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OECD Chief Economist: It's Time To "Temper The Frothiness" In Markets
Excerpted from MarketWatch's Greg Robb's interview with Catherine Mann, a former Fed staffer and current chief economist at The Organisation for Economic Co-operation and Development, who is concerned the Fed is "crying wolf," always threatening a rate hike but not moving. Simply put, The Fed’s inaction is fueling unproductive moves in asset markets, Mann said.
...we argued that September would have been a good idea because it would have put behind us and behind the emerging markets and behind the markets, the timing of the first move.
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Now going forward, we continue to have uncertainty about global trade, about the magnitude of global trade — it is quite low compared to global GDP— but this is something that the U.S. economy has been dealing with for a while. That is not new. Commodity prices? Again this is not new. We’ve been dealing with this for a while.
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What is a new dimension between September and October is, that unfortunately, there is a lot of speculative capital that had been repositioning itself all summer for the expectation of a September hike. Now, since that didn’t happen, all that capital starts running back to where it was before, creating some problems in emerging markets with basically the most speculative money going for six weeks more of higher yields. So that is the unfortunate new aspect, I think, of where the global economy is. And that, again, would suggest that the best thing to do is to take the first move off the table by doing it, and then being very clear about the shallow slope of the trajectory of interest rates going forward.
How can the Fed raise rates when inflation is not on horizon?
I go back to a paper that Ben Bernanke gave at the Jackson Hole conference in 2012 where he set out in really very clear terms about the pros and cons of quantitative easing, which of course we were still in the process of doing at the time.
- The pros were you want to lower interest rates, reduce the slope of the yield curve, get the credit channel moving, use the wealth effect to bolster consumption and business investment.
- The cons were, what would we need to know when it was time to kind of take the foot off the accelerator, and it had to do with disruptions in the Treasury market and it had to do with a change in the nature of asset markets.
So when I look at the Treasury market functioning, I see some problems there, with liquidity, some spiking. So, some disruptions or malbehavior in the Treasury market, I see as one indicator, that even though the objectives of inflation and unemployment have not been reached.
The second indicator that was outlined in the Bernanke speech was concerns about what was going on in asset markets - housing markets but also in equity markets.
But if you look at the equity markets and you look at what is supporting equity prices — how much of that support is coming from real economic activity versus from using stock buybacks, using cash on balance sheet for stock buybacks, or mergers and acquisitions, to reduced competition in the marketplace.
These are the sort of stories that if there were a small increase in interest rates, you would temper some of that frothiness. Is this really a thing you want to be going on in asset markets? Is this really representative of the kind of asset-market activity that is supportive of the foundations for more robust growth in the U.S. economy? The answer has to be no. And so a small change in interest rates would temper some of that activity in the asset markets. So I go back to the Bernanke speech — it was a cost-benefit speech, and I look at those two elements and I say: well, the cost-benefit equation has shifted.
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You’ve got the market participants with the shortest horizon having the greatest incentive to do what they want to do for six weeks at a time. That is not productive activity, whether it be in emerging markets or in the U.S. marketplace, these are not productive investments.
Eliminating the incentive to engage in that kind of activity seems to me to be a good idea. We know that 25 basis points is not going to do that much, on the margin, to affect business decisions on whether to undertake real investment or not.
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there is a possibility that you will see some equity market correction, but since I see a fair underpinning of where we are in equity right now is based on some of these not-really conducive to real economic activity anyway — stock buybacks, the mergers and acquisitions – taking a little bit of the top off of that is not something that is going to negatively affect the economy.
There would be a proportion of the population that would have less capital gains — but they’ve been enjoying very big capital gains, and it is a narrow segment of the population. And for firms, for those who are in the equity markets, the bulk of them have a lot of ammunition to work with on their own balance sheets, so 25 basis points is not going to make a difference to them.
I think it is hard to argue that [the economy] is overheating, but my argument for having the first interest rate rise has very little to do with the inflation target. It has a lot to do with unproductive use of resources in asset markets and so that’s my story, not the one that is the argument for the inflation target.
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That would be what we used to call a "Sell Signal" back in the old days. First semi-legit one I've heard in years.
Then again, she's just another in a long line of tough guys mouthing off AFTER they are no longer in a position to do anything about it.
Stop raining on the parade bitch.
You misspelled "Plebe"
My problem with the Fed is that they are supposed to provide stability.
Yet their meetings cause huge amounts of market disruption and for the past 50 or 60 meetings they HAVENT DONE ANYTHING.
Ergo, they should meet less often. Maybe once a year.
So.. in the new normal, “frothiness” is the propaganda word for fluffing FRAUD?
The Fed is crying Wolf. Good analogy.
Us will just keep borrowing and borrowing and borrowing until the bluff is called. Gov. will cut spending on every single damn thing that taxes were apparently meant to pay for. TAX? Yeah maybe Ok if you are giving me, the worker, safe drinking water, roads, bridges, safety, some kind of safety net...
