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Author Topic: Money, the Fed, Banking, Monetary Policy, Dollar & other currencies, Gold/Silver  (Read 63391 times)
Power User
Posts: 31234

« Reply #750 on: July 30, 2014, 07:14:52 PM »

Improving Economy, Weaker Guideposts To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 7/30/2014

Apparently, an improving labor market and higher inflation are not enough to get any signal from the Federal Reserve that short-term interest rates should be higher or QE should end faster than they thought before.

The Fed did what almost everyone expected, leaving short-term rates unchanged and continuing to taper by $10 billion per meeting. As a result, the Fed will buy $25 billion in bonds in August and remains on a path to end quantitative easing at the end of October.

The Fed did make some important changes to the wording of its statement. On the labor market, it removed language saying the jobless rate “remains elevated.” It’s about time considering how consistently the unemployment rate has been dropping faster than the Fed has anticipated.

But the Fed also added important new language, saying “a range of labor market indicators suggests that there remains significant underutilization of labor resources.” So, despite the jobless rate approaching the Fed’s long-term objective, the Fed isn’t going to provide any firm guideposts on how changes in the labor market are going to influence monetary policy. This is very opaque – the opposite of transparency.

Meanwhile, the Fed acknowledged inflation is approaching its long-term target of 2% and removed language about how inflation running persistently below 2% could hurt the economy. However, it’s important to note that what matters most to the Fed isn’t actual inflation but its own forecast of future inflation. And the Fed has yet to issue a forecast that shows inflation higher than 2%.

Unlike the last meeting in June, there was one dissent from a Hawk. Philadelphia Fed bank President Charles Plosser, who thought the Fed shouldn’t pre-commit to leaving rates low for a “considerable period” after QE ends. After his editorial in the Wall Street Journal, we thought Richard Fisher, President of the Dallas Fed would dissent, but surprise, surprise, he voted with the majority. We assume he was mollified by the minor changes in language to the Fed statement.

Overall, today’s statement is consistent with our view that the Fed is already behind the curve and will end up accepting higher inflation in the longer-run than its current 2% target. Fed policy is easy, the Fed is making a commitment to keep its balance sheet larger for longer, and it sees no real urgency to raise rates. All of this will create a boost for equity markets and the economy over the next 12-24 months. And we still think the bond market does not appreciate the danger it faces.
Power User
Posts: 31234

« Reply #751 on: August 18, 2014, 03:48:03 PM »

   Monday Morning Outlook
                                        Jackson Hole: A Recipe for Inflation To view this article, Click Here
                                        Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
                                        Date: 8/18/2014


On Thursday, The Federal Reserve Bank of Kansas City’s annual retreat in
Jackson Hole, WY will start. The topic of discussion is: “Re-Evaluating Labor
Market Dynamics.”

The title itself says a lot about the Fed’s current mindset. Economists have
been studying labor market dynamics for many, many decades, if not centuries. So,
why does the Fed need to do any re-evaluating?

The answer: the unemployment rate is still 6.2% and other measures of the labor
market are far from robust. This is true even though the Fed has spent trillions on
bonds, boosted its balance sheet to record levels and cut interest rates to zero.

Maybe the Fed should “re-evaluate monetary policy,” or study “the
impact of fiscal policy on the economy” or find “the actual efficacy of
QE.” With all those juicy, and important, policy topics available, why study
the labor market?

Back when Ben Bernanke was Chairman of the Fed, he targeted a 6.5% unemployment rate
to start tightening. Now, Fed Chair Janet Yellen says it’s more complicated
than that. There are more important measures of labor market health.

What’s interesting about all of this is that the Fed is becoming a poster
child for “mission creep.” When the Fed first started in 1913, its job
was to protect the value of the US currency. Then, with passage of the Federal
Reserve Reform Act of 1977, the Fed received a dual mandate – to keep
“the unemployment rate” and inflation low.

This dual mandate was a mistake. The Fed has control over one thing – the
amount of money circulating in the economy. But, money itself cannot create jobs, or
fewer part-time jobs, or increase the labor force participation rate. If printing
money actually created wealth, then we should allow every citizen to counterfeit
their own currency. Of course, this would not work. Counterfeiting is illegal
because you get something for nothing.

