http://dailyreckoning.com/the-new-players-at-the-fed-you-need-to-know-2016-edition/
tl;dr - 2016 FOMC voting members will be (more) biased towards raising rates. Economic data might not allow it though.
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Let’s look at the FOMC scorecard and see what it can tell us about future Fed policy.
Right now there are two vacancies on the board of governors. This means that there are only five governors on the FOMC: Janet Yellen, Stanley Fischer, Lael Brainard, Jay Powell and Dan Tarullo.
The other five seats are taken up by the following regional reserve bank presidents: Bill Dudley (New York), Charles Evans (Chicago), Dennis Lockhart (Atlanta), John Williams (San Francisco) and Jeffrey Lacker (Richmond).
For all practical purposes, the center of gravity comes down to Yellen, Fischer and Dudley. They are the “Big Three.”
The other governors (Brainard, Tarullo and Powell) are relatively new. Jay Powell has been relatively quiet on monetary policy. Lael Brainard and Dan Tarullo shocked markets this week by breaking with Janet Yellen.
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Among the regional reserve bank presidents, Evans is an outspoken dove and Lacker is an outspoken hawk. They cancel each other out.
Lockhart and Williams are both “moderates” who will also go along with Chair Yellen.
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This lineup changes again next month.
Evans, Lockhart, Williams and Lacker will go off the FOMC at that point. They will be replaced by Loretta Mester (Cleveland), Eric Rosengren (Boston), James Bullard (St. Louis) and Esther George (Kansas City).
Once again, the regional reserve bank presidents are split. Mester, George and Bullard are all hawks, while Rosengren is a dove. However, Rosengren is not as outspoken and does not have the intellectual firepower that Evans brought to the debate this year.
The line-up is changing but the confusion continues. The governors are more dovish (because of the Brainard and Tarullo revolt against Yellen). The regional reserve bank presidents are more hawkish (because Evans is leaving and three hawks are joining). It’s a close call, but overall the FOMC looks slightly more hawkish beginning in 2016.
But only slightly. The entire FOMC, governors and presidents, is “data dependent.” Whatever their biases and previously stated views, they will carefully weigh the data and trends at each FOMC meeting. The FOMC will take the process one meeting and one data point at a time.
The next two FOMC meetings are Jan. 27-28 and Mar. 17-18. If there is another rate increase, it is likely to have devastating effects on emerging markets and lead to increased tensions in the currency wars and a further correction in the U.S. stock market.
It is possible that the Fed will raise rates at these meetings. It depends on if there is any strength in the data.
Bottom line: My forecast is that the economic data will remain weak and the Fed’s next move will be toward easing, probably by mid-2016. If the data are stronger than I expect, the Fed will raise rates further.
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While Janet Yellen was careful to say that future Fed policy is data dependent and not on a set schedule, she did, for all intents and purposes, lay out a schedule based on her forecast for economic growth and inflation. The implied tightening cycle for the target Fed funds rate is 100 basis points per year for three years (through the end of 2018).
In keeping with the Fed’s declared desire not to disrupt markets, it is also likely that each target rate increase will be 25 basis points, the same measure Greenspan used in his belated tightening cycle from 2004 to 2006, albeit with a slower tempo.
There are eight FOMC meetings per year. Four of those occasions (every other meeting) include press conferences that are helpful for explaining Fed actions. Yellen, and before her, Bernanke puts a big emphasis on communication and transparency with regard to Fed policy, part of their misguided notions of setting expectations.
Raising rates 100 basis points per year in 25 basis point increments means four rate hikes per year, most likely at those FOMC meetings with press conferences.
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The one thing we can be reasonably certain is that this will not happen. The Fed’s expected path is based on internal models of the interaction of labor markets, growth and inflation. These models are badly flawed and obsolete.
For evidence, we need look no further than the fact that Fed one-year forward growth forecasts have been incorrect by orders of magnitude for nine straight years. A belief that the Fed forecast for 2016 is close to accurate represents the triumph of hope over experience.
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The Fed will likely raise rates in March and June 2016 as expected. That much is baked in the pie. Yellen waited too long to launch a tightening cycle simply to turn on a dime. In any case, the Fed rarely reverses course easily, and usually favors long periods of inaction between course changes.
