Loosening is the New Tightening

By Steve Saville

The Fed meets to discuss its monetary policy this week. There is almost no chance that an outcome of this meeting will be another boost in the Fed Funds Rate (FFR), but there’s a decent chance that the next official rate hike will be announced in March. Regardless of when it happens and regardless of how it is portrayed in the press, the next Fed rate hike, like the two before it, will NOT imply a tightening of US monetary policy/conditions.

The two-part explanation for why hikes in the FFR no longer imply the tightening of monetary policy has been discussed many times in TSI commentaries over the past few years and was also addressed in a March-2015 post at the TSI Blog titled “Tightening without tightening“. The first part of the explanation is that with the US banking system inundated with excess reserves there is no longer an active overnight lending market for Federal Funds (banks never have to borrow Federal Funds anymore because they have far more than they require). In other words, when the Fed hikes the FFR it is hiking an interest rate that no one uses.

The second and more important part of the explanation is that Fed rate hikes are now implemented by increasing the interest rate PAID by the Fed on bank reserves. That is, Fed rate hikes are now implemented not by charging the banks a higher rate of interest but by paying the banks a higher rate of interest. To put it another way, whereas in the “good old days” rate hikes were implemented by removing reserves from the banking system, the Fed now implements rate hikes by injecting reserves — in the form of interest payments — into the banking system.

So, what’s widely known as monetary tightening is now a Federal Reserve action that actually has the effect of LOOSENING monetary conditions.

Orwell’s “1984″ had the slogans “War is Peace”, “Freedom is Slavery” and “Ignorance is Strength”. Thanks to the Fed we can now add “Loosening is Tightening”.

Federal Reserve Policy: The Cash Menagerie

By Danielle DiMartino Booth

Danielle DiMartino Booth, Money Strong, Fed Up, Cash Menagerie, Newsletter“Yes, I have tricks in my pocket, I have things up my sleeve. But I am the opposite of a stage magician. He gives you the illusion that has the appearance of truth. I give you truth in the pleasant disguise of illusion.” 

The next time you happen to find yourself at 111 West 44th Street in New York’s theater district, make it a point to gaze up at the haunting image of the illuminated sign for The Glass Menagerie, the play that launched the career of America’s greatest playwright. Maybe you too will recall the unsettling opening lines written in 1944 by Tennessee Williams, spoken by his protagonist, Tom Wingfield. Tom’s words promised to deliver the sort of truths few of us covet, though the play’s entertainment value has clearly withstood the test of time.

If you’re of the rip-the-Band-aid-off philosophy on facing life’s unpleasant realities, pivot on your heel and look across the street, to 110 West 44th Street. Your eyes will be immediately drawn to the less mesmerizing, but equally inescapable, signage gracing the edifice of that building, the U.S. debt clock, that live, unrelenting tally that is marching towards $20 trillion, be we all damned.

One must wonder if Broadway’s denizens see the theater in having these two facades stare one another down, as if taunting the other to wax more fatalistic.

This week, Federal Reserve policymakers will release a policy statement that paints an illusion of prosperity in cold monetarist verbiage that feigns the appearance of truth. The doves’ message will be uncharacteristically hawkish. They will flap their wings about accelerating underlying growth and inflation. They will allude to the time being upon us to normalize interest rates, to come in from a long, brutal winter of artifice.

The truth, you ask? Unconventional monetary policy in the form of zero interest rates and quantitative easing braced an economy that has been and remains fragile. And yet, as evidenced by the most recent bout of euphoria, animal spirits are out in full force.

There are other calendar years ending in the number ‘7’ associated with rampant speculation in asset markets and a strong Fed. Only one of the two proved to be a buying opportunity. The other stands as testament to one of the greatest monetary policy blunders in history.

As was the case in 1936, monetary policy had been manipulated to serve political needs. It’s noteworthy that the form assumed differed from that of recent years: it was huge gold inflows that were being monetized back then, but similarly, interest rates had been held closer to the zero lower bound for a protracted period.

In another parallel, measured goods inflation was conspicuous in its inability to achieve liftoff while that of asset prices was off the charts. (Has it really been 80 years of repeating the same mistake in gauging aggregate price behavior?) Then and now, investors exiled to a yield dessert justified their irrational approach to investing by rhetorically asking, “What’s the alternative?”

