Was Raising Rates a Yuge Mistake?*

Pragmatic Capitalism ^ | 01/14/2016 | Cullen Roche

[expat_panama]

The recent market jitters have a lot of people saying that the Fed might have made a yuge mistake by raising rates. I’ve been a vocal proponent against raising rates, but I am not convinced that this was a policy error (just yet). The risk/reward doesn’t look great in a world where the US economy is fairly weak and global growth is clearly slowing. Here’s my thinking:

The risk with rate hikes is creating an extreme divergence in global policy approaches where the US Central Bank, the world’s most important central bank, is tightening policy into a global slowdown. The worry is that this exacerbates problems in foreign markets by increasing capital outflows, puts further upward pressure on the dollar, dings commodities, exacerbates foreign denominated dollar debt problems, etc. In the end, a sharp tightening could come back to pull the US into the global recession hole.

We’re only one rate hike into this cycle so let’s not get too worked up. 25 bps isn’t going to derail the global economy after all. But the Fed has to be careful moving forward here. They have the unenviable task of trying to manage domestic risks with foreign risks. Based on some of Janet Yellen’s recent commentaries I think she is probably more worried about financial instability than inflation or unemployment (both of which are obviously not problems). She’s wary of being the next Fed Chair to sit around while asset bubbles blow only to later find out that these bubbles caused yuge problems.

So, what we’re going through right now might actually be the exact type of thing Janet Yellen wants to see. The US economy is doing okay, a few rate hikes aren’t going to kill global growth, but they might be enough of a signal to dampen some of the enthusiasm in financial markets. As Matt Klein has noted, the Fed is simply trying to atone for their 1998 mistake. I think that’s a reasonable assessment. So, maybe the Fed is trying to avoid some of the irrational exuberance we have been seeing in certain markets. If recent high yield bonds and broader stock declines are any sign, then maybe the Fed is achieving exactly what they’d like? And in the long-run, that might not be all bad….Still, the Fed has to be careful here. They’re pouring tiny amounts of gas on a global fire right now. Their actions this year could amount to pouring buckets on it (4 rate hikes would amount to at least a bucket, in my view). They should tread carefully and very slowly.

* Yuge is a word not commonly recognized in most modern dictionaries, but derived from the Donald Trump dictionary. It loosely means “larger than huge”.

[expat_panama]

The article's main question is one that had to be addressed, but the writer seemed to run off into an alternate reality:

...the Fed is simply trying to atone for their 1998 mistake. I think that’s a reasonable assessment. So, maybe the Fed is trying to avoid some of the irrational exuberance

Two things he's missing, one is that Sir Alan's "irrational exuberance" nonsense was in '96 and the crash was after Sir Alan's Y2K nonsense---

--and the other missing link is the fact that the Fed's has no tools and no mandate for stock prices or Y2K.  Their concern is supposed to be inflation.  The mistake w/ last month's rate hike was not stocks or jobs, it was the fact that there was no inflation to stop.

[Dutch Boy]

I guess that depends on the goal. If the goal was to destroy retirement accounts to create more dependency on the government, I’d say it did what they set out to do.

[arthurus]

If prosperity and stability is the goal then any action by the fed is a yuge mistake. The only economically sound policy toward money is to hold the value of the dollar utterly stable no matter what that does to interest rates or to anything else. The only way to have a truly stable dollar and return the phrase -sound as a dollar- to provenance is to return to a real gold standard with an unvarying price for gold. When men try to regulate the economy, deigning to invent their own economic laws, the result is hampered markets and misallocation of resources. The extremely wealthy and the rulers benefit while the prosperity of the general population declines.

[expat_panama]

Happy Friday before a 3-day weekend (markets closed Monday for MLK).  IBD headline yesterday said it all "Stocks Get Their 'Overdue' Rally, But Can It Last More Than A Day?"

Futures now mixed/down while metals fall back to bases.  Report flood:

8:30 AM Retail Sales
8:30 AM Retail Sales ex-auto
8:30 AM PPI
8:30 AM Core PPI
8:30 AM Empire Manufacturing
9:15 AM Industrial Production
9:15 AM Capacity Utilization
10:00 AM Mich Sentiment
10:00 AM Business Inventories

[Proud_texan]

Yeah, rates were too low to begin with and by waiting so long to raise them the Fed has nothing left with which to deal with any kind of slow down.

But, to me, the scariest part is if the Fed is the most responsible adult in the room and did all they could to counteract irresponsible government spending, regulation and burdens like Obolacare. Just think of the national debt and the cost of debt service was just 200 more basis points....

[palmer]

The mistake was lowering them in the first place. Deflationary recessions are necessary and they would be quick without lower rates. Lower rates just postpone the inevitable and drag it out, in the current case for the longest post-recession period ever. The downside of not lowering rates is a spiral of default but mainly in the banks that got too big. How did they get too big? For one thing low rates that favor their model (carry trade and similar BS) and second the completely distorted securities markets mainly from real estate (residential and commercial) and other debt-driven expansion that is unsustainable from mispriced debt.

