Posts Tagged Monetary Policy
When Bill Clinton passed the keys of the Oval Office to George W. Bush, on January 20, 2001, the American Economy was in great shape! Clinton had just balance the Federal Budget for the first time since 1964. The Unemployment Rate sat at 4.40%, somewhat lower than what the Federal Reserve deems “Full Employment,” at 5.00%. (The 5.00% is an assumption for those between jobs, changing jobs, recent lay-offs, etc.)
George Bush then took the Economy and devastated it, in order to accomplish ideological goals. He commenced to take the country into two never-ending wars, first, in Afghanistan, in 2001 and, then, Iraq in 2003. Both wars are still going on, which causes one to wonder what our Mission Statement was. Were they necessary? Will we ever leave?
Also early in his First Term, Bush decided to implement a series of Tax Cuts, which were primarily skewed toward the very wealthiest Americans. Why? Generally, a nation doesn’t lower taxes when it has one war to finance, let alone two! Also, tax cuts for the wealthy do not usually encourage consumer spending. On January 1, 2005, just after he had won his re-election, the Unemployment Rate was 5.30%, and the National Debt had increased from the tax cuts.
That rate began to edge up as the Economy began to stagnate. Banks, which were undercapitalized had been taking undue risks. Sub-prime mortgages were sold to homeowners who could least afford them. Even worse was the packaging of these questionable loans, which were sold to unknowing bond investors as AAA-rated mortgage-backed securities. And in the end, many of the banks, insurance companies, auto makers, etc., had to be bailed-out by the Taxpayers.
That Banking Crisis, which is commonly referred to as “The Great Recession” was first made public in October of 2007, when George Bush forced the very largest banks to take tens of billion of dollars, at virtually no interest. He described the scenario as such: “America is looking down into a Financial Abyss.” If you hadn’t been deeply concerned during the fourth quarter of 2007, when this all began, you certain became so after Bush’s announcement!
The Unemployment Rate of 5.00% at the beginning of 2008 quickly rose to 7.80% at the beginning of 2009. The Bush Tax cuts, coupled with financing two wars caused the Federal Budget to spike, and the interest on the, now higher, National Debt absorbed a larger slice of the budget, as well. Lay-offs reduced the tax polls, consumer spending declined considerably, and many small businesses closed their doors. And credit became virtually non-existent.
Just after Barack Obama took office, on January 20, 2009, the Dow Jones Industrial Average dropped to 6,500, from the prior high of 14,015 in October of 2007. Unemployment continued upward to 10.00% in early 2010.
The Obama Administration did the reverse of what George Bush did by allowing the Bush Tax Cuts to expire; but, he lowered rates for the middle class who, unlike the wealthy, spent their excess cash, thus giving new life to small businesses—the real job creators! Obama’s combination of Monetary and Fiscal Stimulus began the economic recovery, which continues to this day. The Unemployment Rate stood at 4.80%, when Obama left office last January.
Let’s consider how the two prior presidents—before Donald Trump—managed the American Economy. George W. Bush took over a nation, which had balanced its budget, and he ran it into the ground—turning the budget surplus to a deficit, lumping the expense of ineffective tax cuts and two unnecessary wars, doubling the Unemployment Rate and halving the stock market.
Barack Obama took a completely different stance. He almost balanced the budget, allowed the ineffective Bush Tax Cuts for wealthy to expire while lowering taxes for the middle class—the consumer class, put many small businesses back on their feet, tried to withdraw from the two Middle East wars in a gradual and rational manner, and he halved the Unemployment Rate while doubling the stock market.
Donald J. Trump seems dead set on following President Bush’s scenario. Are we ready for another Great Recession?
Each country’s currency usually reflects it relative economic health! When a nation runs a trade surplus—selling more of its products overseas, than it buys—it is running a trade surplus. Foreign buyers, as well as overseas investors, convert their funds to the seller’s currency. That greater demand, due to net foreign exports, increases the demand for the denominated currency, thus making it stronger. Conversely, when nations run a trade deficit—buying more overseas than selling—its currency will decline in value.
The President of the European Council, Donald Tusk, told Donald Trump, on his recent trip to several summits in Europe, that Germany continually runs a large trade surplus within the European Union, as well as with the U. S. I believe that the trade problem, in this case, is primarily due to Germany’s membership in the Euro Area, the 19 (of 28) E. U. members, that use the common currency, the Euro.
