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Failure to Launch: The Federal Reserve is trying to do what nobody else has been able to do
"You can raise rates any time you want, but you can never leave the zero bound.
That, at least, has been the case for almost every country that has tried to increase interest rates from zero the last few decades. It hasn't been long until they've found themselves back where they began, at zero, with their economies still stuck in stall speed."
If a quarter of a point increase is going to cause major concerns in our economy and financial markets ... Well, things are truly in bad shape. We are considered leaders in the global economy; and, an increase in interest rates might encourage other governments and their central banks they should follow our lead to normalize rates. It seems, they have followed us in lowering them. I personally think a rise in interest rates at a measured pace would be a good thing as long as they don't overshoot.
@Old_Skeet- I agree with you, but that's one of the reasons that I thought that this article was so interesting, as the history with smaller economies seems to indicate otherwise. But I have to wonder if past experience will hold true this time, with the world's largest economy.
Add- Further quote from the article: Now, there's a chance that the U.S. economy, with its steady 200,000 jobs-a-month growth, is strong enough to stay out of this trap. But there's also a chance that the U.S. economy, with its well below target 1.2 percent core inflation, isn't. Even worse, neither wages nor inflation have increased at all the past year. Raising rates to head off inflationary pressure you think will be there but isn't now is, as other countries have shown, a risky thing to do when rates are zero.
My concern is that our central bank has held interest rates so low for so long that nobody wants to consider what this has done to the average saver who drew interest from their savings and cd's. As an investor, part of my asset allocation is cash. I am now currently holding a sizeable amount of it in U S Currency as the banks now offer such little return to us depositors. I feel why let them have "free" use of my money. Now, I understand some banks are wanting to charge depositors should their accounts exceed (or fall below) certain thresholds. The last time I ordered checks on one of my checking accounts the bank charged me what I felt was an unreasonable fee for the checks themselves (use to be free) and when I inquired about it ... their reply was that there was no processing fee for these checks. Now, another bank that I maintain a checking relationship with does not charge me for checks nor processing of them. This kinda ticked me off; and, I decieded that they should not have free use of my money that I had kept on deposit with them. Over time, I have been moving cash held at the bank that charged me for the checks to privately held U S Currency thus reducing the amount I keep on deposit with them. It is my belief many US citizens are presently holding more currency today than they previsouly did. I am one of them.
I've called this "Hotel California" monetary policy before and I think that's still where we are. I think this ends badly, but I really question what that looks like and whether it's a repeat of past crisis or looks different.
They could raise rates, but if they have to bring them down to zero again after say, raising them 50 bps, then as far as I'm concerned it's game over. You can't be a cheerleader for an economy that can't take 50 basis points. The fact that everyone is agonizing over will they or won't they raise 25 basis points should tell you something but I think no one really wants to have any view of reality anymore. Everyone wants ZIRP status quo. I mean, think of states already in terrible shape at ZIRP. How're they going to fare with rate hikes?
The Fed will say it's not our fault (nothing ever is, it seems), we didn't create a bubble, etc etc. Ultimately, I think if presented with the choice of letting things go South or taking things to the next level, they will take monetary policy to the next level. Rather than face questioning about policy, it will continually be "it didn't work/wasn't sustainable because it wasn't enough." And I think there's a view that it will never be enough. It is Einstein's theory of insanity meets monetary policy. You already have people calling for more easing.
And we'll probably get a sequel for this (good documentary, worth a view) eventually. Love Grant's discussion of the dollar as the world's greatest "monetary brand".
"It's been 15 years and counting for Japan since its first ill-advised attempt at hiking rates. That's a cautionary tale the Federal Reserve is well aware of as it contemplates raising rates as soon as this week, and maybe the most convincing argument for why it should hold off now."
Nah - I don't think you can compare The U.S. with Japan. Totally different economies and societies. We've seen bubbles before, but nothing like what they had in the 80s and early 90s.
It's a testament to the resiliancy of the U.S. economy that the Fed is even in a position to begin considering raising rates. I don't know what they'll do, but am not expecting a big sell-off even if rates rise a quarter %. Most of the near-term damage is "baked in the cake" after their exceptional job communicating/preparing the markets for such a move (with volumes & volumes of "Fed-speak").
Bonds are "cooked" as many here have been preaching nearly since the inception of MFO. (David published a great piece for Amazon to this point 3-4 years ago.) And stocks look "bubbly" to me - so may fall in coming years regardless of what the Fed does today.
Scott: Please don't refute me with another funny cartoon!
"It's been 15 years and counting for Japan since its first ill-advised attempt at hiking rates. That's a cautionary tale the Federal Reserve is well aware of as it contemplates raising rates as soon as this week, and maybe the most convincing argument for why it should hold off now."
Nah - I don't think you can compare The U.S. with Japan. Totally different economies and societies. We've seen bubbles before, but nothing like what they had in the 80s and early 90s.
It's a testament to the resiliancy of the U.S. economy that the Fed is even in a position to begin considering raising rates. I don't know what they'll do, but am not expecting a big sell-off even if rates rise a quarter %. Most of the near-term damage is "baked in the cake" after their exceptional job communicating/preparing the markets for such a move (with volumes & volumes of "Fed-speak").