Commodities and stocks were the primary target of speculators in the recovery that took hold in 1933. Today, commercial real estate (CRE) and bonds have taken center stage while that of stocks is running a close third depending on your preferred valuation metric.

The latest Moody’s/RCA CPPI aggregate price index for CRE is remarkable. Prices through November, the latest on offer, are up nine percent over the past year. But they are perched 23 percent above their pre-crisis peak, which represents a vertigo-inducing 159 percent recovery of prices’ peak-to-trough losses. Morgan Stanley’s Richard Hill and Jerry Chen helpfully provide perspective on this figure: residential real estate, by comparison, has recovered a mere 80 percent of its losses. As for what’s driving the CRE train, office and industrial properties have taken the lead while, no shock here, retail property prices have begun to decline.

As was the case throughout the housing mania, loose underwriting standards can be credited with initially pushing prices upwards. Add to this lender behavior. Smaller banks, in particular, have aggressively reduced fees to garner market share, raising the ire of Fed regulators alarmed at the growing concentration of banks’ exposure to CRE loans. At last check, banks accounted for nearly half of CRE lending activity, up from 35 percent a few years ago. The good news, unless you’re a seller, is that lending standards have tightened for five consecutive quarters. In response, transaction volumes fell 21 percent in the final three months of last year. Hill and Chen observed that the sales slide, “was unusually high for a period that is typically very active.”

The prima facie evidence on extreme bond market valuation is equally compelling. Rather than delve into specifics on sovereign, corporate and emerging market bonds, we’ll let Deutsche Bank’s math speak for itself. It took a mere eight weeks through early January for the global bond market to rack up $3 trillion in losses. The swiftness of the move placed in stark perspective how hyper-sensitive bonds had become to interest rate moves. Investors should consider themselves warned.

As for stocks, the broadest valuation measure compares the market capitalization of all stocks to gross domestic product. Anything north of 100 percent denotes overvaluation making today’s reading of 127 percent disconcerting. That said, it has been higher – the ratio peaked at 154 percent in 1999 and was 130 percent in late 2015. It was, though, appreciably lower shortly before the stock market tanked. Just before the 2008 crisis, the ratio was at ‘only’ 108 percent. So make your own determination on this count. Does a relatively lower nosebleed valuation give you great comfort?

Looked at from a holistic perspective, the VIX, or so-called fear index, which reflects investors’ comfort level with stocks, flirted with single-digit territory last week. Though it did not break through 10 on the downside, which would have matched its 2007 low, the 10-handle is associated with plenty of daunting history.

“When the VIX is low and yields are falling, stocks do very well,” wrote Citigroup’s Brent Donnelly in a recent report. “When the VIX is low and yields are rising, stocks do poorly.”

That’s intuitive enough. Donnelly then goes on to compare the move in the benchmark 10-year Treasury to moves in stocks over the next 120 days. The sample set he used incorporates instances in which the VIX was less than 11 since 1990. A second step entailed comparing these occurrences to their corresponding three-month moves in the 10-year. Donnelly found that the largest three-month rise had been one standard deviation (you recall the term from Statistics 101, as in the distance from the center point on the bell curve). That is, until today.

“The craziest thing is this: Currently, the three-month rise in 10-year yields is more than 2.5 standard deviations. So based purely on this analysis, the 120-day outlook for U.S. equities is very poor.” The strength of the relationship between yields and future returns suggests stocks will fall by about seven percent over the next three months.

Like it or not, risky assets certainly appear to be sticking to the post-election, honeymoon-is-over script.

The burning question will quickly become one of, how will the Fed react? In its past life, stocks wouldn’t have to give back even 10 percent to trigger the next iteration of quantitative easing riding to the rescue. Listen to the doves’ tough talk today, though, and they sound as if they’re finally comfortable leaving risky assets to their own devices. Politics anyone?

The problem is that perhaps too much like the breakable menagerie of glass animals on display in Tennessee Williams’ play, borrowers of all stripes have amassed a veritable collection of debts throughout the market acts playing out since the Fed first lowered interest rates to the zero bound.

In an economy contingent upon conspicuous consumption, it won’t take much for the Fed to bring on a recession. The recent downtick in the personal saving rate is no cause for alarm on its own. Combine it with the steady increase in credit card spending – inflation-adjusted credit card spending has outpaced that of income growth for over a year now — and you quickly understand just how dependent continued gains in consumption are on interest rates not rising.