But c'mon. Taxes will go to pay trillions in fluffy interest inflated private banks. THE CRIME OF CENTURIES...THE GIVING AWAY OF MONEY PRINTING TO PRIVATE BANKS. WTF?????? And is progressing rather well as we speak. This agenda of dumbed down taxed and homeless. We are getting there. Sooner than later we will have a corporate world peddling poison, immune from any law.
1984 on steroids.
Whacko,
The psychopaths and their acolytes will keep on buying each others' bullshit until the last honestly productive entity either dies or goes Galt.
Then, they will look at each other and say something like-
"Have you seen them?
Which way did they go?
I MUST find them!
I am their leader!"
Which idiot actually convinced everyone that inflation was a sign of health? Tell me how price stability is somehow crippling? ONLY reason to have inflation is to devalue national debt. And make more debt possible. And at the same time please tell me why we need privately owned banks to print national currency?
Simple friggin questions but I just do not get it I suppose. Please tell me how soaring unemployment, off-shoring of good jobs, enshrining corporation profits over national interests in secret, lowering of standards of living, buying politicians and sanctifying the right to buy influence, how a free pass on judicial oversight, how raping tax dollars away from social/infrastructure in order to feed this squid of debt, how the approval of monopolies and pricing, how the capture of science by vested interests, how GMO lobbies that promote death, how how how how can I justify this to the future?
Who needs inflation? Not me or you or any other person earning a living doing any real work. Inflation targets are a huge brainwashing lie.
Its a deke, a feint, a ruse..... ah fuck deja vue.
We can't print our own currency because it wouldn't be fully backed by silver and gold or is actually silver and gold. Go read the Constitution for the united states of America.
All gold and silver plus everything including you have been pledged as surety on the US debt when the DC govt. corp. entered into bankruptcy. The holders of that debt demand we use their "debt notes" and pay them back with interest. The US can't get out of bankruptcy ( that is the plan ) because it always borrows more than it can pay. It is de facto perpetual debt slavery.
I've double dog dared her...twice...to raise rates. If that won't do it, well.....
+1 And she still don't get it - does she ND. Like how about a return to true fucking price discovery on interest rates!!
OK - this guy has GOT to go! Enough with spouting the truth. This man qualifies for the nail gun approach.
Watch out for IBM.
Something is very bad with their accounting...It stinks and the SEC is involved.
Hey sugar tits - how about worry less about this drop in the bucket "speculative cash" you seem to think is going to be the thing that destroys an otherwise indisputable 'recovery' which, magically, occurred because of decisions made by policy makers
http://star.psy.ohio-state.edu/coglab/Pictures/miracle.gif
And worry more about how you can have a real economy benefit from inflation, punishing savers, finding new and exciting ways to tax motherfuckers for phone calls or {my fave} their fed tax rebate... how "the economy" of workers, purchases, and sales benefits from the H1B and unlawful immigrant flood - why wage deflation for the middle class will help everyone buy a new home - over 40 years, at 5 times face value...
explain all that first, figure out how to unfuck the middle class first- the productive, real economy of wage earners and small business people and entrepreneurs.
You fucking idiots keep measuring "the economy" as if how the NASDAQ is doing has fuck all to do with whether this country is continuing to fester and rot from inside out as pussies like you pontificate and bloviate your obscurantist message about how we need to take a little more freedom away, accrue just a little more debt - and magically, all will be well this time.
On second thought - go get your shine box...
The vote on Tuesday was 74 to 21 in support of the legislation. Democratic presidential contender Bernie Sanders voted against the bill. None of the Republican presidential candidates (except Lindsey Graham, who voted in favor) were present to cast a vote, including Rand Paul, who has made privacy from surveillance a major plank of his campaign platform.
Rand Paul has been outed many times,, this is another example..Fuck him!!
Thanks.
This market is on fumes. The transports are decoupling and on a decent reminicent of the pre-august 24 crash
http://taomacro.com/dow-transports-are-decoupling.html
A LITTLE OFF THE TOP MY ASS. THAT'S IMPOSSIBLE AND THAT BITCH DAMN WELL KNOWS IT. another stock market bubble, like we have now, is short term supportive but long term hideously deflationary. not now, but ten or twenty years from now the fed will be forced to buy the entire market. all the stocks, all the bonds, because this bubble is forcing people to pay way too much for bullshit stocks. hedge funds jacking prices on margin and levered corporate buybacks is what we got instead of capital investment, and all that does is increase the wealth divide to ridiculous levels. i wouldn't mind so much but it is impossible to know what to do because the fed will NEVER STOP MEDDLING. when flow turns to ebb, and it will eventually, the rot will be exposed, and WE WILL ALL BE FORCED TO PAY FOR IT WHILE THE MAGGOTS MAKE OFF WITH ALL THE LOOT. what the hell, any bernanke quoting cunt ain't worth getting upset about anyway.
