Posts Tagged Monetary Policy
At 8:30 AM EST today, the Department of Labor reported Jobs Growth of 235,000 last month, and an Unemployment Rate of 4.7%, down from 4.8%. During President Obama’s second term, Trump dismissed the favorable employment statistics as being phony. But now that they reflect upon him–and they’re good–he chooses to boast about them. Will he still like them when they are negative? Time will tell!
Jan Hatzius, Chief Economist at Goldman Sachs, told CNBC-TV: “We’ve seen almost 100,000 jobs added in the construction sector in the last two months, and the warm winter, I think, had something to do with that.” I’ve been writing this blog for several years, and one month doesn’t indicate either an economic boom or a bust. Also, as Mr. Hatzius suggested, statistics can arrive earlier, by a month or two, or they can also be delayed.
Today’s employment statistics can, however, make life easier for Fed Chairman Janet Yellen, as the next Federal Open Market Committee’s (the central bank’s monetary policy-making arm) meeting is scheduled for next Tuesday and Wednesday. Ms. Yellen has already signaled an almost definite rate hike. Donald Trump, on the other hand, has been trying to exert his influence, to maintain low interest rates in order to help job growth. But, maintaining low rates in the face of strong employment, can have adverse economic effects.
The Fed has a so-called “Dual-Mandate”—to balance price stability with maximum sustainable employment. In doing so, it strives to balance those two goals. If the Fed were to keep interest rates too low, in order to enhance job growth, inflation could get out of hand. Conversely, raising rates to rein-in excessive inflation; however, would hurt job creation.
But, as Sean Spicer, Donald Trump’s Press Secretary summed up his boss’s interpretation of today’s DOL Jobs Report: ”I talked to the president prior to this [briefing], and he said to quote him for this, ‘[The jobs reports] may have been phony in the past, but it’s very real now.’” But, how will Mr. Wonderful spin the first negative Jobs Report, issued by his Secretary of Labor, and who will Trump blame for it?
In a recent post, I warned against Donald Trump taking control of the Federal Reserve Board, our central bank, and then directing it toward his own politically biased agenda. The link for that post is: https://thetruthoncommonsense.com/2017/02/09/dont-mess-with-the-fed/?iframe=true&theme_preview=true. Since then, one Fed Governor resigned unexpectedly, thus giving Trump a couple of seats to fill, and then he can nominate his own Chairman, as of February 2018.
The manner in which Donald Trump and his Regime manages the economy, will indeed, have major effects on our Society, in general. Income-inequality, divisiveness and widespread frustration with the government, can have a major effect on Who and What America becomes!
The Role of the Federal Reserve Board, our central bank, is to foster economic conditions that achieve both stable prices and maximum sustainable employment. The optimum is referred to as the Goldilocks Economy, similar to the mid-to-late 1990s: “Not too hot, not too cold, but just right.” The Fed’s goal, in effect, is to manage for Balance.
Republicans in Congress have always wanted to have greater control over the Fed, which would, in effect, politicize it. If the economy were destined to fluctuate between the policies of one party, and then shift to the other party’s goals, the general results would surely be disastrous for the overall Health of the Economy.
Donald Trump has already announced that he will replace Fed Chair Janet Yellen, when her Chairmanship expires. With less than one month in office, Trump has already been trying to browbeat the Fed not to raise rates. There is a reason why democracies insist on their central banks remaining apolitical: wrong moves, especially on purpose, in either direction, or if postponed, may lead to an even more horrendous economic situation.
An interest rate increase, or cut, are usually made after careful economic analysis, based on comprehensive reports, collected from the twelve regional federal reserve banks. Those reports provide the rationale for monetary policy. Arbitrarily cutting the “Funds Rate”, or failing to increase it when appropriate, might result in an overheated economy—and high inflation—on the up-side. Improper moves in the other direction, could result in deflation—price implosion—and a similarly dysfunctional economy.
When the Fed’s monetary policy committee raised rates in December, to a range of 0.50%-to-0.75%, it estimated that a 0.25% rate hike was necessary to keep the economy from accelerating. Balancing the economy assumes that minor adjustments are best, rather than waiting for the economy to either over-inflate on the up-side, or to deflate or the down-side.