It’s been a mighty long time, eight years to be exact, since paper gains eviscerated the net worth of U.S. retirement savings in its various 401k, IRA and pension forms. Factor in the demographic backdrop, however, and know it won’t take long for investors to tune in to just how precious their non-yielding cash has become.

Perhaps the best news is that all heretical arguments in favor of the abolishment of cash necessarily go by the wayside during times of tightening financial conditions. After all, economic theory advocates the destruction of cash for the purpose of forcing hoarded money back into the economy. Even the illusionists at the Fed, hellbent as they are in their insistence that the economy is overheating, cannot square that circle.

The Big Short – Profiting From Distorted Markets

By Capitalist Exploits

Yesterday we discussed how incredibly fragile the global financial system is.

When markets get out of whack the inevitable consequences are typically of an asymmetric nature. Like an elastic band stretched too far, when it inevitably snaps the return to an equilibrium is vicious, violent and rapid.

Markets are like angry divorcees. Neither party wants to settle for half, but instead would rather destroy what’s left than let the other party get it. In the same fashion markets taken to extremes typically don’t merely revert to the mean, but instead go well beyond it destroying much in their path.

This dynamic can prove catastrophic to existing wealth or absolutely positively life changing depending on which side of the fence you are positioned.

The crash of the housing bubble in 2008 provides us with a prequel:

Today, let’s do a quick recap of how it came about since it’s instructive for much of what we’re dedicating our time to here.

What caused the housing crash… really?

You see, the tech bubble and the recession that followed it should have produced a normal market clearing event where the debris of excessive risk, misallocations of capital, and wall street hubris were cleansed from the system.

Instead, the Fed held short-term interest rates at 1%, thereby killing yield in the market and sending yield starved investors into seemingly “safe” mortgage backed securities. As the Fed kept rates low for too long, demand quickly outstripped supply. A problem Wall Street was only too happy to accommodate.

Rating agencies, biased by the fact that their clients are wall street banks were complicit in the game, gleefully rubber stamping AAA ratings on mortgages packaged up and securitized. Mortgages that had little hope of ever being serviced let alone repaid.

By 2006 subprime (which is to say extremely risky) lending accounted for a whopping 23.5% of all mortgage originations.

ce1

Remember “no credit? no problem?”? Ninja (no income, no job) loans proliferated and doing their bit Wall street packaged up the mortgages as “structured products” where not one in a hundred end-buyers knew what meat went into the sausage they’d just bought.

Continue reading The Big Short – Profiting From Distorted Markets

The Fed Needs More Inflation Nerds

By Michael Ashton

Earlier today I was on Bloomberg<GO> when the PCE inflation figures were released. As usual, it was an enjoyable time even if Alix Steel did call me a ‘big inflation nerd’ or something to that effect.

The topic was, of course, PCE – as well as inflation in general, how the Fed might respond (or not), and what the effect of the new Administration’s policies may be. You can see the main part of the discussion here, although not the part where Alix calls me a nerd. A man has some pride.

My main point regarding the PCE report was that PCE isn’t terribly low, but rather right on the long-run average as the chart below (all charts source Bloomberg) shows. Of course, PCE has been lagging behind the rise in CPI, but because it had been “too tight” previously this isn’t yet abnormal.

spread

However, in the interview I didn’t get to the really nerdy part. Perhaps my ego was still stinging and so I didn’t want to highlight the nerdiness?[1] No matter. The nerdy part is that the reason PCE is low is actually no longer because of Medical Care, but because of housing. This next chart plots the spread of core CPI over core PCE, through last month’s figures, versus Owners’ Equivalent Rent (OER).

Continue reading The Fed Needs More Inflation Nerds

What it Means That the Fed Declares That it is Done

By Jeffrey Snider of Alhambra

The FOMC threw four QE’s, six full years of ZIRP and a whole lot of promises and talk at the economy, and it just didn’t respond

As I wrote earlier, in orthodox economics it is actually possible to declare a depression and a recovery at the same time. The Federal Reserve’s statistic for Industrial Production actually contracted for a fifteenth straight month in November, an occurrence observed only eight other times in just about a century of data. Thus, if IP, as one of the four statistics the NBER uses to date business cycles, is displaying rarified weakness, how is it that the FOMC can vote to raise rates for a second time supposedly on a path to normalization?