According to Macquarie Research:
http://is.gd/QdV7KJ
The more they do; the worse it gets
In our latest commentary we ask whether indications of easing by ECB and PBoC and BoJ’s potential expansion of its own stimulus would lead to further contraction of global GDP/trade and whether only Fed QE4 could be reflationary.
Deflators of the world unite. As expected (here), CBs are becoming concerned. Not only has the Fed deferred tightening but ECB is sending a strong signal that it is contemplating expansionary measures by Dec’15 and it is likely that BoJ would at some stage increase both size and pace of its own stimulus. Finally, PBoC has simultaneously cut interest rates and RRR. Not surprisingly, financial assets responded in a typical “Pavlovian fashion” by assuming a “goldilocks” outcome of low interest rates for longer; ample liquidity; steady (but unspectacular) growth rates and low but positive inflationary outcomes.
However as discussed here and here, short of massive globally co-ordinated rise in monetary stimulus, incremental changes are unlikely to make much difference and there is an urgent need to re-think the entire Government support system by either allowing restoration of conventional business cycles (unlikely) or embarking on far more extreme and unorthodox policies (such as CBs directly funding fiscal spending, investment and consumption). Erosion of global velocity of money is severely blunting the impact of more conventional QEs.
At the same time, the divergent paths of the Fed and other key CBs are causing monetary and inflationary cross-currents. In essence non-Fed CBs are attempting to export their domestic overcapacity and deflation to the rest of the world and the more aggressive they become, the higher would be the likely deflationary outcomes. The global economy and trade are already shrinking in US$ terms. In the last three quarters, global (US$) GDP has shrunk at ~5% clip with US$ global trade eroding at ~10% pace. The more ECB, BoJ and PBoC ease, the more likely US$ would ultimately appreciate at far stronger pace. Whilst initially an increase in non-US monetary stimulus reduces perception of tail risks and hence stabilizes or even depreciates US$, over the longer-term it is a recipe for much higher US$. As a result, at some stage DXY (US$) could surge from 95-97 to 110-120 and possibly higher. This would further compress the size of the global economy and trade (US$), perhaps returning global economy back to the levels of ‘09-10 (essentially wiping out the last five or six years of growth).
Why is measuring global economy and trade in US$ critical? As discussed in the past, global economy resides on the de-facto US$ standard. Other currencies play relatively minor role, with US$ accounting for ~50% of global transactions and in excess of 70% of global finance (Rmb is responsible for only ~3%). US$ is particularly significant for Asia-Pacific traders, Latam and commodity producers (though less so for Eastern Europe). If Fed tightens, it could potentially get much worse. However, even if Fed does not tighten but simply refuses to embark on a QE4, the outcome would still be higher deflation and lower US$ global economy and trade. In other words, some currencies are more equal than others and therefore Fed’s policies are far more inflationary than equivalent policies pursued by other CBs. If our core assumption of no tightening but no QE4 comes true, then deflationary pressures are still likely to strengthen as supply of global US$ continues to contract.
This explains our unwillingness to buy countries like Indo or Mal and instead our preference for commodity consumers and countries with trapped domestic liquidity and limited external vulnerabilities (i.e. India, China, Phil and Taiwan).
http://www.reuters.com/article/2015/10/27/us-usa-economy-inflation-analy...
Why Fed may hike rates before seeing whites of inflation's eyes
WASHINGTON | By Jason Lange
Further falls in America's jobless rate will lead inflation to start rising early next year, according to a forecast based on research Federal Reserve Chair Janet Yellen has cited as shaping her confidence a rate hike could be needed this year.
Yellen has recently faced a rebellion at the central bank, with two Fed governors arguing that rate hikes should be delayed because of a breakdown in the tendency of low unemployment to fuel faster inflation, a relationship called the Phillips curve.
Governor Lael Brainard said this month that the Phillips curve relationship was "at best, very weak at the moment" while Daniel Tarullo said it has not been "operating effectively for 10 years now."
With the Fed's rate-setting committee meeting on Tuesday and Wednesday, Yellen and Vice Chair Stanley Fischer may seek to show the bank should not wait for inflation to appear before hiking rates. Both Yellen and Fischer have backed the relationship between jobs and inflation.
"The Phillips curve is alive and well," said Robert Gordon, an academic at Northwestern University whose 2013 paper on the subject was cited by Yellen and Fischer in speeches this year.
Gordon said the key reading to watch for signs of inflation was the short-term unemployment rate, those out of work less than six months, rather than the overall jobless rate. The relationship between that short-term joblessness and prices has held for 50 years, he said.
