Friday, January 29, 2016

The yield curve says "no recession"

Because of the way the Fed conducts monetary policy, the Treasury yield curve can tell us a lot about the market's expectations for economic growth and inflation. Currently, the yield curve is saying that the market expects to see modest economic growth of 1 - 2% for the foreseeable future, with modest inflation as well, in the range of 1.3 – 1.6% per year over the next five to ten years. 

Central banks have only three choices when it comes to policy tools. They can either control the money supply, interest rates (short or long, but not both), or the exchange rate, and only one of those at a time. After choosing one, they must accept the market's verdict on the others. Any attempt to control more than one of these monetary variables will inevitably end in tears, as the central banks of Argentina and many other developing economies can attest.

The Fed long ago decided that it would conduct monetary policy by controlling overnight interest rates (i.e., Fed funds). For many years the FOMC would add or subtract reserves from the banking system in order to keep the Fed funds rate (the rates banks charge each other to borrow reserves) at or near the Fed's target. Beginning in late 2008, the Fed modified this strategy, since it purposefully supplied trillions of excess reserves to the banking system. With a super-abundance of reserves, banks essentially have no need to borrow more, so the traditional Fed funds market no longer exists. The Fed solved that "problem" by deciding to pay interest on excess reserves (IOER), and that rate became the de facto Fed funds rate, enforced recently by allowing non-bank institutions to enter into reverse-repo transactions with the Fed and thus effectively earn the same rate that major banks can by holding excess reserves at the Fed.

The evidence to date is still relatively scant, but it looks like things are proceeding according to the Fed's plan. Libor, the rate that the market demands for lending to banks instead of to the Fed, is trading around 60 bps, which is somewhat higher than the 50 bps that banks earn by lending money to the Fed (i.e., by holding excess reserves at the Fed), and that makes sense. In other words, the Fed appears to have found a way to target the overnight risk-free rate by simply changing the rate it pays on excess reserves. The Fed's primary tool—short-term interest rates—hasn't changed, but the method of implementing it has.

Regardless, it is important to remember that the Fed can only control short-term rates. As three Quantitative Easing episodes from 2008 through 2014 demonstrated, despite the Fed's massive purchases of notes and bonds, 10-yr Treasury yields actually rose (see chart above). This put the lie to the Fed's professed objective of buying notes in order to artificially lower yields and thus "stimulate" the economy. As I've explained many times over the years, the real purpose of QE was NOT to lower bond yields and stimulate the economy—the real purpose was to supply the world with more risk-free monetary assets (aka bank reserves, which, with the addition of IOER, became T-bill substitutes) in order to satisfy the world's intense demand for money and safe assets in the wake of the 2008 financial crisis. The Fed did this by buying notes and bonds and "transmogrifying" them into T-bill equivalents. This was neither stimulative nor inflationary, since the Fed was simply supplying the money that the market wanted to hold.

Since the Fed can only control short-term rates, observing longer-term rates can tell us a lot about the market's expectations for the future of Fed policy. 2-yr Treasury yields, for example, are equivalent to the market's guess as to what the Fed funds rate will average over the next two years. The current 2-yr yield of 0.8% is a function of the market's expectation that the Fed funds rate will rise from 0.5% today to 1% or so two years from now. This expected path of the funds rate is consistent with a forecast of modest economic growth and low inflation. It is not consistent with an expectation of recession.

Market equilibrium tells us that, collectively, investors at any moment in time must be indifferent between earning the prevailing overnight risk-free interest rate for two years or investing their money in a 2-yr risk-free security and holding it for two years. Ditto for 5-year yields. But when it comes to 10-yr yields, the analysis becomes trickier, since the market invariably demands some kind of premium for locking in yields for such a long period. Nevertheless, looking at the difference between 2-yr and 10-yr Treasury yields can tell us a lot about what the market expects from the Fed over the next several years.

