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Yellen Says Fed Still on Track for Liftoff This Year
"Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter," Yellen said in prepared remarks at the University of Massachusetts, Amherst.
Ted, You still have time to change your earlier prediction if you want.
"This is what Yellen said in her speech dissecting the theory, if not practice, of inflation:
"...the federal funds rate and other nominal interest rates cannot go much below zero, since holding cash is always an alternative to investing in securities."
So just a "little" then? Which is what exactly: -0.25%? -1.0%? -2.5%? Or, as Albert Edwards suggested earlier today: -5%?
It is not the initial 25 bps that will be raised, but how fast the next hike and how much in the next few years. The market got to able to withstand these small incremental hikes if it has legs to stand on.
I think it's interesting to note that Chairwoman Yellen, after delivering these remarks, had to sit down and was unable to finish her speech because she suddenly didn't feel well. Some people have no problem with looking other human beings in the eye and spewing disingenuous garbage with an earnest smile in their direction. For others, it slowly gnaws on their conscience until their discomfort becomes expressed in physical ailments. Psychosomatic tell here, me thinks.
I think it's interesting to note that Chairwoman Yellen, after delivering these remarks, had to sit down and was unable to finish her speech because she suddenly didn't feel well. Some people have no problem with looking other human beings in the eye and spewing disingenuous garbage with an earnest smile in their direction. For others, it slowly gnaws on their conscience until their discomfort becomes expressed in physical ailments. Psychosomatic tell here, me thinks.
You have an ailing Yellen (and as much as I dislike what the Fed has done, I hope she's okay - some people thought she had a TIA), a rage-y looking Bullard telling CNBC anchors to tell "their friend Cramer" that he was being "unsavory" for saying that the Fed should keep rates low and one Fed governor (everyone says Kocherlakota, but who knows) calling for negative rates. A stressed-looking Fed is more than a tad concerning.
I still think that there's the real possibility that things are not what the always overly optimistic (and wrong) Fed has predicted and when things go further South that will lead to consideration of taking reckless monetary policy to the next level (NIRP or, continuing Einstein's theory of monetary policy insanity, QE4.) If things are heading South and we are at the zero bound, then the next step is into uncharted waters and I think that absolutely raises the chances of things becoming disorderly, especially if confidence starts to erode.
Yellen's speech was really more of the same: "we think we're going to raise rates before the end of the year, but perhaps we won't." The fact that NIRP has been in the discussion more and more lately (including in her speeches) should be concerning.
Meanwhile, there's a number of things globally that could turn things from bad to worse, including Petrobras sitting on $90B of dollar-denominated debt with the Real seemingly hitting new lows every day.
@scott Yellen will be O.K. Probably some hot lights, poor air circulation, and dehydration; and, at her age, on a given day, the body may not like that abuse and "express displeasure." I read that she was able to continue, and finished the rest of her afternoon itinerary.
The thing that most concerns me now about this unprecedented, zero-bound policy is the effect it is having on pensions and insurance policies. Financial planners do have some flexibility, but there is only so much they can do. At some point (perhaps we're already past it), there can be no revisions to their long-term investment models by which they will be able to make up for lost time. And then what?
EM bonds certainly did not like her commentary yesterday. Or was there something bad about Petrobras, or some other specific event that I missed, to account for the swoon? Alot of stuff occurring out there; markets seem ... edgy.
Petrobras is only the tip of an iceberg in South America. Their economy is heavily natural resource dependent and the global slowdown is impacting them badly than other EM countries, say India for example.
And, by chance only; I happened to see Ms. Yellen's speech at the end. I was very surprised someone did not come onto the stage to assist her. She (her medical circumstance) was indeed having a problem.........I watched thinking that she was having a stroke !!!
I think it's interesting to note that Chairwoman Yellen, after delivering these remarks, had to sit down and was unable to finish her speech because she suddenly didn't feel well. Some people have no problem with looking other human beings in the eye and spewing disingenuous garbage with an earnest smile in their direction. For others, it slowly gnaws on their conscience until their discomfort becomes expressed in physical ailments. Psychosomatic tell here, me thinks.
