Tag: The Federal Reserve

The Times They Are A' Changin'

Posted on by George Yacik

Talk about charter creep. This is more like a charter leap.

As we know well by now, the Federal Reserve’s famous “dual mandate” is to promote price stability and maximum sustainable employment. But as we also know, the Fed really has a third mandate, maintaining moderate long-term interest rates (don’t ask me why they still call it a dual mandate).

So it should be no surprise, then, that the Fed has now gone way beyond that dual (or treble) mandate by wholeheartedly injecting itself into what is really a political debate, namely climate change. And how ironic it is that it rose to the forefront during the same week that the U.S. withdrew from the Paris Climate Agreement.

Last week Fed officials were out in force, declaring that climate change would now be a major factor in not only how it regulates federally chartered commercial banks but also how it conducts U.S. monetary policy.

On Thursday, in a speech at the GARP Global Risk Forum, Kevin Stiroh, an executive vice president responsible for regulating banks at the New York Fed, said financial firms need to take the dangers and costs of climate change into their risk-management decisions.

“Climate change has significant consequences for the U.S. economy and financial sector through slowing productivity growth, asset revaluations, and sectoral reallocations of business activity,” he said. “The U.S. economy has experienced more than $500 billion in direct losses over the last five years due to climate and weather-related events.” Continue reading "The Times They Are A' Changin'" →

Happy Halloween

Posted on by George Yacik

The last week of October is likely to be an eventful one. Halloween is on Thursday, the last day of the month, and Major League Baseball will crown a new World Series champion. And, oh yes, the Federal Reserve will hold its next-to-last monetary policy meeting this year, at which it is expected to continue on its path of easing monetary policy in the face of not-so-terrible economic news that doesn’t appear to warrant another interest rate cut.

The Fed meeting begins on Tuesday and culminates on Wednesday afternoon at 2:00 EST, with a likely announcement that it is cutting its federal funds rate by 25 basis points for the third time in as many meetings. The Fed hasn’t cut rates this often since the financial crisis when the world economy and financial markets looked like the world was coming to an end. Now we’re looking at the U.S. economy weakening from about a 3% annual growth rate to about 2%, and the Fed is acting like its 2008 again.

Of course, the Fed may not be looking to do another rate cut for economic reasons, but because it has pretty much painted itself into a corner by practically promising the markets that yet another rate cut is coming. What would the market’s reaction be if the Fed decides on Wednesday to leave rates unchanged? No doubt it would be ugly, which is why I’m siding with the consensus market view that the Fed will indeed lower rates this week, whether it’s “data-driven” or not.

Speaking of data, Continue reading "Happy Halloween" →

What If They Had A Recession And Nobody Came?

Posted on by George Yacik

There are two main constituencies in the U.S. that are hoping for a recession. The financial markets, both stocks, and bonds seem to have a vested financial interest in there being one.

For the bond market, which has been the biggest rooter for a recession, a weak economy means lower loan demand and lower interest rates, which means higher bond prices. For the stock market, a weaker economy, although not necessarily a full-blown recession, promises more accommodation from the Federal Reserve and, therefore, lower interest rates, which generally translates into higher corporate earnings and, therefore, higher stock prices.

The Democrat Party and its allies in the press naturally want a recession simply because it makes it less likely that President Trump will be re-elected. So they are rooting strongly for a recession, although they can’t actually come out and say so.

The recession lobby got some fresh ammunition last week when the Institute for Supply Management’s purchasing managers’ indexes for September came out. They were some of the worst in years, which ignited a rally in the bond market.

On Tuesday, the ISM manufacturing index slipped further into contraction territory, dropping more than a point from 49.1 in August to 47.8, its lowest level since June 2009, during the Great Recession (there’s that word again).

Unfortunately for the pro-recession crowd, a lot of the rest of the economic numbers aren't telling the same story. The ISM’s index for the services sector – which covers about three-quarters of economic activity – also came in lower than expected, dropping nearly four points from 56.4 to 52.6, its slowest pace in three years. But it remained well in expansion mode (i.e., over 50). That part of the story got little attention. Continue reading "What If They Had A Recession And Nobody Came?" →

It's Time To Go long

Posted on by George Yacik

While President Trump’s tweet calling the members of the Federal Reserve “boneheads” for failing to cut interest rates as low as Trump wants them grabbed the financial headlines, his suggestion that the government “refinance” its enormous $22.5 trillion debt got less attention. At the most, it was dismissed as undoable.

It’s hard to believe that the smartest people on Wall Street and at the U.S. Treasury can’t come up with some kind of scheme that would take advantage of today’s – and probably tomorrow’s – historically low bond yields and save taxpayers some money. This job would fall to Treasury Secretary Steve Mnuchin – himself a former Goldman Sachs investment banker – and not the Fed.

On Thursday, Mnuchin told CNBC that Treasury is “very seriously considering” issuing a 50-year bond next year. “We think there is some demand for it. There are some technology issues we need to make sure we have in place; there are market issues. But we would do this in a way that if there is demand, it’s something that we would meet.”

If Walt Disney and several European countries can sell 100-year bonds, certainly the United States of America can.

The initial reaction to Trump’s suggestion about refinancing Treasury debt was met with derision and skepticism. Continue reading "It's Time To Go long" →

Lock In Now Before It's Too Late

Posted on by George Yacik

I’ve been shopping for brokered certificates of deposit, and the rates between one-year and five-year CDs aren’t a whole lot different. Rates at my broker range from 2.4% for one-year to 2.65% for five, with two- and three-year rates in between.

My first inclination was to stay short. Why lock up my money for five years when I can get nearly the same rate for one, two, or three years? What if rates go up in the meantime?

Fat chance. Given the Federal Reserve’s past behavior, the odds of that happening are pretty slim, if nonexistent. It may make more sense to lock up your money – if you don’t want to risk it in the stock or bond market – for as long as possible now.

With all of the betting now on the Fed cutting – not raising – interest rates this year, market interest rates are only likely to go down from here, not up. Despite its recent track record of quick monetary policy reversals in the face of market volatility, shifting from a restrictive policy to a more accommodative one – i.e., lower interest rates – just makes the Fed more comfortable. Other than savers – who most people with any influence ignore – everyone loves low rates, and if nothing else the Fed wants to be loved. Continue reading "Lock In Now Before It's Too Late" →