Tag Archives: Interest Rates

John Rubino: Startling Inflation News Illustrates The Failure Of Easy Money

By John Rubino, Apr 13, 2016

Startling Inflation News Illustrates The Failure Of Easy Money

After three decades of epic deficit spending and three years of extraordinary money creation, Japan’s economy is enjoying a rollicking inflationary boom. Just kidding. Exactly the opposite is happening:

Japan households’ inflation expectations hit three-year low – BOJ

(Reuters) – Japanese households’ sentiment worsened in the three months to March and their expectations of inflation fell to levels before the Bank of Japan deployed its massive asset-buying programme three years ago, a central bank survey showed.

The survey’s bleaker outlook keeps alive expectations of additional monetary stimulus even as BOJ Governor Haruhiko Kuroda maintained his optimism that the world’s third-largest economy was recovering moderately.

Kuroda, however, warned that he was closely watching how a recent surge in the yen and slumping Tokyo stock prices could affect the outlook.

“Global financial markets remain unstable as investors are becoming increasingly risk averse due to uncertainty over the outlook of emerging and resource-exporting economies,” Kuroda said in a speech at an annual meeting of trust banks on Monday.

“The BOJ won’t hesitate to take additional easing steps if needed to achieve its inflation target,” he said.

The BOJ’s quarterly survey on people’s livelihood showed the ratio of households who expect prices to rise a year from now stood at 75.7 percent in March, down from 77.6 percent in December and the lowest level since March 2013.

A separate index measuring households’ confidence about the economy stood at minus 22.5 in March, worsening from minus 17.3 in December to the lowest level since March 2015.

The gloomy outcome underscores the dilemma the BOJ faces as it battles mounting external headwinds for the economy with its dwindling policy tool-kit.

The BOJ’s adoption of a massive asset-buying programme, dubbed “quantitative and qualitative easing,” in April 2013 was intended to spur public expectations that prices will rise, and in turn, encouraging households and firms to spend.

That has failed to materialise, forcing the central bank to add negative interest rates to QQE in January in a fresh attempt to accelerate inflation towards its ambitious 2 percent target.

The move has failed to arrest a worrying spike in the yen or boost business confidence. Japan’s economy contracted in October-December last year and analysts expect it to post only feeble growth, if any, in January-March. Inflation has also ground to a halt, keeping the BOJ under pressure to ease again in coming months.

A separate poll by private think tank Japan Center for Economic Research, among the most comprehensive surveys conducted on Japanese analysts, showed 39 of the 44 analysts surveyed projecting that the next BOJ move would be further monetary easing.

But Japan is a unique case; easy money is generating excellent growth and rising inflation pretty much everywhere else. Just kidding again. The US, after multiple QEs and a doubling of federal debt, is looking a lot like Japan:

Consumers’ Inflation Expectations Fell Again in March, Fed Says

U.S. consumers’ expectations for inflation declined in March following a rise from record lows the month before, according to Federal Reserve Bank of New York data released Monday.

The numbers, which have been highlighted recently as a potential cause for concern by top officials including Fed Chair Janet Yellen and New York Fed President William Dudley, may add to the debate over downside risks to the U.S. central bank’s 2 percent inflation target. These risks have contributed to policy makers’ cautious approach to tightening monetary policy this year following a decision in December to raise interest rates for the first time in almost a decade.

The median respondent to the New York Fed’s March Survey of Consumer Expectations expected inflation to be 2.5 percent three years from now, down from 2.6 percent in the February survey. In January, expected inflation three years ahead was 2.45 percent, marking the lowest level in data going back to June 2013.

Inflation expectations April 16
The New York Fed divides survey respondents into two groups based on a short aptitude test: high-numeracy and low-numeracy. Expected inflation among high-numeracy respondents, which tends to be more stable than that for low-numeracy respondents, declined to a record low in March.

The drop came despite a rise in expected gasoline prices. The median survey respondent in March expected the cost of gas to be 7.3 percent higher a year.

This is odd, since oil prices have stabilized and a consensus seems to be forming around the idea that inflation is about to pick up. Some talking heads are even wondering how the Fed will respond to the above-target inflation that’s coming. See Just how much of an overshoot on inflation will the Fed tolerate?