Yes ... But, having watched the speech live in its entirety and than viewing it again on Bloomberg today, I'm of the opinion that throughout most of the speech The Chair was actually "choking" on her words. (Some might even say gagging.) One might assume that other FOMC members had advance copies of the hour+ long scripted speech, and that some may have even contributed to its content in assundry ways. (You've heard the old joke about how giraffes or camels were designed.)
Yellen is between a rock & a hard place. She inherited a 0% rate policy not of her own making. She's being tugged and pulled in multiple directions. Hawks in Congress want rates to rise. EU leaders have exerted pressure to keep them low. Many domestic investment managers want them to rise - but not yet! An election's brewing, and the Fed has always been hesitant to make big moves close to an election. By the same token, some of the candidates in the primaries have blasted Fed policies and may conjure up rising popular support for a more hawkish stance. (And, Oh - Do tell me the Fed is immune to political pressure.)
Add to to all of the above the decidedly mixed messages from global markets. (Commodities and EMs are in the dumpster - but real estate is hot in the U.S. and our super-heated stock market is barely into "correction" territory.)
Is it any wonder the Chair may have choked while delivering her script?
OK, wasn't going to comment on this, but since there's so much interest in the contents of her speech I'm going to do some work and report on some of the footnotes, from an article that I read earlier. I shall return!
Federal Reserve Chair Janet Yellen never delivered some of the juiciest parts of her speech on Thursday.
They were hidden in the footnotes, of which there were more than 34. It was an important but highly academic speech arguing for the start of withdrawing the Fed’s extraordinary support for the economy this year and an explanation of why the factors holding back inflation in America will soon fade.
Footnote No. 5: Why the Fed won’t set a target for unemployment: The maximum level of employment is something that is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. Moreover, the maximum level of employment, the longer-run “natural” rate of unemployment, and other related aspects of the labor market are not directly observable, can change over time, and can only be estimated imprecisely. Footnote No. 13: Why low inflation is bad: Very low inflation also can result in chronically higher unemployment by closing off an important way in which the labor market can respond to adverse shocks. In sectors where productivity is lagging or demand is slowing, declines in real wages might be necessary to avoid even worse outcomes, such as layoffs. But when inflation falls to a very low level, this passive approach to wage reductions may no longer be viable for many firms, causing relatively more of the burden of adjustment to fall on employment.
Footnotes No. 14 & 28: Inflation target: It is not obvious that a modestly higher target rate of inflation would have greatly increased the Federal Reserve’s ability to support real activity in the special conditions that prevailed in the wake of the financial crisis. Changing the [Fed’s] long-run inflation objective would risk calling into question the [Fed’s] commitment to stabilizing inflation at any level because it might lead people to suspect that the target could be changed opportunistically in the future. I am somewhat skeptical about the actual effectiveness of any monetary policy that relies primarily on the central bank’s theoretical ability to influence the public’s inflation expectations directly by simply announcing that it will pursue a different inflation goal in the future.
Footnote No. 15: You haven’t felt the full force of the Fed yet: Our analysis implies that the peak unemployment effect [did] not occur until early 2015, while the peak inflation effect is not anticipated until early 2016. The model estimates that the FOMC’s unconventional policy actions provided essentially no stimulus in the first two years following the financial crisis. The FOMC’s actions do appear to have appreciably sped up the pace of recovery beginning in 2011. The model estimates that we are only now approaching the full effects of unconventional policy on real activity and inflation.
Footnote No. 29: The ‘70s are over: The wage-price spiral no longer seems to provide a useful description of the U.S. inflation process. In fact, some evidence suggests that, like inflation, the rate of growth of labor costs is now characterized by a stable long-run trend. Movements in labor costs no longer appear to be an especially good guide to future price movements. This development does not imply that wage developments carry no useful information: Because wage growth is influenced by labor market slack, observed movements in compensation gains can provide an indication of how close the economy is to full employment.
Low inflation is no longer primarily due to a weak economy. Instead, it’s mainly the result of falling energy prices and a stronger dollar that has reduced the cost of imports. This is a key reason why the Fed believes that inflation will eventually return to 2 percent – and why it still expects to raise its benchmark interest rate this year.