Bonds are "cooked" as many here have been preaching nearly since the inception of MFO. (David published a great piece for Amazon to this point 3-4 years ago.) And stocks look "bubbly" to me - so may fall in coming years regardless of what the Fed does today.
Scott: Please don't refute me with another funny cartoon!
Nah, I don't disagree with you in terms of the Japan/US comparison, but I'm not as optimistic on the US economy (and neither - it seems - is the Fed.) I suppose the concern was that the Fed may raise rates in order to "make the numbers match the desired narrative", but I guess not.
I don't think stocks are entirely in bubble territory - in fact, the disconnect of a lot of sectors has (I think) created some appealing long-term opportunities in things like REITs. Are things "March 2009" cheap? No, but I think a lot of things have become appealing.
There are pockets of opportunities after the short pullback. Not so much of US but the developed market is in early phase of recovery while their respective governments are trying to get the economy going again.
Tend to agree with Scott that raising rate is more like window dressing. The US economy is in worst shape than we believe if it cannot handle 25 basis point hike. As it stands the Fed has kept the rate too low for too long as Old_Skeet pointed out. I hate to be the one who depends on their CDs that pay close to zero after inflation.
Comments
If a quarter of a point increase is going to cause major concerns in our economy and financial markets ... Well, things are truly in bad shape. We are considered leaders in the global economy; and, an increase in interest rates might encourage other governments and their central banks they should follow our lead to normalize rates. It seems, they have followed us in lowering them. I personally think a rise in interest rates at a measured pace would be a good thing as long as they don't overshoot.
Add- Further quote from the article: Now, there's a chance that the U.S. economy, with its steady 200,000 jobs-a-month growth, is strong enough to stay out of this trap. But there's also a chance that the U.S. economy, with its well below target 1.2 percent core inflation, isn't. Even worse, neither wages nor inflation have increased at all the past year. Raising rates to head off inflationary pressure you think will be there but isn't now is, as other countries have shown, a risky thing to do when rates are zero.
My concern is that our central bank has held interest rates so low for so long that nobody wants to consider what this has done to the average saver who drew interest from their savings and cd's. As an investor, part of my asset allocation is cash. I am now currently holding a sizeable amount of it in U S Currency as the banks now offer such little return to us depositors. I feel why let them have "free" use of my money. Now, I understand some banks are wanting to charge depositors should their accounts exceed (or fall below) certain thresholds. The last time I ordered checks on one of my checking accounts the bank charged me what I felt was an unreasonable fee for the checks themselves (use to be free) and when I inquired about it ... their reply was that there was no processing fee for these checks. Now, another bank that I maintain a checking relationship with does not charge me for checks nor processing of them. This kinda ticked me off; and, I decieded that they should not have free use of my money that I had kept on deposit with them. Over time, I have been moving cash held at the bank that charged me for the checks to privately held U S Currency thus reducing the amount I keep on deposit with them. It is my belief many US citizens are presently holding more currency today than they previsouly did. I am one of them.
BEWARE ... there are seizure laws to consider.
And, so it goes.
They could raise rates, but if they have to bring them down to zero again after say, raising them 50 bps, then as far as I'm concerned it's game over. You can't be a cheerleader for an economy that can't take 50 basis points. The fact that everyone is agonizing over will they or won't they raise 25 basis points should tell you something but I think no one really wants to have any view of reality anymore. Everyone wants ZIRP status quo. I mean, think of states already in terrible shape at ZIRP. How're they going to fare with rate hikes?
The Fed will say it's not our fault (nothing ever is, it seems), we didn't create a bubble, etc etc. Ultimately, I think if presented with the choice of letting things go South or taking things to the next level, they will take monetary policy to the next level. Rather than face questioning about policy, it will continually be "it didn't work/wasn't sustainable because it wasn't enough." And I think there's a view that it will never be enough. It is Einstein's theory of insanity meets monetary policy. You already have people calling for more easing.
And we'll probably get a sequel for this (good documentary, worth a view) eventually. Love Grant's discussion of the dollar as the world's greatest "monetary brand".
Nah - I don't think you can compare The U.S. with Japan. Totally different economies and societies. We've seen bubbles before, but nothing like what they had in the 80s and early 90s.
It's a testament to the resiliancy of the U.S. economy that the Fed is even in a position to begin considering raising rates. I don't know what they'll do, but am not expecting a big sell-off even if rates rise a quarter %. Most of the near-term damage is "baked in the cake" after their exceptional job communicating/preparing the markets for such a move (with volumes & volumes of "Fed-speak").
Bonds are "cooked" as many here have been preaching nearly since the inception of MFO. (David published a great piece for Amazon to this point 3-4 years ago.) And stocks look "bubbly" to me - so may fall in coming years regardless of what the Fed does today.
Scott: Please don't refute me with another funny cartoon!
I don't think stocks are entirely in bubble territory - in fact, the disconnect of a lot of sectors has (I think) created some appealing long-term opportunities in things like REITs. Are things "March 2009" cheap? No, but I think a lot of things have become appealing.
Tend to agree with Scott that raising rate is more like window dressing. The US economy is in worst shape than we believe if it cannot handle 25 basis point hike. As it stands the Fed has kept the rate too low for too long as Old_Skeet pointed out. I hate to be the one who depends on their CDs that pay close to zero after inflation.