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The Fed Desperately Tries To Maintain The Status Quo
Submitted by Ronald-Peter Stöferle via The Mises Institute,
During the press conferences of recent FOMC meetings, millions of well-educated investment professionals have been sitting in front of their screens, chewing their fingernails, listening as if spellbound to what Janet Yellen has to tell them. Will she finally raise the federal funds rate that has been zero bound for over six years?
Obviously, each decision is accompanied by nervousness on the markets. Investors are fixated by a fidgety curiosity ahead of each Fed decision and never fail to meticulously observe Janet Yellen and the FOMC, and engage in monetary ornithology on doves (growth- and employment-oriented FOMC members) and hawks (inflation-oriented FOMC members).
Fed watchers also hope for some enlightening information from Ben Bernanke. According to Reuters, some market participants paid some $250,000 just to join one of several dinners, where the ex-chairman spilled the beans. Apparently, he does not expect the federal funds rate to return to its long-term average of about 4 percent during his lifetime.
In a conversation with Jim Rickards, Bernanke stated that a rate hike would only be possible in an environment in which “the U.S. economy is growing strongly enough to bear the costs of higher rates.” Moreover, a rate increase would have to be clearly communicated and anticipated by the markets — not to protect individual investors from losses, Bernanke assures us, but rather to prevent jeopardizing the stability of the “system as a whole.”
It is axiomatic that zero-interest-rate-policy (ZIRP) cannot be a permanent fixture. Indeed, Janet Yellen has been going on about increasing rates for almost two years now. But, how much more lead time will it require to “prepare” the markets? In both September and October the FOMC chickened out, even though we are not talking about hiking the rate back to “monetary normalcy” in one blow. The decision on the table is whether or not to increase the rate by a trifling quarter point!
The Fed’s quandary can be understood a little better by examining what “monetary normalcy,” or a “normal interest rate,” is supposed to be. Or, even more fundamentally: what is an interest rate?
We “Austrians” understand an interest rate as an expression of market participants’ time preference. The underlying assumption is that people are inclined to consume a certain product sooner rather than later. Hence, if savers restrict their current consumption and provide the resources for investment instead, they do so only on condition that they will be compensated by increased opportunities for consumption in the future. In free markets, the interest rate can be regarded as a measure of the compensation payment, where people are willing to trade present goods for future goods. Such an interest rate is commonly referred to as the “natural interest rate.” Consequently, the FOMC bureaucrats would ideally set as a goal a “normal interest rate” that equals the “natural” one.
This, however, remains unlikely.
Six Years of “Unconventional” Monetary Policy
ZIRP was introduced six years ago in response to the financial crisis, and three QE programs have been conducted. This so-called “unconventional monetary policy” is supposed to be abandoned as soon as the economy has gathered pace. Despite the tremendous magnitude of these market interventions, the momentum in the US economy is rather lame. Weak Q1 data, which probably resulted from a weak trade balance due to a 15 percent rise of the US dollar, shocked even the most pessimistic of analysts; the OECD and the IMF have revised down their 2015 growth estimates. A long-lasting, self-sustaining growth is out of the question. This confirms the assumption that ZIRP fuels everything under the sun — see “The Unseen Consequences of Zero-Interest-Rate Policy” — except long-term productive investment.
And what about unemployment and inflation that are key elements of the Fed’s mandate? The conventional unemployment rate (U3) has returned to its long-run normal level, so the view prevails that things are developing well. However, those figures conceal a workforce participation rate that has fallen by more than 3 percent since 2008, indicating that some 2.5 million Americans are currently no longer actively looking for a new job. However, should the economic situation improve, they would likely rejoin the labor force. Furthermore, the proportion of those only working part-time due to a lack of full-time positions is much higher now than before the crisis. “True” unemployment currently stands rather at about 7.25 percent.
A Weak Economy and Weak Inflation
With regard to inflation, the Fed’s target is 2 percent, as measured by growth of the PCE-index. This aims to buffer the fiat money system against the threat of price deflation. In a deflationary environment, it is believed, the debt-servicing capacity of market participants (e.g., governments, private enterprises, financial institutions, and private households) would come under intense pressure and likely trigger a chain reaction in which loans collapse and the monetary system implodes.
In many countries, and among them the US, inflation is remarkably low — partly due to transitory effects of lower energy and import prices — while low interest rates have merely weaved their way to asset price inflation so far. But, as price reactions to monetary policy maneuvers may occur with a lag of a few years, we should expect that sooner or later inflation will also spill over to normal markets.
