Fed Up: Culture Shock

By Danielle DiMartino Booth

“If it were possible to take interest rates into negative territory, I would be voting for that.”

— Janet Yellen, February 2010

Photo Credit: Howie Le

As her fame has grown, Janet Yellen is recognized in restaurants and airports around the world. But her world has narrowed. Because the Fed chairman can so easily move markets with a few casual words, Yellen can’t get together regularly and shoot the breeze with businesspeople or analysts who follow the Fed for a living. She must rely on her instincts, her Keynesian training, and the MIT Mafia.

“You can’t think about what is happening in the economy constructively, from a policy standpoint, unless you have some theoretical paradigm in mind,” Yellen had told Lemann of the New Yorker in 2014.

One of Lemann’s final observations: “The Fed, not the Treasury or the White House or Congress, is now the primary economic policymaker in the United States, and therefore the world.”

But what if Yellen’s theoretical paradigm is dead wrong?

The woman who “did not see and did not appreciate what the risks were with securitization, the credit rating agencies, the shadow banking system, the SIVs . . . until it happened” has led us straight into an abyss.

It’s time to climb out. The Federal Reserve’s leadership must come to grips with its role in creating the extraordinary circumstances in which it now finds itself. It must embrace reforms to regain its credibility.

Even Fedwire finally admitted in August 2016 that the Federal Reserve had lost its mojo, with a story headlined “Years of Fed Missteps Fueled Disillusion with the Economy and Washington.” In an effort to explain rising extremism in American politics in a series called “The Great Unraveling,” Jon Hilsenrath described a Fed confronting “hardened public skepticism and growing self- doubt.”

Mistakes by the Fed included missing the housing bubble and financial crisis, being “blinded” to the slowdown in the growth of worker productivity, and failing to anticipate how inflation behaved in regard to the job market. The Fed’s economic projections of GDP and how fast the economy would grow were wrong time and again.

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Dr. StrangeYellen or: How I Learned To Stop Worrying And Love The Depression

By Jeffrey Snider of Alhambra

A good part of the problem in analyzing modern money is that it is not a clear break from traditional understanding, but more so like radical evolution of it

The main policymaking body of the Federal Reserve, the FOMC, has had a tortured relationship with eurodollar futures during this past decade. As I chronicled here in greater detail, starting in early 2007 the committee members decided that the deepest, broadest market in terms of money in human history could not possibly reflect accurate expectations. Ben Bernanke had told Congress that subprime was contained, therefore there was no reason for Fed members to expect that they would be forced to reduce interest rates so soon after having stopped raising them (in name only, of course).

The episode reflected the growing divergence between what eurodollar futures were and are, and what they are “supposed” to be. To the FOMC, it alone will decide what short-term money rates are going to be, so eurodollar futures no matter how many trillions in open interest should never deviate so significantly from the official position. To Bill Dudley and the rest, they knew what was coming and it wasn’t anything to be much concerned about; to eurodollar markets, there were rising doubts about all that, those that over time proved correct.

A good part of the problem in analyzing modern money is that it is not a clear break from traditional understanding, but more so like radical evolution of it. Thus, the language and terminology is often imprecise, a fault that I am quite guilty of. I often use the vernacular of traditional monetary theory as a starting point, a frame of reference with which to introduce similar concepts in their evolved state (dollar vs. “dollar”). It often takes on a life of its own, leading to further ambiguity as terms themselves shift into a hybrid sort of shorthand that requires perhaps too much familiarity to easily comprehend.

Eurodollar futures, and certainly my own treatment of them, fall into this category. In the spirit of precision, they are not money, nor are they anything other than a temporal reflection of market expectations. It is quite easy to fall into a sort of laziness where eurodollar futures become interchangeable with money in analysis and discussion.But, by their very definition and contract terms, as a single contract gives the right to a $1 million eurodollar deposit balance for a three-month term at LIBOR, though they are integral to the monetary system they are not explicitly it. They are a future indication of money conditions as expressed via current circumstances, or at least the general and conventional perceptions of those circumstances.

It is for these reasons, the multi-faceted and multi-dimensional aspects, that I favor eurodollar futures as one of the most important, if not the most important, market indications for all that is hidden about what the global system, including economy. The history of the past ten years has been told in eurodollar futures, and told very well if you can translate them via these non-traditional terms. In fact, everything you need to know about the Great “Recession” and its entire ongoing aftermath is contained in just one chart:

I have segmented this select group of contracts into those under ZIRP (shades of red) and those longer that will fall under whatever counts as this end of “normalcy” (shades of blue). In my mind, it is an astounding visual that accounts for depression as well as how that relates to what is an unmistakable breakdown of money and especially monetary policy.