The two charts above show the history of 2- and 10-yr Treasury yields and the difference between the two, which is the slope of the yield curve. Note that the slope of the yield curve typically flattens or inverts (becomes negative) in advance of recessions. This is the bond market's way of saying that emerging weakness in the economy is putting a lid on the Fed's ability to raise short-term rates, and that it is increasingly likely that the Fed's next move will be to cut, rather than raise, rates. The current slope of the yield curve is not unusual at all, and is typical of the middle part of a business expansion. The market doesn't believe the economy is going to be weak enough to warrant lower short-term rates for the foreseeable future.

The chart above compares the nominal yield on 5-yr Treasuries with the real yield on 5-yr TIPS, the difference between the two being the market's expected annualized rate of inflation over the next 5 years, currently 1.3%. This is relatively low, but not unprecedented and not of great concern. Indeed, I would be thrilled if inflation were to average 1.3% per year for the foreseeable future. Inflation is pernicious, penalizing savers and rewarding borrowers, and is effectively a backdoor way for the government to avoid the full consequences of its spendthrift ways. The lower the better, in my book.

The chart above compares the real yield on 5-yr TIPS with the 2-yr annualized rate of real GDP growth. These rates tend to track each other, with real yields on TIPS tending to be a point or so less than the economy's growth tendency over the past two years. That makes sense: you can lock in a risk-free rate of return on TIPS, or you can take your chances with the real growth of the economy. Risk-free yields should always be less than riskier returns. As I read this chart, the market is expecting real GDP growth to be between 1 and 2% for the next few years, which is a bit less than the 2.1% annualized growth of the economy in the current business cycle expansion.

There's not much to get excited or worried about here. The market is (not atypically) projecting that recent trends in growth and inflation will persist for the foreseeable future.

Meanwhile, as the chart above suggests, this continues to be the weakest post-war recovery on record. If this had instead been a "normal" recovery, the economy today would be about 15% ($2.8 trillion!) bigger. Rather than worrying about a recession, we should be obsessed with finding ways to get the economy back on its long-term growth path. (Hint: smaller government, reduced regulatory burdens, lower and flatter marginal income tax rates, and much lower corporate tax rates.)

It's the unrealized growth potential of the economy that is the big news, not the risk of recession.


Matthew Grech said...

Everybody who isn't an economic know-nothing believes strongly that we need fiscal reforms: smaller govt, reduced reg burdens, lower taxes.

But on the monetary side, I keep running across people and pundits who have an underlying worry about inflation. It's bizarre to me. It feels like I'm talking to a bunch of really old Germans or something.

Since inflation is always a monetary phenomenon, that being of an excess supply of money compared to the demand for money, I fail to see even the theoretical worry at this time. Money supply is affected by the Fed, obviously, but the stuff of worrisome inflation is when velocity zooms. And velocity zooms when lending really takes off. But since an enormous pile of money is NOT being lent out because it is being paid by the Fed to effectively lend it to the Fed at 50 bps, how is it even possible that inflation could rise to the point of being worrisome?

In light of this unprecedented dynamic, doesn't it make sense for the Fed to boost the money supply until we see evidence that big banks would rather lend the money through traditional channels in lieu of parking it at the Fed?

The fact that the Fed isn't taking this approach is the reason why we see disinflationary signals in the PCE (declined again), gold, other commodities, and inflation breakevens. The Fed seems to want to RAISE rates to the highest level that the economy can tolerate (whatever the hell that means). Rather, it should adopt the policy of boosting the supply of money until we see signs of the banks chasing yield by withdrawing funds at the Fed and actually lending them to people/corporations. The traditional worry of overshooting doesn't hold water with the new dynamic of excess reserves. The Fed should act accordingly.

We seem hellbent on worrying about the wrong things. AS such, while we may not get a recession, the Fed is not doing everything it can to provide a sense of monetary stability which would result in general confidence. This lack of confidence is retarding the recovery. And this has been going on for years now.

Unknown said...

A low growth environment juxtaposed against the backdrop of a weakening global economy is going to provide fodder for those that seek to exploit fear, and those that are susceptible to fact-free persuasion.