So what’s with all the pessimistic consumers?

Well, a data series from PriceStats (related to MIT’s Billion Prices project, I think) that measures a wide variety of prices in real time has the answer: Prices are actually falling faster than the official CPI number indicates, and have not picked up as oil has stabilized. In fact, the US has been in deflation for the past five months.

PriceStats inflation April 16

So it’s no surprise that people who are actually buying the stuff that’s falling in price would register this fact and answer surveys with deflationary sentiments. It’s also no surprise that central banks, which presumably see the same data, would be looking for ways to ease even further (Japan and Europe) or walk back their previous threats to tighten (the US Fed) — apparently in the hope that increasing the dose will cure the credit addiction.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:

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Fed’s Evans Repeats Belief Rate Increases to Follow ‘Very Shallow Path’

WSJ, Apr 5, 2016

fed_charles_evans

Federal Reserve Bank of Chicago President Charles Evans repeated Tuesday his belief the U.S. central bank will raise rates slowly over time. 

In an economy still surrounded by downside risks, “a very shallow path—such as the one envisioned by the median [Federal Open Market Committee] participant in March—is the most appropriate path for policy normalization over the next three years,” Mr. Evans said.

Mr. Evans’s remarks on the economy and monetary policy largely reprised remarks made last week in public appearances in New York. His comments Tuesday came from the text of a speech prepared for delivery before the Credit Suisse Asian Investment Conference.

Mr. Evans isn’t currently a voting member of the interest-rate setting FOMC. That body is set to meet at the end of the month to decide whether or not to lift its short-term interest rate target rate off the current 0.25% to 0.50% target range toward something higher.

Few Fed officials have suggested action is on the table at the coming gathering while they continue to gather information about how an otherwise healthy U.S. economy is being affected by foreign weakness. Officials would also like to see more evidence weak inflation is rising.

Last week, Mr. Evans, an official who has generally been skeptical of the need to boost rates much while price pressures are low, said he was anticipating summer and year-end rate increases. According to current forecasts, most of his colleagues see something similar happening.

Mr. Evans repeated in his speech that he expects the U.S. economy to expand slightly above its long-run trend, with activity rising by 2% to 2.5% this year, amid a likely decline in the unemployment rate from its current 5% reading to 4.5% to 4.75% by the end of 2017. He expects weak inflation to rise back to 2% over the next three years.

“While I see this path for the U.S. economy as the most likely outcome, there are a number of downside risks to my outlook for both growth and inflation,” the official said, underscoring why he believes the Fed should only raise rates slowly.

Mr. Evans noted the Fed’s limited ability to respond to new shocks argues in favor of a go-slow approach. He noted that unconventional policy measures are “second best” and should be avoided if possible. Meanwhile, if inflation were to rise faster than desired, it could easily be dealt with by interest rate rises.

“This tilting of the odds strengthens the rationale for shading policy in the direction of accommodation and provides additional support for a gradual path in normalizing policy,” the official said.

Source

Yellen Takes Control of Fed Message to Stress Gradual Approach

Bloomberg, Mar 30, 2016

yellen_janet

* Fed chair spells out what officials need to see for rate hikes
* Data dependence places dollar, growth abroad in sharp focus

Federal Reserve Chair Janet Yellen spelled out on Tuesday what she means by data dependence, asserting her leadership of the U.S. central bank with a clear message that interest rates will be raised at a cautious pace.

In one of her most detailed policy discussions this year, Yellen gave investors a list of conditions they need to watch for future rate hikes. Here they are:

  • Foreign economies and their financial markets need to stabilize.
  • The dollar can’t appreciate further. That would depress inflation and exports, and hurt U.S. manufacturing.
  • Commodity prices need to stabilize to help foreign producers find a better footing for growth.
  • The housing sector needs to make a larger contribution to U.S. output.
  • Inflation is a two-sided risk: Yellen is skeptical that the recent rise in core inflation, which strips out food and energy, “will prove durable.” She is watching closely.

