Fed Rate Hikes, Fiscal vs. Monetary Policy and Why Again the Case for Gold?


I’ve been thinking about the current Fed Funds rate hike cycle, which is logically gaining forward momentum now that the Fed can stand down from its 8-year, ultra-lenient monetary policy cycle.  That is because the Obama administration’s goals required a compliant Federal Reserve to continually re-liquefy the economy as its fiscal policies drained it.

With the coming of Trump mania and its very different fiscal policy goals, we will witness the end of much of what I considered to be the “evil genius” employed by the Federal Reserve, mostly under Ben Bernanke.  When he oversaw the brilliant and completely maniacal painting of the macro known as Operation Twist in 2011, I knew we were not in Kansas anymore.  We’d gone off the charts and off the balance sheet into a Wonderland of financial and monetary possibilities.

What else would you call a plan to sell the government’s short-term debt and buy its long-term debt in the stated effort to “sanitize” (the Fed’s word, not mine) inflationary signals on the macro?  It was evil, it was genius, and it worked.  So too did various other financial manipulations that took place before and after Op/Twist.  And here we are.

The Republican view is one where businesses and consumers are stimulated, not money supplies.  I think it is a better economically, but not by much in this case.  That is because the Trumpian ‘reflation’ would simply be another form of man-made stimulation attempting to deny market and economic excesses from being cleared.  A normal economy goes through normal cycles.  We have not had a normal economy or a normal cycle since at least pre-2000.

Since Alan Greenspan panicked and blew the credit bubble of last decade, we have been on a continuum further into uncharted waters.  Trump’s policies are not going to stop it, either.  Besides, he inherits this (chart source: SlopeCharts).

s&p 500 and monetary base

What we see above is a dangerous correlation between Monetary Base, which is the product of monetary policy, and the S&P 500.  We see that the S&P 500, which followed the Base in lockstep for much of the bull market, is playing a little catch up to the Base, which itself is only bouncing within a topping structure.  That is a dangerous looking chart if the assumption that monetary policy will be withdrawn as fiscal policy is anticipated/enacted is a good one.

Continue reading Fed Rate Hikes, Fiscal vs. Monetary Policy and Why Again the Case for Gold?

Two Bond Guys, Post-FOMC

By Biiwii

A smart bond guy speaks, post-FOMC.  Amazingly, this interview is jumping right to a foregone rate hike conclusion in December and speculation about the Jawbone-o-rama we are going to be subjected to in the interim.  Always good to hear Gundlach, though.  Other good observations here.

“The bond market is sniffing out a pivot to fiscal stimulus…”  Gee, where have I heard that before?  Oh yes, in my own post at NFTRH.

Also, rock star bond guy Bill Gross weighs in, post-FOMC.  I didn’t say smart, I said rock star.  There’s a difference.  I see rock stars and promoters (cough… Gartman… cough cough) all over the financial market media landscape but very few smart people.  Anyway, I have not yet listened to Gross, but he’s Bill Gross… always worth a listen if not a laugh.

FOMC Minutes

By Biiwii

For anyone who wants to get bogged down in it, have a ball…

A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, July 26, 2016, at 10:00 a.m. and continued on Wednesday, July 27, 2016, at 9:00 a.m.1PRESENT:
Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
James Bullard
Stanley Fischer
Esther L. George
Loretta J. Mester
Jerome H. Powell
Eric Rosengren
Daniel K. TarulloCharles L. Evans, Patrick Harker, Robert S. Kaplan, Neel Kashkari, and Michael Strine, Alternate Members of the Federal Open Market CommitteeJeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively

Brian F. Madigan, Secretary
Matthew M. Luecke, Deputy Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Steven B. Kamin, Economist
Thomas Laubach, Economist
David W. Wilcox, Economist

Thomas A. Connors, Troy Davig, Michael P. Leahy, David E. Lebow, Stephen A. Meyer, Ellis W. Tallman, Christopher J. Waller, and William Wascher, Associate Economists

Simon Potter, Manager, System Open Market Account

Lorie K. Logan, Deputy Manager, System Open Market Account

Robert deV. Frierson, Secretary of the Board, Office of the Secretary, Board of Governors

