As expected, the Federal Open Market Committee (FOMC) raised its target federal funds rate to 0.50-0.75%. There wasn’t much substantive change in the language of the statement. Economic activity was judged to be expanding at a moderate pace, with a declining unemployment rate. Measures of inflation were said to have “moved up considerably” but still remain low, which seems to be contradictory. All FOMC members voted in favor of raising the target federal funds rate at this meeting.
Looking forward to 2017, some media reports have touted that the Fed’s “dot plots” point to the potential for three rate hikes in 2017. That possibility has a few things working against it. First, the Fed is watching closely to see what other central banks are doing. If the European Central Bank, Bank of England, and Bank of Japan maintain loose monetary policy, the Fed will find it tough to raise rates unilaterally. Secondly, the FOMC membership is switching up again as it does every year. For those who are unfamiliar, here’s the Federal Reserve’s description of the FOMC:
The Federal Open Market Committee (FOMC) consists of twelve members–the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. The rotating seats are filled from the following four groups of Banks, one Bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco. Nonvoting Reserve Bank presidents attend the meetings of the Committee, participate in the discussions, and contribute to the Committee’s assessment of the economy and policy options.
Next year the four Federal Reserve Bank Presidents rotating onto the FOMC are: Charles Evans of Chicago, who has a dovish reputation; and Patrick Harker of Philadelphia, Robert Kaplan of Dallas, and Neel Kashkari of Minneapolis, all of whom are recently-hired and will be voting on the FOMC for the first time. Dallas and Philadelphia have reputations for being more hawkish, but it remains to be seen whether the new Presidents will maintain that reputation.
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Just about everyone expects the Federal Open Market Committee (FOMC) to raise its target interest rate at its meeting this week. The talk of raising rates has occupied newspaper columns all year, and the comments from FOMC participants have become stronger in recent months in discussing their desire to raise rates. But the decision to raise rates won’t have come about because of any strong economic data, be it inflation hovering around the Fed’s target or the low unemployment rate showing strength in the labor market. Labor market activity has been relatively steady all year and there haven’t been any surprisingly strong signs of economic growth, so why the green light now? Because the European Central Bank (ECB) announced at its meeting last week that it would extend but taper its bond purchases.
In the aftermath of the financial crisis, one central bank after another engaged in quantitative easing. The Federal Reserve, Bank of England, ECB, and Bank of Japan all engaged in large-scale asset purchases in attempts to drive down interest rates, remove overvalued assets from bank balance sheets, and attempt to jump-start their economies. Various interest rate targets were driven to near-zero, and even negative in Japan and Europe. Central bankers eventually realized that they couldn’t maintain those levels of policy accommodation indefinitely. But no one wanted to be the first one to start tightening. The fear was that if a central bank began to tighten policy while other central banks didn’t, the first country’s tighter policies would cause its economy to slow down, harming its relative position vis-a-vis other major countries. No central bank wanted to take the blame for weakening its country’s economy. So month after month, meeting after meeting, central banks just held pat.
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In an unsurprising decision, the Federal Open Market Committee (FOMC) decided today once again to keep its target federal funds rate steady at 0.25-0.50%. It was widely speculated that the FOMC would hold rates steady at today’s meeting due to concerns about influencing next week’s Presidential election. Expectations now are that the Fed, if it decides to raise rates, will do so at next month’s FOMC meeting.
There were no significant changes in the language of the statement from September’s meeting. Household spending was described as “rising moderately” rather than growing strongly, price inflation and measures of inflation expectations have risen but still remain lower than what the Fed would like to see, and the case for raising rates has continued to strengthen. Voting against today’s action were Esther George from Kansas City and Loretta Mester from Cleveland, both of whom wanted to raise the target federal funds rate to 0.50-0.75%. Eric Rosengren, who voted against September’s FOMC action, switched this month to supporting the most recent FOMC action.
It remains to be seen when the Fed might raise rates, as it seems that central banks are waiting to see what the other central banks are going to do before they make their own decision. The Fed, the Bank of Japan, the European Central Bank, and others are playing a game of chicken. They are like cars heading full-speed towards a volcanic crater, soon to plunge into the chasm and assured of destruction. Yet none of them want to be the first to hike rates. That would be tantamount to admitting error, or at least admitting defeat, and would be a tremendous blow to their pride. And so meeting after meeting we see central bank after central bank holding steady.
Some of them like to talk a good game, jawboning markets into thinking that more easing might be on the way (BOJ, ECB) or that rate hikes are just around the corner (Federal Reserve), but they never back up their tough talk with action. Watching central banks nowadays is like watching a game of poker in which each player has a horrible hand, tries to bluff, and is unwilling to show his hand. And so it goes again today. Even if the Fed were to raise rates next month, it would likely only be to 0.50-0.75%, still an abnormally low figure. Given that the Fed spent all year talking about raising rates and not doing anything, it would be safe to say that rates won’t even approach 1% until December of 2017. Don’t expect full “normalization” to be reached until 2020 at the earliest, assuming the economy doesn’t go down the toilet before then, which is very likely given the huge asset bubbles that easy money policies have inflated all across the world.
