Recent Fed Speeches
With last week's FOMC meeting over, which means Fed members are speaking once again, reflecting on the June meeting and looking forward to future decisions. Here is a breakdown of the content given by the five Fed members who appeared publicly this week so far.
New York Fed President Dudley stated that inflation, which is closer to 1.5% than 2% as measured by the PCE, is on the low side but he is happy with the progress made on the headline employment numbers. Given the low inflation, future rate hikes are not as certain as they were a few months ago.
Chicago Fed President Evans was focused on the "low inflation" as while, wanting to emphasize the alleged importance of making sure the public knows that the Fed is going to be doing something about the low inflation problem. Apparently, the "public" is worried that their costs of living aren't going up fast enough and needs confidence that the Fed will sweep in to the rescue in such a dire situation. “We have to assure the public that we recognize the new low-inflation environment and that we are not overly conservative central bankers who see our inflation target as a ceiling,” Evans said, according to Bloomberg. Of course, the opposite is the truth. The Fed has been overly extreme in its monetary expansion and reckless interest rate suppression.
Fed Vice Chair Fischer focused on the steps that must be done to prevent another financial crisis. His focus, naturally, was on government regulation including oversight of lending practices and bank stress tests. As always, there was no mention of the danger to financial stability caused by artificial expansion of the money supply and the suppression of interest rates, which encourages speculation and diverts resources into "investments" which otherwise would not have been funded if it wasn't for the Fed's easy money regime in the first place.
The Boston Fed President almost stumbled onto the right track when he said that persistently low interest rates may raise concerns about financial stability. Unfortunately, all he meant was that the Fed needed to be prepared to "act" (which of course means print more money) in response to possible negative shocks. It seems there was no realization about the reality sitting right under his nose: the Fed's previous course of action is what led interest rates so low in the first place!
Dallas Fed President pointed to the low yields on the 10 year Treasury as a sign that investors were anticipating slow growth in the years ahead. Because of this, Kaplan warned about being too hawkish on monetary policy and moving to remove "accommodation" too early. That is, the Fed's quadrupling of the balance sheet over the last decade hasn't actually provided for a robust economy and now the Fed is stuck having to prop it up with easy money.
Robert Kaplan: Interest Rate Hikes and Balance Sheet Reduction
Dallas Fed President Robert Kaplan weighed in on the rate hike storyline Thursday, endorsing the "three rate rises" view. He also qualified it, saying that if the economy outperforms, more than three is possible; and if it is weaker, less than three is possible. Thanks Bob.
He also stated that he was paying particular attention to price inflation trends. It's going the right direction, in his view (prices are rising), but unfortunately there are factors such as "technology-enabled disruption of business [that is] exerting downward pressure" (Reuters). This is unfortunate, of course, because rising prices are desirable and economic advancement challenges their efforts. Sarcasm aside, it is in statements like these that we get a peak into the anti-consumer mindset brought forth by the world's most eminent economists.
Beyond the tired rate hike issue, there is of course the new balance sheet theme. Kaplan informs: "As soon as later this year or maybe early next year, we should begin the process of letting the balance sheet roll off." The balance sheet has grown over 400% since the financial crisis, and now stands at $4.5 trillion compared to the $800 billion level where it stood in 2007. Yes, from the Fed's inception in 1913 to 2007 –almost a hundred years– it racked up an $800b balance sheet. And yet, in the 9 years since the crisis, it launched up to $4.5t.
So how much of this can actually be scaled back? Kaplan's answer: the balance sheet "[is] going to be bigger than the $800 billion we used to run." Clearly.
Richmond Fed's Lacker, Source of Medley Leak, Announces Immediate Resignation
Looks like Trump may have another opening to get more influence at the Fed. The fallout from this remains to be seen:
In 2012 there was a leak of sensitive information that caused an investigation into the Fed. There was some heavy scrutiny of Yellen herself:
Ms. Yellen met in 2011 and 2012 with a representative of Medley Global Advisors, the financial consultancy involved in several investigations into its publication of sensitive details of internal Fed policy deliberations.
Just today, Richmond Fed President Lacker came forward and admitted himself as the source of the leak. He announced his immediate resignation. MarketWatch reports:
The Medley report made several accurate predictions about some missing details of the asset purchase plan agreed to by Fed officials at a meeting in the September 2012 that were not released to the public. At the time, the Fed said it could not tell how the reporter got the information.
"I deeply regret the role that I may have played in confirming…confidential information," Lacker said in a statement.
Reality vs. The "Recovery" Narrative
As Jeffrey Lacker leads the pack on the Fed’s “concern of overheating” front, last Friday’s 2016 fourth quarter GDP numbers completely contradict the narrative. Coming in at a paltry 1.85% growth rate, the Fed was handed yet another excuse to push off the so-called “normalization of interest rates” further into the future. The Fed's FOMC again confirmed as much at its February meeting.
The Fed has stated for years — since 2008 — that it needed to keep interest rates low in order to support a sustainable recovery. The Fed was allegedly paying close attention to it’s Congressionally-sourced dual mandate to determine when it could start allowing rates to rise. But now it is 2017 and the Fed’s bureaucratic statistics relating to unemployment and price inflation say things are just dandy. But the GDP numbers, which purport to measure growth, scream the opposite.
This is the Fed’s predicament. They’ve held that the dual mandate was their only guide, but it’s becoming quickly evident how irrelevant those numbers are. As it turns out, the third quarter’s 3.5% GDP number was not a sign of coming paradise, but was rather a mocking anomaly. In the past six quarters, only once (third quarter 2016) did the GDP growth rate come in above 2%.
Moreover, things are getting worse, not better. 2016’s average growth rate was worse than both 2014 and 2015. Needless to say, Yellen’s credibility, to use a word of the mainstream, should be absolutely shattered. Stimulus and quantitative solutions have been an epic failure.
In light of this, the Fed’s decision to raise the target Federal Funds rate over the coming months is especially painful. Should they choose to do so, they do it in the face of a growth rate that is barely treading water. But if they choose to prolong these target rate hikes, they do so as their own dual mandate components tell them they should be normalizing monetary policy by now.
Of course, these PCE (personal consumption expenditure) and Official Unemployment numbers tell us almost nothing about the real economy. But then again, the Fed can’t admit this either can they?
Finally, all the above doesn’t even take into account that Fed Funds rate itself is just a smoke-and-mirrors target that is actually not very important. What truly matters, as Joe Salerno points out, is the expansion of the money supply. That is the true villain in all this.