Matthew J. Eichner,2 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors; Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors; Nellie Liang, Director, Division of Financial Stability, Board of Governors

James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors; Daniel M. Covitz, Deputy Director, Division of Research and Statistics, Board of Governors

Andrew Figura, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors

Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors

Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors

Fabio M. Natalucci and Gretchen C. Weinbach,3 Senior Associate Directors, Division of Monetary Affairs, Board of Governors; Michael G. Palumbo, Senior Associate Director, Division of Research and Statistics, Board of Governors; Beth Anne Wilson, Senior Associate Director, Division of International Finance, Board of Governors

Michael T. Kiley, Senior Adviser, Division of Research and Statistics, and Senior Associate Director, Division of Financial Stability, Board of Governors

Antulio N. Bomfim and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors; Brian M. Doyle,3 Senior Adviser, Division of International Finance, Board of Governors

Jane E. Ihrig,3 Associate Director, Division of Monetary Affairs, Board of Governors

John J. Stevens, Deputy Associate Director, Division of Research and Statistics, Board of Governors

Glenn Follette and Steven A. Sharpe, Assistant Directors, Division of Research and Statistics, Board of Governors; Elizabeth Klee,3 Assistant Director, Division of Monetary Affairs, Board of Governors

David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors

Elmar Mertens, Principal Economist, Division of Monetary Affairs, Board of Governors

Valerie Hinojosa, Information Manager, Division of Monetary Affairs, Board of Governors

Marie Gooding, First Vice President, Federal Reserve Bank of Atlanta

David Altig and Ron Feldman, Executive Vice Presidents, Federal Reserve Banks of Atlanta and Minneapolis, respectively

Tobias Adrian, Michael Dotsey, Stephanie Heller, Susan McLaughlin,3 Julie Ann Remache,3 and John A. Weinberg, Senior Vice Presidents, Federal Reserve Banks of New York, Philadelphia, New York, New York, New York, and Richmond, respectively

John Duca, Jonas D. M. Fisher, Deborah L. Leonard,3 Antoine Martin,3 Ed Nosal,3 Anna Paulson,3 Joe Peek, and Patricia Zobel,3 Vice Presidents, Federal Reserve Banks of Dallas, Chicago, New York, New York, Chicago, Chicago, Boston, and New York, respectively

John Fernald, Senior Research Advisor, Federal Reserve Bank of San Francisco

Long-Run Monetary Policy Implementation Framework
The staff provided several briefings that reviewed progress on a long-term effort begun in July 2015 to evaluate potential long-run frameworks for monetary policy implementation. The briefings highlighted some foundational considerations that are relevant for such an evaluation. The staff described the recent experience of several central banks of advanced foreign economies (AFEs) in implementing monetary policy, noting that they use a wide variety of frameworks to control short-term interest rates and that their approaches have evolved over time. For example, foreign central banks vary in their choice of the interest rate used to communicate monetary policy; in their approach to the provision of reserve balances; and in their use of policies, such as large-scale asset purchases, various funding programs, and negative interest rates, to supplement more traditional means of policy implementation. The staff also described the Federal Reserve’s experience in implementing monetary policy during the recent financial crisis. Before the financial crisis, traditional implementation tools–relatively small-sized open market operations and discount window lending–were adequate for interest rate control even during periods of stress. But the evidence from the period of the crisis and its aftermath suggested that the Federal Reserve’s pre-crisis framework did not enable close control over the federal funds rate when liquidity programs were expanded significantly and subsequently was unable to generate sufficiently accommodative financial conditions to support economic recovery without the use of new policy tools. Finally, the staff noted that various aspects of U.S. money markets, which determine short-term interest rates and are important for transmitting monetary policy, have changed since the financial crisis. The differences include changes the Federal Reserve has made to its policy tools and balance sheet, changes in market participants’ business practices, and the regulatory changes made around the globe to strengthen the financial system. Taken together, these factors may, for example, raise the long-run demand for safe assets, including reserve balances, and they should help make U.S. money markets more stable than they were before and during the financial crisis.

