- Inflation will rise slowly to the Fed’s target, 2 percent.
- The Fed funds rate is now 0.50 percent, so Yellen is indicating two quarter-point hikes in the rest of 2016 -- if that -- and another 1 percent in 2017. If that.
- Yellen could not be more clear: We are not entering some death march to 4 percent or even to 3 percent or maybe even to 2 percent.
Janet Yellen nailed it in her Tuesday speech last week. Even the financial media have struggled to get the magnitude, but the civilian version, below, will make sense and give reason to celebrate. (Beware April Fool’s Day. But we’ll get to that.)
Yellen’s multi-home-run speech established her command of the Fed after a shaky first year, and her command of economic analysis of our situation (the only way to command the Fed), and capped near-term interest rates, both short- and long-term.
The points she made on the way to her overall conclusion are now “settled law” inside the Fed. Unless superseded by surprising new data — to which she will react, of course — it will be foolish for anyone at the Fed to argue.
Three key points: inflation will rise slowly to the Fed’s target, 2 percent. Risks are asymmetric: It is much easier for the Fed to adjust to a strong surprise from the economy than to a new recession. And Yellen repeatedly mentioned new weakness in foreign economic conditions.
Fed Chairs do not get more definitive than this: “Reflecting global economic and financial developments since December, the pace of rate increases is now expected to be somewhat slower. The median of FOMC participants’ projections for the federal funds rate is now only 0.9 percent for the end of 2016 and 1.9 percent for the end of 2017, both 1/2 percentage point below the December medians.”
She knows perfectly well that these median forecasts are tilted upward by voting hawks. The Fed funds rate is now 0.50 percent, so she is indicating two quarter-point hikes in the rest of 2016 — if that — and another 1 percent in 2017. If that.
The best guide to future Fed funds is the future inflation rate — presumably 2 percent — plus the “neutral real rate,” historically 2 percent. Higher than that sum, and the Fed is trying to slow the economy; lower and the Fed is “easy.”
Once in a while I get one right, and I can’t resist the temptation to crow. A couple of weeks ago, I wrote: “The normal neutral Fed rate may be no higher than the rate of inflation.”
Yellen on Tuesday: “The economy’s ‘neutral real rate’…is likely now close to zero.”
If the neutral real rate is close to zero, then the Fed’s neutral rate is inflation plus nothing, therefore the 2 percent inflation target. Yellen could not be more clear: We are not entering some death march to 4 percent or even to 3 percent or maybe even to 2 percent.
The politics of Fed command involve two groups: the governors of the Fed, appointed by the president and confirmed by Congress. These people nearly always align with the Chair even if they disagree.
A formal dissent by one is most unusual and a sign of revolt. I think it’s been more than 20 years since one of those.
Group two is the presidents of regional Fed banks, twelve of them, relics of America in 1912. Only one is west of Dallas. Their original purpose was to be close enough to country banks to supply cash, and to add some local-bank opinion versus the pointy-heads in Washington. Until Bernanke gave them open-season to speak their minds, we rarely heard from them. About half are good people, today three or four are very good.
But these — Mester, George, Lacker, Lockhart, Williams, and Kashkari — are the result of self-perpetuating local boards of directors unqualified for the job, promoting to local president a variety of careerist dopes.
April Fool honors to Williams of San Francisco, who in Singapore last week delivered the single-worst Fed speech I’ve ever read, insisting to an Asian audience that the world outside the U.S. does not matter to the Fed. And to Narayana Kocherlakota, Minneapolis emeritus, who this week demanded that presidential candidates debate Fed policy. These candidates?
So all is good except one thing: the outside world.
The bird-brained Fed hawks above are unanimous that the U.S. is little-affected by the global economy. That modest error aside, they don’t understand that the outside world is mightily affected by the Fed.
Aggressive tightening here would force China to devalue, and wreck anyone else who had borrowed in dollars (nearly everyone) — and we would certainly feel that here. As it is, Japan and Europe are on the brink again.
The 10-year T-note five years back. A bad accident overseas, or slippage here, and we’ll try the 2012 all-time low.
The 2-year T-note is the best Fed-predictor we have, the chart of trading in the last week. No trouble finding Yellen’s Tuesday speech! The increase Friday was reaction to news of improved manufacturing.
The data behind the Atlanta Fed GDP-Tracker may have influenced Yellen. The first quarter is over now, and it sucked.
Non-financial corporate cash and deposits, Japan, U.S., U.K., Euro. Japan and Euro have negative rates, designed to push cash into consumption, lending or investing. The Negative Interest Rate Policies (“NIRP”) are not working.
Japan. Energy efficiency is good, unless you’re Saudi Arabia. Or Japan, imploding.
Japan again. Confirmation of demographic end-games show up in funny places.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at email@example.com.