Posted on 01/30/2016 3:04:49 PM PST by Kaslin
Early in the new year, on Sunday, January 3, Federal Reserve vice chair Stanley Fischer delivered a hawkish speech to the American Economic Association. Completely misreading the economy, which is woefully weak while inflation is virtually nil, Fischer strongly hinted that the Fed would be raising its target rate by a quarter of a percent every quarter for the next three years.
The next day the S&P 500 dropped 1.5 percent. In the week that followed, the broad index fell 6 percent. The week after that it fell over 2 percent. During that two-week period, the Dow Jones dropped 1,437 points.
The dollar went up. Oil plunged 21 percent. Raw material commodities dropped. And credit risk spreads in the high-yield junk market rose substantially.
Actually, it was a global event, as stock markets around the world plunged. Utter chaos.
This past week, the Fed retreated in its FOMC policy statement. For the first time in a long while, it didn't bother with a risk assessment between inflation and employment. The whole statement had a much softer tone. It reminded me of the prevent defense of the old Bill Parcells New York Giants.
Putting it more starkly, I'd say the Fed is completely freaked out by financial markets that are turning against it.
The central bank says its policies are "data driven." But the recent FOMC statement suggests the Fed is looking at everything. It has a hundred indicators -- domestic, international, jobs, and inflation. In truth, it doesn't know what its next move is going to be because it can't read the economy. Fed policy is opaque, confusing, and rudderless.
Take a look at the new GDP report for the fourth quarter of last year. A mere 0.7 percent growth. Across 2015, real GDP grew 1.8 percent. It's not a recession. But any shock could push us into recession.
Business investment fell. Commercial building fell. Inventories fell. Inflation came in less than 1 percent.
Nominal GDP -- real output plus inflation -- registered a small 1.5 percent gain. In normal times, money GDP should be between 4 and 5 percent.
Perhaps most troublesome to the stock market and the economy is the decline in corporate profits. According to most estimates, profits are set to drop for the third straight quarter while business sales look to be falling for the fourth straight quarter. Add this to less than 1 percent economic growth, and the risk of recession is surely rising.
The recession threat is a risk, not a fact. But for Fed policy makers to tell us the economy is healthy is a complete misreading of the situation. And with ultra-weak economic growth and ultra-low inflation, how could the Fed, or any central bank, think about tightening policy?
Besides stocks, other market indicators are trying to tell the central bank: No More Rate Hikes. Copper is down 16 percent over the past year. Inflation expectations in the Treasury bond markets have fallen significantly. And the dollar over the past several years has increased roughly 30 percent.
A healthy King Dollar is a good thing, and so are falling energy prices. But enough is enough. More Fed rate hikes will raise the dollar and reduce energy prices so much that the economy will be completely disrupted. A stable, reliable greenback is a good thing. But let's not press our luck.
Now, if the Fed were operating on a true price rule, it would keep the dollar where it is today for as far as the eye can see. In turn that would stabilize gold and other commodities and avoid further economic disruption.
In a speech back in 2014, former Fed head Paul Volcker argued for a rules-based monetary policy along with international currency cooperation. Right now we have neither. Europe and Japan have moved toward negative interest rates while the Fed threatens higher rates. Where is Volcker's currency diplomacy? Nowhere to be seen.
Thankfully there's a way out of this mess. Let the Fed keep interest rates and the dollar stable. No more tightening. Meanwhile, the Republican Congress can pass a significant tax cut for large and small businesses. Push the rate down to 15 percent for C-corps and S-corps. Provide easy repatriation of U.S. money overseas. And permit immediate tax write-offs for new-business-investment expenses.
Congress could also push for reduced regulatory burdens, although it looks like there's no stopping the Obama administration's unconstitutional march toward even greater regulations.
But a big business tax cut would be the most stimulative way to move the economy from near recession to 4 or 5 percent growth. That's what we need. Put it together with a stable and reliable dollar, and we can move from pessimism to optimism.
It's been done before. We can do it again.
i dont know if big business tax cuts are going to work like they did in the 80s, before outsourcing.
biggest cut in the world is still hard pressed to beat pennies on the dollar labor.
and a quarter point every quarter for the next three years?!?!?!
are they nuts?
economy is barely moving as it is.
no more QE but i dont know about so many rate hikes.
What?! If the Fed is reading the market correctly, it should be freaked out. And “no inflation”? Complete and utter BS!
The Fed always misreads the situation. The FEd is always at least six months behind the cause of the current economic situation. The’a one reason why the Fed doe mote harm than good.
The Fed needs to be replace by a computer that simply calculates a certain measured yearly increase in the money supply. Period. No politics - or certainly a lot less politics and stupid economic interference that does more harm than good- which is the history of the Fed.
Kudlow is misreading the situation, too. We need to raise interest rates not because the economy is strong, but because it’s dangerous to have then so so long. Do we want to end up pushing on a string? Do we want to end up like Japan in the 90’s?
If what I think is coming, comes...Japan as it is right now will look like Nirvana.
Truth, Justice, and the American Way.
We are in RECESSION. I would argue we've been in recession ("officially") since mid-2008, perhaps earlier.
Only would be more reason why we need some room to go down.
The last thing we need is a roaring economy in 2016 to get the Democrats elected to everything.
That is not a recession. That is a depression which is where we are and have been. We even have the bread lines. Nowadays we do it by EBT and SNAP instead of queuing up at the feeding station.
the Fed may possibly be freaked out by the markets
but
the markets are definitely freaked out by the (irresponsible) Fed
Obamacare , illegal immigration and H1B visas are destroying the economy.
A professor in a graduate econ course I took back in the seventies once observed that the Fed’s attempts to drive the economy utilizing the data it had available could be likened to trying to drive your car down the road while looking only in your rear view mirror.
Which FED Window should I use to get my Zer0 percent loans?
excellent point!!!.......How many people are on the bread line now?.....How many were added last yr?
“We are in RECESSION. I would argue we’ve been in recession (”officially”) since mid-2008, perhaps earlier.”
If everyone using an EBT card was standing in a bread line, we’d see that we have been in a serious depression since 2009, at the latest.
Unemployment is not the 5 and 6% reported; it has been above 25% for the entire administration of the Negro from Nairobi.
I can not believe I agree with you on interest rates. ZIRP has decimated velocity of money. Savers and seniors have much less money to spend. Many are going after risky stuff to gain some yield. Retail is hurting.
The problem is not lack of loan money. Banks can borrow from FED at zero rates. Problem is lack of demand for loans.
Regulations and Obamacare are killing full time jobs, because if you work less than 30 hours, employer is not required to offer healthcare.
Sounds about right.
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