Taking Charge

For all their efforts at transparency, Yellen’s speech in New York showed that communication by the Federal Open Market Committee, the panel that sets U.S. interest rates, sometimes means the leadership taking charge to hammer down a guiding view. That can be hard with a group that currently numbers 17 participants. Still, in times of uncertainty, it is the chair’s job to step up and describe the challenges and possible outcomes for policy.

“I thought it was her best performance since she has been chair,” said Michael Gapen, chief U.S. economist at Barclays in New York. “In the absence of unity, the chair has to exert leadership and it felt like she exerted that.”

Officials this month left their target for the federal funds rate unchanged at 0.25 percent to 0.5 percent and signaled a slower pace of rate hikes in 2016 than they’d expected in December, before concerns over Chinese growth sent a spasm through global financial markets.

However, following the March 15-16 FOMC meeting, a number of regional Fed presidents, including James Bullard of St. Louis, Patrick Harker of Philadelphia and Dennis Lockhart of Atlanta, signaled they would like to see rates rise further, pointing to the possibility of a move at the next FOMC meeting on April 26-27.

Rate Path

While the Fed chair steered clear of telegraphing an April or June rate hike, that was probably intentional. Neither she nor anyone else on the FOMC knows if the global climate for growth will have improved enough by then to warrant action.

For that reason, Yellen also drove home the message that when officials don’t know, they either don’t change policy at all, or only move gradually. That means making progress in the current tightening cycle isn’t about the Fed following a pre-set course of rate hikes, but acting when conditions are right. In a way, it takes a page from previous Fed playbooks.

During the chairmanship of Alan Greenspan, Fed officials spoke about “opportunistic disinflation,” or a strategy of moving interest rates early in an economic cycle to clip off the inflation impetus that was embedded in the economy at that time. Today, the Yellen Fed is coming from the opposite direction — letting the economy run hot and only raising interest rates when it won’t upset fragile balances in the global economy and financial markets.

‘Proceed Cautiously’

The Fed chair said it was appropriate to “proceed cautiously.” One sentence later she said “caution is especially warranted.” If her audience at the Economic Club of New York still didn’t get the message, a footnote in the text of her speech stated “uncertainty and greater downside risk” when the Fed’s policy rate is so close to zero “call for greater gradualism.”

“They really mean they are data dependent and willing to be patient,” said Laura Rosner, U.S. economist at BNP Paribas in New York, whose firm predicts no further rate increases for 2016 or 2017. “She is saying, ‘We have started this process and don’t have to continue if not warranted.”’

While the committee continued to suspend its assessment of the balance of risks to the outlook in the March statement, Yellen clearly saw more risks to the downside, said Ward McCarthy, chief financial economist at Jefferies LLC in New York.

“What I learned is just how little weight they gave to their own baseline and how much weight they put on a plethora of downside risks,” he said.

All Embracing

Another insight from the speech, McCarthy said, is the “wide range of things” data dependence covers.

For example, just looking at the Fed’s domestic mandate of employment and inflation, it looks like the central bank should be raising rates further this year.

The unemployment rate of 4.9 percent in February sits just above officials’ estimate of 4.8 percent consistent with full employment — one half of its dual mandate from Congress. The other is price stability. Core inflation measures are rising. Still, the FOMC median estimate for the appropriate pace of rate increases this year was halved in March from four hikes projected in December.

“We are looking at a whole variety of factors that impact the outlook for the U.S. economy,” Yellen said in the question-and-answer session following her speech.

If Fed officials had stuck with their December forecast for four rate rises this year in the face of slowing global growth, it could have been bad news for U.S. inflation and unemployment, she explained.

“Ideally, we want to get ahead of that,” she said. “The market response has been favorable.”

Source

John Rubino: Bad – But Better Than What’s Coming

By John Rubino, Mar 25, 2015

Bad — But Better Than What’s Coming

Talk about diminished expectations. This morning’s estimate of 1.4% Q4 GDP growth is being hailed as a pleasant surprise. Which is odd, considering that for most of the past century a number this low would have been seen as weak enough to require emergency action.

And that’s just the headline number. Dig a little deeper and the picture — at least when viewed through a non-Keynesian lens — is of a system in crisis. Consider:

Corporate profits are, as today’s Bloomberg puts it, sliding.

