Fed Raises Rates

In what may be the most telegraphed monetary policy move in history the Federal Reserve raised rates today by 0.25% (here is an article). The great wailing and gnashing of teeth predicted by all the Chicken Littles seems not to have come to pass though. I have been saying this on JT’s show for the better part of a year now: If the economy is so fragile that a 0.25% increase in rates is a threat to economic growth than we have bigger issues.

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The “Real” Fed Funds Rate

This is a little more macro/money than much of the stuff I post here but it seems to be something people miss sometimes. The Federal Reserve drastically lowered rates in response to the unfolding financial crisis in 2008 and later. Those rates remain low today, essentially set between 0.0 and 0.25%. Despite this range the rate is effectively staying at or below 0.1%, but that is not what I am addressing today.

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Inflated Worries

Being a frequent contributor to the Jarrod Thomas Show (1310 KNOX AM, Grand Forks) over the last several years I received many questions about inflation. The massive monetary stimulus injected by the Fed in response to the Great Recession “must” be inflationary. Many callers believed there was no way to avoid a massive inflation as an outcome.

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Another lesson in the limits of economic management

I was startled by some of the information in this article. The most startling thing I learned today might be that Japan is only 39 percent self-sufficient as far as calories. I knew Japan relied on significant imports of fuels given their natural resource limitations. But food? This is a developed country, one that was supposed to rival the economic might of the United States in the 1980s. Relying on imports for such a significant part of food consumption can be a serious issue. Combine this with economic stagnation and an aging population and it hardly seems like a recipe for an economic turnaround.

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Doing the French Mistake

I think the aspect of this I find the most amusing in this article is the suggestion from President Hollande that the penalty would “…[introduce] a risk, doubts, suspicions about the soundness of Europe’s financial system…” This seems to suggest that we do not already have doubts and suspicions about the risks and soundness of the European financial system. You broke the rules, and you pay the price. The move to make companies admit guilt is a new approach, and a welcome one. This forces banks to really address what their policies are and face the consequences.

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Yellen Nomination Moves Forward

This is something of a non-news item (article). Three Republicans on the banking committee supported her making it very likely there would be 60 votes for her in the Senate which would negate any procedural moves to delay her appointment. Fed policy is entering a transition period as extraordinary policy measures such as asset purchases are in line for phase out. The timing of these events is very important because, unfortunately, financial markets depend on these measures right now. Fed purchases are supporting prices and keeping yields low, impacting individual asset allocation decisions. When the interventions end we will see changes in yields, and therefore changes in those asset allocation decisions. As a result you will see increased volatility in financial markets, which matters for individual retirements, college savings and so on.

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Monetary policy in the spotlight

The grilling of Janet Yellen as the nominee to be the next Fed Chair is sure to raise some interesting fodder. I will comment as appropriate but I have a presentation on Friday so it may take some time for me to get the posts up. I will suggest the following though: the nomination of Yellen is a status quo pick. She is an insider and has been present through the QE policies and so understands the rationale behind current Fed policy. This makes here unlikely to undertake drastic immediate change. This is in contrast to a Summers nomination. Summers ego was likely to get in the way and he would need to change policy simply to put his stamp on events.

Shutdown and Equity Values

Reminder: I am not giving trading advice, just my interpretation.

Some of my students wondered why equity markets are not down more and at times look to potentially increase. Equity markets are an imperfect reflection of future economic prospects because there are company specific issues that could dominate national negatives.

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Fiscal policy tempered the Fed’s taper

The Fed has been wrong about growth lately in their forecasts, and wrong in a very bad way. The Fed forecasts have not yet taken into account fundamental changes in individual behavior. It would not be a surprise that such forecasts were wrong during or in the immediate aftermath of the crisis, but to still be so wrong at this point is worrisome. What is the problem? People are scared.

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