This article offers some "snap shot" thoughts concerning where our volatile global economy is currently positioned.
"...what’s happening in China right now has limited the ability of the Federal Reserve Bank to do what’s right for the American economy."
"The core reasons we had a financial crisis in 2008 (over-consumption by the West, under consumption in the East) never got fixed and so central bankers were forced to brew up a huge credit bubble that has both sowed the seeds of the next crisis and locked them into low interest rates which further increase market risk without actually helping the real economy."
time.com/4043067/china-us-monetary-policy/
Comments
Not sure about the first part, but the second part couldn't be more right as to where we are. As for China switching towards a society focused more on consumption/the consumer, that doesn't seem to be going too well, does it?
Relatedly, Federal Reserve Bank of St. Louis President James Bullard argued at the most recent Fed meeting against allowing the global backdrop to impact the rate increase decision. He indicated the case for starting to move towards policy normalization is strong since the Committee's twin objectives have mostly been met.
cnbc.com/2015/09/19/feds-case-for-continued-cheap-money-not-compelling-bullard.html
How this tug-a-war plays out over the course of the remainder of the year will definitely impact our investing environment.....
http://www.zerohedge.com/news/2015-09-22/pimcos-balls-fed-there-will-be-no-escape-zirp
Perhaps that's why Bullard looked like he was about to rage on CNBC yesterday. Ooops, sorry Mr Bullard, you're not a voting member of the FOMC. His anger and the way he spoke about Cramer yesterday were truly a little off-putting. I don't like Cramer, but I've never seen a Fed governor act like that on television.
Personally, I go into the "hope for the best, prepare for the worst" category. I'd like to hope that everything turns out well in this time period but I'm highly doubtful of that. Bullard can say that the "objectives have been met", but clearly they have not been met, nor have they been met for years now.
Ultimately, you have a Fed that has told people time and time again that things are getting better and yet, here we are still at ZIRP, not that far from a commodity crisis, China is a mess and emerging markets are in real trouble. All the cheerleaders keep going on about how things are great here, but I'd guess a lot of main street would disagree. Additionally, if this economy can't take 50 basis points, the cheerleaders need to GTFO.
We have spent the last several years focusing entirely on raising asset prices, which will once again prove to be an unsustainable bubble. If that's the case and we go back to square one not having made any progress on things like infrastructure, healthcare, education or anything else in regards to Main Street, then the next round of easing had better be directly to people or me thinks the natives may get a tad restless. If anything, I think it could be the "ultimate bubble",where things look different in the global economy on the other side. We're at ZIRP and you have people calling for QE and NIRP, including one Fed governor. Yellen also did not rule out NIRP, as well.
If things do go South, I think we're going to see monetary policy taken to its outer limits. The Vice President of the STL Fed authored a paper that basically said QE has been a failure and that ZIRP can easily turn into an endless loop. "A Taylor-rule central banker may be convinced that lowering the central bank's nominal interest rate target will increase inflation. This can lead to a situation in which the central banker becomes permanently trapped in ZIRP. With the nominal interest rate at zero for a long period of time, inflation is low, and the central banker reasons that maintaining ZIRP will eventually increase the inflation rate. But this never happens and, as long as the central banker adheres to a sufficiently aggressive Taylor rule, ZIRP will continue forever, and the central bank will fall short of its inflation target indefinitely. This idea seems to fit nicely with the recent observed behavior of the worldís central bank."
We live in a world where the people in charge of monetary policy have little humility and think they can control a complex and volatile system in a simple, straightforward manner. They didn't learn anything in 2008 and we'll probably have another crisis. Given that we're at the zero bound already, where we go from here is really into uncharted territory - and confidence can easily erode. I think you're already seeing that with an increasing amount of people questioning why the Fed hasn't raised rates if everything is as a-okay as they've been saying (and as many have noted, the Fed has made overly optimistic - and wrong - predictions for years now.)
As I've said before, I still favor needs (healthcare) and real assets (real estate, infrastructure, etc.) I don't see the volatility getting any better, so you have to own what you own and be okay with that or trade in and out and try to time the market. I have no interest in the latter.
I agree with much of what you say. Here is my personal take on things.
The Fed has been providing "extraordinary" monetary accommodation for going on 7 years now. At some point, the Fed needs to reinstate its "normal" policy. Otherwise, recent extraordinary policy becomes the new normal. And, it it my understanding those policies stretch the limits of its current legal authorities.
The legislative branch has chosen not to implement targeted fiscal programs during this time to stimulate the economy (infrastructure investment for one thing). It has also chosen not to provide the Fed with additional authorities including the authority to implement fiscal policies such as providing direct cash payments to private citizens to supplement or replace its QE style trickle down monetary policy. It has left the Fed to try to do it all with its present shot gun style tools.
The Fed as currently authorized has a dual mandate that relates to the US economy. It is not charged to act as the world's central banker. The domestic economy does not presently appear to require emergency shock treatment (unless we want to define the 2008 shock as being potentially endless). The unemployment rate is close to 5% and the year over year core CPI is close to 2%. And, the economy is growing at a slow but steady pace. What is now happening domestically and in the world not a shock event. It is part of the world's economic transition to its "new normal" state.
The legislative branch can provide the Fed with additional authorities if it wants the Fed to assume a role as the world's central banker or to begin to explicitly implement fiscal policy. But, it show no signs of planning to do this. So, it appears appropriate for the Fed to continue to incrementally scale back on its extraordinary level of monetary accommodation. Baby steps will make a statement domestically and globally that the Feds role has limits but will not in themselves derail the US economy. The legislative branch can always act at any time to fill the fiscal policy vacuum that has existed over the past 7 years. A continued legislative branch decision not to act is not the Feds responsibility.