By late summer or early fall of 2016, global weakness and possibly a U.S. recession will be the dominant stories. This recession is already apparent to many observers, but it will take more time for that reality to sink in at the Fed.
The normal course of policy at that point would be to cut rates to mitigate the impact of the slowdown. But, a rate cut in September 2016 will be politically impossible coming just 48 days before the U.S. presidential election.
Yellen is a well-known liberal Democrat. Any effort by her to boost the economy (via portfolio channel effects) just before the election will invite a withering political backlash from the Republican nominee. Yellen is already party to a criminal investigation of insider trading at the Fed and has no interest in that kind of added scrutiny.
This means the earliest rate cut will be December 14, 2016, the first post-election FOMC meeting.
The most Yellen could do to ease in September is offer forward guidance that the Fed will not increase rates for an extended period, and plans to remain “patient” in considering further increases.
There are two risks to this forecast. The first is that the recession data is overwhelming by spring causing the Fed to hold off on the June rate hike. The second is that the Fed hikes again in September because not raising is seen a form of ease with adverse political repercussions for the Fed.
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Indeed, if one had to summarize Yellen's message to the S&P, it would probably look as follows: "you haven't dropped enough for the Fed to change course."
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... If the S&P hits 1,690 by next week or 1,615 by March 11 (just ahead of the next FOMC meeting), the Fed may sit up and take notice. Short of that, the Fed doesn’t care. They have other policy goals, and will remain on track to raise interest rates.
The “plunge protection team” is on leave of absence. Investors are on their own.
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... here’s the difference between helicopter money and quantitative easing: In QE, the Fed prints the money and uses it to buy existing bonds from the banks. Then the money usually sits there in the banks. I’ve explained how that policy has failed.
With helicopter money, though, Congress spends the money. It covers its deficit with more borrowing, and the Fed prints the money to cover the borrowing. It’s essentially monetizing the debt. The difference is that in the case of QE, there’s no extra spending. In the case of helicopter money, there is because Congress spends all the money.
That means, in the final analysis, helicopter money is the recipe for inflation.
This policy is coming sooner than you may think…
no risk of us poor plebs being given anything at this stage as its only right that our dear leaders make such important decisions.
Also goes to demonstrate that there was never any need to tax us, as they could have printed all gov expenditure to date.
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Also goes to demonstrate that there was never any need to tax us, as they could have printed all gov expenditure to date.
Bridgewater's Ray Dalio has argued that central banks' ability to invigorate economic growth has atrophied, and he predicts a new era of radical monetary policy possibly involving "helicopter money."
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He therefore predicts that central banks will eventually have to usher in what he calls "monetary policy 3" ... which will more directly and forcefully encourage spending.
The Bridgewater founder says this third era of monetary policy will range from central banks directly financing government spending through electronic money-printing to what the famous economist Milton Friedman coined "helicopter money" in 1969 -- in other words, central banks disbursing cash directly to households. ...
Well no. Unfettered monetization leads to hyperinflation/currency crisis and that's where we are headed if Rickards is correct about the Fed/gov plan. A growing debt bubble fed by monetization will become a death spiral that we can never stop (won't be able to pay the interest on the debt [without monetization] after the event horizon is passed). This will naturally lead to loss of faith in the currency as we are going to need ever increasing amounts.
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The market does not expect a rate hike in March. In fact, the market is giving low odds of any rate hikes in all of 2016. Meanwhile, the Fed is moving at full throttle toward a rate hike.
There are only three possible outcomes. The first is that the market gets safely out of the way by adjusting expectations in the next two weeks. The second is that Yellen grabs the brake and slows down the Cannonball Express by signaling that the Fed will not raise rates. The third possible outcome is a train wreck that will roil markets.
Right now a train wreck looks like the most likely outcome. Here’s why…
Global markets have been in turmoil since the Fed’s last rate hike in December. This is because the Fed tightened into what was already a weak economy. If the Fed continues tightening, a U.S. recession later this year is highly likely.
The Fed had its own reasons for tightening. They wanted to avoid making asset bubbles any bigger. (Bubbles in stock and real estate markets had been inflating for years under the Fed’s zero interest rate policy.) The Fed needed to maintain its institutional credibility after promising for over a year that they would begin to raise rates in 2015.
