have in my hand will be a freshly emptied gun....
nobody ever talks about the elephant in the room...
the velocity depressing effect of interest on excess reserves.
you mean "the rugged genius of broad-shouldered capitalism"
"the lowest the FOMC can feasibly push the real federal funds rate is essentially the negative value of the inflation rate"
This makes no sense. If inflation is 10%, rates can go to negative 10%? That would increase inflation more.
its another way to say we cant go below zero, since at zero we would be at the negative inflation rate
Whoa, whoooaaaa!!!! The FED said something that absolutely counters known reality and sounds batshit insane on the face of it? I'm shocked, SHOCKED at this turn of events!!
I thought it made no sense either, but she said "real fed funds rate". So she's basically saying the FF rate has to be greater than or equal to zero:
FF rate - inflation = real FF rate >= - inflation rate, or
FF rate >= 0.
(just noticed medicalstudent said the same thing.)
Here comes that wave of deflation from the EM's and Asia I was talking about a few months ago.
There can only be only one to win the "race to debase", Highlander.
The only thing that is less than zero is Yellen and her band of clueless, arrogant, pretentious douche bag FR governors and committee members.
According to Itau BBA:
http://is.gd/XzTkOs
The Big Fear
Thus, Fed announcement day arrived with most equity markets up 5%-10% off the late August lows, commodity prices higher and rates priced for Fed action. The main concern coming into the Fed meeting was not that the Fed would hike; it seemed quite clear that it would not go against virtually the entire global economic policymaking community and raise rates. No, the concern was that the Fed would stand pat and stocks, rather than rally, would sell off.
Lo and behold, that is exactly what happened, and that is why we need to be very, very concerned about how things move from here. It remains unclear whether the equity market reaction to the Fed decision was (hopefully) just a classic case of buy the rumor (no hike) and sell the news, or something much worse, namely that investors might be starting to price in policymakers? loss of control – The Big Fear.
The Big Fear of policymakers losing control has been lurking underneath the global equity market for years, underpinned as markets have been by central bank support. Think of it this way: there are two global growth drivers: China and the US. Recently, the competence of the policymaking community in both countries has been called into question, suggesting a possible loss of faith in policymakers, which if true is very worrisome, thus the Big Fear concept.
Why is the Big Fear so worrisome? It’s simple. If investors lose faith in policymakers and decide that cash or bonds are a better place for their money, then stocks are likely to sell off much further. How much further? One never knows, but maybe asking a few questions might help. First, at what level does the S&P need to be for the Fed to engage in QE 4? Second, what S&P level will be considered cheap (keep in mind 2016 E estimates need to come in sharply)? I don’t know the answer to either question, but it seems reasonable to expect that the S&P would need to go much lower than the 1870 level it bottomed at in late August or the 1830 level of a year ago.
The economic implications of such a sell-off would likely be a US and global recession. Such an environment could create a negative feedback loop between financial markets and the real economy, which policymakers would find very difficult to break.
It seems clear that the Fed will not raise rates this year, neither next month when they meet again nor in December, which is the last meeting of the year. Will they raise rates in 2016? From this armchair, the odds are against it, as the forces of recession gather while the forces of reflation stagnate. On this front, one has to question the Fed’s 2016 inflation forecast of 1.6%, up from 0.4% this year. The Fed’s crystal ball has been mighty cloudy for years, but this forecast takes the cake.
A look at the global economy helps explain why. Four factors stick out: excess debt, an absence of inflation, insufficient demand and excess supply of raw materials and manufactured goods. None of this is new – what is new is how the various hopes and remedies have fallen short while the problems deepen. The toxic combo of excess debt and disinflation is one powerful reason why the Fed did not move, and excess supply in commodities and manufactured items (look at the PPIs around the world) is another. The global economy needs demand-creation or production shut-ins, and to date both have been lacking.
There are small signs that the commodity complex is starting to finally adjust, with closures, dividend cuts and stock issuance in the mining sector and talks about talks in the world oil market. However, the manufacturing segment of the world economy is quite far behind the commodity segment, suggesting that China’s need to shift excess production will ensure manufactured-goods disinflation for the foreseeable future.
One can wish for inflation and for the Fed to be able to hike, but one also needs to be focused on the realities of the current global economy. Where is the demand going to come from? Who is going to shut in production? Let?s look at the three main economic regions: Asia, Europe and the Americas. Asia is likely to be a source of manufactured-goods disinflation as it seeks to rebalance itself to a China that is a competitor first, a customer second. Japan?s recovery is sputtering; it will continue QE while a fiscal stimulus package seems quite likely in the months ahead. Europe remains quite weak, and with the refugee issue now occupying policymakers, ECB-led QE seems the only game in town.