The reflection of Germany’s economic health is somewhat muddied since it shares the same currency as 18 other nations. Under normal conditions (a single-country currency), there is a self-regulating mechanism in foreign trade. Strong currencies create a price disadvantage for themselves, making their products more expensive than their overseas competitors. Likewise, weak currencies help expand trade exports; because, the nation’s products are more attractive, when priced in the weaker currency.
The single Euro currency must be valued the same way, however, by foreign-exchange traders, since it is the unit of exchange for all 19 nations. For Germany, and any other Eurozone members that run a trade surplus, this provides a perfectly legal advantage–the Euro is weaker than if it used the old Deutschmarks. The advantage, of using the Euro applies to transactions, both within the E. U. and globally. And the deficit nations must contend with a high-priced currency.
Accordingly, the Euro trades around the mean (roughly, the average) for the various nations in the Euro Area. This enables Germany to run a larger surplus than it otherwise would. And likewise, the negative impact of the stronger currency provides a price disadvantage for nations with weaker economies, that run a trade deficit.
In effect, Germany has maintained a low unemployment rate, 3.9% as of April, as compared to Spain at 17.8%, and Greece at 23.2%, by exporting its unemployment. Besides the great many benefits of membership in the European Union brings, they far outweigh the negatives. But, after so many years, the Euro Area needs to be changed, so that the E. U. remains relevant.
The convenience of a single currency—in two-thirds of the member nations—seems to be outweighed by the structural trade imbalance that the euro provides. And, that problem will never be solved as long as there is a common currency! Whether a Euro member is weak or strong, the common currency will keep them in that same alignment–and this needs to stop!
NOTE: Germany is merely taking advantage of an edge that is available to it; however, its actions might not be quite in keeping with the spirit of why the E. U. and the Euro Area were established.
Today, the Federal Reserve announced that it was raising the “Fed Funds Rate”, which is the intra-bank lending rate that banks charge one another. The increase was made after one of the eight yearly Federal Open Market Committee Meetings, which are generally attended by all seven members of the Federal Reserve Board, as well as the twelve regional Federal Reserve Bank Presidents, from around the country. While still low on a historical basis, the rate has risen by just 0.25%, to a range of 1.00-to-1.25%.
At the two-day meeting, the FOMC reviews many economic statistics, from each of the 12 regions, with an emphasis on Employment and Inflation in each. Following the meeting, Fed Chairwoman Janet Yellen announced that the labor market continues to improve, and that inflation is expected to soon approach the Fed’s two percent target rate.
Donald Trump has been trying to prod Ms. Yellen not to raise rates again, and several journalists have been reporting that some homeowners have had trouble with the last increase mortgage payment increase. Many retirees, however, have been clamoring for higher CD rates, since they need the higher income to live on. Although the Fed doesn’t set mortgage, consumer loan or CD rates, any adjustments to the “Funds Rate” generally do have some impact, across the interest rate spectrum!
Over the past 40 years that I have been involved specifically in the bond market, interest rates had never been anywhere near as low as they are now; that is, until ten years ago! To an extent, such very low rates had added to The Great Recession (4Q07 to 1Q09), since banks found ways to encourage mortgage re-financing and consumer lending to people who should not have qualified for the loans. Then, once the money was spent—on real estate and merchandise that they couldn’t afford—all they had left were big, big bills!
But, let’s consider today’s rate hike in terms of the Fed’s Dual Mandate—Maximum Employment and Stables Prices, along with Moderate Long-Term Interest Rates. The amount of necessary monetary stimulus dwindles as the labor market recovers, and if the rates remain depressed for too long, that could cause the economy to overheat, and inflation to overshoot the two percent target.
When rates are still extremely low, as they currently are, the Fed also has little ammunition to respond to another banking crisis, or a foreign currency crisis, such as occurred during the 1990s, both in Latin America and East Asia. This is why today’s rate increases makes perfect sense, as is the anticipated one more this year.
As always, the Fed doesn’t act on a rigid schedule regarding changes in monetary policy. Rather, it is constantly reviewing the updated data, keeping in constant touch with other central banks and considering its options. Ultimately, the Federal Reserve makes decisions on a meeting-to-meeting basis; however, it can act sooner, when necessary!
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!