Benjamin Cole said...

Matt G--

I agree. The hysterical squeamishness about moderate rates of inflation makes little sense in a modern economy.

The structural impediments we will always have: Property zoning, an economically parasitic $1 trillion a year national security complex, occupational licensing, the USDA, rural subsidies, too-high taxes on the middle class. FICA taxes that discourage working and hiring. The list goes on.

Interesting that that Bank of Japan has gone to negative interest on excess reserves, And that recently that Bank of India criticized commercial banks for not passing through rate cuts to borrowers.

Meanwhile, the US Federal Reserve jibber-jabbers constantly about inflation.

The US had plenty of prosperity from to 1982 to 2007 and the average inflation rate was 3% CPI.

Benjamin Cole said...

Low growth, you have it.

0.7% GDP growth Q4 2015 and Q1 will be less...this is not the time for taxes or tighter money...quite the opposite..

Bodin Hugger said...

Mr. Cole,
I enjoy reading your comments. Is this information pulled from Linkendin correct?

Authored two books for Bloomberg Press, The Pied Pipers of Wall Street 2001), and The New Investor Relations (2003). Also co-authored with Marcus Nunes the e-book, Market Monetarism: Roadmap to Economic Prosperity.

Plus I wrote a detective novel, but no one ever published it. It's really good, though.

Please keep the comments coming...

Thank you

Hans said...

"But on the monetary side, I keep running across people and pundits who have an underlying worry about inflation. It's bizarre to me. It feels like I'm talking to a bunch of really old Germans or something."

The only guys I know whom worries needless about inflation, are the people who
service my car tires.

Yet you managed, to elevate the FRB and their economists to lofty levels with
the hope of bring about the badly wanted prosperity, despite a decade of FedZero
and their failed economic programs. If the FRB where are doctors we all would be

"In light of this unprecedented dynamic, doesn't it make sense for the Fed to boost the money supply until we see evidence that big banks would rather lend the money through traditional channels in lieu of parking it at the Fed?"

In Mr Grannis thread just below this one, indicates record high in bank credits and
commercial and industrial loans. In fact, businesses have now accumulated a record
29 trillion in debt!

If you are credit worthy, there is no shortage of funds

Benjamin Cole said...

Will you read my detective novel? It is about murders at Caltech.

Thanks for the compliment.

Matthew Grech said...

Hans, you completely misinterpreted what I wrote. Please re-read it and think a bit harder before you respond with irrelevant commentary. When you have more time, I would recommend reading Jude Wanniski's The Way the World Works. I can't prove it - because the great Jude Wanniski has passed - but I strongly believe he would agree with every word I wrote.

Lawyer in NJ said...

The first comment was mine. I didn't know I wasn't logged in.

Hans said...

Mr Grech, I neither have the time nor the inclination to finger
his book.

However, I did read this nine page review of him.

William said...

Velocity of M2 Fell Yet Again in the 4th Quarter of 2015

From the St Louis Fed's website:

"The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy...

"M1 (the narrowest component) is the money supply of currency in circulation (notes and coins, demand deposits, and checkable deposits). A decreasing velocity of M1 might indicate fewer short- term consumption transactions are taking place. We can think of shorter- term transactions as consumption we might make on an everyday basis.

"The broader M2 component includes M1 in addition to saving deposits, certificates of deposit (< $100,000), and money market deposits for individuals. Comparing the velocities of M1 and M2 provides some insight into how quickly the economy is spending and how quickly it is saving.

William said...

Velocity of M1 Has Also Been Falling Since 2008

So the "economy", as it were, is less "quickly" spending and saving. Some insight!

Benjamin Cole said...

From St. Louis Fed, PCE chain-type index, quarterly:

2013-10-01 108.108
2014-01-01 108.540
2014-04-01 109.117
2014-07-01 109.441
2014-10-01 109.322
2015-01-01 108.795
2015-04-01 109.391
2015-07-01 109.740
2015-10-01 109.775

According to this series, the U.S. has had a 1.54% increase in prices in the last two years, or about 0.7% annually.