No monetary policy expert has argued that the US experienced the crisis of 2008
because the Fed was too tight. And no one, with credentials, argues now that the US
economy is growing slowly because money is scarce.

In other words, monetary liquidity was not, and has not been, a problem for the
economy. As a result, any findings by the Fed that the labor market is not
performing at its full potential can be seen as proof that monetary policy is not
the tool for the job.

As the US learned in the 1980s, over the long-term, a single policy lever cannot
accomplish more than one policy objective. Monetary policy controls inflation in the
long run. Fiscal policy impacts the real economy (GDP and unemployment).

The Fed has now been easy for over five years, so it is impossible to argue that
monetary policy is being used as a short-term tool. If the labor market is still
having problems it must be because fiscal policy is harming potential growth. With
government spending, and especially redistribution, much higher than in the 1990s,
regulation a huge and growing burden, Obamacare, and higher tax rates, it’s no
wonder employment and incomes are lagging.

Unfortunately, the Fed does not see it this way. It is willing to maintain
abnormally, and artificially, low interest rates because the US hasn’t reached
so-called full employment. But those artificially low rates may cause other
problems, like a bubble in some sector, which the Fed has now decided to deal with
using “macro-prudential policy tools.” It sounds really technical, but
it's essentially playing “whack-a-mole” once excesses from easy money
pop up. In effect, the Fed wants to use monetary policy as a long-term policy tool
and deal with short-term monetary problems by using regulatory tools.

In reality, the existence of financial market excesses should prove that Fed policy
is being mishandled. But the Fed will choose to view excesses as a mistake by
financial institutions themselves. Blame the other guy, always.

This is a recipe for falling behind the curve. The Fed is already there and is
likely to stay there for some time to come. 
Power User
Posts: 31234

« Reply #752 on: August 18, 2014, 03:55:42 PM »

second post

StealthFlation Defined………………by BDI


An intractable economic condition that inevitably arises as unlimited units of
currency compulsively pursue nonproductive wealth assets in a grossly over-leveraged
economy which has been artificially reflated in a desperate and misguided attempt by
monetary authorities to synthetically engineer growth via extreme monetization. 
Preventing the real economy on the ground from seeking the healthy normalization and
natural balance of free market forces necessary for genuine productive economic

Also known as; wishful thinking, and robbing Peter to pay Paul.

This entirely synthesized approach to capital formation has brought us the following
disastrous results:

1)  Stealth incendiary inflationary risks to the economy due to latent money velocity

2)  Repeat massive unstable asset bubble dislocations

3)  Gross misallocation of genuine productive investment capital, stifling the
crucial SME sector

4)  Excessive market volatility which stymies business development and trade

5)  Lethargic economic activity and growth

6)  Massive off-shoring of the manufacturing base

7)  Facilitates fantastic fiscal deficit spending sprees

Cool  Decreases income & real job creation

9)  Extreme income inequality

10)  Eviscerates the very essence of money itself

Brought to you by The Savant @ StealthFlation , Stop by for Shelter from the Storm

Power User
Posts: 31234

« Reply #753 on: August 19, 2014, 08:18:36 PM »

Data Watch
The Consumer Price Index Increased 0.1% in July To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 8/19/2014

The Consumer Price Index (CPI) increased 0.1% in July, matching consensus expectations. The CPI is up 2.0% versus a year ago.
“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) was unchanged in July and is up 1.8% in the past year.

Food prices increased 0.3% in July, while energy prices declined 0.3%. The “core” CPI, which excludes food and energy, increased 0.1%, below the consensus expected 0.2%. The gain in core prices was led by owners’ equivalent rent. Core prices are up 1.9% versus a year ago.

Real average hourly earnings – the cash earnings of all employees, adjusted for inflation – were unchanged in July and unchanged in the past year. Real weekly earnings are up 0.3% in the past year.