The answer actually lies in just two pieces of data provided also by the Fed, though these are the modeled projections that accompany Fed meetings that fall at the quarterly intervals. The first is similar to the now infamous dots, where the various statistical models the Federal Reserve uses to forecast all the various possibilities replicate what committee members consider when placing those dots. As Monte Carlo simulations, mostly, they produce a statistically significant range where the models expect conditions to be – including for the federal funds rate.

When policymakers in the US began in 2013 to seriously discuss the “exit” from the “emergency” monetary policies that had to that point been continuously applied since the depths of the Great “Recession”, they had in mind the literal interpretation of that word as well as “recovery.” The Fed’s models then were showing that despite years of “unexplained” weakness, there was still every reason to expect it was all just a temporary condition that time and enough “stimulus” would overcome.

As late as June 2015, ferbus and all the rest were expecting the federal funds rate to be between 2.4% and 3.8% by the end of 2017. That level of “normalization” no longer exists as a central tendency, however, since the Fed’s models now suggest that full “exit” would be itself a very low probability tail event. Instead, the central tendency for the federal funds rate has been marked down to a range of just 1.1% to 1.6% for next year. There is a vast difference in those two sets of estimates even though they were produced only a year and a half apart.

abook-dec-2016-fomc-federal-funds-rate

We have to understand monetary policy and economics as they see them, not in common sense terms (there is so very little here). The FOMC is guided by several core philosophies, but among them is monetary neutrality. I have seen several definitions for it out there in the internet, but in policy terms it can be quite simple. Money doesn’t define the long run trend, they believe, it can only aid in the short and intermediate terms “aggregate demand.” The long run trend is what the long run trend will be regardless of whatever it is the Fed does or does not do along the way.

Continue reading What it Means That the Fed Declares That it is Done

The Federal Reserve and the Destruction of the American Dream

By Danielle DiMartino Booth

“Government is a just execution of the laws, which were instituted by the people for their people’s preservation: but if the people’s implements, to whom they have trusted the execution of those laws, or any power for their preservation, should convert such execution to their destruction, have they not the right to resume the power they once delegated, and to punish their servants who have abused it?”

—John Wilkes, The North Briton, October 19, 1762

 

No truer words have ever been penned to the betterment of a people struggling to break free of tyranny. Indeed, John Wilkes is considered by some historians to be the primary source of inspiration for revolutionary colonial Americans given his staunch defense of religious liberty, prisoners’ rights and freedom of the press, rights we hold dear to this day.

So idolized was Wilkes, our forefathers named countless towns and babies in his name, quite the honor all things considered. You see, Wilkes was also an infamous pornographer and relished his notoriety, raising self-promotion to an art form. Even Benjamin Franklin was disturbed by the raunchy rake, which is saying something considering Franklin’s own proclivity for dalliances.

But what if the colonials, the “We the People” to be, assigned added value to Wilkes’ brand of self-cultivated ill-repute? What if he rose to such fascinating infamy precisely because he launched vicious attacks on the privileged? What better way to become a champion of the powerless? Ring any bells?

On November 8, 2016, a stunned TV audience bore witness to Wilkes’ legacy playing out across this great land. Millions of voters joined forces to punish their elected servants who had so egregiously abused their power. The establishment was disenfranchised overnight.

Since the election, a not entirely unexpected pivot has taken place. President-elect Donald J. Trump is sure to have recruited cabinet members whose rich resumes no doubt raise the hair on the backs of some of his most radical supporters. We can only hope the promised, the demanded, reforms are not sacrificed on the altar of deal-making. It will come as no surprise to regulars of these missives what the deepest betrayal would be for yours truly. Trump must hold firm on his commitment to return the Federal Reserve to its right place as an apolitical institution. The very future of the American dream depends upon our new president being true to his word.

Reams upon reams have been written on the downfall of the American Dream. Social mobility stunted. Generations of stagnant incomes. The decline in new business formation. Income inequality the likes of which hasn’t persisted since the days preceding the Great Depression. Money in the bank is a theory for most Americans, even those fast approaching retirement. If you do have savings, by the way, you are punished with insulting levels of interest rates.

And just so we’re clear here and inside the trust tree, let’s be honest and acknowledge how and especially where the anger this trap incites will manifest itself — that is, shout-out-loud, hostile and open conflict and on our streets. An exaggeration? If only that were the case.

Two weeks ago, Real Vision aired an interview conducted with me right after the elections were held. Many subjects were covered over the hour. But the one that struck the loudest chord with viewers was the issue of underfunded public pensions, which stands to reason given the headlines of late.

