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Federal Reserve

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By EconMatters

  
Rate Hike

 

The Federal Reserve has been telegraphing to markets that they are going to raise the fed funds rate by 25 basis points next month at its December Fed Meeting. The financial markets think they are serious this time and have been pricing in this 25 basis point rate hike for the past 6 weeks. The real question is that since the Fed has told us that they are Data Dependent for the past 7 years regarding changes to monetary policy, what has really changed in the economic data for the positive? Why now of all times do they decide to raise rates? Are they raising rates for the right reasons? These are just some of our concerns as the Federal Reserve embarks upon their final FOMC Meeting on December 16th 2015.

 

John Williams

 

It is hilarious watching Federal Reserve Bank of San Francisco President John Williams flip flop on rate hikes faster than a politician on an issue after a new poll comes out. It has become obvious that this Fed member has no views of his own regarding monetary policy, he is basically Janet Yellen`s mouth piece, and is not an independent Fed member. If one just reads his statements over the course of 2015 regarding possible rate hikes, with an economy that hasn`t dramatically changed much in 2015, one would demand immediate and supervised drug tests on a monthly basis. Maybe I am being too hard on this guy, and that he has a difficult job of navigating Fed Policy politics, but he sure is coming across as an incompetent and unqualified board member that adds no real value to the committee.

 

Neel Kashkari

 

Any maybe that is why Neel Kashkari, has been chosen as head of the Federal Reserve's regional bank in Minneapolis to make everyone else appear more qualified in comparison. I am not sure why this Fed move hasn`t garnered more attention by the mainstream financial media, but what has Neel Kashkari ever done that makes him qualified to be a Federal Reserve Board member? And yes it is too easy a cynical softball setup for the peanut gallery to shout out “He worked at Goldman Sachs!” here. But he has accomplished very little in the Hedge Fund community, Investment Banking, his small time as a Portfolio manager at PIMCO, he made an unsuccessful run for governor of California in 2014, and was an unsuccessful aerospace engineer at TRW Corp. So unsuccessful in fact at TRW Corporation that he went to Wharton to get his MBA to reinvent himself at Goldman Sachs.

 

It seems the only thing this guy has succeeded at is kissing up to Hank Paulson while at Goldman Sachs, which landed him a high profile position at the Treasury Department during the TARP bailout program, by the way another colossal failure both in terms of policy creation and implementation. The guy has literally failed at every job he has ever done, and keeps getting promoted to better jobs with higher required responsibilities and required competencies. It is not like this guy has written extensively on monetary policy in his career or has a PhD in economics from a respected academic institution. This guy was literally pushing defense stocks on CNBC a couple of years ago while learning Portfolio Management at PIMCO. I realize that often employment success in life is knowing the right people and connections, but this is the Federal Reserve we are talking about, and not the Vice President of some obscure department in a sleepy corporation. Consequently the Peter Principle is alive and well at the Federal Reserve, has the Federal Reserve become one giant example of the Peter Principle?

 

Inconsistent Message

 

This brings us back to the fact that the Fed now is so motivated to raise rates just to show that they can actually raise rates, even when it is obvious to everyone in financial markets that there is no need to raise rates here. In fact, the Fed should have raised rates 3 or 4 years ago, and at the very least last year when GDP was more robust during the second half of 2014. In short, for the near term the Fed missed their opportunity window to raise rates, according to the economic data and overall global economic environment – them being ‘Data-Dependent’ and all.

 

Therefore, this rate rise is purely for show, the Federal Reserve has had 7 plus years to raise rates and they pick the time when China is struggling, and the ECB, Japan, and almost every other EM country is trying to weaken their currency. And they are going to do it, as they have extended so much credibility the last 6 weeks talking up this rate cut, that they would become a complete laughing stock by their most diehard supporters if they bailed out on this one. The Federal Reserve isn`t even consistent with their messaging within the same calendar year. As the reason they couldn`t raise rates back in June, another heavily telegraphed Fed Rate Rise Meeting, was because the US Dollar was too strong. They were worried about the effects of a strong dollar on the US Economy from a trade and corporate profits standpoint; not to mention its effects on emerging markets. Hello Federal Reserve, just six months later we have the same conditions with a strong US Dollar, it is not like anything has changed from a data standpoint to now suddenly merit a 25 basis point rate hike. I realize it is easy for me to sit back and criticize their actions, but it seems that from a logical reasoning standpoint if they can raise rates now, then they should have raised rates back in June.