Implications: Consumer prices continued to move higher in July, though only at the tepid 0.1% pace the consensus expected. Although consumer prices are up a moderate 2% from a year ago, the year-over-year number masks an acceleration. The CPI is up at a 2.5% annual rate in the past six months and up at a 2.8% rate in the past three months. (!!!)  Since the start of 2014, consumer prices are up 2.4% at an annual rate versus the 1.2% pace in first seven months of 2013. Owners’ equivalent rent (what homeowners would pay if they were renting their homes from soemone else) led the way in July, up 0.3%, accounting for most of the increase in the overall index. Owners’ equivalent rent, which makes up about ¼ of the overall CPI, is up 2.7% over the past 12 months and will be a key source of the acceleration in inflation in the year ahead, in large part fueled by the shift toward renting rather than owning. And while energy prices declined 0.3% in July, muting the rise in the overall CPI, we expect this measure to move higher in the months ahead, continuing the trend higher we have seen over the past twelve months. The worst news in today’s report was that “real” (inflation-adjusted) average hourly earnings remained flat in July and are unchanged in the past year. Plugging today’s CPI data into our models suggests the Fed’s preferred measure of inflation, the PCE deflator, probably increased 0.1% in July. If so, it would be up 1.6% from a year ago, barely below the Fed’s target of 2%. We expect to hit and cross the 2% target later this year, consistent with our view that the Fed starts raising short-term interest rates in the first half of 2015.
Power User
Posts: 31234

« Reply #754 on: August 22, 2014, 11:58:33 AM »

Hawks Crying Wolf

AUG. 21, 2014

According to a recent report in The Times, there is dissent at the Fed: “An increasingly vocal minority of Federal Reserve officials want the central bank to retreat more quickly” from its easy-money policies, which they warn run the risk of causing inflation. And this debate, we are told, is likely to dominate the big economic symposium currently underway in Jackson Hole, Wyo.

That may well be the case. But there’s something you should know: That “vocal minority” has been warning about soaring inflation more or less nonstop for six years. And the persistence of that obsession seems, to me, to be a more interesting and important story than the fact that the usual suspects are saying the usual things.

Before I try to explain the inflation obsession, let’s talk about how striking that obsession really is.

The Times article singles out for special mention Charles Plosser of the Philadelphia Fed, who is, indeed, warning about inflation risks. But you should know that he warned about the danger of rising inflation in 2008. He warned about it in 2009. He did the same in 2010, 2011, 2012 and 2013. He was wrong each time, but, undaunted, he’s now doing it again.

And this record isn’t unusual. With very few exceptions, officials and economists who issued dire warnings about inflation years ago are still issuing more or less identical warnings today. Narayana Kocherlakota, president of the Minneapolis Fed, is the only prominent counterexample I can think of.

Now, everyone who has been in the economics business any length of time, myself very much included, has made some incorrect predictions. If you haven’t, you’re playing it too safe. The inflation hawks, however, show no sign of learning from their mistakes. Where is the soul-searching, the attempt to understand how they could have been so wrong?

The point is that when you see people clinging to a view of the world in the teeth of the evidence, failing to reconsider their beliefs despite repeated prediction failures, you have to suspect that there are ulterior motives involved. So the interesting question is: What is it about crying “Inflation!” that makes it so appealing that people keep doing it despite having been wrong again and again?

Well, when economic myths persist, the explanation usually lies in politics — and, in particular, in class interests. There is not a shred of evidence that cutting tax rates on the wealthy boosts the economy, but there’s no mystery about why leading Republicans like Representative Paul Ryan keep claiming that lower taxes on the rich are the secret to growth. Claims that we face an imminent fiscal crisis, that America will turn into Greece any day now, similarly serve a useful purpose for those seeking to dismantle social programs.

At first sight, claims that easy money will cause disaster even in a depressed economy seem different, because the class interests are far less clear. Yes, low interest rates mean low long-term returns for bondholders (who are generally wealthy), but they also mean short-term capital gains for those same bondholders.
Continue reading the main story Continue reading the main story

But while easy money may in principle have mixed effects on the fortunes (literally) of the wealthy, in practice demands for tighter money despite high unemployment always come from the right. Eight decades ago, Friedrich Hayek warned against any attempt to mitigate the Great Depression via “the creation of artificial demand”; three years ago, Mr. Ryan all but accused Ben Bernanke, the Fed chairman at the time, of seeking to “debase” the dollar. Inflation obsession is as closely associated with conservative politics as demands for lower taxes on capital gains.
Continue reading the main story
Recent Comments

Sooner or later we will have some inflation and the wingers can say they were right.
Larry Hoffman
25 minutes ago

Mr. Krugman, once again, points out the prognosticators who keep making the same "WRONG" prediction. The most amazing thing about them is...
Bob Burns
25 minutes ago

Great column. I've been having this same argument with my investment advisor for 6 years and so far he's been left to manufacturing "facts"...

