Federal Reserve

Federal Reserve to Economy: Party On, Not So Excellent!

Continuing to keep interest rates near zero, as the past few years of that haven't done enough good.

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Although many have been predicting the Federal Reserve would raise interest rates very soon, the Fed now says it ain't so, at least not now, and that they just haven't seen enough growth from their multi-year near-zero-rate experiment, as reported by Washington Post:

"Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term," the central bank's official statement read.

The decision to keep the Fed's benchmark interest rate at zero amounts to a recognition that the robust recovery central bank officials had hoped for when they launched into an uncharted era of easy money during the throes of the 2008 financial crisis has yet to materialize….Seven years after the central bank cut its target rate to zero, Fed officials believe the recovery is not yet ready to stand on its own.

Actual rate hikes still might happen later this year or next year. The last time the Fed raised interest rates was in June 2006.

The Wall Street Journal on some of the specifics of what might be ahead, and why:

Though Fed officials still expect to move rates up this year, their projected path of rates has become shallower in recent months. The median projection for rates at the end of 2015 dropped to 0.375% from 0.625% in June. It also dropped to 1.375% at the end of 2016 from 1.625% projected in June. It fell to 2.625% at the end of 2017 from 2.875% projected in June. In the long-run the Fed projected the fed funds rate will reach 3.5%, down from an earlier estimate of 3.75%.

One official called for a negative interest rate in 2015 and 2016, something that has been tried in several European countries to boost growth and inflation. The Fed doesn't identify which officials make specific projections.

One reason for the shifting outlook: Officials have become a bit less optimistic about the economy's long-run growth potential. They projected the economy will grow at a rate between 1.8% and 2.2% in the long-run, down from their June estimate of growth of 2.0% to 2.3% in the long-run. A more lumbering economy has less capacity to bear much higher rates.

From last month, why Fed policy for the past few years may have done little more than inflate a stock market bubble.

Market analyst and "interest rate observer" James Grant talked to Matt Welch for Reason TV about why these low, low, low interest rates forever might be creating an economy goosed more by government choice than core economic reality:

NEXT: Donald Trump and the GOP's National Status Anxiety

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  1. Interesting

  2. They really, really do not want people saving. They want them spending to shore up the numbers. Of course, with unpredictability and a shit-ass economy, people want to save to build up a safety net. But oh boy does the government not want that.

    So no interest on savings, and low interest if you take on more debt and spend! Yay!

    1. I get 1% in my savings account. Yay! Maybe I should start listening to the invest in guns and ammo types.

      1. If I was you I would listen to William Devane and buy gold.

    2. Saved money is static; it’s not moving around, hooking up with other money, and having lots of (legitimate or illegitimate, depending on the market in question) money children.

      In other words, saved money is not promiscuous; it is rather abstinent, “saving” itself for later. This is what is meant when we talk about “loose money” or “loose monetary policy” … we don’t want your money to be conservative, buttoned-down, and prudish, we want it out there partying like there’s no tomorrow.

      And don’t want to be thought a prude, do you? So get that money out there, mixing it up. Do it for the children. Do it for your country. Let’s all be patriotic tonight, and go out shopping.

      1. Will there be anal sex, cocaine, and hookers? In that order?

        1. There’ll be cocaine. Or cocaine residue, at least. It’s money, after all.

      2. Will there be anal sex, cocaine, and hookers? In that order?

  3. Eh. I have been swayed by the opinion that markets lead the Fed rather than the Fed leading the markets. Anything the Fed does to counter the markets either way is upsetting to the economy. And the markets are saying that interest rates are low as far as they can see.

    So this is the right nonmove. Certainly the only reason anyone can articulate as to why the Fed should raise rates is that the Fed wants to raise rates.

    1. Certainly the only reason anyone can articulate as to why the Fed should raise rates is that the Fed wants to raise rates.

      There is no reason to believe that any rate the Fed sets is correct, anymore than there was to believe in Soviet farming quotas.