In the discussion that followed the staff presentations, policymakers agreed that decisions regarding an appropriate long-run implementation framework would not be necessary for some time. Furthermore, their judgments regarding a future framework would benefit from accruing additional experience with recently developed policy tools, such as the payment of interest on reserves, and accumulating more information about some important considerations that are still evolving, including financial regulations and market participants’ responses to them.

One key consideration discussed by policymakers was the appropriate amount of flexibility that an implementation framework might have–for example, the extent to which a framework could readily enable interest rate control under a wide range of economic and financial circumstances. With neutral interest rates potentially remaining quite low, policymakers also observed that, in order to promote the Federal Reserve’s policy objectives, the framework should have the capacity to supplement conventional policy accommodation with other measures when short-term nominal interest rates are near zero. Policymakers emphasized that the relationship between the monetary policy implementation framework and financial stability considerations would require careful attention. Importantly, the policy implementation framework would need to be consistent with recent changes in regulation designed to enhance the stability of the financial system. Also, because episodes of financial stress can arise with little warning, policymakers noted the advantage of being operationally ready for such situations; however, they also recognized that such operational readiness could entail some costs. Participants observed that various choices associated with policy implementation frameworks–such as the selection of counterparties or types of collateral to accept, and the overall size and composition of the Federal Reserve’s balance sheet–may both be influenced by, and themselves influence, incentives and activity in financial markets. Moreover, they indicated that the implications of the implementation framework for the efficiency of the financial system needed to be taken into account.

Continue reading FOMC Minutes

FOMC, July 27… Speed Readers on Your Mark!

By Biiwii

Release Date: July 27, 2016

For release at 2:00 p.m. EDT

Information received since the Federal Open Market Committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate. Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months. Household spending has been growing strongly but business fixed investment has been soft. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook have diminished. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.


What do You Know? Cramer Rants on Inflation and the Fed

By Biiwii

It is as simple as this; deflation fears had a blow off in December and gold moved early (January) on a coming inflationary phase.  The whole raft of ‘inflation trade’ items then got a memo in February and began to move higher.  This included stocks (note the media’s obsession with crude oil as an indicator for stocks).

We (NFTRH, anyway) have noted that a great inflation phase indicator, silver vs. gold became dangerously over bought and now wouldn’t you know it, here is Jumpin’ Jim Cramer on TeeVee going on about the CPI and the beast known as Yellen (she of the absolute dovish, USD adversarial roll overs of recent memory).

The beast is portrayed as something to be feared by this TV show and it could make a paranoid person wonder ‘gee, are they actually speaking through this TV clown now?’ in their forever expectations management game?

“Bulls need to pray to Janet Yellen”?  Are you kidding me?

Richard Fisher on Fed Policy

By Biiwii

Very interesting talk from Richard Fisher on ZIRP’s effects on insurers and the financial sector.  Yet at the end he notes they could “flatten the curve even further; that would be the only tool left in the Fed’s Toolbox.”

We have noted for years that the whole operation, post-2008, has been little more than a series of ingenious parlor tricks.  But they seem to be a 1 trick pony now.  It’s sad, really.

They Keep Giving Them Microphones…

By Biiwii

time tunnel

The media keep giving them the Mic, and they keep gulping it down to the tune of dissonant views that keep market participants suspended in a state of to and fro, on a boat listing from side to side, spinning in a Time Tunnel; pick your metaphor, it’s a lot of noise and confusion.

New York’s Dudley calls for cautious approach to lifting rates

Of course he does.  A couple weeks ago Hawks-in-Drag (HiD) hit the circuit and now out pops a Dove after a downer of a day yesterday in the stock market.  Wouldn’t want any sort of consensus for the market to over react to, would we? After all, if we went all Yellen we could be looking at a manic upside extension and the HiD could inspire nasty things like yesterday.

It seems obvious that they think they can massage the market indefinitely with this wax on/off routine.  At some point this market, black boxes, machines, quants, casino patrons, substance abusers and all, is going to shake this off and go where it was going anyway, because… REASONS!!