The short-term rate appears to matter because businesses set wages based on plausible candidates for a job, so the surge in people out of work for long spells since the recession might not influence inflation.
The short-term jobless rate has sunk to 3.7 percent, which is lower than it was at the outset of the 2007-09 recession. The overall unemployment rate is currently 5.1 percent.
Gordon's projection is that the short-term rate will sink to 3.5 percent by the end of 2016 and 3.3 percent by early 2017.
Inflation excluding food and energy, currently at 1.3 percent, would start slowly in the first quarter of 2016, with overall inflation rising from its current 0.3 percent rate to the Fed's 2 percent target by 2020, Gordon said.
Many Fed policymakers actually expect inflation will rise more quickly, so Gordon's projections are not an argument for the Fed to more aggressively head off price increases.
They do, however, shed light on why the Yellen and others at the Fed are confident inflation will rise.
Since when was the main responsibility of a nation's central monetary authority to police equity markets?
What about seasonal monetary flows?
What about stable prices?
Nope...
Just, "Let's keep Traders sane and happy"????
http://safehaven.com/article/39355/fed-headed-into-inflation-overdrive
While the deflation effect from plummeting oil prices wears off by years-end, there is no reason to believe the same deflationary forces that sent oil and other commodities down to the Great Recession lows won't start to spill over to the other components, such as housing and apparel, inside the inflation basket. This would especially be true if the Fed continued threatening to raise interest rates and driving the U.S. dollar higher.
Central banks and governments can always produce any monetary environment they desire. It is a fallacy to believe that deflation is harder to fight than inflation. Deflation is currently viewed as harder to fight because the policies needed to create monetary inflation have not yet been fully embraced -- although this is changing rapidly.
The Fed just can't seem to grasp why its newly minted $3.5 trillion since 2008 hasn't filtered through the economy. But this is simply because debt-disabled consumers were never allowed to deleverage and markets were never allowed to fully clear.
But the Fed isn't one to let the truth get in the way of its Keynesian story. And why should it? Financial crisis is the mother's milk of increased central bank power. For example, before the last financial crisis the Fed was unable to buy mortgaged back securities; rules were then changed to allow it to purchase unlimited quantities of distressed mortgage debt. The Fed is perversely empowered to continue making greater mistakes, thus yielding them greater authority over financial institutions and markets.
Since 2008 the rules and regulations fettering Central Banks have become more malleable depending on the level economic distress. Congress has mandated that the Fed can not directly participate in Treasury auctions. But there is no reason to believe in the near future that this law won't be changed to better accommodate fiscal spending.
Strategies such as: pushing interest rates into negative territory, outlawing cash, and sending electronic credits directly into private bank accounts may appear more palatable in the midst of market distress. The point is that Central Banks and governments can produce either monetary condition of inflation or deflation if the necessary powers have been allocated.
In the Fed's most recent dot plot (a chart displaying voting member's expectations of future rates) the Minneapolis Fed's Kocherlakota was mocked as the outlier for placing his interest rate dot below zero. However, persistent bad economic news has quickly driven the premise of negative rates into the mainstream. Ben Bernanke told Bloomberg Radio that despite having the "courage to act" with counterfeiting trillions of dollars, he thought other unconventional issues (such as negative interest rates) would have adverse effects on money market funds. However, anemic growth in the U.S., Europe and China over the past few years has now changed his mind on the subject.
Supporting this notion, the president of the New York Fed, William Dudley recently told CNBC, "Some of the experiences [in Europe] suggest maybe can we use negative interest rates and the costs aren't as great as you anticipate." Indeed, over in Euroland, ECB President Draghi hinted recently that the current 1.1 trillion euro ($1.2 trillion) level of QE would soon be increased, its duration would be extended and deposit rates may be headed further into negative territory.
Statements such as these have me convinced that negative interest rates in the U.S. are likely to be the next desperate move by our Federal Reserve to create growth off the back of inflation. After all, the Fed is overwhelmingly concerned with the increase in the value of the dollar. Keeping pace with other central banks in the currency debasement derby is erroneously believed to be of paramount importance. Outlawing physical currency and granting Ms. Yellen the ability to directly monetize Treasury debt and assets held by the public outside of the banking system could also be on the menu if negative rates don't achieve her inflation mandates.
Instead of repenting from the fiscal and monetary excesses that led to the Great Recession the conclusions reached by government are: debt and deficits are too low, asset prices aren't rising fast enough, Central Banks didn't force interest rates down low enough or long enough, banks aren't lending enough, consumers are saving too much and their purchasing power and standard of living isn't falling fast enough.
The quest of governments to produce perpetually rising asset prices is creating inexorably rising public and private debt levels. The inability to generate inflation and growth targets from the "conventional" channels of interest rate manipulation and the piling up of excess reserves are leading central banks to come up with more desperate measures.
Sorry kid, TMI and too obtusely.