      1. This.

      2. Exactly. If interest rates were truly set by the market, then as bubbles formed, the scramble for cash to speculate in that bubble would raise interest rates as the borrowers competed for money. This would not stop the bubble from happening, but would moderate it and protect people from being over leveraged in those bubbles.

        Interest rates are an important signal to anyone existing in an economy, and the Federal Reserve system masks it behind price controls.

    2. The fed policy only really matters to the currency. The market is not the currency. The market, be it for drugs, ass sex, mexicans, or IR porn for Nicole, will always be there and will be little (some but not in the big picture) affected by currency bullshit. And looking into the future currencies are meaning less and less so the markets will continue to become immune to such shenanigans.

      I certainly doesn’t preclude getting ones ass handed to him in the short-medium term. Currency collapses are not fun and any assets held in 100% currency can go poof overnight. But from the most macro level, then they weren’t really assets to begin with.

      1. A widely used and accepted currency matters to banks and other lending institutions to some degree, if only because of that currency’s effect on credit. And what happens to financial institutions is important to broader markets.

        You’re certainly correct that markets will always exist regardless of what happens to the currency, but people generally can’t handle extreme fluctuations in the currency, at least psychologically, and it’s people’s reactions that can, as you say, really fuck up the ability to trade.

        It helps if you have a lot of hard assets (or a hard ass, if you will), but good luck finding someone with the liquidity (and without obligations) to trade with you.

        1. Liquidity is mostly a red herring. If SHTF liquidity is rather easy to conjure for most types of assets…specifically your labor. I am not saying it is nice, or fun, but even if the dollar imploded tomorrow the larger picture would be the use of other currencies, barter for some things, metals, scrips, and local solutions. This is demonstrated time and time again. The real problem exists when you have a wheelbarrow full of worthless dollars. And as the Weirmier taught us, that wheelbarrow is the most valuable part.

          1. If SHTF liquidity is rather easy to conjure for most types of assets…specifically your labor.

            Of course. And if shit hits the fan, there may be less incentive to honor legal obligations anyway. But, many people don’t have much they could trade. This includes their labor if their labor isn’t in demand.

            I think of savings as a good way for people without many marketable skills to acquire wealth – the interest is akin to income from rents as opposed to labor or capital. What the Fed is doing is fucking over unskilled people and those who simply can’t put in the work that they used to be able to (like very old people).

        2. Hard to have a good economy with a shit currency.

          1. Only if you measure economy in one currency. Several nations have actually has their currencies collapse, give up, and adopt what the folks were doing anyway (which was the us dollar).

      2. The market is not the currency. The market, be it for drugs, ass sex, mexicans, or IR porn for Nicole,

        Oh I see a new Nicole meme coming together. Do you think she fucks midgets? If not, why does she hate midgets?

        1. Can we please stop talking about what is going in or not into Nicole’s vagina or anything about Nicole’s vagina, period?

          Seriously making me ill.

    3. Certainly the only reason anyone can articulate as to why the Fed should raise rates is that the Fed wants to raise rates.

      Keeping interest rates low has allowed the market to be dominated by institutional investors getting easy money. They have more spending power than this economy justifies. They cannot make a reasonable rate of return from building wealth, as that would mean (investing in) producing goods and services that people will buy- which isn’t happening since the economy isn’t that good.

      So instead these institutional investors are putting their money into other assets- stocks and bonds. The imbalance of Market Cap in equity markets versus actual earnings is bad. The only thing keeping stocks up is the promise of more easily borrowed money to ram into the same markets.

      The reason to raise interest rates is simple: It needs to cost money to borrow money. If it doesn’t cost you, then you have no incentive to balance economic potential of an investment against the cost of borrowing.

      1. It needs to cost money to borrow money.

        and the government doesn’t want to pay anything to borrow money.

        Eventually we’ll have negative interest rates (a Fed move of only 25 basis points downward will do that) and then the whole thing will be obvious to everyone except the most stupid.

    4. I have been swayed by the opinion that markets lead the Fed

      Then you have fallen for propaganda.

      Unless by “the markets” you mean “the ten largest financial institutions”.