As a response to anything short of massive improvement of economic and employment data, a rate hike is scarcely likely, and inflation in the short-term is also unlikely. Moreover, the current composition of the FOMC — which is extremely dovish — implies inflation-sensitive voices are relatively underrepresented. This gives rise to the suspicion that rate hikes are not very likely at all in the scenario in the short-term.
What Will the Fed Do If There’s Real Economic Trouble?
One is concerned about economic development, which has a shaky foundation and headwinds from other parts of the world; it appears that growth has cooled down substantially in the BRICS countries. Meanwhile, China might be on the brink of a severe recession. (Indeed, China was possibly the most decisive factor to nudge the Fed away from raising rates in September and October.) This implies that world-wide interest rates will remain at very low levels and a significant rate hike in the US would represent a sharp deviation in this environment, bringing with it massive competitive disadvantages.
The markets are noticeably pricing out a significant rate hike. The production structure has long since adapted to ZIRP and “short-term gambling, punting on momentum-driven moves, on levered buybacks” are further lifting the opportunity costs of abandoning it. In order to try to rescue its credibility, the Fed may decide to try some timid, quarter-point increases.
But what will they do if markets really crash? Indeed, they are terrified of the avalanche that they might trigger. If there are any symptoms that portend calamity, the Fed will inevitably return to ZIRP, launch a QE4, or might even introduce negative interest rates. Hence, there does not seem to be a considerable degree of latitude such that a return to conventional monetary policy could seriously be expected.
“The Fed is raising rates!” — This has become a running gag.
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Please, the Fed is not "desparate", far from it, so long as everyone is still accepting their paper/debt...
Keep in mind, the velocity of a dead currency is in fact zero.
What wil they do? NIRP? Announce they will buy stocks? Ban selling stocks?
Whatever they can to keep people thinking someone actually has this under control. Good decision, bad decision. Doesn't matter so much. It's a hoax. Smoke and mirrors.
"Hence, there does not seem to be a considerable degree of latitude such that a return to conventional monetary policy could seriously be expected."
I keep thinking.... do these authors come to these conclusions on their own or do they just read the last 5 years of ZH articles and climb on board?
Maybe it's my old friend paranoia, but I have the distinct feeling I'm being "written at" like I'm a member of some demographic group or something. I like ZH, but I do have my own brain, too.
After seven years of the same crap, there really isn't much more to write about that we haven't heard or said 1000 times over.
Agreed. It also probably means the game has shifted and we're not seeing where the ball is any more.
In 1941 Marriner Eccles was asked by Congress if we would ever return to the normalization of Monetary Policy.
He testified that it would not happen in their lifetimes or their children's lifetimes.
Currently Ben Bernanke has stated that we would not ever return to the normalization of monetary policy or something to that affect.
So are you really surprised that the same conclusions are being drawn by everybody and anybody who analyzes this fiasco called an economy?
There are no solutions other than the possible exception that the dissolution of the FED happens. And even that will not bring back prosperity. Only hard and dilligent work will realize that.
And frankly America is currently populated by "Girly Men".
They have smooth hands...like GIRLS. They have not ever worked and have no callouses.
(Thank the writers of Trading Places for this exposure. The hooker checked out Winthop's hands and said he had never worked a day in his life.)
In fact I believe that the greatest indicator of your chances for survival in the aftermath is directly proportional to the percentage of the surface of your hands that are covered by callouses.
The Girly Men will starve.
(Hell I know some women with more callouses than most of the men in the USA. That is downright shocking and frightening. They know how to work. They grew up and are no longer girls.)
What about you? Do you have Girly Man hands?
zzzzzzzzzzz......
(wake me when something different happens).
....zzzzzzzzzzz
the fed knows there is no happy ending whatever they do at this point - hyperinflation will win as it always does - when was the last time there was a hyperdeflation ?
"The fed raising rates" This has become a running gag.
Yet every month "market" participants hang on their every word. At some point in time one would think that they would come into the inevitable conclusion that the fed is stuck in a liquidity trap and therefore they have become irreverent.
It's not quite as tiresome as those endless articles about Greece. Yet.
<--GREXIT
<--FEDXIT
Groundhog day. Eventually their hoping everyone forgets.
"Raise rates this meeting?" No, it's China"
"Raise rates this meeting?" No, it's the weak economy"
"Raise rates this meeting?" No, we'll wait a couple of months"
"Raise rates this meeting?" No, inflation isn't at 2%""
ZIRP, NIRP or if the pot metal coin the Fed garden gnome flips stands on edge, BOTH.
A solution that doesn't actually fix the problem, but still acts as a major distraction, and causes a host of additional problems to many more people.
This stuff is brilliant!!
The Fed has figured out how to plug the GDP shortfall.
Quick everyone! Start talking about what you think the Fed will do!