• • • • •
Believe it or not, I've edited and shortened the above to the extent possible while attempting to retain the overall context. My point in reproducing this information is to emphasize that glib and cursory comments sometimes seen here on MFO fail to give credit to the enormous amount of background work that goes into Fed policy deliberations. You may or may not agree with the Fed, but they are trying their best to stabilize our national economy. This stuff is not simple.
The current issue of Consumer Reports has an interesting article on the ongoing retail practice of "downsizing", while trying to maintain the packaging appearance of the previous larger size. All of us are familiar with that, but what I found to be interesting was the response from various companies when Consumer Reports called them to ask what the story was: almost all of the companies cited increasing costs for product materials and transportation (but not labor). So how can that be true if there is essentially no "core" inflation? What do you call raising prices or diminishing the quantity if it's not inflation?
Low inflation is no longer primarily due to a weak economy. Instead, it’s mainly the result of falling energy prices and a stronger dollar that has reduced the cost of imports. This is a key reason why the Fed believes that inflation will eventually return to 2 percent – and why it still expects to raise its benchmark interest rate this year.
Those two items happened recently as is falling commodity prices.
Also, that only takes into account the supply side and omits the demand side - that is very surprising.
Inflation may get to 2%. But, the demand is/will not be there. Workers wages have been stagnant and will continue to be so.
There are many headwind that will prevent inflation being a issue for years to come.
Comments
http://www.zerohedge.com/news/2015-09-24/one-phrase-actually-matters-yellens-speech-nominal-interest-rates-cannot-go-much-bel
"This is what Yellen said in her speech dissecting the theory, if not practice, of inflation:
"...the federal funds rate and other nominal interest rates cannot go much below zero, since holding cash is always an alternative to investing in securities."
So just a "little" then? Which is what exactly: -0.25%? -1.0%? -2.5%? Or, as Albert Edwards suggested earlier today: -5%?
I still think that there's the real possibility that things are not what the always overly optimistic (and wrong) Fed has predicted and when things go further South that will lead to consideration of taking reckless monetary policy to the next level (NIRP or, continuing Einstein's theory of monetary policy insanity, QE4.) If things are heading South and we are at the zero bound, then the next step is into uncharted waters and I think that absolutely raises the chances of things becoming disorderly, especially if confidence starts to erode.
Yellen's speech was really more of the same: "we think we're going to raise rates before the end of the year, but perhaps we won't." The fact that NIRP has been in the discussion more and more lately (including in her speeches) should be concerning.
Meanwhile, there's a number of things globally that could turn things from bad to worse, including Petrobras sitting on $90B of dollar-denominated debt with the Real seemingly hitting new lows every day.
Yellen will be O.K. Probably some hot lights, poor air circulation, and dehydration; and, at her age, on a given day, the body may not like that abuse and "express displeasure." I read that she was able to continue, and finished the rest of her afternoon itinerary.
The thing that most concerns me now about this unprecedented, zero-bound policy is the effect it is having on pensions and insurance policies. Financial planners do have some flexibility, but there is only so much they can do. At some point (perhaps we're already past it), there can be no revisions to their long-term investment models by which they will be able to make up for lost time. And then what?
EM bonds certainly did not like her commentary yesterday. Or was there something bad about Petrobras, or some other specific event that I missed, to account for the swoon? Alot of stuff occurring out there; markets seem ... edgy.
Futures are currently looking up, though.
http://www.zerohedge.com/news/2015-09-25/divine-intervention-house-speaker-boehner-resigns-congress
http://www.marketwatch.com/story/boehner-to-resign-from-congress-in-october-report-2015-09-25
Thank you.
Boehner links................
And, by chance only; I happened to see Ms. Yellen's speech at the end. I was very surprised someone did not come onto the stage to assist her. She (her medical circumstance) was indeed having a problem.........I watched thinking that she was having a stroke !!!
Yellen is between a rock & a hard place. She inherited a 0% rate policy not of her own making. She's being tugged and pulled in multiple directions. Hawks in Congress want rates to rise. EU leaders have exerted pressure to keep them low. Many domestic investment managers want them to rise - but not yet! An election's brewing, and the Fed has always been hesitant to make big moves close to an election. By the same token, some of the candidates in the primaries have blasted Fed policies and may conjure up rising popular support for a more hawkish stance. (And, Oh - Do tell me the Fed is immune to political pressure.)