      1. There is certainly an issue that institutions that perceive themselves as too big to fail may not worry about extending low interest rates into the far future as they will be bailed out when the rates spike. To the extent that these drive the long term interest rate futures, there is a latent and high instability.

        The solution is to commit in advance to remorselessly sending these firms into bankruptcy and converting their debt into reduced equity.

        They’ll start easing up their long term rates in that case, and then the Fed can follow suit with the short term rates.

  4. They actually uttered Negative Interest. Holy Shit. They are now officially 100% fucked. I know that this isnt new but now it is official.

  5. The equity and junk bond bubbles will burst soon enough. Subprime auto loans are pretty much the only thing propping the economy up right now.

    Related:

    The late-to-the party quote of the day come from Bloomberg who just now realized “There may very well be something wrong with the manufacturing sector.”

    The quote is in response to the Philadelphia Fed Business Outlook Survey where the Consensus Opinion was for a “respectable” 6.3 reading but the actual reading was -6.0, well below the consensus range of 2.50 to 10.50.

    Green shoots!

    1. Dude, Obama healed the oceans and lifted the planet or something. Didn’t you get the memo?

  6. So, I’ve been pretty busy at work this week and I just checked facebook, apparently some woman insulted every single nurse on the planet?

    1. My sister is a RN and makes six figures, so I find it difficult to gin up sympathy because the nurses unions are angry some ladies on a tv show said vaguely mean things about a nurse who was in a beauty contest.

          1. Jesus. If CRUSTY doesn’t think she’s hot…

    2. Yeah, there’s some ridiculous memes going around. I don’t care to understand why.

      1. That’s all my newsfeed is these days: stupid memes.

        1. The worst one I’ve seen this week:
          http://www.rawstory.com/2015/0…..fers-help/

          “When another 14-year-old boy built a nuclear reactor at his parents’ home”

          Wut? No he fucking didn’t. But we can’t let facts get in the way of the narrative!

          1. I just assume they are light on the facts.

          2. Do you not know any nurses?

            1. I’m not sure which way you’re going with this.

  7. Interest is just the price of borrowing. Our country supports a rigid price control system that, for any other good or service, economists would vilify as market distorting.

    And since the price of borrowing is low, look at that, we have a surplus of borrowing. And that money is pumped into unneeded capacity, equities, houses and other bubbles. Bubbles can happen in any economic system, but they are guaranteed in one where we force the cost of borrowing to be low.

    Even worse, since low interest rates keep people from giving money to banks, they have to put that money in risky ventures like high yield bonds (i.e. Junk bonds) and equities. Just watch in 3 years when another major bubble pop puts retirement portfolios in the toilet, our elites will explain that this is why people should just entrust the government to managing their retirements.

    1. As usual, they will say “nobody could possibly have foreseen this!” and then blame free markets for the crash. Then we’ll all get buttfucked by yet another bullshit monstrosity like Sarbanes-Oxley or Dodd-Frank.

  8. I’ll admit that I was wrong a few weeks ago. I thought the wheels were coming off the wagon.

    I bought a shitload of SPY puts, and they’re worthless (except for time value).

    But you know what? When they expire, I’m going to buy some more. This shit can’t continue.

    1. The Iron Law of Markets: A market can remain irrational longer than you can remain solvent.

    2. What’s a SPY?

      1. You don’t have Canadian google?

    3. If they are for Oct or Nov they won’t be worthless soon. The market is going down soon no matter what.

  9. Is this where I preen about $1.9 Billion surplus Canadian govt. posted? Even if it’s in Canadian Dollars, so, like, basically broke even.

    Or to link reactions from our Commies (“we get a head start on spending!”) or our Idiot who makes W look smart (“this is only done through cuts which caused recession, our deficit spending will boost economy”).

    1. If the commies can win in Alberta then Harper & Co are in big trouble.

      1. If Commies can win in Alberta, we’re all in big trouble. It’s gonna be Venezuela North up here.

      2. The polls do not show much trouble for Harper in Alberta. The CPC are basically tied with the others right now, and that likely means a CPC minority will come out of the election.