Now that Steven Mnuchin has been sworn-in as Secretary of the Treasury, Donald Trump might just turn his attention more toward the Fed nominations. The key question here, is whether Secretary Mnuchin will work smoothly with the Fed, or merely follow Donald Trump’s incongruous agenda. Hopefully, he will cooperate with the Fed, and focus on maintaining a stable economy, for all America!
Among the various governmental departments, which most definitely should not be politicized in any way, the Federal Reserve Board is among the most important! Recently, political influences may have influenced Donald Trump’s attacks on Federal Judge Robert, and the Judiciary in general, as well as the disastrous raid in Yemen, which might have been carried-out, before the plans were set, due to a sense of false bravado.
I am not aware of one foreign democratic government, in which the head-of-state is able to influence their respective central bank’s monetary policy—interest rates and the supply of money in circulation. On the other hand, governments do have direct control over their Treasury (or Exchequer), which are part of the government, and the President or Prime Minister implements fiscal policy—taxes and spending—through them.
Oftentimes, one political party or the other does try to suggest changes in Fed Policy, which are generally in that party’s best interest. In 1972, President Richard Nixon made some dumb changes in fiscal policy, which caused the devastating “Stagflation”—high inflation in a recessionary involvement—which lasted through most of the decade. The tools that would normally be applied to correct for a recession, unfortunately, are opposite to what is needed to fight inflation.
The Fed is mostly staffed by economists, or other financial professionals, who can work with the Board in implementing monetary policy. For instance, last week’s Jobs Report, which the Department of Labor released on Friday, was very strong. If it had reflected a significant decline in employment, and high unemployment: however, an over-reaching President might have tried to urge the fed to cut interest rates.
Such pressure might be even stronger, if—like in 1972—a re-election was approaching. But as I suggested in a recent post, employment statistics can be flukey, due to a number of factors, and they are more reliable when reviewed in, perhaps, several quarters at a time.
Donald Trump will be able to fill an open seat on the Board, and has signaled that he would nominate someone to be the vice Chairman; however, that doesn’t give that nominee much power. Additionally, the Vice-Chairman of the FOMC is traditionally the President of the Fed-New York. The President of the Federal Reserve Bank of New York has a permanent seat on the FOMC is because His or Her bank carries-out Federal Reserve Monetary Policy.
Over the years, members of the Republican Party have called for such asinine changes to the Fed, as its: Elimination; Auditing; Control, etc. The Fed is already the most transparent department in the Federal Government. The Chairman testifies twice a year to both the Senate Finance Committee and the House Banking Committee. It holds a press conference immediately after each of the eight annual FOMC meetings, and the minutes are released ten days afterward.
The Fed Board, as well as each of the twelve regional, independent and shareholder-owned, banks release volumes of reports and studies throughout the year. With the GOP controlling all three branches of government, and given its past on-going aspirations to control the Fed, I’m concerned that there isn’t a strong group of Republicans to band with the Democrats, and control Donald Trump.
This past Friday, the Department of Labor reported that the number of Jobs grew by 227,000, which was about one-third higher than estimated. The Unemployment Rate grew from 4.7% to 4.8%, but, otherwise, it was a good report. In an article in the Washington Post, Donald Trump claimed credit, even though he was only in office for one-third of the month.
Economists always suggest that the Employment Market is subject to “Seasonality” Factors, such as weather; where holidays occur during the month; number of business days, etc. Generally, its best to review all Employment Statistics over a course of time, perhaps several quarters, in order to arrive at rational conclusions.
In the New York Times, however, rather than beating his chest over the Jobs Report, Trump was complaining, on the very same day—saying that the real unemployment rate is 42%. There are six different iterations of an Unemployment Rate, which the DOL reports monthly; however, the highest (U6) only reflects a 9.4% rate—meaning that the individuals have looked for a job at least once during the month, as does the regular rate. The U6 Report, however, also includes people who want a job but haven’t even looked, or have only found part-time work.
Now, we can almost reach Trump’s 42% assertion; but, only by counting every adult in America, who is not working. That would have to include: stay-at-home mothers (or fathers), the elderly and disabled, the wealthy, retired people, and those who are just not interested in looking for job.