And, just as Casey Jones did not see danger until it was too late, Yellen does not see a recession. Her forecasts, using badly flawed models such as the Phillips Curve, NAIRU, and FRB/US, are signaling steady growth, tighter labor markets, and inflation just around the corner.
The Fed has not entirely ignored recent market turmoil. The Federal Open Market Committee (FOMC) made reference to it in their January statement. And several Fed officials have echoed those concerns in public pronouncements and speeches since then.
The problem is that the markets have overinterpreted these supposedly dovish statements. What Fed statements actually say is that they are watching the turmoil closely. At no time has the Fed said they would deviate from their prior course. It would be easy enough to do so if that’s what the Fed wanted.
Saying you are watching something is not the same as saying you are changing what you already planned to do. The plain implication of recent Fed statements is that financial conditions will have to get worse than we have already seen to cause the Fed not to raise rates in March.
The market’s dovish interpretation of Fed statements is wishful thinking. In fact, the market’s dovish view has made it more, not less likely the Fed will raise rates in March. The dovish interpretation caused equity markets to rally the past two weeks in expectation of no rate hike. The rally eases financial conditions, which makes it easier for the Fed to raise rates.
What would it take in the next two weeks for the Fed not to raise rates? There are three scenarios. A plunge in the S&P Index to 1650 (a 15% decline from current levels) would stop the Fed in its tracks. If the February jobs report (due this Friday, March 4) produces fewer than 100,000 jobs or if unemployment rises to 5.0% or higher, that would give the Fed pause.
Finally, a full-scale financial panic comparable to the Asian crisis of 1997 I discussed with Michael Covel this week would delay a rate hike. (The Asian Crisis of 1997 was the last time the Fed did “one and done.”)
Right now none of those scenarios seems likely to emerge. The Cannonball Express is still running at top speed. If the Fed hikes rates in March when the market is not expecting it, the rapid repricing of rate hike expectations will lead to a stock market mini-crash.
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Rickards said:... If the February jobs report (due this Friday, March 4) produces fewer than 100,000 jobs ...
Jobs were good; earnings were a disaster - that's the best summary of today's jobs report.
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The breakdown: of the 242K jobs created in February, 189K were of the minimum-wage variety, ...
In other words, a whopping 82% of jobs "created" in February were minimum wage teachers, retail trade, and waiters, bartenders and chambermaids.
What about well-paying jobs like finance, trucking, manufacturing or mining? +6K, -5K, -16K, and -18K, for a net loss of 33k jobs.
Perhaps the bigger surprise is how wage growth wasn't far worse.
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- FED MEDIAN FORECAST IMPLIES TWO 2016 RATE HIKES VS FOUR IN DEC
- FED SAYS GLOBAL ECONOMIC DEVELOPMENTS CONTINUE TO POSE RISKS
- FED LEAVES RATES UNCHANGED AT 0.25%-0.5% AS EXPECTED
the debate around helicopter drops has given way to a welcome fightback from central bankers who reassert that they are never powerless to generate inflation.
Citing Milton Friedman’s maxim that “inflation is always and everywhere a monetary phenomenon”, economist Tim Congdon is adamant that monetary policy is still the only game in town.
“Monetary policy can never – repeat, never – 'run out of ammunition'”, he says.
... yesterday the Fed announced that this coming Monday, April 11, the Fed will hold a closed meeting "under expedited procedures" during which the Board of Governors will review and determine advance and discount rates charged by the Fed banks.
As a reminder, the last time the Fed held such a meeting was on November 21, less than a month before it launched its first rate hike in years.
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With the Fed’s next policy meeting looming this week, hedge funds are exiting from gold. Speculators cut their bets on a bullion rally by the most in more than three months. Holdings in global exchange-traded funds backed by the metal are down from a three-year high in August. Aggregate open interest in New York futures is mired in the longest slump since May.
Speculation is mounting that Fed officials, in a statement scheduled for release on Sept. 21, will signal that higher US interest rates are on the way. That’s bad news for gold, which thrives as an alternative asset. Through Friday, the metal had surged 24% for the year as the policy makers declined to raise borrowing costs.
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Certainly a rate hike, which I think is completely off the table for the foreseeable future, would be just the thing to take the stock market down 20%.
If that happens it’s going to be extremely destructive of confidence.