Add to to all of the above the decidedly mixed messages from global markets. (Commodities and EMs are in the dumpster - but real estate is hot in the U.S. and our super-heated stock market is barely into "correction" territory.)
Is it any wonder the Chair may have choked while delivering her script?
Federal Reserve Chair Janet Yellen never delivered some of the juiciest parts of her speech on Thursday.
They were hidden in the footnotes, of which there were more than 34. It was an important but highly academic speech arguing for the start of withdrawing the Fed’s extraordinary support for the economy this year and an explanation of why the factors holding back inflation in America will soon fade.
Footnote No. 5: Why the Fed won’t set a target for unemployment:
The maximum level of employment is something that is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. Moreover, the maximum level of employment, the longer-run “natural” rate of unemployment, and other related aspects of the labor market are not directly observable, can change over time, and can only be estimated imprecisely.
Footnote No. 13: Why low inflation is bad:
Very low inflation also can result in chronically higher unemployment by closing off an important way in which the labor market can respond to adverse shocks. In sectors where productivity is lagging or demand is slowing, declines in real wages might be necessary to avoid even worse outcomes, such as layoffs. But when inflation falls to a very low level, this passive approach to wage reductions may no longer be viable for many firms, causing relatively more of the burden of adjustment to fall on employment.
Footnotes No. 14 & 28: Inflation target:
It is not obvious that a modestly higher target rate of inflation would have greatly increased the Federal Reserve’s ability to support real activity in the special conditions that prevailed in the wake of the financial crisis. Changing the [Fed’s] long-run inflation objective would risk calling into question the [Fed’s] commitment to stabilizing inflation at any level because it might lead people to suspect that the target could be changed opportunistically in the future. I am somewhat skeptical about the actual effectiveness of any monetary policy that relies primarily on the central bank’s theoretical ability to influence the public’s inflation expectations directly by simply announcing that it will pursue a different inflation goal in the future.
Footnote No. 15: You haven’t felt the full force of the Fed yet:
Our analysis implies that the peak unemployment effect [did] not occur until early 2015, while the peak inflation effect is not anticipated until early 2016. The model estimates that the FOMC’s unconventional policy actions provided essentially no stimulus in the first two years following the financial crisis. The FOMC’s actions do appear to have appreciably sped up the pace of recovery beginning in 2011. The model estimates that we are only now approaching the full effects of unconventional policy on real activity and inflation.
Footnote No. 29: The ‘70s are over:
The wage-price spiral no longer seems to provide a useful description of the U.S. inflation process. In fact, some evidence suggests that, like inflation, the rate of growth of labor costs is now characterized by a stable long-run trend. Movements in labor costs no longer appear to be an especially good guide to future price movements. This development does not imply that wage developments carry no useful information: Because wage growth is influenced by labor market slack, observed movements in compensation gains can provide an indication of how close the economy is to full employment.
Low inflation is no longer primarily due to a weak economy. Instead, it’s mainly the result of falling energy prices and a stronger dollar that has reduced the cost of imports. This is a key reason why the Fed believes that inflation will eventually return to 2 percent – and why it still expects to raise its benchmark interest rate this year.
• • • • •
Believe it or not, I've edited and shortened the above to the extent possible while attempting to retain the overall context. My point in reproducing this information is to emphasize that glib and cursory comments sometimes seen here on MFO fail to give credit to the enormous amount of background work that goes into Fed policy deliberations. You may or may not agree with the Fed, but they are trying their best to stabilize our national economy. This stuff is not simple.
Here is a link to the complete Washington Post article.
http://takingnote.blogs.nytimes.com/author/teresa-tritch/
Also:
https://www.washingtonpost.com/opinions/memo-to-fed-dont-raise-interest-rates/2015/09/01/448996b6-5012-11e5-8c19-0b6825aa4a3a_story.html
Also, that only takes into account the supply side and omits the demand side - that is very surprising.
Inflation may get to 2%. But, the demand is/will not be there. Workers wages have been stagnant and will continue to be so.
There are many headwind that will prevent inflation being a issue for years to come.