A new virtual economy brought to you by Larry, Curly, and Moe...
The Fed needs to come out of the closet. Everyone knows what they're doing in there ain't natural.
Should have been going for it in 2014. Whatever they do, it looks like they might appear redundant (seems kind of childish now); the quarter point is just for show, but it should be encouraged and welcomed, who knows it could get the juices flowing. Lets face it, if that kind of bull market can't handle a quarter point then they're better off getting it all out of the way ASAP, hope she can accept that.
Those of us who recall the late 1980 markets will remember Fed meetings that counted for something, i.e., 1% FF moves were not uncommon. Rates moved around a lot back then because there were still real markets. The Fed actually said very little, however.
Gold was flying higher even as rates doubled. Ah, the good old days...of course, the only gold I was trading back then was the class ring I sold for scrap to a dealer after waiting in a looonggg line at the mall. The anti-gold propagandists will tell you those people were lined up to buy the top but that is a lie...ordinary people were lined up out the door to sell. People were selling when gold was high a few years back, too, but the sad part is that people had so little to sell. The vast majority of the American people now own virtually nothing in the way of gold.
" [...] what will they do if markets really crash?" The stock market is not the economy, stupid. Let the stock market people try to pull their money out of the stock market. Once 3% of the big players pull out of the market, everyone else won't even get chump change for their shares. Talk about paper! That's how the market works, and that's how the markets are supposed to work.
"As a response to anything short of massive improvement of economic and employment data, a rate hike is scarcely likely, and inflation in the short-term is also unlikely."
Mises, schmises. Inflation is the measure of the amount of new money entering the economy, which generally reflects itself in higher consumer prices, the colloquial measure of inflation. We definitely have terrific inflation in the amount of new money going into the economy. The FED is spending money hand over fist, even if the FED's money isn't reaching Main Street. The banks have taken many trillions in ZIRP loans, and more money has gone into circulation from direct FED bailouts and outright purchases.
We also have massive colloquial inflation the inverse of rising consumer prices, when we measure the LOST purchasing capacity of consumers.
Six years ago a friend of mine who has very little education, is in his seventies, and operated his own small construction company for years summed the ZIRP economy up very well when he said, "Nobody's got no money."
Both the FED and Mises.org are dishonestly measuring colloquial inflation by simply measuring consumer prices which are constrained by this fact, that nobody's got no money. There's the real measure of colloquial inflation we all know is there, the diving purchasing power of consumers.
And the economy continues on that trend, because savers, small businesses and those who have left the job marketplace are all finding it difficult-to-impossible to contribute to the economy because ZIRP has halted the velocity of money to near zero, and again simply because, nobody's got no money.
The inflation is there. And the longer ZIRP continues to put money into the system at the top, the longer everyone at the bottom will have to remain poor in order to control this liars' measure of colloqial inflation. It's a fraud. And everyone knows it's a fraud.
In terms of real inflation, putting new money into the system, the economy has never seen inflation to the extent we've seen inflation since 2008. We've had absolutely colossal inflation since 2008.
We “Austrians” understand an interest rate as an expression of market participants’ time preference. The underlying assumption is that people are inclined to consume a certain product sooner rather than later. Hence, if savers restrict their current consumption and provide the resources for investment instead, they do so only on condition that they will be compensated by increased opportunities for consumption in the future. In free markets, the interest rate can be regarded as a measure of the compensation payment, where people are willing to trade present goods for future goods. Such an interest rate is commonly referred to as the “natural interest rate.” Consequently, the FOMC bureaucrats would ideally set as a goal a “normal interest rate” that equals the “natural” one.
Wrong. The underlying assumption is wrong. Saving to buy something is one thing, investing it is somewhat different. Investment (including bank deposits unfortunatly and term deposits, etc) carries a risk with it because the income comes from the uncertain future. It's like a cheetah chasing prey. It chooses to invest considerable energy in the sprint to get its food, but if the prey escapes or is taken by stronger carnivores, it is at a loss, at the least hungrier or maybe even dead or injured. Evaluated risk therefore is an estimate of the future (just ask your booky). Hence it is the investors appetite for a reward vs risk of losing investment that determines interest rates. i.e. interest rates=future risk of losing investment.
When FED rate is at 0%, they are pretty much saying that there is 0 risk. Which ofcourse is fucking stupid. And NIRP means that the risk of not investing is >0%. This is why we need three currencies per country to disassociate the three metrics.
Past=savings
Present=production
Future=risk.
And just to add drama :D (https://www.youtube.com/watch?v=PJLSzsEjpWM), three currencies to rule them all, three currencies to find them; three currencies to bring them all and in the darkness bind them.