The Federal Open Market Committee (FOMC) decided yet again today to hold off on raising the target federal funds rate. Not much changed in the language of the FOMC statement, with the Fed believing that the labor market continues to strengthen and that economic activity is picking up. The FOMC continues to see economic activity expanding, the labor market strengthening, and thus a stronger case for an increase in the federal funds rate. Perhaps the only shocking part of today’s FOMC statement was that there were three dissensions from the decision. Kansas City Fed President Esther George, Cleveland Fed President Loretta Mester, and Boston Fed President Eric Rosengren all dissented, each favoring a rise in the federal funds rate to 1/2 to 3/4 percent.
While there had been some discussion of a surprise rate rise today, and the dissent of three FOMC members shows indications that a rate rise may very well be around the corner, news of today’s Bank of Japan monetary policy action may have also played a role in the Fed’s decision not to raise rates today. Tightening monetary policy, no matter how loose it still remains, while other central banks continue to loosen, will only exacerbate the effects of the Fed’s actions. Perhaps the Fed is just taking a wait and see approach to see what happens in Japan and Europe before it decides to go ahead with another rate hike. Let’s hope that someone asks that question in this afternoon’s press conference.
Let’s take a look at a selection from a prominent official’s recent speech and tear it apart piece by piece.
Deflation refers to a situation where prices decline persistently. If prices of individual goods and services fall thanks to innovation and improved productivity, this is of course a good thing. A good example is the gradual price decline in PCs and smartphones. However, the deflation I am talking about refers to a situation in which the prices of a broad range of goods and services decline, and consequently, prices as a whole drop. In most countries, including the United States, general prices are measured in terms of consumer price indices, which are the weighted averages of baskets of goods and services purchased by consumers. Put very simply, deflation can be understood as a continuous decline in consumer prices.
What happens to the economy if prices as a whole decline continuously? Looking at the overall economy, suppliers of goods and services will see a decrease in sales and profits, and firms with declining profits typically start to lay off employees or restrain their wages. Employees that have been laid off or whose wages have declined experience a fall in their income and restrain their spending due to uncertainty about their future. Such restraint in spending leads to a further decline in the sale of goods and services, resulting in harsher competition among firms. Firms therefore lower prices in order to compete, leading to a further decline in their sales and profits. This simple outline shows that once deflation starts, it perpetuates itself, so that the economy falls into a bad “equilibrium, in which economic activity is shrinking.”
Who was this prominent official?
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The negative interest rates imposed by the Bank of Japan have begun to make their way into the Japanese banking system. Japanese trust banks have begun to impose negative interest rates on accounts held by institutional investors. It shouldn’t be surprising that Japanese banks are trying to pass on the costs imposed by the central bank’s policy of negative interest rates. It happened in Switzerland, it is happening in Japan, and it will happen in Europe. And as it becomes more widespread, investors will begun to withdraw their funds from the banking system.
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As if the world weren’t already awash in trillions of dollars, euros, and yen conjured up out of thin air, central bankers and politicians around the world are gearing up for yet another round of monetary expansion. It didn’t work before, it won’t work now, but don’t get these guys confused with the facts. They have to look important and make it seem as though they’re doing something, so they’re resorting to the only thing they know how to do: create more money. Here’s a roundup of what’s in store.
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On top of the news of increased cash hoarding in Japan
comes news that the Swiss are starting to hoard cash too, as circulation of the 1,000 CHF note has increased. In all likelihood this is a response to the Swiss National Bank’s introduction of negative interest rates. This pattern has repeated itself everywhere negative interest rates have been introduced. Making it more expensive for banks to offer bank accounts and for depositors to hold cash in banks will lead to cash withdrawals from banks and increased hoarding of cash.
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In response to the Bank of Japan’s introduction of negative interest rates, the Wall Street Journal reports that sales of personal safes
to store hoarded cash are soaring. It’s an entirely predictable reaction to the introduction of negative interest rates. If you’re going to have to pay to store your money in a bank, why not just store it yourself?
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Economic activity can be either productive or non-productive. Productive activity is that which satisfies the wants of consumers and increases their well-being. Non-productive activity is that which detracts from consumer wants or lessens their well-being. Consider the example of a grocer who sells fresh food to consumers. His activity is productive in that he is providing a desired good to consumers, allowing them to purchase food that they wish to eat. If someone comes to his store and steals some of that food, that loss is non-productive. If the store owner has to put up security cameras or hire a guard to prevent theft that is also non-productive, as resources that he could have devoted to selling food to consumers instead have to be diverted to defending against theft.
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