To aid in understanding this shift, we can take the whole history by parts. Picking up the story in mid-2008 when eurodollar futures’ concern had already proven correct (and Bill Dudley the fool), it was still unclear as to what that would actually come to mean. Over the course of the rest of 2008, it ultimately meant panic and massive global economic contraction. What followed, however, were expectations for full recovery; for the “emergency” monetary policies of ZIRP, QE, and some others to help ensure the historical outcome of symmetry.

Continue reading Dr. StrangeYellen or: How I Learned To Stop Worrying And Love The Depression

Yellen: Maybe We Don’t Know What We Are Doing

By Jeffrey Snider of Alhambra

The Fed is losing control with increasing doubts about what monetary policy actually is

In 1953, Milton Friedman wrote out what have been the guiding principles of modern, orthodox economics that were necessary should it wish to join the ranks of serious science. In his Methodology of Positive Economics, Friedman recognized economics unlike harder sciences proceeds from an enormous disadvantage, meaning that for the most part all of it is unobservable. We know that an economy happens and that there are observable conditions that relate to the immense and complicated interactions that make up any economic system, but to figure out exactly how A becomes B is all but impossible. You and I may arrive at the same place, economically or financially speaking, but the way in which we did might be extremely different and that might be important.

This was, of course, Adam Smith’s “invisible hand” of free market economies where social progress was a product of mutual interdependence. But economists of the post-Great Depression era were concerned that because so much was invisible leaving it up to markets alone was too messy and far too often violent. Many, like Friedman, were actually concerned that without a more central role for someone (it was only human that economists saw themselves in that role) that free markets altogether would be subsumed by raw statism, as so many other places had already experienced. To them, to save it was to corrupt it.

To get to that place of a more delimited and therefore “optimal” structure meant that economists had to overcome this information limitation. This is what Positive Economics meant to accomplish, to set out the rules by which economists could still fulfill their self-selected goal even with that possibly disqualifying handicap. In truth, Positive Economics was and remains quite simple as I wrote back in July:

To get to this point, Friedman claims a hypothesis must be “important”, by which he defines as, “if it ‘explains’ much by little, that is, if it abstracts the common and crucial elements from the mass of complex and detailed circumstances surrounding the phenomena to be explained and permits valid predictions on the basis of them alone.” In statistical usage, this is justification for ignoring the “error” terms so long as the few independent variables supply sufficient predictive capacity. [emphasis added]

In terms of the activist central banks that followed from this thinking, Alan Greenspan’s Fed, for instance, could stake a claim to economic control by nothing more than the federal funds rate even though they truly had no idea how that “control” actually worked. That much they were unconcerned about because the mathematical correlations of that time showed a high degree of relationship between all the important economic variables leading back to short-term interest rates. Greenspan didn’t need to understand how or why, according to Positive Economics, he just needed to be assured that he could explain a whole lot (borrowing, inflation, economy) by a very little (the federal funds rate); which he believed he did and so did “everyone” else.

Continue reading Yellen: Maybe We Don’t Know What We Are Doing

Hard to Ignore Dovish Tone of Yellen’s Remarks

By Chris Ciovacco

Janet Yellen’s speech last Friday cast some doubt on current expectations of a December rate hike. The first sentence of her prepared remarks questions analysis based on recent economic history:

“Extreme economic events have often challenged existing views of how the economy works and exposed shortcomings in the collective knowledge of economists.”

It is possible Yellen was implying the call to raise interest rates based on the historical relationship between employment and inflation may be premature given the state of the global economy. From The Wall Street Journal:

“Her speech at a conference held by the Federal Reserve Bank of Boston offered a window into her mind-set and how policy might evolve in the months ahead. She effectively expressed sympathy for the idea of keeping short-term interest rates low to let the economy gather steam and reverse some of the long-run debilitating effects of the slow recovery, such as low labor-force participation and business investment. That implied very gradual rate increases in the months ahead.”

Are Inflation Expectations Taking Off?