If you think the job of a central bank is to quell inflation, then you think Janet Yellen is the best Fed chairperson...ever. Even Volcker never got close to this. Maybe the Fed bankers of the Great Depression did.

When Volcker left, inflation was 4% to 5% and rising....

Is Yellen and FOMC setting up a recession? Hard to tell. Certainly, not setting up boom-times, that is pretty clear.

Thinking Hard said...

POMO (Permanent Open Market Operations) include “the outright purchase and sale of Treasury securities, government-sponsored enterprise (GSE) debt securities, and federal agency and GSE mortgage-backed securities (MBS)”

Permanent means permanent. The Fed will actively be involved in the UST market moving forward. The Fed will continue rolling over maturing USTs to the tune of approx. $800B over the next 3 years.

UST held by the Fed maturing in:
<15 days: $1.911B
16-90 days: $60.689B
91days-1yr: $156.556B
1-5 yrs: $1.12T
5-10 yrs: $488.379B
>10yrs: $633.455B
Total: $2.461T

Total outstanding Bonds: $1.724T (30 year)
Total outstanding Notes: $8.456T (2, 3, 5, 6, 10 year)
Total: $10.176T!A1

Total % held by Fed: 24.184%
Total >10 yrs % held by Fed: 36.74%

So, 36.74% of the long end of the bond market is not liquid. Japan is running into the fence in this regard and liquidity coupled with QE is a major concern there, hence NIRP being adopted on Friday.

Also, see 3mo T-bill to 10 UST spread 2014-2015 YOY change of -16.8% (2.51 to 2.09).Interesting side note in the UST market….US public has been net purchasers of 81% of USTs from 11/14 to 12/15 while being 18% net purchasers from 2009-2014. Foreign held purchases went from 43% (2009-2014) to 1% in 2015. BIG shifts in the UST market as far as who is buying. Remember, this will shift in 2016 because the Fed will be buying a significant amount. YOY of over -1% is a net negative and strong indicator of recession. There have only been a couple false positives in this indicator since WW2.

Overall---negative side: lower merchant wholesalers sales, higher inventory to sales ratio, lower industrial production, manufacturing has weakened, total nonfarm payrolls expansion slowing, total business sales dropping, after tax corporate profits declining, strength of the dollar with divergent monetary policy in place (US v. World eg. ECB, BOJ, PBOC), 30 year fixed rate mortgage low in 2012 with refinancing dropping lower, flattening yield curve, no SS COLA, pension benefit cuts (teamsters), HY Energy credit spreads worsening, Fed stopped QE 3 in 10/14 and raised FFR 12/15 effectively tightening over 325bps from the shadow rate low of -2.99% in 5/14.

Positives – elevated job openings, retail sales, quit rate in non farm employment, u-6 dropping under 10%, wage increases, core inflation, cheap energy for consumers, strong mortgage applications, housing sales, auto sales, overall HY credit spreads, C&I lending.

I find it very difficult to ignore the negative side at this time, but am always open to countervailing arguments. The one major positive I can see is a lot of the negative could be explained by a transitory low oil price assuming oil rebounds to >$50 within the next 6-9 months. Good hedging opportunity there if you ask me.

Scott Grannis said...

Thinking: Total marketable Treasury debt outstanding is now $13.6 T. By my calculations, the Fed holds just under 20% of that. It may be hard to believe, but that ratio (Fed holdings of Treasuries as a % of outstanding Treasury debt) was about the same at the end of 2002. As you note, a lot—if not most—of the negative news can be traced to the collapse of oil prices (industrial production, capex, profits (which are actually down only marginally over the past year, and are still very close to all-time highs relative to GDP), HY spreads.

I'm confident the market is very aware of all the negatives, but I think the market may be ignoring some of the positives. At the very least, It seems to me that those suffering from sharply lower oil prices are making more noise than those who are benefiting.