It will be interesting to see if the Fed decides to act during the remainder of the year. I am not a trader either so I will trust that my somewhat contrarian portfolio and cash reserves will allow me to successfully ride out any storm that happens.
http://www.nytimes.com/2015/09/07/opinion/you-deserve-a-raise-today-interest-rates-dont.html
There are much more important things to address meaningfully in this economy than interest rates, except for the opinion bankers and their business spread, and of course the media / chattering class.
Further, the risk is really asymmetric, as Summers and Krugman and many other pros are emphasizing:
What we do know is that inflation is still below target, and what we also know from the experience of the last eight years is that it is really really hard to get an economy going if interest rates are at zero and you've shot your bolt on that.... If the Fed waits too long to raise rates, then we get a little bit of inflation. But if the Fed raises rates too soon, we risk getting caught in another lost decade. So the risks are hugely asymmetric. I really find it quite mysterious that the Fed is eager to raise rates given that they're going to be wrong one way or the other, we just don't know which way. But the costs of being wrong in one direction are so much higher than the costs of being the other.
It is my understanding the Fed's policy objectives are as follows: "The Congress established the statutory objectives for monetary policy--maximum employment, stable prices, and moderate long-term interest rates--in the Federal Reserve Act." (From: federalreserve.gov/faqs/money_12848.htm )
The article you linked states that "Wage stagnation is a clear sign that the economy is not at full employment, which means it needs loose monetary policy, not tightening." Wage stagnation is not the same thing as unemployment. It's not my understanding it is the Fed's responsibility to deal with that issue. Do you have a different understanding?
I think the Fed is asked to solve problems that are the responsibility of Congress and the President to address. It makes sense to me for the Fed to continue to move very gradually in the direction of normalizing monetary policy if the domestic economy does not begin to deteriorate. They can simultaneously articulate the limits of their responsibilities and that legislative action may be appropriate to mitigate structural problems outside their mandate. Either that or Congress can explicitly broaden the Fed's mandate.
IMHO.....
No one quite equates income stagnation w employment. I do agree that econ improvement is the job of policymakers as much as if not more than the Fed.
One simple Costco-like start of a solution (PK a couple months ago):
... A key implication of ... new understanding is that public policy can do a lot to help workers without bringing down the wrath of the invisible hand.
Many economists used to think of the labor market as being pretty much like the market for anything else, with the prices of different kinds of labor — that is, wage rates — fully determined by supply and demand. So if wages for many workers have stagnated or declined, it must be because demand for their services is falling. In particular, the conventional wisdom attributed rising inequality to technological change, which was raising the demand for highly educated workers while devaluing blue-collar work. And there was nothing much policy could do to change the trend, other than aiding low-wage workers via subsidies like the earned-income tax credit.
But the case for “skill-biased technological change” as the main driver of wage stagnation has largely fallen apart. Most notably, high levels of education have offered no guarantee of rising incomes — for example, wages of recent college graduates, adjusted for inflation, have been flat for 15 years.
Meanwhile, our understanding of wage determination has been transformed by an intellectual revolution — that’s not too strong a word — brought on by a series of remarkable studies of what happens when governments change the minimum wage.
More than two decades ago the economists David Card and Alan Krueger realized that when an individual state raises its minimum wage rate, it in effect performs an experiment on the labor market. Better still, it’s an experiment that offers a natural control group: neighboring states that don’t raise their minimum wages. Card and Krueger applied their insight by looking at what happened to the fast-food sector — which is where the effects of the minimum wage should be most pronounced — after New Jersey hiked its minimum wage but Pennsylvania did not.
Until the Card-Krueger study, most economists, myself included, assumed that raising the minimum wage would have a clear negative effect on employment. But they found, if anything, a positive effect. Their result has since been confirmed using data from many episodes. There’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.
How can this be? There are several answers, but the most important is probably that the market for labor isn’t like the market for, say, wheat, because workers are people. And because they’re people, there are important benefits, even to the employer, from paying them more: better morale, lower turnover, increased productivity. These benefits largely offset the direct effect of higher labor costs, so that raising the minimum wage needn’t cost jobs after all.
The direct takeaway from this intellectual revolution is, of course, that we should raise minimum wages. But there are broader implications, too: Once you take what we’ve learned from minimum-wage studies seriously, you realize that they’re not relevant just to the lowest-paid workers.
For employers always face a tradeoff between low-wage and higher-wage strategies — between, say, the traditional Walmart model of paying as little as possible and accepting high turnover and low morale [[and he does not even mention that their workers need social safety nets, meaning we taxpayers subsidize Walmart low wages]], and the Costco model of higher pay and benefits leading to a stabler work force. And there’s every reason to believe that public policy can, in a variety of ways — including making it easier for workers to organize — encourage more firms to choose the good-wage strategy.
What I was saying is that achieving maximum employment does not necessarily mean there will not continue to be wage stagnation or even more wage decline. Wages are more apt to stabilize or increase in a full employment situation than if there is high unemployment...that's where supply and demand come into play. But, other factors including globalization have impacted domestic wage levels during at least the past 20 years.
I know the Fed looks at and expresses concern about wage stagnation. But, it is not clear to me that tailoring policy to attempt to specifically address it is part of their mandate. And, I think it is more appropriate for Congress and the President to work on that problem. After all, I think we did elect them to do something useful. The Fed has a big enough job to do already.
I had read about the study you noted above and was glad to see evidence there are circumstances under which raising the minimum wage does not negatively impact employment. But, the benefits New Jersey workers received resulted from the legislature taking action rather than monetary policy.