By EconMatters
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Rate Hike
The Federal
Reserve has been telegraphing to markets that they are going to raise the fed
funds rate by 25 basis points next month at its December Fed Meeting. The
financial markets think they are serious this time and have been pricing in
this 25 basis point rate hike for the past 6 weeks. The real question is that
since the Fed has told us that they are Data Dependent for the past 7 years
regarding changes to monetary policy, what has really changed in the economic
data for the positive? Why now of all times do they decide to raise rates? Are
they raising rates for the right reasons? These are just some of our concerns
as the Federal Reserve embarks upon their final FOMC Meeting on December 16th
2015.
John Williams
It is
hilarious watching Federal Reserve Bank of San Francisco President John
Williams flip flop on rate hikes faster than a politician on an issue after a new
poll comes out. It has become obvious that this Fed member has no views of his
own regarding monetary policy, he is basically Janet Yellen`s mouth piece, and
is not an independent Fed member. If one just reads his statements over the
course of 2015 regarding possible rate hikes, with an economy that hasn`t
dramatically changed much in 2015, one would demand immediate and supervised
drug tests on a monthly basis. Maybe I am being too hard on this guy, and that
he has a difficult job of navigating Fed Policy politics, but he sure is coming
across as an incompetent and unqualified board member that adds no real value
to the committee.
Neel Kashkari
Any maybe
that is why Neel Kashkari, has been chosen as head of the Federal Reserve's
regional bank in Minneapolis to make everyone else appear more qualified in
comparison. I am not sure why this Fed move hasn`t garnered more attention by
the mainstream financial media, but what has Neel Kashkari ever done that makes
him qualified to be a Federal Reserve Board member? And yes it is too easy a
cynical softball setup for the peanut gallery to shout out “He worked at
Goldman Sachs!” here. But he has accomplished very little in the Hedge Fund
community, Investment Banking, his small time as a Portfolio manager at PIMCO,
he made an unsuccessful run for governor of California in 2014, and was an unsuccessful
aerospace engineer at TRW Corp. So unsuccessful in fact at TRW Corporation that
he went to Wharton to get his MBA to reinvent himself at Goldman Sachs.
It seems the
only thing this guy has succeeded at is kissing up to Hank Paulson while at
Goldman Sachs, which landed him a high profile position at the Treasury
Department during the TARP bailout program, by the way another colossal failure
both in terms of policy creation and implementation. The guy has literally
failed at every job he has ever done, and keeps getting promoted to better jobs
with higher required responsibilities and required competencies. It is not like
this guy has written extensively on monetary policy in his career or has a PhD
in economics from a respected academic institution. This guy was literally
pushing defense stocks on CNBC a couple of years ago while learning Portfolio
Management at PIMCO. I realize that often employment success in life is knowing
the right people and connections, but this is the Federal Reserve we are
talking about, and not the Vice President of some obscure department in a
sleepy corporation. Consequently the Peter Principle is alive and well at the
Federal Reserve, has the Federal Reserve become one giant example of the Peter
Principle?
Inconsistent Message
This brings
us back to the fact that the Fed now is so motivated to raise rates just to
show that they can actually raise rates, even when it is obvious to everyone in
financial markets that there is no need to raise rates here. In fact, the Fed
should have raised rates 3 or 4 years ago, and at the very least last year when
GDP was more robust during the second half of 2014. In short, for the near term
the Fed missed their opportunity window to raise rates, according to the
economic data and overall global economic environment – them being ‘Data-Dependent’
and all.
Therefore,
this rate rise is purely for show, the Federal Reserve has had 7 plus years to
raise rates and they pick the time when China is struggling, and the ECB, Japan,
and almost every other EM country is trying to weaken their currency. And they
are going to do it, as they have extended so much credibility the last 6 weeks
talking up this rate cut, that they would become a complete laughing stock by
their most diehard supporters if they bailed out on this one. The Federal
Reserve isn`t even consistent with their messaging within the same calendar
year. As the reason they couldn`t raise rates back in June, another heavily
telegraphed Fed Rate Rise Meeting, was because the US Dollar was too strong. They
were worried about the effects of a strong dollar on the US Economy from a
trade and corporate profits standpoint; not to mention its effects on emerging
markets. Hello Federal Reserve, just six months later we have the same
conditions with a strong US Dollar, it is not like anything has changed from a
data standpoint to now suddenly merit a 25 basis point rate hike. I realize it
is easy for me to sit back and criticize their actions, but it seems that from
a logical reasoning standpoint if they can raise rates now, then they should
have raised rates back in June.
Reasons Not to Raise Rates
The main
reason the Federal Reserve shouldn`t raise rates now is that the ECB, which the
Euro makes up the largest part of the US Dollar Index, is going full scale
nuclear on devaluing their currency for trade competitive advantages over the
United States. The second reason is that Emerging Markets haven`t shown a real
pickup yet from their latest stimulus attempts, and are still hampered by being
in the early stages of financial reform and structural rebalancing. The third
reason is that commodities are being hammered with a strong dollar, further
reinforcing deflationary pressures from a “Data-Dependent” standpoint given
that the Fed wants to stimulate ‘inflation’ in the economy. The fourth reason
is that there really is no need to now, that ship has sailed about 5 years ago,
for all we know we have reached the other side of the business cycle, and are
headed back into recession.
QE4
In fact,
there can even be a case for QE4 as the inflation in the economy is coming
mainly from Housing, (not enough affordable housing), and healthcare. Thus buying
new bonds and lowering interest rates further might stimulate the housing industry
in helping additional buyers move from apartment living into buying their first
home; thereby lowering the steep rise in apartment rents of the last several
years. This might also stimulate loan growth for both commercial builders and
banks now that some have started to up their commitment to consumer home loans.
Moreover, with regard to healthcare, raising rates isn`t going to promote or reduce
inflation as this inflation is purely institutional to the absolute structural
nightmare that is the healthcare industry today. A major overhaul will be
required in the healthcare business over the next five years. The recent college
try at reform has been a total and unmitigated disaster; we have only begun to
see the fallout from this failed policy initiative.
The Gang that couldn`t Shoot Straight
The Federal
Reserve is increasingly looking like the scared kid who is egged on to show his
bravery by jumping from a high cliff to regain his ‘manhood’ in the eyes of the
cool kids only to make a reckless decision with negative consequences. Yes the Federal
Reserve needed to raise rates, but they probably should have started 7 years
ago. After 7 plus years of being ‘Data Dependent’ why now?
In case the
Fed hasn`t been paying attention, the world has devolved into a full out
currency war, what the ECB has done to devalue the Euro in 2015 is not in the
United States best interests. It makes for bad Fed Policy to raise rates now,
it puts the US at a competitive disadvantage. All one has to do is look at the
hit to the retail sector from the drop in tourism spending of this year due to
the stronger dollar and compare this with the latest economic upturn in the European
economic data with a weaker Euro to realize that currency devaluation as a
strategy works and confers a strategic advantage for countries.
Really Federal
Reserve, you pick now of all times to raise rates? I think I know why Neel
Kashkari was recently selected to head the Federal Reserve's regional bank in
Minneapolis, he makes the rest of the brain dead zombie Fed Members feel ‘comfortable’
and not threatened by actually making competent and sound monetary decisions
for the US economy.
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