One of the current myths promulgated by Wall Street is that the Federal Reserve will raise rates once this year, breathe a sigh of relief, and be done until the “12th of never”. But those who are familiar with our central bank’s history are aware that the Federal Open Market Committee (FOMC) has never tightened the Fed Funds Rate just once. A quarter point hiking cycle has no historical basis and is just wishful Wall Street thinking.
In the spring of 1988 fearing a rise in core inflation, the Fed went on a tightening cycle that lasted from April 1988 to March 1989. During that time the Fed funds rate increased more than 300 basis points. This episode was followed by a recession beginning in 1990, suggesting that the corrective policy actions may have intensified a weakening economy, and that the Fed is prone to being economically tone deaf.
Then, during the fall of 1993, a rise in long rates represented a potential inflation scare and led the FOMC to raise the Funds Rate again another 300 basis points between February 1994 and February 1995.
And finally, as concerns over a potential housing bubble mounted, the Fed began to hike rates in June 2004 and continued through July of 2006, for a total increase of 425 basis points. Soon after, the subprime mortgage crisis was exposed and the Great Recession was in full throttle.
But we don’t have to be Fed soothsayers to predict the planned trajectory of the Funds Rate; the Fed makes its intentions public during four of its eight scheduled meetings. During those meetings the FOMC provides us with a model of the members’ expectations for policy rates in a chart known as the “dot plot.”
While the FOMC is not bound by its “dot plot” predictions, it does provide insight into committee’s monetary policy plans. The markets are aware of their intentions and will begin to price in future interest rates moves as soon as the Fed begins liftoff. Continue reading
Dead Letter Syndrome: Equality Before the Law
Former Italian prime minister Silvio Berlusconi – the cavaliere – has been successful in fighting off legal challenges ranging from sex with minors to alleged tax fraud involving humungous amounts for well over adecade. On a number of occasions, the Italian State even created new laws specifically designed to keep the cavaliere out of jail.
Former Italian emperor, the irrepressible and highly entertaining cavaliere.
Image by Steve Bell
We admittedly just loved his constant successful evasions of justice. First of all, we were deeply worried by the thought of potentially losing this unsurpassed master of political entertainment. Secondly, when the Eurocracy decided it didn’t like him anymore, he was basically putsched out of office, and we greatly dislike the meddlers administering the Moloch in Brussels. Incidentally, ever since he has lost political power, Berlusconi’s successes in evading justice have been waning rather rapidly.
What was of course also great about Berlusconi’s brushes with the law was that they demonstrated unequivocally that the concept of “equality before the law” is a basically a bad joke. They showed the hoi-polloithat the modern-day rulers of the “democratic” societies of the West are in many respects really not much different from the feudal robber barons of the past. This seemed eminently useful from an educational perspective to us. Continue reading
Submitted by William Bonner, Chairman – Bonner & Partners
All Eyes on the Fed
GUALFIN, Argentina – Stocks have been wiggly-waggling along for the last few days. Just like the tail on a happy dog. Investors don’t know what to do…
And everyone is on the edge of his seat in anticipation of whether the Fed will raise interest rates at its policy meeting this week. This must be the most anticipated move by a central bank in all history.
Ms. Yellen, dispensing her imminent rate hike glare
Photo credit: Kevin Lamarque / Reuters
In a few days, Janet Yellen and her central banking cronies will decide whether to begin raising short-term interest rates. Supposedly, the six-year emergency is over. It’s time to help those interest rates up off the floor.
If the Fed does anything at all, it will probably do so little that it won’t make any real difference. Maybe an increase in the federal funds rate of one-quarter of a percentage point! (This rate is the “base” interest rate in the economy. It’s the rate at which banks lend reserves – aka federal funds – to each other, usually overnight.)