    See All Comments
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It’s less clear why. But faith in the inability of government to do anything positive is a central tenet of the conservative creed. Carving out an exception for monetary policy — “Government is always the problem, not the solution, unless we’re talking about the Fed cutting interest rates to fight unemployment” — may just be too subtle a distinction to draw in an era when Republican politicians draw their economic ideas from Ayn Rand novels.

Which brings me back to the Fed, and the question of when to end easy-money policies.

Even monetary doves like Janet Yellen, the Fed chairwoman, generally acknowledge that there will come a time to take the pedal off the metal. And maybe that time isn’t far off — official unemployment has fallen sharply, although wages are still going nowhere and inflation is still subdued.

But the last people you want to ask about appropriate policy are people who have been warning about inflation year after year. Not only have they been consistently wrong, they’ve staked out a position that, whether they know it or not, is essentially political rather than based on analysis. They should be listened to politely — good manners are always a virtue — then ignored.
Power User
Posts: 31234

« Reply #755 on: September 17, 2014, 05:40:37 PM »

Rate Hikes Approaching To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 9/17/2014

We count five major takeaways from today’s activity at the Federal Reserve.

First, quantitative easing (QE) still looks on track for winding down at the end of October. As expected, the Fed announced it would cut its purchases of Treasury securities and mortgage-backed securities to $15 billion in October and expects to announce an end to QE at the next meeting, which is October 29th.

Second, the median view among Fed officials is for a slightly faster increase in short-term rates. Back in June, the consensus was for the top of the federal funds target range to be 1.25% at the end of 2015; now it’s 1.5%. Previously the consensus was around 2.5% for the end of 2016, now it’s 3%. As a result, it now looks like the Fed will start raising rates by April 2015, perhaps even as early as the first quarter. To confirm this, look for the Fed to dump the “considerable time” language later this year.
Third, once it starts raising rates, the Fed will try to control the federal funds rate by using the interest it pays banks for holding excess reserves. It will also use reverse repos to help control the funds rate, but only as much and as long as needed. The Fed says it won’t use reverse repos for other purposes.

Fourth, the Fed isn’t going to outright sell securities from its portfolio to unwind its bloated balance sheet. After starting to raise the funds rate, the Fed will eventually allow its balance sheet to shrink in a passive way, by letting securities gradually mature without full reinvestment. The Fed is particularly reluctant to sell mortgage-backed securities (MBS), but may eventually do so several years down the road to clean up some long-dated securities on its books that won’t mature anytime soon. Long-term, the Fed intends to go back to holding almost all Treasury securities, not a large portfolio of MBS.

Last, where there’s smoke, there’s fire. Two Fed officials dissented from the statement, both Philadelphia Fed Bank President Charles Plosser and Dallas Bank President Richard Fisher. More importantly, both dissents were from hawks, which suggests that if the Fed makes any changes in policy or projections at the next couple of meetings, it’s more likely to get more hawkish than more dovish.

The Fed also made some minor changes to the language in its statement, noting that the unemployment rate is little changed since the last meeting and the economy is expanding moderately after the downside surprise in Q1 and sharp rebound in Q2.

The bottom line is that the Fed has been and will remain behind the curve. Nominal GDP – real GDP growth plus inflation – is up 4.2% in the past year and up at a 3.7% annual rate in the past two years. A federal funds target rate of nearly zero is too low given this growth. It’s also too low given well-tailored policy tools like the Taylor Rule.
Hyperinflation is not in the cards; the Fed will keep paying banks enough to keep the money multiplier depressed. But, given loose policy, we expect gradually faster growth in nominal GDP for the next couple of years. In turn, the bull market in equities will continue to prevail and the bond market is due for a fall.
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