Tag Archive for Monetary Policy

First Quarter: Temporary Slide or Precursor to the Plunge?

Fed Vice Chairman Stanley Fischer today said that weak growth in the US economy in the first quarter is likely only temporary, and that the Fed could continue on with its planned rate hikes. Time will tell whether he’s right or wrong, but there is so much evidence out there that the economy is dependent on central bank money printing for its continued health that we can’t help but think that Fischer really isn’t in tune with what’s going on. Once the central bank stock and bond purchases wind down, stock markets will lose their luster, markets will begin to panic, and in the absence of any further quantitative easing the malinvestments that have been propagated through a decade of easy money will eventually be brought to light. Fischer, like most economists of the past few decades, doesn’t understand the consequences of his actions because of his failure to believe the teachings of Austrian Business Cycle Theory. That disbelief is irrelevant, however, and the consequences of the Fed’s decisions will occur regardless. When they do, let this post be a reminder that the Vice Chairman of the most powerful central bank in the world didn’t see the crisis coming.

The Bullard Flip Flop Continues

Coming in at the end of Friday, we have a little flashback to our article about St. Louis Fed President James Bullard and his penchant for constantly changing his views on the proper course for monetary policy. At the time we published the article, Bullard was in his hawkish phase, but he subsequently went back to being a dove, stated that the US economy only needed one rate hike through 2018. Now he is back to aligning himself with the hawks, stating that another rate hike next year would be appropriate, as would beginning to allow the Fed’s balance sheet to shrink. Perhaps that is why the FOMC can’t seem to make up its mind on what it wants to do, its members keep changing their opinions on what’s happening and what they should (or shouldn’t) do about it. As we wrote back in March:

At the end of the day, decisions on monetary policy are ultimately a judgement call, made with the same level of thought that might be given to where to hold the office Christmas party. The value of the dollar, the standard of living of the American people, and the health and well-being of money and banking in the United States are placed in the hands of a tiny group of people. It is a recipe for failure and disaster. Far better to leave everything to the workings of the market, where the choices of millions work together for mutual betterment and to outweigh the efforts of would-be tyrants, than to trust in the capricious and flighty fancies of our modern-day mandarins.

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Takeaways From The FOMC Meeting

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.

What the Federal Reserve Will Do This Week

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.

Fed Holds Rates Steady: Setting Up for December Hike?

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.

Ron Paul: Wells Fargo or the Federal Reserve – Who’s the Bigger Fraud?

The Wells Fargo bank account scandal took center stage in the news last week and in all likelihood will continue to make headlines for many weeks to come. What Wells Fargo employees did in opening bank accounts without customers’ authorization was obviously wrong, but in true Washington fashion the scandal is being used to deflect attention away from larger, more enduring, and more important scandals.

What Wells Fargo employees who opened these accounts engaged in was nothing more than fraud and theft, and they should be punished accordingly. But how much larger is the fraud perpetrated by the Federal Reserve System and why does the Fed continue to go unpunished? For over 100 years the Federal Reserve System has been devaluing the dollar, siphoning money from the wallets of savers into the pockets of debtors. Where is the outrage? Where are the hearings? Why isn’t Congress up in arms about the Fed’s malfeasance? It reminds me of the story of the pirate confronting Alexander the Great. When accused by Alexander of piracy, he replies “Because I do it with a small boat, I am called a pirate and a thief. You, with a great navy, molest the world and are called an emperor.”

Over two thousand years later, not much has changed. Wells Fargo will face more scrutiny and perhaps more punishment. There will undoubtedly be more calls for stricter regulation, notwithstanding the fact that regulators failed to detect this fraud, just as they have failed to detect every fraud and financial crisis in history. And who will suffer? Why, the average account-holder of course.

FOMC, Not Surprisingly, Holds on Interest Rates Again

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.

Federal Reserve Holds Yet Again

Unsurprisingly, the Federal Open Market Committee (FOMC) decided today once again to hold the target federal funds rate at 1/4 to 1/2 percent. Kansas City Fed President Esther George was the sole dissenting vote in this month’s FOMC statement, preferring that the target federal funds rate be raised to 1/2 to 3/4 percent. Pointing to some of the rosier economic data that has come out recently, the FOMC adopted a slightly more upbeat stance in its statement. According to the FOMC, the labor market has strengthened, labor utilization has increased, and household spending has been growing strongly.

One curious statement added in this month’s statement is that “Near-term risks to the economic outlook have diminished.” This is probably a reflection of a belief that market risks from China, from the Eurozone, or within the United States have largely blown over. This seems overly optimistic. While August will likely be slow with so many people taking vacation, September has a history of being an unruly month and the next two to three months are definitely within the “near-term.” Has the Fed forgotten the roller coaster that was September 2008? China is a powder keg waiting for a spark, the Eurozone is facing another crisis in the Italian banking system, and the United States has seen bouts of “good” economic data followed up the next month by bad economic data. Whether the economy will boom or bust over the next three months is still up in the air.

Given the Presidential election coming up in November, it would be highly unlikely for the Fed to raise the target federal funds rate until after the election. The Fed wants to make the economy look as good as possible before the election, and raising rates risks slowing things down and increasing pessimism among voters. That would play into Donald Trump’s hand, so we would not be surprised if President Obama has told Chairman Yellen to do whatever she can to ensure a rosy outlook in November.

Fed Declines to Raise Rates

The Federal Open Market Committee (FOMC) decided today to leave the target federal funds rate at between 0.25 and 0.50 percent. This was widely expected, given the dismal jobs report that was published two weeks ago and the uncertainty in the banking sector surrounding the UK’s upcoming Brexit vote. Some FOMC participants had in recent weeks expressed uncertainty about raising rates because of the potential for instability in the banking sector if the UK votes to leave the European Union.

Language in this month’s FOMC statement was largely unchanged from April. The main changes in emphasis were that the FOMC appears to be more downbeat about job gains, stating that the “pace of improvement in the labor market has slowed”, although the Committee continues to believe that “labor market indicators will strengthen.” Additionally, the Committee claimed that household spending has strengthened, but it flagged business fixed investment as soft. References to strong job gains from the April statement were removed in the June statement. The FOMC still maintains that inflation is running below its 2 percent target and points to most measures of inflation expectations remaining little changed. Perhaps surprisingly, there was no mention of specific international factors such as Brexit that might factor into decision-making, only the same “the Committee continues to closely monitor inflation indicators and global economic and financial developments.”

Today’s decision was passed unanimously. Kansas City Fed President Esther George, who dissented from the previous statement and favored a rate hike in April, voted in support of this month’s FOMC policy decision.

Since markets were largely expecting rates to remain steady, we expect no major ramifications from this announcement. More interesting to markets will be the Bank of England’s monetary policy announcement tomorrow, coming one week before the Brexit vote. The ECB has already vowed to support the banking sector in the event that the UK leaves the EU, so it will be interesting to see if the Bank of England makes the same promise to UK banks.

Finally, Fed Chairman Janet Yellen testifies before the Senate and the House of Representatives next week as part of her semiannual Humphrey-Hawkins testimony. Summer testimony has normally been held in July, so these earlier testimony dates are undoubtedly an attempt to provide more timely scrutiny of today’s FOMC decision.