 

Reasons Not to Raise Rates

 

The main reason the Federal Reserve shouldn`t raise rates now is that the ECB, which the Euro makes up the largest part of the US Dollar Index, is going full scale nuclear on devaluing their currency for trade competitive advantages over the United States. The second reason is that Emerging Markets haven`t shown a real pickup yet from their latest stimulus attempts, and are still hampered by being in the early stages of financial reform and structural rebalancing. The third reason is that commodities are being hammered with a strong dollar, further reinforcing deflationary pressures from a “Data-Dependent” standpoint given that the Fed wants to stimulate ‘inflation’ in the economy. The fourth reason is that there really is no need to now, that ship has sailed about 5 years ago, for all we know we have reached the other side of the business cycle, and are headed back into recession.

 

QE4

 

In fact, there can even be a case for QE4 as the inflation in the economy is coming mainly from Housing, (not enough affordable housing), and healthcare. Thus buying new bonds and lowering interest rates further might stimulate the housing industry in helping additional buyers move from apartment living into buying their first home; thereby lowering the steep rise in apartment rents of the last several years. This might also stimulate loan growth for both commercial builders and banks now that some have started to up their commitment to consumer home loans. Moreover, with regard to healthcare, raising rates isn`t going to promote or reduce inflation as this inflation is purely institutional to the absolute structural nightmare that is the healthcare industry today. A major overhaul will be required in the healthcare business over the next five years. The recent college try at reform has been a total and unmitigated disaster; we have only begun to see the fallout from this failed policy initiative.

 

The Gang that couldn`t Shoot Straight

 

The Federal Reserve is increasingly looking like the scared kid who is egged on to show his bravery by jumping from a high cliff to regain his ‘manhood’ in the eyes of the cool kids only to make a reckless decision with negative consequences. Yes the Federal Reserve needed to raise rates, but they probably should have started 7 years ago. After 7 plus years of being ‘Data Dependent’ why now?

 

In case the Fed hasn`t been paying attention, the world has devolved into a full out currency war, what the ECB has done to devalue the Euro in 2015 is not in the United States best interests. It makes for bad Fed Policy to raise rates now, it puts the US at a competitive disadvantage. All one has to do is look at the hit to the retail sector from the drop in tourism spending of this year due to the stronger dollar and compare this with the latest economic upturn in the European economic data with a weaker Euro to realize that currency devaluation as a strategy works and confers a strategic advantage for countries.

 

Really Federal Reserve, you pick now of all times to raise rates? I think I know why Neel Kashkari was recently selected to head the Federal Reserve's regional bank in Minneapolis, he makes the rest of the brain dead zombie Fed Members feel ‘comfortable’ and not threatened by actually making competent and sound monetary decisions for the US economy.

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Tue, 11/24/2015 - 04:04 | 6830551 KashNCarry
KashNCarry's picture

For Neal it's not who you know

It's who you blow...

Tue, 11/24/2015 - 02:54 | 6830468 GoldenDonuts
GoldenDonuts's picture

Raise rates by .25% hammer gold and cover all of the bank pm shorts for the coming storm?  Or is that too simplistic.

Mon, 11/23/2015 - 23:33 | 6830118 luna_man
luna_man's picture

 

 

How Dare any mortal, second guess, the CRIMINAL Fed!

 

yeah, the CRIMINALS, are confused...we're going down boy's

Tue, 11/24/2015 - 02:06 | 6830418 SixIsNinE
SixIsNinE's picture

and it's high time we stopped using euphemisms for this rascally gang of banksters -

the science is settled, and it's "FERAL RESERVE" .  No Fed denialists, under penalty of prison.

Mon, 11/23/2015 - 23:38 | 6830116 RMolineaux
RMolineaux's picture

This item is another example of fashionable Fed bashing to mask the misbehavior of the Wall Street greed platoon and corporate managements.  This latter gang has shown very little appreciation for the hundreds of billions of dollars that the Fed made available to them in 2008-9 to save their collective asses from bankruptcies and insolvencies brought about by their own criminal activities.  

But the Fed's plan to raise rates runs new risks due to its use of untried measures to raise employment and GDP.  Newer untried measures are apparently planned to push interest rates ever so slightly higher.  Because commercial banks hold enormous balances of excess reserves at the Fed, plus the fact that they do not trust each other to stay solvent, could prevent the Fed from using its traditional participation in the short-term treasury market to influence the "Federal Funds" rate.  Instead, it is talking about expanding its acivity in the reverse-repo market, dealing directly with hedge funds, of all people.  The Fed has no leverage over the hedgies such as it has over the banks that are their current prime dealers, and whom it regulates.  Such cooperation flrom the hedgies is expected to be "voluntary."  Good luck with that.  The typical hedge fund manager by attitude and experience is unlikely to accept the idea of the Fed being "the boss."  Hedge funds have relied upon the stupidity or indifference of the very wealthy to expand their activities, given their colossal fees.  The fact of their recent expanion in size and numbers is excellent testimony to the accumulation of vast wealth by the relatively few.   They have grown like the algae in a warm pond, and could just as rapidly shrink in a cold spell.