William said...

@ Thinking Hard Quite a good summary of very complicated data. There are global issues also as expressed by William White, former Chief Economist of the Bank of International Settlements (BIS), Chairman of the OECD’s review committee and chief author of G30’s recent report on the Post Global Crisis future of central banking.

"His warnings have special resonance since Mr White was one of the very few voices in the central banking fraternity who stated loudly and clearly between 2005 and 2008 that Western finance was riding for a fall, and that the global economy was susceptible to a violent crisis."

Mr White has more to say about central banking and the present world economy in The Telegraph:

Said he: “The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up,” said William White. “Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief,” he said.

"Combined public and private debt has surged to all-time highs to 185% of GDP in emerging markets and to 265% of GDP in the OECD club, both up by 35 percentage points since the top of the last credit cycle in 2007. Emerging markets were part of the solution after the Lehman crisis. Now they are part of the problem too,” Mr White said.

Benjamin Cole said...


Keep in mind that the BIS believes that always and everywhere money and credit should be tighter. As for White, if one doom-sooths long enough, and then doom appears, is the doomsayer prescient...or merely persistent like the broken clock? He was preaching doom in 2005 and now. How about in 2000 and then in 2020. Martine Feldstein is still wailing about hyperinflation .

A side question to Scott Grannis (or Thinking Hard). I have no agenda in asking this question. It is an earnest question.

Okay, we have global capital markets. So the U.S. Treasury market is not really segregated, it is part of a global high-quality government bond market. And there is not really a discrete American pool of bond-sellers or bond-buyers, but rather a global pool. The BIS says there is about $35 trillion in developed nation bonds outstanding, and I think that does not include state bonds, such as California or a good local credit in Germany or Japan etc.

The global bond market. all issuers, is north of $100 trillion.

Okay, so in QE the Fed prints (digitizes) money and buys (monetizes) $4.2 trillion in bonds, and $3 trillion of that is Treasuries. As a fraction of U.S. debt, it looks look it should "improve" or "warp" the markets one way or the other, depending on your ideology or political beliefs.

But then, when compared against the global bond market, it looks much less impressive. Sheesh, just in the US more than $6 trillion in bonds were issued in 2015.

This makes me wonder what was the real purpose, or results, of QE. The Fed said it was to promote portfolio rebalancing (investors move into stocks, property) and to lower interest rates (Relatively! Rates might go up nominally during QE if investors think the QE will boost the economy). Grannis says it was to give fearful investors cash.

Maybe a central bank can buy a very small portion of the global bond market through QE and that will relatively lower rates, or satisfy demand for cash. That does not strike me as likely.

We know that QE boosts U.S. commercial bank reserves, as when the 22 primary dealers sell bonds to the Fed, the Fed credits the commercial bank accounts of those 22 primary dealers by the amount of bonds purchased. We don't seem to know who actually sold the bonds to the primary dealers, or what the real bond sellers did with the fresh cash they received.

All in all, I wonder about QE. It does seem to have an element of free lunch about it. The Fed can monetize debt, and there is no impact on inflation. The Fed has lessened debt burdens on US taxpayers.

Right-winger John Cochrane suggests the Fed should buy the entire federal debt.

To me, any analysis of QE has to start inside the framework of "Okay, there is a $100 trillion global bond market, and there are $35 trillion in developed nation bonds outstanding. They are owned globally. It is a global market. A single central bank can buy or sell bonds. What will be the impact?"

Burke said...

What would happen if the Fed allowed interest rates to rise to the level they would be in a free market? Seems to me the Fed thinks it would be really bad seeing as they have been keeping them low for years now.

I think we would rapidly go into what everyone would call a depression, which is why they are keeping rates so low.

What this means to me is that we ARE in a depression and have been since the 2008 economic meltdown. That's because everything the Fed/govt has been doing is really just wealth redistribution-the bailouts, the QEs, everything.