But most likely, the Fed will do nothing… because nothing is the safest thing to do. Yellen is well aware that there is always a last straw that breaks the camel’s back. Her main goal as Fed boss is to avoid being the one who puts it there. Continue reading
Well, that was timely. The August CPI came in at -0.1% and is up a mere 0.2% over the past year. So Janet Yellen can now say, look ma, no inflation!
Once again, therefore, the Fed has an excuse to keep shoveling free money into the casino. If Stanley Fischer insists that more evidence is needed that consumer inflation is progressing toward its intended 2% destination, and Bill Dudley persuades Yellen & Co. that financial conditions have already “tightened” by 25 basis points, as measured by Goldman’s spurious Financial Conditions Index (GSFCI), we will get the 81st month of ZIRP; and with it a short-lived relief rally, not the Wall Street hissy fit that is long overdue and eventually unavoidable.
Alas, we will also get a vivid demonstration that main street America is being put in harm’s way by the posse of cowards, dissemblers and academic fanatics who run the world’s most powerful central bank. The evidence is right below in the summary table from this morning’s BLS inflation report.
It shows quite clearly that prices of commodities and goods are falling in the wake of the intensifying tide of global deflation, while the cost of shelter and domestic services is moving higher at a spritely pace. Accordingly, it does not take a PhD in economics to figure out that the resulting “average” rate of price change for the BLS’ dubious market basket of consumer items is purely a statistical accident, and absolutely outside of the Fed’s ability to shape.
In fact, it makes a mockery of the Fed’s insensible commitment to 2% inflation. The latter has always amounted to a policy target confected from whole cloth, anyway, since it is not contained in or required by the Humphrey-Hawkins Act, nor is it grounded in a shred of historic evidence that decimal points of difference around 2% consumer inflation have anything whatsoever to do with economic growth or gains in societal wealth and living standards. Continue reading
Industrial production contracted again in August at a rate (month-over-month) similar to that in June. That would suggest the rebound in July was the aberration since IP has now declined in seven out of the eight months this year. The year-over-year growth rate of just 0.9% would have been the worst of the “recovery” except that downward revisions forced June’s Y/Y rate to be a slightly lower at 0.8%. In any case, the past four months number among the five lowest annual gains going back to 2010.
These production levels are still being aided significantly by the oil and gas sector despite the fact that activity in energy has clearly slowed with non-transitory energy prices. While not growing anywhere close the almost 20% Y/Y rate from December, even at 5.2% in August that is still a seriously positive contribution overall; suggesting that the declines in production away from energy are a bit more severe and that so far are just the beginning. Continue reading
Submitted by Mark O’Byrne – GoldCore
Gold rose 1.3% yesterday ahead of the Federal Reserve interest rate announcement today. Markets remain divided and uncertain whether the Fed will increase rates by 25 basis points today (1900 GMT).
The Fed last raised interest rates in June 2006, by 25 basis points to 5.25%, shortly after that America’s central bank found itself reducing rates and since December 2008 the Fed’s benchmark interest rate has been set between 0.0% and 0.25%. Gold prices rose in the months after the interest rise and were 23% higher in 2006.
Lower than expected U.S. inflation numbers yesterday eased fears the Fed will hike interest rates later this session. The dollar came under pressure today after the weak inflation data led traders to pare bets that the U.S. Federal Reserve will deliver an interest rate hike.
The ‘will they or won’t they’ speculation is rife and all consuming in markets. The Fed will hold rates near unprecedented historic lows at 0.25% and not have its first interest rate rise in nearly a decade, according to a little over half of economists in a Reuters poll who only last week narrowly predicted the Fed will increase rates by 0.25% today.
Since last week’s poll, five economists have changed their prediction for a hike and now expect the Fed to keep rates at 0.25%. None changed their view from a hold to a hike, suggesting that momentum is moving against a Fed move this week. The number of economists predicting no change in rates now outnumbers those betting on a hike by 45 to 35. Among primary dealers, 12 banks expect the Fed to hold and the remaining 10 expect a hike. Continue reading