The Fed Is On Course to Be Behind the Curve

The Fed is Behind the Curve.

JM Bullion
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As the Federal Reserve tapers in to a recession insisting things will get better with the weather, the taper talk continues

Here is what some of the Federal Reserve Presidents and Fed Chair Ms. Yellen have been saying about tapering quantitative easing and raising interest rates:

Chair of the Federal Reserve, Janet Yellen (dove)

The job market isn’t fixed yet, so never mind what I said about raising interest rates six months after QE ends.

When Janet Yellen’s nomination to the Fed was announced, we noted that her primary focus would be to use monetary policy to “fix” the job market. To date, she has followed the path that her predecessor Ben Bernanke started of tapering the $4 trillion quantitative easing program he initiated. We are unconvinced that she will follow through with ending QE without either starting a new round of QE or another interventionist stimulus program designed to help the labor market.

Speaking to the Economic Club of New York earlier this month, Ms. Yellen remarked: “The Fed must respond to significant unexpected twist and turns the economy may make”. “Thus far in the recovery and to this day, there is little question that the economy has remained far from maximum employment.”

Ms. Yellen noted that there are seven million people are working part time and who would like to be working full time and noted “This number is much larger than we would expect at 6.7% unemployment, based on past experience, and the existence of such a large pool of ‘partly unemployed’ workers is a sign that labor conditions are worse than indicated by the unemployment rate.” She concluded by backtracking on her comment that the Fed would raise rates six months after this round of QE ended, choosing to state that “for the many reasons I have noted today, I think this extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policy makers at the Fed”.

Ms. Yellen also projected full employment in two years and the unemployment rate will be 5.2-5.6% with little or no inflation!

You can read Ms. Yellen’s full speech to the Economic Club of New York by clicking here.

St. Louis Fed President James Bullard (moderate)

The economy is on track for a good year

Recently, James Bullard, speaking in Hong Kong said that the outlook for the U.S. economy is “quite good,” and “set for a pretty good year” even though the economic data has been worse than expected. “The biggest thing is that unemployment has come down more quickly than expected,” said Bullard and predicted that unemployment would drop to 6% by the end of the year.

Mr. Bullard downplayed a rate hike six months after the end of QE and didn’t explain why interest rates would be kept low if the economy was improving.

Philadelphia Federal Reserve President, Charles Plosser (hawk)

No worries, interest rates will remain low

Mr. Plosser in a recent CNBC Squawk Box interview after the March FOMC meeting said “It’s a little bit puzzling that the market would react the way it did,” “I don’t think the Fed changed its position. In fact, it tried to say very explicitly in its statement that we believe forward guidance or the expectations have not changed as far as we’re concerned.”

Atlanta Fed President Dennis Lockhart (dove)

Interest rates will remain low for “some time” after QE ends

During a speech in Atlanta last month, Mr. Lockhart helped to retract Ms. Yellen’s statement regarding the possibility of a rate hike six months after QE ends using, the nebulous temporal measure of raising interest rates “some time” after QE ends. “I think it’s a question of conditions that actually are achieved over the next two or three years. I think when Chair Yellen, in a sort of offhand way said maybe six months or longer, that is really a minimum, not a maximum,” he said. “We’re not going to flip a switch from easy money to tight money. We’re not going to flip a switch where overnight you go from one environment to a radically different environment. I don’t see that happening.” “The environment after the beginning of normalization of interest rates is going to remain, I think, very accommodative for some time after that decision.”

Chicago Fed President Charles Evans (dove)

What inflation?

During a recent speech at an economic policy conference in Washington D.C., Mr Evans said “I confess that I am somewhat exasperated by these repeated warnings given our current environment of very low inflation,” and that the Fed’s target inflation rate will come in lower “for several years.” Mr. Evan believes that inflation is not coming anytime soon and that the Fed’s massive balance sheet is not a “classic warning sign” of inflation.

Seems Mr. Evans is oblivious to soaring housing costs and beef prices hitting all time highs.

Dallas Fed President Richard Fisher (hawk)

We would have economic growth if only Congress did its job!

Mr. Fisher has been a long critic of QE and recently of Congress. During a speech to the Asia Society Mr. Fisher blamed the politicians for slowing economic growth despite the Fed’s supposed salubrious money printing. “Someone has to provide the incentive to step on the accelerator and move the economy forward. And right now they’re stepping on the brakes,” he said. “And that’s Democrats and Republicans and the lower and the upper house and a president that just don’t work together. Until we have that, we will not have the confidence we need to proceed.”

Media Pundits

The Wall Street Journal and New York Times seem to have the inside track as to what the Fed might do. Reporters at both news outlets believe that the recent weakness in the economy and job market (weather related!) will not deter the Fed from continued tapering of QE.

New York Times

What’s Next for the Fed?

The Fed wants to end QE and retain the “benefits” of higher inflation and low interest rates that produce increases in the stock and housing markets, creating a wealth effect. Ms. Yellen also wants to boost the labor markets. Without QE we find it hard to believe that these goals can be achieved in the short term if QE ends as tapering QE is the equivalent of tightening monetary policy. If the Fed stops purchasing hundreds of billions of dollars worth of mortgage backed securities (MBS’s) and U.S. Treasuries (T-Bonds) who will buy them? Two of the historically larger buyers of T-Bonds,China and Russia, have curtailed their purchases recently while increasing their gold reserves. If there aren’t sufficient buyers to replace the Fed’s exit from the MBS and T-bond market, bond prices will fall and interest rates will rise, irrespective of where the Fed “sets” rates.


Since the Fed started tapering their purchases last December, tiny Belgium has emerged as a large buyer of U.S Treasuries. There are also reports that Europe may start a QE program of their own. There seems to be no limit to the tricks central banks around the world can play to stitch together the appearance of a recovery.

There are many unanswered questions created by the Fed’s exit from their $4 trillion dollar money printing monetary experiment: What if the Fed is tapering into a recession? Did China tell them to knock off the QE? Does the Fed know interest rates will rise? Jamon Dimon predicts a doubling of interest rates when QE ends and says that will be just fine. As rates rise, will the banks start to lend out the reserves they have accumulated during the Fed’s money printing spree? What will the Fed do if the stock market crashes? or if real estate prices stop rising and sales continue to drop?

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Further Reading:

Federal Open Market Committee Minutes – March 2014

Did China Warn the U.S. on QE?

For Fed Presidents Economic Hope Springs Eternal in the Spring

Janet Yellen and Negative Interest Rates

Janet Yellen Overstates the Health of the Labor Market and Understates Inflation

Five Long Years in the Fed’s Potemkin QE village

To Continue or Not To Continue Tapering – Fed Presidents Muse

Tapering is Tightening

Market Drop Won’t Impact Fed’s Taper Decision

Fisher: The Fed Needs to Get off the Monetary Cocaine

The Fed Starts Talking About its Decision to Taper QE

Fisher: QE Could Ignite a Bubble

More Taper Talk From the Fed Presidents

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