  10. The Fed is trapped. If they raise rates, all the leverage driven bubbles pop. Which we have seen before, and it is ugly as hell. Setting off a major recession type of deal.

    And, worse, if they raise rates, they utterly fuck the federal budget, because that means the feds interest expense will go up. And when you are starting from a very low base rate, any increases in rates lever big increases in interest owed.

    When rates revert to their mean, our federal interest expense will be around $1TT/year, due to the increase in debt over the last several years.

    So, they can’t raise rates without setting off a catastrophe, and this has been clear for years. What their exit strategy is, and what its knock-on effects will be, is a mystery.

    1. At some point people will stop buying government debt, and that’s when the shit will really hit the fan.

      1. The Fed has been clearing auctions for years and years now. There already isn’t nearly enough of a market for Treasuries.

    2. Last time, the “too big to fail” entities were smaller than something else. There is nothing bigger than governments, though.

    3. They don’t have an exit strategy. Their only strategy is to try and avert a catastrophic meltdown until they can get out of office having made their money and connections. Of course, as new politicians and bureaucrats come in, they want to do the same thing. So it just. Keeps. Going.

      There is absolutely no incentive to fix this from the people who are pulling the strings (not that they even could, but they could always just go hands off). There is no incentive to fix this long term, as they will be out. There is only one incentive: keep it going while you profit off your position as much as you can, then get clear.

      And this is exactly what we are seeing; a seemingly endless low-level depression/recession that just won’t get better but isn’t getting necessarily worse either. Stagnation works for them here. It’s better than a crash.

      1. I’m not clear on exactly what the money flows, etc. are at the tippy-top level.

        I know the Fed holds shitloads of Treasuries, and II believe it refunds the interest to the government on those. Theoretically, I guess, the interest on Treasuries held by the Fed is irrelevant to the federal government. In effect, the Feds get zero interest rates, regardless.

        But, if the Fed is holding a crapload of assets that it can’t make money on, how does that effect the rest of the banking system? If Treasuries are effectively zero-interest in the hands of the Fed, what does that mean when all the other bonds out there are paying 5, 8, 10%?

        And, more importantly (I think), how does this effect the money supply? We seem to have a system where the government can borrow as much as it wants at an effective zero rate. Haven’t we just institutionalized monetization of debt? As the Fed’s balance sheet bloats, its my understanding that increases the money supply, which sooner or later has to turn into inflation.

        My belief is that the only reason we are in a low-inflation/deflationary mode right now is that all that new money being created by the Fed is basically backfilling dead capital in bad investments (mainly mortgages, but I’m sure there’s more). This is a de facto bailout. What happens when they run out of dead capital to bail out, but the government still needs their balance sheet to grow by $1TT/year to absorb federal debt?

        1. The fed is slowly unwinding its balance sheet, but I don’t think they are keeping up with ‘Quantitative Tightening’, the phenomenon of other central banks (mainly China) selling USD denominated assets (mainly treasuries).

        2. As the Fed’s balance sheet bloats, its my understanding that increases the money supply, which sooner or later has to turn into inflation.

          And to keep money supply inflation from turning into price inflation, the gov’t will increase taxes and/or the Fed will introduce negative interest rates. As long as the extra money can’t be spent in the economy, prices will not be affected.

          This is what Japan has already been doing. The BoJ already buy all the Japanese Treasury debt. Abe then raised sales taxes , etc. Most of that extra money supply either goes straight to the treasury or goes to consumers who then give it straight to the treasury via the increased taxes.

          All that is going on is a few macro measurements have activity that looks like recovery. But the rest of the macro measurements are either flat or show recession. So the central Bank doesn’t know what to do with that “data”.

          Basically, the central bank currency winds up being no different than Treasury note currency. But with the added inefficiency of a few additional fake transactions to make it look like its not just the Treasury printing money.

      2. I’ve argued for the comparative superiority of monarchy on this basis. Not like doing so would surprise many here, but it’s somewhat satisfying to blow someone’s mind who hasn’t really thought things through, and has just been programmed to hold the belief that democracy == good, everything else, especially a king/queen == bad.