If we use the ratio of inflation-protected Treasuries (TIP) to standard Treasuries as a proxy for inflation expectations, it is difficult to say they have reached alarming levels. The TIP/IEF ratio is currently lower than it was in both November 2008 and June 2015.

inflation expectations, tip-ief ratio

Other excerpts from Yellen’s prepared remarks lean toward the dovish end of the interest rate spectrum:

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Yellen Unveiling, Jackson Hole 2016

By Doug Noland

Credit Bubble Bulletin:  Yellen Unveiling, Jackson Hole 2016

The Global Financial Crisis and Great Recession posed daunting new challenges for central banks around the world and spurred innovations in the design, implementation, and communication of monetary policy. With the U.S. economy now nearing the Federal Reserve’s statutory goals of maximum employment and price stability, this conference provides a timely opportunity to consider how the lessons we learned are likely to influence the conduct of monetary policy in the future. The theme of the conference, ‘Designing Resilient Monetary Policy Frameworks for the Future,’ encompasses many aspects of monetary policy, from the nitty-gritty details of implementing policy in financial markets to broader questions about how policy affects the economy.” The introduction to Janet Yellen’s speech, “The Federal Reserve’s Monetary Policy Toolkit: Past, Present, and Future,” Jackson Hole, August 26, 2016

Bloomberg: “Yellen Says Rate-Hike Case ‘Strengthened in Recent Months.’” The FT was almost identical to Bloomberg. It was hardly different at the WSJ: “Fed Chairwoman Janet Yellen Sees Stronger Case for Interest-Rate Increase.” And from CNBC: “Yellen says a rate hike is coming—but markets say not now.” And this from Zerohedge: “Best Reaction Yet: ‘Yellen Speech A Whole Lot Of Nothing.’”

I have a different take: Yellen provided more content for history books. In today’s short-term focused world, analysts and pundits remain fixated on clues to the next policy move. And while Yellen included language unbecoming of ultra-dovishness for the near-term, the Fed chair’s presentation was zany-dovish for the intermediate- and longer-term.

The Yellen Fed has begun methodically laying the analytical foundation for a Federal Reserve (and global central banks) balance sheet of unthinkable dimensions. It’s right there in her writing, as explicit as it is astounding. Before it’s too late, the Fed’s power – and their runaway policy experiment – need to be reined in. Contemporary Central bankers have been operating with blank checkbooks only because it was never contemplated that they would actually exploit their capacity to print “money” with reckless abandon. Who cannot see that these central bankers need clear rules and well-defined restraints? Their judgment is not trustworthy.

The WSJ’s Jon Hilsenrath penned an interesting pre-Jackson Hole piece, “Years of Fed Missteps Fueled Disillusion With the Economy and Washington.” “Once-revered central bank failed to foresee the crisis and has struggled in its aftermath, fostering the rise of populism and distrust of institutions. In the past decade Federal Reserve officials have been flummoxed by a housing bubble that cratered the financial system, a long stretch of slow growth they failed to foresee and inflation persistently undershooting their goal. In response they engineered unpopular financial rescues, launched start-and-stop bond buying and delayed planned interest-rate boosts. ‘There are a lot of things that we thought we knew that haven’t turned out quite as we expected,’ said Eric Rosengren, president of the Federal Reserve Bank of Boston. ‘The economy and financial markets are not as stable as we previously assumed.’”

Yellen’s above speech introduction refers to “lessons we learned.” It is, however, rather obvious that the Federal Reserve has completely failed to recognize how a flawed monetary policy framework was fundamental to a financial Bubble that collapsed into the “worst financial crisis since the Great Depression.”

Continue reading Yellen Unveiling, Jackson Hole 2016

The Vanity of Central Bankers and the Common Sense Rule

By Danielle DiMartino Booth

The Vanity of Central Bankers and the Common Sense Rule

Some wedding gifts just keep on giving, even after the celebrated union upon which they were bestowed has failed. That would certainly be true in the case of Carly Simon and James Taylor, whose notoriously rocky marriage ended in 1983. The timing of her November 1972 wedding marked more than a vow to Taylor, it coincided with Simon’s gift to pop music and the release of “You’re So Vain,” which ripped to the No. 1 spot on the charts and still retains the ranking of 82nd highest on Billboard’s Greatest Songs of All-Time. What a generous gift!

But, was it for the duo? Might it just be possible this lasting gift bred some not so blissful turbulence in the marriage? At the time, speculation swirled around the obviously vainglorious but mystery male subject. Was it Warren Beatty, David Geffen, Mick Jagger, Kris Kristofferson, Cat Stephens or James Taylor himself? The list went on and on. As of November 2015, Simon has only divulged that Beatty was one of three the lyrics reference. Taylor is not among the remaining two mystery men.

It’s a safe bet that a Taylor of a completely different stripe is far from being a mystery man in Janet Yellen’s appreciably less torrid past. In fact, the roles might even be reversed in Yellen’s world, with a slew of economists lamenting her vanity in rejecting them. The eminent John Taylor would be first in line, given that no less than his namesake rule used for devising monetary policy has been so explicitly and publically snubbed by the Chair.

Continue reading at TalkMarkets →

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?