But the reaction from viewers was anything but expected. The bile, the contempt, the malicious back and forth in the comments between public and private sector workers stunned me speechless.

It was the teachers, firefighters and policemen vs. you name the line of work among those in the private sector. No side won in the event you’re holding your breath. And both made great points. Promises made should not be broken. Teaching our children, protecting our citizens from harm – noble, often thankless professions without question. By the same token, why should someone who has worked their entire life swallow a spike in their property taxes to foot the bill? It’s not as if the investments in their 401ks are not on the same vulnerable footing as those in pensions.

Continue reading The Federal Reserve and the Destruction of the American Dream

Bi-Weekly Economic Review: Is the Fed Behind the Curve?

By Joseph Calhoun of Alhambra

Is the Fed Behind the Curve?

Economic Reports Scorecard

scorecard-11-1-16

There was little improvement in the economic data the last couple of weeks, the Citigroup Economic Surprise index still well below zero (-8.1). And frankly, where there was improvement such as the GDP report, it doesn’t look sustainable…unless the US is about to become a soybean exporting powerhouse. Anything is possible I suppose but counting on Brazil to have a lousy soybean crop every year doesn’t sound like much of a growth plan. Neither does adding to inventories when shelves are already more than fully stocked, inventory to sales ratios at recession levels.

I said in the last report that it appeared that, based on what we were seeing in the bond market, real growth expectations were rising. It took a mere two weeks to make me look a fool on that front. Bonds have continued to sell off but it is nominal bonds leading the way with TIPS outperforming. In other words, the bond selloff isn’t about real growth, it is about inflation fears. Those fears have been bolstered by some data such as the Case Shiller and FHFA house price indexes (+5.1% and 6.4% YOY respectively), a CPI that is rising closer to the Fed’s alleged target and the Employment Cost Index, up 2.2% YOY. But more than that I think is the new meme coming out of the Fed about allowing the economy to “run hot” for a while to make up for lost ground in the inflation indices. Janet Yellen, in a recent speech, touted the supposed benefits of operating a “high pressure economy”, one with inflation higher and unemployment lower than what the Fed believes to be appropriate in normal times.

Of course, this tradeoff between inflation and unemployment is one that, while oft alleged, has been tough to see in a real, actual economy. The alleged benefits of a high pressure economy are so extensive – raise consumer spending and business investment, raise the labor participation rate, increase R&D spending and new business formation according to Yellen – that to not pursue them would seem to be monetary malpractice. Of course, all the reckonin’, allowin’ and speculatin’ (as my father used to say) about such a high pressure economy presumes that the two variables are in some way linked and can be easily controlled by the Fed. The market seems to have no problem believing the Fed will let inflation run beyond its target but is much more skeptical about any benefit to the real economy.

I am frankly horrified that the leader of the Federal Reserve has such reverence for the old, rough Keynesian distortion of the A.W. Phillips study of labor markets and real wages. The original study did nothing more than prove that the forces of supply and demand apply to labor markets like any other. It had nothing to say about general inflation or any alleged trade-off with unemployment. The idea that more people working creates inflation is one that should spring only from the mind of a simpleton with limited critical thinking skills or a politician with an agenda – often one and the same for sure. It is as if the new person working adds to aggregate demand but has no impact on aggregate supply – which if true should limit their employment to a very brief period. The productivity figures in the new century are nothing about which to brag but they aren’t that bad.

Anyway, the point is that inflation expectations are on the rise and may or may not be a result of Janet Yellen’s inane mental maundering. As I said above, there is some evidence of inflation pressures in the economic data but it is unlikely to be anything other than – to use Yellen’s favored phrase – transitory absent a supporting move in the dollar. Inflation is about the purchasing power of money and a sustained burst of higher inflation isn’t going to happen without the dollar falling in value. Which it may do and indeed our momentum indicators say is likely. If so, this initial move higher in bond yields may be just that – initial and subject to further rises. For now though, the rise in inflation expectations is modest although the losses in the long end of the curve are not. Which makes me wonder if Ms. Yellen has considered the impact of higher bond yields in a world that thinks her daft and inattentive to the one thing over which she has some control – inflation.

Continue reading Bi-Weekly Economic Review: Is the Fed Behind the Curve?

Will the Fed be Able to Fight the Next Recession?