        1. I would still contend that democracy is the least worst of the two systems. But yes, there is something to be said for a system where there is no pretense of everything being “by the people, for the people” when the most important decisions are made over our heads.

          What a lot of people fail to realize is that we rarely get to vote on issues; we get to vote on people who then vote on issues. And if those people don’t do what they said they’d do, and there isn’t enough outrage over it to get a recall movement going, we’re stuck with them. Or, if they insist on doing stupid shit (like, oh, going on some military adventure in the Middle East without congressional approval) then we wouldn’t be able to remove them from office even if we could muster enough support for a recall.

          At least with a monarchy, an armed revolution would be much more likely if the king made things miserable enough. Nowadays, our officials skyrocket past the bullshit threshold of eras past, and just about everyone puts up with it because it’s “the will of the people”.

          1. As for the vote, I’d characterize the difference between having it, and not having it, as being similar to the difference between buying a lottery ticket, and being given one for free.

            In either case, the main difference between democracy and monarchy is that under democracy, you’re likely, assuming a near split among the electorate, to be under rulers more to your liking, around half the time, whereas with a monarchy, it will depend on the political bent of the set of monarchs you happen to find yourself under over your lifetime.

            However, where elected leaders are ostensibly beholden to a particular political ideology, monarchical ones are not; assuming the aggregate ideology of the people to be the same in either case, we should assume that in attempting to maintain sufficient favor, a monarch will find it necessary to adopt a range of ideological positions, such that the effective direction of government ends up being split, yielding little functional difference from the democratic system.

            If we look at rulership as a concept, I think it can be argued that democracy is a higher-evolved form, where by higher-evolved, I mean that it is fittest to remain in power. That is to say, the monarchical aspect had to sacrifice itself in order for the organism of government in general to continue to survive.

        2. To paraphrase Mencken, a monarch is expected to be murdered, so there is incentive to not over do the corruption; of course they still over do it – but then they get murdered. An elected or appointed bureaucrat is “just doing their job” a la Eichmann – the buck never stops with them. So in a democracy, the buck stops nowhere.

          It didn’t used to be this bad in the US, whenever an elected office changed hands, almost all the employees of said office were replaced. This turnover tended to keep bureaucracy in check. But legislation was passed so that nobody can be fired for this reason and we now have the sclerotic system of today.

          1. Thanks a lot, Chester A. Arthur!

      3. Stagnation works for them here. It’s better than a crash.

        Err we had a crash 7 years ago…and seven years before that.

        I think if we are going to say what we see and what we have seen is what works then what works for them is a crash then 7 years stagnation then a crash then 7 years stagnation then….

        Should also point out that during the above described period there has been a massive transfer of “wealth” from pretty much everybody to a very small minority. So that also is what works for them.

        Note: “wealth” is in parenthesis because i am getting more and more skeptical about a bunch of numbers on some database which is supposed to equal money is actually wealth. I mean if any substantial amount of it was actually spent to do anything it would trigger hyper-inflation.

    4. When the dollar tanks, we can pay the interest and the principal with them new $1T coins (the Krugloo).

      Problem solved.

      We will have to start eating each other, but at least we’ll pay down the debt.

    5. When China collapses as a funtioning state, the manufacturing boom will soak up all the excess money AND create a budget surplus. Alternately, a large scale war.

  11. Damn that George Bush. When will his ruinous policies end their ruinous-ness.

    1. Everyone knows that in some way, this is all Reagan’s fault.

      /prog

  12. This can’t be. Shriek was just assuring me that the economy, like, totally rules right now.

    1. Don’t forget that there are no bubbles — none.

      1. He kept repeating lists of buzzwords and vaguely statistical-sounding numbers! I was convinced, man!

  13. Audit the Fed.

    1. I think you misspelled “Arrest”.

  14. “Fed officials believe the recovery is not yet ready to stand on its own.”

    In other words it is not a recovery. Who knew?

    1. Not to worry, Summer of Recovery VIII will finally succeed.

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