The Americas is a concern. South America is in a deep funk, whether it is Mexico?s subpar growth rate, Brazil?s political and economic travails, Andean copper dependency or the impact of weak oil on countries such as Colombia or Venezuela. All this is pretty well known.
The US is most worrisome because of its combination of still-high equity prices and a very bare policy toolbox to confront any economic weakness. How bare? Well, monetary policy is on hold, and the bar to QE4 is likely a much lower S&P. What about US fiscal policy, one might ask? Great question. Here is the only thing one needs to know about the US presidential election process: it takes fiscal policy flexibility away and locks it in the freezer until late 2017, two whole years from now. In other words, at a time when the US economic expansion is close to seven years old, with the Fed on hold, incomes flat, debt levels high, a strong dollar and absolutely no inflation, fiscal policy is locked away for the next two years at least!
By the way, the UK confronts similar issues and could possibly be a canary in the coalmine for US monetary policy – QE for the people on BOTH sides of the Atlantic perhaps? The UK?s negative rate discussion is likely to move across the pond over the next quarter or so. One other way of thinking about it is this: which comes first, the end of ECB QE or QE4 in America? I would go with the latter.
How does one vanquish the Big Fear? With aggressive policy action on the demand-and-supply side. What is the likelihood of that? Exactly. Seen in this light, it makes perfect sense for investors to worry that policymakers no longer have their back, and thus they take some money off the table. One analogy is that the US economy is like a ship that has engine trouble, is drifting towards the rocks and is left to hope that the wind shifts and takes it away from the reef…. not exactly a bull-market, high-valuation tableau. Hope is not a strategy.
Executive order in 3..2...1
I suppose NIRP will arrive in tandem with negative rates on deposit accounts of all types. Why, that will increase money velocity for sure.
Lunacy.
Okay, I'm a old college educated business major with a minor in economics. Help me understand what happens after the negative interest rates force everyone to spend all of their money? Does everyone sit around on the porch unemployed and poor?
Spend all of their Munny? Nay, stuff it under the mattress!
sheikurbootie: I don' think so. My guess is that this nonsense from the FR and our government will cause people's confidence to swing away from government (towards the private sector).Through time this pendulum swings from one side to the other. I believe the swing has started moving from public to private--and the dumb ass central banking and central government people don't even realize that they are causing the swing with their ZIRP, income and other taxation, business regulation, and everything else they are doing that classifies as meddling in the private affairs and businesses of the people. They are causing the lack of prediction and the uncertainty that exists in the peoples' minds. People, who have been staying in cash to preserve their wealth, will take their $ out of their savings and checking accts and maybe go into corp bonds of old, strong companies; lend it via first trust deeds or liens; buy assets, commodities or things cheaply that they can resell for a profit; come up with methods of making their money earn money through "off the grid" vehicles. The government—the Marxist dumb asses—will get less velocity and less tax revenues as a result. The people are creative, resilient and determined to survive and build their wealth for the future. They are smarter than government. The more government insanity, intervention, meddling that occurs the closer we approach the tipping point where the people quietly declare war on government and take matters into their own hands.
Oil to the (blood) moon.
Why not just ban everything that causes deflation like Amazon, Ebay, Groupon, after Christmas sales, Black Friday and coupons. 2% inflation target achieved
For me? the important is this:
US
http://www.tradingeconomics.com/united-states/current-account
Russia
http://www.tradingeconomics.com/russia/current-account
China
http://www.tradingeconomics.com/china/current-account
Yeah... isn't some of you said Russia & China would bankrupt soon??
Bwahahahaha...
"...may require pushing real interest rates far below zero for an extended period to restore full employment at a satisfactory pace."
Yellen is a mouthpiece for economic ignorance (along with Krugman).
The only way to sustainable economy is reducing debt levels. To prevent social calamities, this should be done in orderly fashion: some debt write-offs, some debt to equity transfers, some inflation.
To prevent this happening in the future, financial system should be changed - to prevent the Fed inflating money supply and blowing debt bubbles along with commercial banks
Bottomline: NIRP is on the table next to QE4.
the wall the wall
finally they are admitting there is a wall that stimulus can not overcome - once interest rates to lend are close to zero but still noone is buying there is nothing one can do to stimulate demand except starting lowering prices
Just wait until they start having annual Social Security cost-of-living decreases.