The entire economy is depressed and is effectively in a soup line. The money printing is the soup for everyone. Without it we would be starving. And it won't last forever.

William said...

@ Benjamin

I read this blog for Scott's knowledgeable opinion and charts. As you may have noticed, most of my posts are accompanied by an internet link to an article reporting economic facts / statistics or quotes from a knowledgeable, respected person.

Sorry, Benjamin, but I never read your opinions or those of others with Goofy Photos.

Johnny Bee Dawg said...

Wesbury reports that 13-week annualized growth in M2 through 1/18/16 is 9%.
This doesn't sound like tighter money from the Fed.

Thinking Hard said...

TIC data breaks down foreign/domestic net purchases/sales of USTs. It is rather like a discreet pool in the sense that foreigners are either net buyers/sellers and same with domestic US. I have found data breaking down US, foreign, Federal Reserve, and intra-gov bond purchases. Data is found here ( through the TIC data. Interesting to dive into this data and see anomalies like Belgium owning $32.1B of UST in 1/2011 and $341.2B in 3/2014 with a GDP in 2012 of $498B and 2013 of $521.4B. Also, the Fed breaks down assets here ( Also see FRED data here:

The way I view QE is artificial demand coming from the CBs of the world boosting bond prices and lowering bond yields. This may not happen initially as you point out, but ultimately economics points to increased demand (artificially through CBs) as one part of the supply/demand equation. QE initially was a tool to buy MBS and other GSE debt. QE can also be seen as a liquidity swap in which the Fed purchases lower liquidity longer dated bonds for higher liquidity reserves. So, QE in multiple goals of lowering long term rates to drive lending and refinancing, swap lower liquidity longer dated bonds for higher liquidity reserves to spur additional lending, and relieve the banks of underperforming MBS and GSE debt.

It seems likely that the Fed will take corrective action during the next downturn and cut IOER, the FFR, and potentially add on additional QE all in the hope of spurring lending. The problem with QE is when you run into the “fence” ( and and there is a shortage of tradeable bonds thus lowering liquidity in a very important sector. Also see ( for the Yen movement during this time period.

As for the U.S. please see ( Japan is further along this path of QE and lower rates than the U.S. and actually intervenes in the equity markets which the Fed does not currently have the authority to do like the BOJ. Hypothetically, Cochrane may be ahead of his time. Total Federal Debt seen here ( will need to increase substantially in the absence of further individual (bad demographics) or corporate debt expansion. This could theoretically be accomplished along with QE in order to place a ceiling on bond yields while debt issuance increases.

The inflation target could also be lifted during the next downturn allowing the Fed to target >3% inflation instead of 2% in order to “catch up” from a low inflationary period. In my mind it all comes down to confidence, and Japan is a much different society than the U.S. When the above corrective action is taken, that will be a great buying opportunity. Right now, I like a defensive oriented portfolio hedged with oil for upside potential. Just my two cents.

Always welcome to feedback and/or criticism. Thanks!

Thinking Hard said...

Side note - Check out for the strong correlation between Fed balance sheet expansion and S&P 500 increases since 2009. Looks like the Emergency Economic Stabilization Act of 2008 fundamentally altered our monetary system much like Executive Order 11615 and the Economic Stabilization Act of 1970.

William McKibbin said...

The reality of 10-year treasury yields going negative is around the corner...

Marc Semaan said...

Hello Scott
Interesting post however i don't agree with your read on the yield curve. Given how low interest rates are now, I don't think we can expect the yield curve to invert in order to signal a recession. Current slope is extremely flat in my view. What is more surprising is that this slope got flatter despite the huge re-pricing of the 2Y lower since the beginning of the year.

William McKibbin said...

PS: Might the Fed want European and Japanese cash to flood out of the ECB and BoJ into Fed treasuries? We're going to know the answer soon enough...

William McKibbin said...

PPS: I am taking a beating in transporations -- scary...

Benjamin Cole said...

Thinking Hard: Belgium? Who knew? Great stuff. Thanks much.