[Jumper]

The market in the US was driven by the Obama administration and proved crucial in his reelection. The FED has since lost control, and world events are proving more powerful than political controls to help socialists win elections.

[Jumper]

The stock market rise in 2015 simply provided the USG with tax receipts owed by people who will have lost the value of their market holdings, plus the taxes. The Interest Rate increase will provide the money lost because in 2016 there will be no tax revenues to support the USG. It is just a way to finance the government, and the rise in markets starting in October gave Obama a second term.

[Sequoyah101]

This I agree with but what you and I think does not matter.

The economy has been over controlled just like the sheeple have been over controlled.

The result of over control is out of control.

[scooby321]

Looks that way.

Mark Twain called the Gilded age for it was thin veneer.

Obama economy has a veneer.

Blaming the warm Winter for lower sales.

Last year he blamed for vortex winter

[DCBryan1]

Bloomberg news:

The following are today's top stories from Bloomberg on your My News categories:

Business Briefing

1) Asian Stocks Retreat as Oil Resumes Drop; S&P 500 Futures Sink
Asian stocks sank to a three-year low as oil fell back below $31 a barrel. Chinese equities slid with industrial metals and the Australian dollar, while the yen strengthened. The MSCI Asia Pacific Index fell 0.5 percent, reversing a 1.1 percent advance, as financial and energy shares led declines. The Shanghai Composite Index extended losses after a report that some banks had stopped accepting small-cap shares as collateral on loans. Futures on ...
2) Goldman Says It Will Pay $5.1 Billion in U.S. Mortgage Probe
Goldman Sachs Group Inc. said it agreed to settle a U.S. probe into its handling of mortgage-backed securities for about $5.1 billion, cutting fourth-quarter profit by about $1.5 billion and closing out a year of record legal and litigation costs. The proposed deal, which the bank announced in a statement Thursday, would be the latest multibillion-dollar settlement resulting from the government’s push to hold Wall Street firms to ...
3) Hedge Fund Octagon Returning Outside Money to Run Family Office
Octagon Capital Management Pte , a hedge- fund firm started by former Government of Singapore Investment Corp. executives, will return all client money in its two funds and convert to a family office, joining a rising number of managers going back to running in-house capital. Investors will receive their money early next month, co- founder Lam Poh Min said in an instant message exchange from Singapore. Lam and other Octagon Capital executives are meeting with ...
4) Headland Capital Loses Half Investment Team After Fund Scrapped
Headland Capital Partners Ltd., the Asian buyout firm spun out of HSBC Holdings Plc, lost nearly half its investment professionals after scrapping a fundraising. The Hong Kong-based firm, which manages $1.5 billion of assets, decided to focus on managing and improving its existing portfolio companies in the next 18 months, according to Chief Executive Officer Marcus Thompson. The shift in strategy resulted in the size of its investment team falling ...
5) China’s Credit Jumps Most Since June on Surging Bond Sales
China’s broadest measure of new credit surged the most since June as companies increase borrowing on the corporate bond market, underscoring a shift away from reliance on state-backed banks for funding. Aggregate financing rose to 1.82 trillion yuan ($276 billion) in December, according to a report from the People’s Bank of China on Friday, compared with the median forecast of 1.15 trillion yuan in a Bloomberg survey. The data shows companies are ...
World News Briefing

[mad_as_he$$]

DJIA in freefall. See if the computers will try and hold it in 3, 2, 1....

[Sequoyah101]

My car insurance went up 4.5% and the house insurance went up 6.8%. Both went up more than inflation again just like health insurance went up more than inflation.

The house insurance increase was blamed on more weather related claims. So we are having more weather than normal? What about the years we had less weather than normal and the rates didn’t go down?

We are being played and screwed.

I’m dropping my collision insurance on the cars and when I get moved I’m dropping all but liability on everything. If it burns to hell with it all.

[Sequoyah101]

and the obvious reason is? What?

[mad_as_he$$]

FUD.

[dennisw]

Fed raised rates by one quarter percent so they would have something

[stockpirate]

Those who remember my posts will recall that I sid QE was supporting the markets and when QE ended the markets will correct because it was inflted to levels the market can’t support.

It was a fraud, the Fed pumped up the market to make Obama look good. Now it’s time to crash the bus as republicans takeovee next year.

Anyone that gives others reasona for the correction are lying.

[expat_panama]

...I sid QE was supporting the markets..

--and some freepers were part of your faction and agreed. The rest probably guessed that you only knew what you were talking about enough to proclaim your opinion, but not enough to actually risk any of your own money on it.  Sounds like we're all in agreement as to what your QE/stocks opinion is worth.