Perhaps Donald Trump is setting himself up with an excuse for when the Economy sours on all of his Executive Orders, Tweets, failure to release Tax Returns or divest himself—and his Family—from his Business Empire. It’s not just the Economy that could go awry; so Donald, better get ready!
Stagflation is the coincidence of high inflation during a recession, and it has only happened once in the U. S., during the 1970s. There was a mild recession in 1972, and although the Fed and the Treasury had each provided stimulus, President Richard Nixon wanted to boost the economy, to enhance his re-election chances. But, when Nixon took matters into his own hands, he just made the situation worse—much worse!
President Nixon implemented wage and price controls and, simultaneously, took the
U. S. Dollar off the Gold Standard. Initially, the dollar surged in global markets; however, when Great Britain tried to exchange $3 billion, in dollars for gold, the dollar plummeted. As the global markets abandoned the dollar, the price of gold skyrocketed from $30 per ounce, to $120.
During a normal recession, as the economy slows, and unemployment rises, inflation is generally weak. In such cases, the Fed would flood the economy with cash, to stimulate the economy, and thus promote consumer spending and hiring. In a stagflation situation, however, stimulus measures intended to enhance employment, would just make the inflation problem even worse. And, that just leads to a sure case of: “Damned if you do, and dammed if you don’t!”
Businesses couldn’t pass the higher prices on to customers due to the price controls. So, the only alternative businessmen had, rather than to raise prices, was to cut its expenses by laying-off workers. But, that only made the recession worse. But, prices kept rising, even though they couldn’t be passed on. Demand also increased as people thought prices might rise even more in the future.
Paul Volcker, as Chairman of the Fed, finally solved the stagflation problem.
He raised the “Fed Funds” (short-term intra-bank lending) rate by two full percent in one day in 1981, up to 20%, and that slammed the breaks on the economy. Incidentally, the higher interest rates also strengthened the dollar, which helped alleviate inflation.
Now, I’m not predicting a return of stagnation to the U. S. economy; but, with Donald Trump’s bull in the china shop mentality, and his apparent ignorance of the issues; I can only wonder. He has also handicapped himself by appointing mostly inexperienced ideologues with which to fill-out his Regime. As I have been following the financial markets, and monitoring his attempt to micromanage the various industries, I sure have my doubts about positive economic outcomes ever becoming reality.
I would prefer raising an awfully scary issue, and being wrong; rather than not have suggested such an abnormal situation at all. In 2008, as America went through The Great Recession, we were extremely lucky to have had such a smooth transition, from the Bush Financial Team to the Obama Team. All experienced pros, who worked well together, took the political heat and did what was best for America. I’m surely not expecting any such thing from the Donald Trump Regime!
NOTE: If you use a financial professional in your investing, ask her or him what they think the chances of stagflation might be. Chances are, they have never even heard of the term.
During my forty year career in Investment Services, I hardly ever read a book, and then only an occasional one that was generally work-related. Approximately six months ago, however, I began reading books from our County Library, on a multitude of topics. So far, I’ve had great luck in my selections, and I would like to list a few of them. OVER TIME, I WILL MAKE ADDITIONS TO THIS LIST. If you don’t find one that might interest you, perhaps consider another!
GLOBAL PUBLIC HEALTH—TWO ALL-ROUND FEEL-GOOD STORIES:
Epic Measures, by Jeremy N. Smith.
Christopher Murray, a Harvard-trained M.D, with an Oxford, Ph.D. in Medical Health Economics, challenged the Global Health Establishment and won. His tool is a data base of virtually every known disease, broken-down by country. Knowledge of country-specific diseases enables more accurate, disease-specific appropriations. The free on-line “GMD Compare” is linked, as follows: http://vizhub.healthdata.org/gbd-compare/.
Mountains Beyond Mountains, by Tracy Kidder.
Paul Farmer, a fellow resident at Brigham and Women’s Hospital, with Chris Murray (cited above), and Jim Yong Kim, all three vowed to “Save the World,” and they are still working toward that goal. Farmer and Kim, through their Partners in Health, also challenged the Establishment, and appear to be winning, as well. PIH is providing high-quality health care to some of the poorest and remotest locations on Earth: Haiti, Mexico, Rwanda, and a Siberian Gulag.