Tue, 11/24/2015 - 04:57 | 6830584 r00t61
r00t61's picture

The Fed deserves to be bashed.

They are nothing more than a legalized counterfeiting operation.

Attempting to defend the Fed just reveals you for the Keynesian potato that you are.

Mon, 11/23/2015 - 19:59 | 6829328 Grandad Grumps
Grandad Grumps's picture

The Fed lies ... as does Obama ... as does Satan.

Mon, 11/23/2015 - 19:50 | 6829280 Never_Put_Down
Never_Put_Down's picture

Does the fed even have a Charter anymore? The 100 year Federal Reserve Act to control the currency of the US expired 2 years ago. Who renewed it? Who's mandate and what Charter are they operating under now?

Mon, 11/23/2015 - 21:10 | 6829620 Roanman
Roanman's picture

To quote the Fed, "The Federal Reserve Act of 1913--which established the Federal Reserve as the central bank of the United States--originally chartered the Federal Reserve Banks for 20 years. But in the McFadden Act of 1927, the Congress rechartered the Federal Reserve Banks into perpetuity, and so there is currently no "expiration date" or repeal date for the Federal Reserve."

That's just a damn shame, if you ask me.

Mon, 11/23/2015 - 19:16 | 6829102 Fukushima Fricassee
Fukushima Fricassee's picture

No Increase ever

Mon, 11/23/2015 - 17:56 | 6828781 JRobby
JRobby's picture

Derivative positions

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Derivative positions

Mon, 11/23/2015 - 17:33 | 6828698 Clowns on Acid
Clowns on Acid's picture

Kashkari was nominated to head the Minn Fed Reserve because he is a non white face that worked at Goldman sachs and at PIMCO. Thats all the Media propaganda machine needs as a background in order to make Kashkari seem / appear like he is imminently qualified. If anyone criticizes him that will be racist. Every TV commercial must be diverse, every college campus must be diverse, every TV show and movie must be diverse.

What does "diverse" mean? "Don't worry, we will tell you" "Just keep giving us $$ and authority". Sounds like a really sustainable plan, particularly on a historic basis. 

Mon, 11/23/2015 - 17:29 | 6828668 honestann
honestann's picture

The federal reserve has not had any intention of raising rates, and still has no intention of raising rates.  They only pretend they want to raise rates.

Why?

To back up their self-serving lie that their "extraordinary measures" have helped the economy (not destroyed it, which is the actual case).

Also, any economy that has more consumption than production (and more debt than savings) actually net benefits by having a strong currency.  So they can keep the dollar high by pretending "we're gonna raise it any minute" while not actually doing so.  Of course that lie is getting old, which is why everyone (including the fed) keeps wondering when they'll HAVE TO raise rates (or admit they've destroyed the USSA and world economy).

My guess about the "emergency meeting" is the following:

#1:  Should we start QE4ever?

#2:  What should be blame this on... like "terrorism" maybe?

#3:  Maybe Yellen wants out before the world economy collapses?

Mon, 11/23/2015 - 16:23 | 6828411 SILVERGEDDON
SILVERGEDDON's picture

Another false flag rate hike.

Yellin be smellin, and rate hike panic.

Two things you can count on.

Mon, 11/23/2015 - 15:58 | 6828292 inosent
inosent's picture

looking at that d0llar index, no doubt there will be new highs, within 6 months.

Mon, 11/23/2015 - 15:37 | 6828191 Albertarocks
Albertarocks's picture

According to Reuters the Fed has decided to meet on Nov. 30 to discuss "implementation of amendments to its emergency lending authority under the Dodd-Frank Wall Street reform law."

What does that mean to you?  To me it means they are expecting to have to open the floodgates much wider than they have authority to, whatever amount that is.  To my way of thinking they are not going to be holding this meeting with the intention of tightening restrictions on their own power.  To me it means the Fed sees the writing on the wall, they're scared shitless, and they are preparing to lend out money in gobs so huge the whole world will shudder.  And of course, this money is earmarked for banks... themselves.

If I'm right, the first instant we see signs that this emergency 'expansion in lending authority' is being put to use, that would absolutely mark the bottom for gold and silver.  These prices will never be seen again.  EVER.

Mon, 11/23/2015 - 17:22 | 6828652 RaceToTheBottom
RaceToTheBottom's picture

They might even bring in Paulson to talk about tanks in the streets and propose further benefits and welfare handouts to the big banksters like GS.

Mon, 11/23/2015 - 23:16 | 6830050 bamawatson
bamawatson's picture

he was impressive when he ran for president; i liked him on the smothers brothers show also

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