The Daily Shot 9.22.16

By SoberLook

Greetings,

We begin with the United States where, as expected, the Federal Reserve has left rates unchanged. The divided FOMC, however, hinted that a rate hike is coming soon.

Source: FRB

The futures-implied probability of a rate hike by year-end is now above 60%.

Source: CME

One of the key results from the FOMC meeting – something that the media doesn’t seem to cover much – is another downgrade by the Fed of the US long-term growth. The central bank now believes (on average) that the United States economy won’t grow faster than 2% in years to come. The FOMC has been steadily downgrading its expectation for long-term growth over the past five years – from 2.65% to 1.85%.

As a result of the above, in just over a year, the Fed has downgraded the US long-run fed funds rate from 3.8% to 2.9%.

The FOMC has also been consistently downgrading the fed funds rate projections for the next couple of years.

Source: Bloomberg

In other US developments, markets remain convinced that inflation will stay benign in years to come.

Source: Macquarie, @joshdigga

According to the Mortgage Bankers Association, growth in US mortgage activity for home purchases, while still positive, has been declining.

Now let’s turn to the funding markets, where US dollar LIBOR continues to grind higher.

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Japan is Doomed. Again

By Michael Ashton

Quantitative easing does nothing to help economic growth

Japan is doomed. Again.

A couple of years ago, the Bank of Japan began to pursue QE, with the intention of doubling its money supply. While this is a bad plan for almost every country, it was exactly the right plan for Japan, whose economy had been mired in deflation from 1999 until this policy began (see chart, source Bloomberg).

japancore

To a monetarist, it was no surprise that Japan was experiencing deflation. Since the early 1990s, annual money supply growth in Japan has been below 4% (see chart, source Bloomberg). It averaged 2.4% from 1992-2012. (The new policy pushed M2 growth above 4% for the first time since the 1990s, albeit briefly as it turned out).

japanm2

Remember, the monetarist equation says MV≡PQ. With unchanged money velocity and an economy with, say, a 3% potential growth rate in GDP, a 2.4% growth in M2 should result in deflation. And, in fact, just as in the US lower interest rates in Japan produced lower monetary velocity.

Continue reading Japan is Doomed. Again