THE AMERICAN HEALTH CARE SYSTEM:
Reinventing American Health Care: How the Affordable Care Act will improve our terribly complex, blatantly unjust, outrageously expensive, grossly inefficient, error prone system: by Emanuel, Ezekiel J.
Dr. Emanuel is a Professor of Oncology and Medical Ethics at the University of Pennsylvania, and was a key architect of the Affordable Care Act (derisively called “Obamacare” by the Republicans). This program currently provides health insurance to some 25 million previously uninsured Americans. Dr. Emanuel acknowledges that any Health Care, or Insurance, System can always be improved upon.
ORIGINS OF HUMANITY:
Sapiens: A Brief History of Humankind, by Yuval Noah Harari
A great historical and scientific explanation of Who we are, Where we came from, and How we got here. The obvious idea is to understand our past in order to contemplate our future.
ENVIRONMENTALLY-BASED SCIENCE FICTION:
The Collapse of Western Civilization: A View from the Future, by Naomi Oreskes and Erik M. Conway
Two scientists have written this science fiction novel, which predicts what the Earth, which Mankind is currently passing on to successive generations, might be like. We must change direction, in order to avoid assured destruction.
THE FINANCIAL CRISIS (4Q07 TO 1Q09):
Stress Test: by Timothy F. Geithner
Tim Geithner was President of the Federal Reserve Bank of New York at the beginning of the crisis and, then, he moved over to take Hank Paulson’s place, as Secretary of the Treasury during the First Obama Administration. The FRB-NY implements the Federal Reserve Board’s Monetary Policy. The book reveals the thinking from inside the Obama Financial Team.
Too Big to Fail: the inside story of how Wall Street and Washington fought to save the financial system from crisis–and themselves, by Andrew Ross Sorkin
Respected Wall Street journalist—as a reporter for the NY Times and a morning host on CNBC-TV—Mr. Sorkin describes the crises from outside the Government, with numerous excerpts of discussions and interviews with the Wall Street and Government participants.
Historically based Racism in America:
Freeman, by Leonard Pitts, Jr.
In this well-researched historical novel, Mr. Pitts describes life, in the Deep South, given the uncertainty of what life had actually become, in the vanquished south, immediately after the Civil War.
The Plot Against America, by Philip Roth
A historically fictional novel, as told through the eyes of eleven year-old “Philip”, growing-up in a Jewish neighborhood of Newark, NJ, during pre-World War II America. The hypothetical situation assumes that famed aviator Charles Lindbergh, an avid Nazi-Sympathizer, defeated incumbent President Franklin D. Roosevelt, for the Presidency, in Isolationist America. Published in 2005, the ironies with the current political environment abound.
Mankind, and our Sense of Humanity:
Tribe: On Homecoming and Belonging, by Sebastian Junger.
Tribe is a wonderful book, that calls on a number of academic fields, in order to describe Mankind’s search for a sense of belonging. Mr. Junger traces this Tribalism from Colonial America, the WWII London Blitz, returning war veterans with PTSD, the lasting psychological effects on rape victims, etc. The outstanding review, from the Guardian (UK) is linked, as follows: https://www.theguardian.com/books/2016/jun/22/tribe-by-sebastian-junger-review.
War and Misunderstanding:
My Lai 4: A Report on the Massacre and Its Aftermath, by Seymour M. Hersh
Sy Hersh won a Pulitzer Prize for uncovering, what I believe, was the very darkest hour of the U. S. Army. Elements of the Army’s Americal Division massacred some 550 Vietnamese old men, women, children, even suckling babies—for no other reason, perhaps, than “scoring body counts”. The Courts Marshall went nowhere in what seems to have been a massive cover-up–by many men, up-and-down the Chain-of Command.
Half the Sky: Turning Oppression into Opportunity for Women Worldwide
by Nicholas D. Kristof and Sheryl WuDunn.