It’s going to be the opposite of what the Fed wants. It’s going to be deflationary, it will increase savings, reduce spending and reduce the volatility of money.
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Three of the Federal Reserve’s own primary dealers are warning bond traders that a growing consensus the central bank will raise interest rates by year-end is misguided.
While none of the 23 banks that trade with the Fed expect a hike at the conclusion of Wednesday’s meeting, HSBC Holdings Plc, Royal Bank of Canada and Royal Bank of Scotland Group Plc remain steadfast that policy makers will choose to hold off on raising rates at the Fed’s Dec. 14 meeting as well.
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Trump was critical of the Fed during the presidential campaign, at one point charging that its low interest rates were fomenting a “big, fat, ugly bubble” in the stock market. He also complained that the central bank had been more political than his Democratic opponent, Hillary Clinton -- a charge that Fed Chair Janet Yellen repeatedly denied.
With two slots vacant on the Fed’s seven-seat board, Trump will have an opportunity to nominate monetary policy makers more to his liking when he takes over as president in January. He’ll also have a chance to pick a new chairman and vice chairman in 2018, when Yellen’s term and that of her deputy, Stanley Fischer, expire.
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To recap, that makes five of Trump’s people on the Board of the Federal Reserve:
– Two vacancies from the Obama administration that he’ll fill with Republicans.
– One more vacancy on the way with Fed Governor Daniel Tarullo resigning.
– Republican Fed Governor Jay Powell will remain
– A nomination to replace Janet Yellen when her term is over in January.
But it gets even more interesting…
Six months after all of that, on June 12, 2018, Federal Reserve Vice Chairman Stanley Fischer’s term ends. That marks a sixth appointment that Donald Trump will be in charge of. And it’s entirely possible that Fischer decides to leave early because of the radical changes happening around him.
The conclusion?
By this time next month, Donald Trump could have three selections made with a republican already in place.
By the middle of summer 2018, he should have six.
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And if all goes accordingly, President Trump will have control of six or even seven seats on the Federal Reserve Board by the summer of 2018.
Trump will own the Fed. Meaning, whatever the president wants monetary policy to be, he’ll get.
That’s the easy part…
The hard part is figuring out what President Trump wants.
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... on Wednesday morning, Sept. 6, Fed Vice Chairman Stanley Fischer unexpectedly announced his resignation effective almost immediately. ...
But this resignation now means that four of the seven Fed board seats are now vacant.
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Finally, last Wednesday afternoon, Sept. 6, the White House leaked to Axios that Gary Cohn, Trump’s top economic adviser and the former chief operating officer of Goldman Sachs, was out of the running to replace Janet Yellen. This also confirms what I said months ago, that Kevin Warsh is the likely next chair of the Fed.
Warsh has previously served on the board. After being nominated by President George W. Bush he was a Fed governor where he served from 2006 until he resigned early in 2011.
This is a complete changing of the guard. The old guard represented by Yellen and Fischer are leaving. A close associate of the old guard, Lael Brainard, has admitted publicly that the Fed models are broken and they have no idea what they are doing.
Kevin Warsh and a group of new appointees vetted by Warsh will be the new guard before the end of this year. They are pragmatists, not ideologues like Yellen.
Brainard is right about one thing. Disinflation is a serious problem for a country with a 105% debt-to-GDP ratio. Inflation is needed for the U.S. to have any hope of getting the debt problem under control. This means government theft from savers and negative real rates. Warsh and the pragmatists understand this.
Warsh believed that the Federal Reserve should have raised interest rates a long time ago. But with disinflation a much more pressing concern than inflation right now, being a pragmatist means he won’t commit to tightening if conditions don’t warrant it.
You should expect lower real rates, slower balance sheet normalization and higher inflation than markets are now pricing. This will not happen all at once, but in stages over the next year.
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President Trump says he is considering three main candidates to lead the Federal Reserve Board.
In an interview on Fox Business Network's "Mornings with Maria" set to air Sunday, Trump said he is considering Federal Reserve Governor Jerome Powell, Stanford University economist John Taylor and current Fed Chairwoman Janet Yellen.
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Reuters had reported the day before that White House National Economic Council Director Gary Cohn and former Fed Governor Kevin Warsh are also under consideration to chair the Fed.
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