By Steve Saville

Anyone who asks the question is therefore either a deliberate promoter of dangerous propaganda or a victim of it

If you are asking the above question then your understanding of economics is sadly lacking or you are trying to mislead.

The Fed will never be completely out of monetary ammunition, because there is no limit to how much new money the central bank can create. The Fed will therefore always be capable of implementing some form of what Keynesians call stimulus. However, the so-called stimulus cannot possibly help the economy.

To believe that the central-bank monetisation of assets can help the economy you have to believe that an economy can benefit from counterfeiting. And to believe that the economy can be helped by lowering interest rates to below where they would otherwise be you have to believe that fake prices can be economically beneficial. In other words, you have to believe the impossible.

The reality is that the Fed never fights recession or helps the economy recover from recession, but it does cause recessions and gets in the way of genuine recovery after a recession occurs. For example, the monetary stimulus put in place by the Fed in response to the 2001 recession caused mal-investments — primarily associated with real estate — that were the seeds of the 2007-2009 recession. The price distortions caused by the Fed’s efforts to support the US economy from 2008 onward then firstly prevented a full liquidation of the mal-investments of 2002-2007 and then promoted a range of new mal-investments*. It’s therefore not a fluke that the most aggressive ‘monetary accommodation’ of the past 60 years occurred alongside the weakest post-recession recovery of the past 60 years. Moreover, the cause of the next recession will be the mal-investments stemming from the Fed’s earlier attempts to stimulate.

Unfortunately, if you have unswerving faith in a theoretical model that shows stronger real growth as the output following interest-rate cutting and/or money-pumping, then in response to economic weakness your conclusion will always be that interest-rate cutting and/or money-pumping is the appropriate course of action. And if the economy is still weak after such a course of action then your conclusion will naturally be that the same remedy must be applied with greater force.

For example, if cutting the interest rate to 1% isn’t followed by the expected strength then you will assume that the correct next step is to cut the interest rate to zero. If the expected growth still doesn’t appear then you will conclude that a negative interest rate is required, and if the economy stubbornly refuses to show sufficient vigor in response to a negative interest rate then your conclusion will be that the rate simply isn’t negative enough. And so on.

Whatever happens, the validity of the model that shows the economy being given a sustainable boost by central-bank-initiated monetary stimulus must never be questioned. After all, if doubts regarding the validity of the model were allowed to enter mainstream consciousness then people might start to ask: Should there be a central bank?

Circling back to the question posed at the top of this blog post, the question, itself, is a form of propaganda in that it presupposes the validity of the stimulus model (it presumes that the Fed is genuinely capable of fighting a recession, which it patently isn’t). Anyone who asks the question is therefore either a deliberate promoter of dangerous propaganda or a victim of it.

*Examples of the mal-investments promoted by the Fed’s money-pumping and interest-rate suppression during the past several years include the favouring by corporate America of stock buybacks over capital investment, the debt-funding of an unsustainable shale-oil boom, a generally greater amount of risk-taking by bond investors as part of a desperate effort to obtain a real yield above zero, the large-scale extension of credit to ‘subprime’ borrowers to artificially boost the sales of new cars, and the debt-funded investing in college degrees for which there is insufficient demand in the marketplace (a.k.a. the student loan scam).

Bond Market Knows What Fed Should Do

By Tom McClellan

Bond Market Knows What Fed Should Do

Fed Funds rate versus 2-year T-Note yield
September 22, 2016

This article first appeared in McClellan Market Report #515, published Sep. 21, 2016, and reflects a theme we have reported on multiple times before. 

We have an unblemished 21-year track record of predicting what the Fed should do, with 100% accuracy.  What the FOMC actually does is often different from what it should do.  As of the Sep. 21 FOMC meeting announcement, the Fed has missed another chance to do the right thing.

There is only one reason why the FOMC should ever change the Fed Fund target rate, and that is if the rate is in the wrong place.  Deciding what is the right or wrong rate is really difficult to do if all you do is look at economic data and complex models with Greek-letter math.  It is a lot easier if you just look at the bond market.

We have long held the belief that the FOMC should just outsource the task of setting the Fed Funds rate, and give that job over to the 2-year T-Note yield.  The chart above compares those two, and makes the point that the further apart they are, the bigger the problems that the Fed is creating.  Problems can result from being too restrictive, or too stimulative.  Right now, they are being too stimulative (and punishing savers).

Continue reading Bond Market Knows What Fed Should Do