Economy | - Part 5

Groupthink at the Fed

Take away the regional bank presidents from this chart (said presidents being physically removed from the center of power in Washington D.C. and not being political appointments) and there are virtually no dissenting votes at any Federal Reserve policy meeting going back two decades, a point that should be cause for concern as detailed in this Bloomberg story.

Fortunately, unlike the executive branch of government, the central bank has no military to dispatch when enacting its chosen policy course, so, this is clearly a case where groupthink will have only limited (though still quite important) negative repercussions.

No, Central Bankers Are Not Learning

In his eight years at the helm of the Federal Reserve, Ben Bernanke really never had to raise interest rates – he finished off Greenspan’s “baby steps” normalization campaign in early-2006, but, in the understatement of the decade, it was all downhill from there.

Absent a premature departure from the central bank, expectations are that current Fed Chief Janet Yellen will have to raise rates at some point, but, given recent economic reports in the U.S. and stories like Debt Traders to Fed: We Dare You to Try Raising Rates This Year at Bloomberg, it is not at all clear when that might happen.

Of course, asset bubbles are gestating (see The Federal Reserve Asset Bubble Machine for more on this timely subject) as they are wont to do under overly accommodative monetary policy and, with fiscal policy aimed at boosting economic recovery permanently absent around the world, central banks are the only game in town.

Or so the thinking goes.

Now that the European Central Bank has entered the game in a big way and Japan’s monetary policy continues to be off the charts (as detailed in It’s Official: The BoJ Has Broken The Japanese Stock Market), it was interesting to stumble upon this item ($) at FT Alphaville that included the following comment by former Fed Vice Chair Donald Kohn from 2004 (i.e., about when we sold our California home and began a six-year, multi-state trek as renters):

A second concern is that policy accommodation – and the expectation that it will persist—is distorting asset prices. Most of this distortion is deliberate and a desirable effect of the stance of policy. We have attempted to lower interest rates below long-term equilibrium rates and to boost asset prices in order to stimulate demand…

I believe that at least for a while the macro imperatives are likely to outweigh any threat to financial or longer-term economic stability from accommodative policy. Any unusual distortions in asset prices that might intensify a subsequent correction are probably small…In our situation, a high burden of proof would seem to be on policies that would slow the expansion, leaving more slack and less inflation in the economy in the intermediate run to avoid hypothetical instabilities later.

The FT Alphaville story includes this comment by ECB Board Member Benoît Cœuré that “it would be wrong to treat bubbles as a welcome replacement therapy to a sustainable growth model”, but as in the case of Janet Yellen’s “warnings” about the housing bubble via Fed transcripts from a few years back, this is much too little and far too late.

No, central bankers haven’t really learned anything when it comes to asset bubbles.

A Recession Without Room to Cut Rates?

Just a few months ago, most in the financial media would have scoffed at the idea that the U.S. economy might enter a new recession sooner rather than later. After months of mostly disappointing economic data, they’re not scoffing any longer and this story at The Economist (replete with a Depression era black-and-white image) is a good example.

HOW strong is the American economy? Forecasters are pretty confident: the average prediction is for 2.6% GDP growth this year and for 2.8% in 2016. But actual growth was just an annualised 0.2% in the first quarter and, after disappointing retail sales numbers for April, the Atlanta Federal Reserve’s GDPNow model, which was pretty accurate about the first quarter, is going for just 0.7% annualised in the second. Citigroup’s economic surprise index (which shows whether data have been better or worse than forecasts) has been relentlessly negative since the start of the year.

Does this mean that America is heading towards recession? Not necessarily. Whether or not you call it “secular stagnation”, the developed economies are in an era where growth seems to be stuttering; last year’s first quarter dip in GDP was a case in point. However, as HSBC, a bank, points out in a new research note, it is now six years since the US economy was last in recession—a reasonably long cycle by pre-1980 standards. Suppose that developed economies did slip back into recession. What could the authorities do?

Of course, what makes the prospect of a new U.S. recession so scary is that interest rates have been stuck at zero for the last six years or so, taking away the “firepower” the Federal Reserve normally has to combat the slowdown, all of which reminds us of what Mark Twain may have once said, “History doesn’t repeat itself, but it does rhyme”.

April Retail Sales Disappoints

Markets will likely cheer the news from the Commerce Department that U.S. retail sales flat-lined in April (when most analysts were expecting solid gains) as this makes it less likely that the Federal Reserve will raise interest rates anytime soon.

As shown above, the result for April was slightly negative, but rounded to zero and, when combined with the report on business inventories in the next hour or so should make for an exciting update to the Atlanta Fed’s closely watched GDPNow forecast at 10 AM.

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What a Difference Two Percent Makes?

The chart below from this item at the Wall Street Journal’s Real Time Economics Blog may go a long way in explaining why wages aren’t rising nearly as fast as  they should be, given the tumbling jobless rate and steady rise in non-farm payrolls over the last few years.

While the overall jobless rate is now back to the pre-2008 norm of the low 5 percent range (and, yes, the historically low participation rate has helped push this down), the make-up of that workforce is different enough (i.e., part-time workers for both reasons in the chart above are about one percentage point higher than before the financial crisis) that pressure on wages is much less than it would otherwise be (or so the theory goes).

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