Janet Yellen Admits the Fed Won’t Normalize Rates

A Comeyesque Fed Lays Out Case For Rate Hike But …

Rate Hike! Rate Hike! Rate Hike!

Another Fed meeting came and went without a rate hike. Like prior meetings there was plenty of Fed official chatter prior to the meeting that a rate hike was definitely ‘on the table’ and strong cases made that a rate hike would probably be appropriate.

Indeed, Fed Chair Janet Yellen made the case for a rate hike in late August for a rate hike in her Jackson Hole speech. Fed Vice Chair Stanely Fischer echoed her rate hike case -the economy is strengthening, labor market is robust, consumer spending is solid, or words to those effects.

These calls for rate hikes (Fed Yack Attacks) normally come as market participants start to write off the potential of a rate hike and the Dollar Index falls. The Fed Yack Attacks are designed to convince markets that a rate hike(s) is imminent which has the impact of boosting the Dollar.

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Crying Wolf

Prior to each Fed meeting for the past two years there has been a very vocal chorus of Fed members spewing their rate hike threats. In 2016, there have been six Federal Reserve Open Market Committee (FOMC) meetings through September and NO rate hikes.

Two years ago the Fed projected that by the end of 2016 the Fed would have raised rates six times. At the beginning of 2016 the Fed projected four rate hikes in 2016. There are two FOMC meetings left so four rate hikes this year are “off the table”.

Comeyesque

After the September meeting, the FOMC press release presented a compelling case for a rate hike, but the FOMC concluded not to raise rates, similar to FBI director James Comey’s investigation into Hillary Clinton’s handling of classified information where he concluded that no reasonable prosecutor would file charges under the circumstances of her case. (no reasonable Fed would raise rates under circumstances of a strengthening economy and labor market?)

The Fed decided that it would perhaps be better to wait and get further confirmation about the strength of the economy and labor market and to see if prices might rise closer to their inflation target of 2%.

Waiting for Godot or the Great Pumpkin

Each Fed Yack attack about imminent rate hikes that ends with another interest rate hike-less FOMC meeting strains the Fed’s credibility.

When the Fed officials started their interest rate hike Yack Attacks, markets used to respond violently, the equity markets, gold and silver would fall and the dollar would rise. While the Fed is perfectly within its First Amendement Rights to conduct Open Mouth Operations, markets are also free to ignore constant calls for rate hikes.

Fed Cries Rate Hike!, Again – Markets Remain Seated

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Yellen Press Conference

Fed Projects Low Growth but Higher Inflation, So Higher Rates?

After the Fed released its statement, Fed Chair Janet Yellen held a press conference. She fielded questions from the corporate establishment media including CNBC, Reuters, AP, the Wall Street Journal, Bloomberg, Financial Times, New York Times, Washington Post, Politico and CNN.

There wasn’t much substance to the questions or the answers (one reporter asked Ms. Yellen if it might make sense for the Fed to take over job training! They can’t handle interest rates, why would they be put in charge of job training?)

It wasn’t until Bloomberg television asked this question that it became obvious there are holes in the Fed’s “gradual rate hike story.

The Fed has been promising not only will it raise interest rate but rather it will “normalize” them through a process of gradual rate hikes, all of course subject to incoming data (mawneterry paulicy is not on a set course)

We have argued that the Fed can’t normalize interest rate (but they CAN raise them) especially when the rest of the world is either at zero or negative rates. The Fed just needs to pay a nominal amount of interest to remain the world’s reserve currency and to be able to continue to sell treasury bonds.

The Fed also needs to maintain the impression that it will raise rates so that the dollar strengthens or at least does not weaken, especially if the Fed intends to embark on another round of “asset purchases”.

The Bloomberg television reporter astutely noted that the Fed has provided tepid GDP projections ranging from 1.8-2% for 2016-2019, yet had inflation rising from 1.3% in 2016 to 2% in 2019, a modest increase. The Fed funds rate projections were 0.6% in 2016 (indicating at least one more 1/4 rate hike in 2016) to 1.1% in 2017, 1.9 in 2018 to 2.6 in 2019.

The reporter asked Ms. Yellen given the low growth projections, why were the inflation projections as high as they were and why would that warrant such a big increase in interest rates over the next three years?

Ms. Yellen agreed that the growth projections were low, but noted they had revised down the Fed Funds rates too and that low growth is a concern for policy makers.

Because the interest rate projections for the next three years are as false as the ones the Fed made two years ago that projected six interest rate hikes by the end of 2016

Further Information:

September 2016 Yellen press conference

September 2016 FOMC statement

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