This book tells the stories of a multitude of people—victims of sexual slavery, non-existent health care, domestic abuse and murder, decade’s-long civil warfare, etc. Once they found a way-out, they had the humanity to, then, help others. You might find other, similar books by this husband and wife team of interest.
The Rosie Project, by Graeme Samson
A hilarious fictional novel about a middle-aged professor of genetics, with Asperger’s Syndrome, deciding that he needs to find a wife, for his “Wife Project”. So, he draws-up a 16 page questionnaire for candidates to complete. Need I say more? Bill Gates’ wife, Melinda, suggested that he read it, since it deals with the structured mind of a logically-focused person.
The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies, by Erik Brynjolfsson and Andrew McAfee
This book describes how today’s Technological Revolution–the Digital Age–is taking-over where the Industrial Revolution had left-off. Now, as then, innovation often doesn’t necessarily precede applications, the two of which might come in either order, or even simultaneously. And in same cases, intermediate inventions or applications might be required.
Hillbilly Elegy, by J. D. Vance
After World War II, many people from Appalachia moved-up, to southern Ohio and Indiana, searching for a better way-of-life. But, they retained their Hillbilly culture—extreme poverty, lacking job skills or a respect for education. Actually, Appalachia moved north with them. This is J. D. Vance’s personal story about how he escaped, gained a good education and began a successful career; but, he still shares many of those same Hillbilly values.
The Rothschilds : a family portrait, by Frederic Morton
The true story of a poor man, who sends his five sons to the major capitals of Europe, creating a global financial dynasty. There are many financial lessons to be gleaned from this book: the origins of global banking; the reasons for some of the most basic securities laws; business intelligence (Intel); and the relationship between commerce and politics.
The Hunt for Red October, by Tom Clancy
Yes, the fiction adventure movie was great, but the book was even better. American naval forces compete with Soviet naval forces to find and “destroy” (retrieve) a run-away technologically state-of-the-art Soviet sub. All the while, the Americans don’t know if the Skipper has gone berserk, or is trying to turn it over to us. Once again, the Pentagon wonders where Clancy gets his spot-on information.
Today, the Federal Open Market Committee raised the “Fed Funds” rate, by 0.25%, to a range of 0.50%-to-0.75%. The Fed does not actually set the rates, per se; rather the Fund’s rate is merely a target range in which our central bank suggests financial institutions lend money to one another—generally on an overnight, or very short-term basis. In this manner, it more or less, nudges rates, which are sometimes reflected throughout the maturity range (three months to 30 years), but sometimes not.
Besides the Federal Reserve Board, which is an arm of the Federal Government in Washington, there are also twelve regional Federal Reserve Banks. Each of them are privately owned, have their own Boards of Directors, and regulates the banks in their respective Districts. As you will see in the linked “Rube Goldberg” article, from the New York Times, the Federal Reserve Bank (FRB) of New York actually implements the monetary policies that the FOMC makes. The light-hearted link is as follows:
The Times article was initially published after the FOMC meeting last December, which was the last time that the Fed raised the Funds Rate. Today’s rate hike was widely expected, since Chairwoman Janet Yellen had recently mentioned its likelihood, at today’s meeting. The reason that the stock Market immediately plummeted, however, was the inclusion in Mrs. Yellen’s usual after-meeting statement, which suggested that the Fed would probably raise rates three times in 2017. But, pending changes in various economic metrics, those increases may or may not actuality happen.
Generally, a rate increase signals the Fed’s belief that the economy is improving, while a decrease suggests weakness. The financial markets, however, tend to be quite fickle. After 39 years of following the bond market quite closely, I look at the Funds Rate, and recall it being mostly in the four-to-five percent range. During the early ‘80s, the Fed Funds rate reached a historical high of 20%, as noted in the linked The Balance article: https://www.thebalance.com/fed-funds-rate-history-highs-lows-3306135. So, even if the rate did increase three times, assumedly to a range of 1.25% to 1.50%, that wouldn’t be overwhelming; but, let’s see what happens.
As I’ve suggested many times in this blog: financial markets have trouble dealing with Uncertainty; and everything should be taken into context. One other reminder would be: Don’t try to get ahead—anticipate without reason—of the market!