I think we are in broad agreement... because we are not narrow-minded!

Benjamin Cole said...

10-year US Treasuries selling below 2%.

OK, put away the slide-rules, calculators and contorted explanations and talk common sense: if large qualified extremely well-advised institutions are buying 10 year Treasuries at less than 2%, that tells me inflation is deader than a doornail.

Why are doornails dead? I don't know.

Scott Grannis said...

Marc: Forward yield curves are flatter than the spot curve but they are still positively sloped and the market continues to expect modest Fed tightening (e.g., a 1% funds rate in two years). If the market were braced for a recession, I have to believe that forward curves would reflect a flat, lower or even zero funds rate.

Scott Grannis said...

Thinking Hard: correlation is not causation. Finding a logical causation path from the Fed's QE purchases to stock prices is a lot more complicated than observing that rising profits were the main driver of rising stock prices.

Benjamin Cole said...

BTW, PCE core for December was negative 0.1. We are now in deflation.

This despite scarce housing, caused by pinko-NIMBY property zoning practices.

The No. 1 structural impediment in the USA today is property zoning.

Matthew Grech said...

Benjamin: All the environmental laws are quite growth-inhibiting, as well. They are cousins of the zoning laws...

Marc Semaan said...

Scott: Thank you for your prompt response. Indeed the forward curve is not inverted but fairly flat. I was looking at a 3Y forward start 5s10s at 25bps which is not very steep. I don't think the market is pricing a recession but current slope of the curve is telling me that the outlook for the US economy is not great.
Do you see an opportunity playing a steepener in the forward curve? my rationale would be more term premium priced in going forward but I am struggling to see it happening if the Fed continues its hiking cycle.

William said...

Fed's Esther George: Damn the Torpedoes; Full Steam Ahead

Federal Reserve Bank of Kansas City President Esther George said recent financial turmoil was anticipated and is no reason to delay further interest-rate increases.

“While taking a signal from such volatility is warranted, monetary policy cannot respond to every blip in financial markets,” George, who votes on policy this year, said in prepared remarks in Kansas City, Missouri. “The recent bout of volatility is not all that unexpected, nor necessarily worrisome, given that the Fed’s low interest rate and bond-buying policies focused on boosting asset prices as a means of stimulating the real economy.”

Speaking to the Central Exchange, George said the recent decline in oil prices and strengthening of the dollar could slow U.S. growth but they don’t change the overall forecast for continuing expansion.

“Despite these headwinds, the U.S. economy has proven itself to be resilient to a wide range of shocks in recent years, including sluggish growth abroad,” she said.

So what if this is the Yellen's "Volker Moment"? Perhaps the FOMC will do what is necessary and right for the long term health of the US economy knowing full well that the economy will suffer to some extent and that some bubbles will burst. They realize that some investors count on a "Fed Put".

And they know that they better do it now before Trump or Cruz are elected.

Hans said...

It was been suggested by the pundits, that 2035 will be
the year of crisis when Social Insecurity, Medicare and
Medicaid implode. This does not even include the massive
federal governmental unit debt, currently reaching 19
trillion dollars.

If the growth rate declines to levels as suggested by
Mr Grannis, the crisis date can and will be advanced to
as early as 2025. We can thank the FRB, along with their
cronies pals in CONgress for advancing this truly historical
financial debacle.

We are only a decade away, when hundreds of trillion of unfunded
"mandates" will mature. The only recourse will be, to shrink the
circle of inclusion. Those now excluded, shall never be able to
recover their economic wherewithal and be reduced to poverty.

Add to this, the collapse of the Y2K generation, which will not
contribute to ro"bust" household formations.

There remains only two or at most three general election cycles
to change the course of events.

If Americans do not act decisively - the mechanism of the economy
will provide a very harsh reality.

This is my Macro outlook: I am not sanguine of what the future

Frozen in the North said...

For what its worth

yesterday the 6M /1Y yield curve did invert, if only for a few hours...