Wednesday, December 16, 2015

The US Fed has delivered a nice blow "Christmas present" to Main Street businesses. The US Fed has NEVER cared about Main Street, it ONLY cares about Wall Street. The collapse of the US economy will accelerate, while the Fed pushes out fake statistics pretending things are OK...Yellen says policymakers have raised rates now "to keep the economy moving along the growth path its on ... we would like to avoid a situation where we have left so much accommodation in place for so long that we overshoot those objectives", meaning they are forced to "tighten abuptly" and risk undermining the recovery.  She says that while policymakers are "reasonably close" to achieving one part of their mandate: full employment, she recognises they are "significantly short" of achieving the second part: keeping inflation at 2pc. Policymakers will monitor the data closely in the coming months, though there is no formula on how policymakers would proceed with future rate hikes. Inflation stood at 0.2pc in October, well below the Fed's 2pc target. Yellen repeats that much of the recent downward pressure on inflation has come from "transitory factors" such as falling oil prices "that we expect to abate over time".  She says "diminishing labour slack" is expected to put "upward pressure" on inflation in the coming months. Yellen also reminds everyone that it takes time for monetary policy to filter through to the economy.  If policymakers delayed rate hikes for "too long" they may have to tighten "relatively abruptly to keep the economy from overheating and inflation from overshooting". This could push the economy back into recession, she says. She says "even after today's increase the stance remains accomodative", with the FOMC expecting "gradual increases in the Federal Funds Rate.



Anonymous said...

The idea that they can predict what will happen to the global economy a week ahead let alone two years is hubris of the highest order. The only point of the rise is to test the waters. Will it be left at 0.25% for a quarter, 6 months or a year? Your guess is as good as the bankers.

With respect to the BoE, I can only assume they'll follow suit over the next 6 months but if I was a betting man I'd lay a wedge on them getting it wrong.

We have at least three factors likely to thwart any accuracy in deciding a rate rise for at least two more years. A continuing flat lining rate of inflation (unpredicted by the BoE), further slow down in China & Brazil, and the EU referendum. If you throw in the volatility of oil prices, a runaway housing market and a downward pressure on wage growth it is more likely than not that an early rate rise here will be ill-judged.

America's economy is not much shy of the combined wealth of the EU, which by comparison is in a poor state, and so until the ECB raises rates we shouldn't. I can't see the ECB doing anything so rash this side of kingdom come.

Anonymous said...

They said they were going to raise, so they had to raise it.

The US economy is also built on vast amounts of debt and credit, it cannot afford to have any meaningful rate rise due to concomitant rise in mortgages and business loans.

I have a £420,000 commercial mortgage, and I'm currently paying 5%, minimum base rate 3% + 2%, i.e. if the base rate goes above 3%, then I start to pay more.

I think that if our or the US base rate goes anywhere near 3% in the next few years, then the number of defaults and repossessions would be enormous.

Anonymous said...

Projected rises are 1.5% in 2016 and 2.5% in 2017 and the 3.5% in 2018.
The ECB's rates are currently-0.3% , as the song goes, "There may be trouble ahead....."

Anonymous said...

So the Fed proves its employment mandate is purely theatrical. With the US labor force participation rate at multi-decade lows, and an unemployment rate metric which is widely known to be statistically flawed and which under-represents real unemployment, the Fed is putting the brakes on the recovery.

This does create an interesting test case for secular stagnation, however. The Fed's actions indicate they think the US economy will return to trend growth. Therefore, if GDP growth trends remain at lower than historical averages, if productivity continues to lag its historical trends, and real unemployment remains high, the Fed's decision will have been invalidated, and the secular stagnation hypothesis validated.

Anonymous said...

wait till interest rates are 3 or 4% again - & see all the mortgage defaulting & the house re-possessions. Efficient markets need some participants to fail, even fail badly.

That's what we need: having tried to unfreeze council housing now we will see the same happening in the private sector. Mortgage defaulters, the failures, will see their dreams shattered, having to go back to one-bedroom flats, even bedsits, with a landlord who doesn't care. Justice for all those who thought they were entitled to their own home, who thought they were privileged & better off than chavs. Their comeuppance awaits them.

Freeing up the frozen, market-failing private housing market, the home of better-income welfare queens & kings, will move out mortgage failures into the private rental market, pushing up rents for everyone. Those who haven't saved enough for 3% or 4% will suffer - deservedly so. Life is a struggle, & there have to be losers - even desperate ones who will find themselves unable to continue - such is life, & death.