Corp profits March 16

Meanwhile (also from Bloomberg),

A firm labor market and low inflation encourage households to keep shopping. Today’s fourth-quarter growth figure reflected more spending on services, particularly on recreation and transportation. “It’s really U.S. consumers who are powering the global economy forward at this point,” said Gus Faucher, an economist at PNC Financial Services Group Inc. in Pittsburgh.

But if companies are earning less money, how likely is it that they’ll step up hiring going forward? Not very. And since today fewer Americans have full time jobs than in 2007 (making the current stellar 4.9% unemployment rate look like a cruel joke) a new round of mass layoffs will make the job market even more dire for anyone hoping to support a family with full-time work.

“If profits remain depressed, the prospects for capex and hiring will come under greater pressure,” Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, wrote in a research note.

What are the chances of profits remaining depressed? Pretty good, considering that two of the big growth drivers of the past few years have been student debt and car loans. The former is, as everyone by now knows, at levels that consign a whole generation of kids to life in their parents’ basements — not a recipe for robust consumption.

Car loans, meanwhile, are starting to look like subprime mortgages circa 2006:

Unpaid subprime car loans hit 20-year high

(CNN Money) – Americans with lower credit scores are falling behind on auto payments at an alarming pace.The rate of seriously delinquent subprime car loans soared above 5% in February, according to Fitch Ratings. That’s worse than during the Great Recession and the highest level since 1996.

It’s a surprising development given the relative health of the overall economy. Fitch blames it on a dramatic rise in loans with lax borrowing standards that have helped fuel the recent boom in auto sales. More Americans bought new cars last year than ever before and the amount of auto loans soared beyond $1 trillion.

Fitch points out that the subprime end of the market is where there’s increased competition to peddle loans. The ratings firm flagged an increase in loans to “borrowers with no FICO scores,” lower downpayments, and extended term lending.

Toss in contracting global trade, turmoil in Europe and Latin America, and a grinding multi-month decline in US manufacturing output and the year ahead doesn’t look any better. Here’s the Atlanta Fed’s GDPNow measure of current growth, which shows a huge drop in just the past month:

GDPNow March 16

What does all this mean? Very simply, if you borrow too much money life gets harder and the things that used to work stop working. For a country, lower interest rates no longer induce businesses and individuals to borrow and spend, and government deficits no longer translate directly into more full-time private sector jobs. Growth slows, voters get mad, politics gets crazy, and generally bad times ensue. The only question is why this is a surprise to the people whose choices brought us to the edge of the abyss.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:

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John Rubino: Here We Go Again: Government Ramps Up Borrowing As Private Sector Slows

By John Rubino, Mar 21, 2016

Here We Go Again: Government Ramps Up Borrowing As Private Sector Slows

This morning, US existing home sales plunged and the Chicago Fed’s national activity index turned negative. Both are obvious signs of a slowing economy.

Anticipating this kind of news, Credit Bubble Bulletin’s Doug Noland in his most recent column analyzed the Federal Reserve’s quarterly Z.1 Report for signs of changing financial trends, and found something potentially serious. The following three charts tell the tale:

First, corporate borrowing slowed dramatically in 2015’s fourth quarter…

Corporate borrowing SAAR

…while households scaled back their mortgage borrowing:

Mortgage SAAR revised

And guess who stepped in to save the credit bubble? That’s right. Federal government borrowing soared:

Govt borrowing SAAR

Writes Noland: “This more than offset the private-sector slowdown, ensuring that overall Non-Financial Debt growth accelerated to an 8.6% pace in Q4.”

In other words, monetary policy (QE and low/negative interest rates) has stopped working and now we’re reverting to deficit spending to juice the economy. If this is the beginning of a trend, expect to see a torrent of announcements in coming months touting new government programs on infrastructure, health care and/or the military.

It’s as if the people making these decisions have forgotten that 1) the world borrowed $57 trillion post-2008 and got next to nothing for it and 2) the new debt will have to be rolled over at higher rates if interest rates are ever to be normalized, thus decimating government finances. For more on the implications of this latest iteration of the Money Bubble, see Is This The Debt Jubilee?

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:

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