Tag Archives: Monetary policy

Officials said the appropriate path for the FED`s funds rate over the next few years would likely be slightly steeper than they had previously expected

The Interest Rate are increasing while the outlook for the economy are getting stronger and the inflation is expected to follow the rate in the coming months. The FED, meeting for the first time under Chairman Jerome Powell, raised the funds rate to 1,5 – 1,75 percent during its March meeting.

FOMC holds eight regularly scheduled meetings during the year and other meetings as needed. Their next meeting is May 1 – 2, 2018, and GDP, Interest Rate and Inflation is on the table. The economic outlook is improving and the FED officials has recently projected a steeper path of hikes next year and 2020.

The FEDs funds rate was extremely volatile when Ronald Reagan entered the White House in 1981. In the early 80s the rate peaked at 20 percent and plummeted to about 10 percent and then back to nearly 20 percent again. That`s what I call action.

During the period of Ronald Reagan, the rate went from 20 percent and down to 10 percent in 1989, when Ronald Reagan said welcome to the next president; George Bush. He succeeded to push down the rate even more, but it hit a record low of 0,25 percent in 2008. That time is for now over.

The increase in March was the sixth rise since the central bank began a tightening cycle back in December 2015. As the economy has strengthened, the FED has upped the pace of hikes.

After the FOMC meeting in March, officials said the economy looks good and that the inflation is expected to move up. Almost all of the officials agreed that a gradual tightening remains appropriate.

The FED also said that the prospect of retaliatory trade actions by other countries as well as other issues and uncertainties associated with trade policies as downside risks for the economy.

Some people are concerned among their business contracts about the possible ramifications of the recent imposition of tariffs on imported steel and aluminium. They didn`t see the steel and aluminium tariffs, by themselves, to have significant effect on the national economic outlook.

Contracts in the agricultural sector reported feeling particularly vulnerable to retaliation.

The stance of monetary policy will remain accommodative, supporting strong labor market conditions and a sustained return to 2 percent inflation.

Some of the participants in the March meeting said that the stronger outlook for economic activity, along with their increased confidence that inflation would return to 2 percent, implied that the appropriate path for the FED`s funds rate over the next few years would likely be slightly steeper than they had previously expected.

It is expected to see the rate unchanged after the meeting on Wednesday, but another hike is imminent at the following one in mid June.

The next FOMC meeting took place on Tuesday this week and will end on Wednesday with any changes to monetary policy announced immediately after the meeting.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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If the Fed`s neutral rate is as low as they estimate or even lower, they will be glad to have their unconventional tools in their toolkit

President Trump will announce the next Fed Chair very soon. This is happening at a time were Mr Trump is planning a new tax reform. At a time were Mr Trump want to spend more money on infrastructure.

Mr Trump attacked Ms Yellen on the campaign trail and accused her for holding the rates too low, but he has halted any criticism of Yellen and the Fed since his inauguration. Now, Mr Trump say he like Ms Yellen and refuse to close down the possibility of reappointing her.

 

Ms Yellens term as a Fed Chair is about to end and the term is up for renewal early next year, but Yellens term as a governor on the Federal Reserve extends until January 2024.

So, if Mr Trump wants to “fire” Ms Yellen as a Fed Chair, she will still stay on the board even is Mr Trump dont want her to win the next term as a Fed Chair.

John Taylor and Jay Powell are among two of the other candidates on Mr Trumps shortlist. Anyway, whats interesting is their policy on interest rates.

Fed Chair Janet Yellen wrote an article about A Challenging Decade and a Question for the Future on the Fed`s own website. Her headline was a key question for the future. As the financial crisis and Great Recession fade into the past and the stance of monetary policy gradually returns to normal, a natural question concerns the possible future role of the unconventional policy tools we deployed after the onset of the crisis, Ms Yellen said.

My colleagues on the FOMC and I belive that, whenever possible, influencing short-term interest rates by targeting the federal funds rate should be our primary tool. As I have already noted, we have a long track record using this tool to pursue our statutory goals. In contrast, we have much more limited experience with using our securities holdings for that purpose.

Where does this assessment leave our unconventional policy tools? I belive their deployment should be considered again if our conventional tool reaches its limit, that is, when the federal funds rate has reached its effective lower bound and the U.S economy still needs further monetary policy accommodation.

Does this mean that it will take another Great Recession for our unconventional tools to be used again? Not necessarily. Recent studies suggest that the neutral level of the federal funds rate appears to be much lower than it was in previous decades.

Indeed, most FOMC participants now assess the longer-run value of the neutral Federal funds rate as only 2-3/4 percent or so, compared with around 4-1/4 percent just a few years ago. With a low neutral federal funds rate, there will typically be less scope for the FOMC to reduce short-term interest rates in response to an economic downturn, raising the possibility that we may need to resort again to enhanced forward rate guidance and asset purchases to provide needed accommodation.

Of course, substantial uncertainty surrounds any estimates of the neutral level of short-term interest rates. In this regard, there is an important asymmetry to consider. If the neutral rate turns out to be significantly higher than we currently estimate, it is less likely that we will have to deploy our unconventional tools again.

In contrast, if the neutral rate is as low as we estimate or even lower, we will be glad to have our unconventional tools in our toolkit.

The bottom line is that we must recognize that our unconventional tools might have to be used again.

If we are indeed living in a low-neutral-rate world, a significantly less severe economic downturn that the Great Recession might be sufficient to drive short-term interest rates back to their effective lower bound.

Ms Yellen concluded with this summary: As a result of the Great Recession, the Federal Reserve has confronted two key challenges over the past several years: One, the FOMC had to provide additional policy accommodation after short-term interest rates reached their effective lower bound; and two, subsequently, as we made progress toward the achievement of our mandate, we had to start scaling back that accommodation in the presence of a vastly expanded Federal Reserve balance sheet.

Ms Yellen highlighted two points about the FOMC`s experience with those challenges. First, the monetary policy tools that the Federal Reserve deployed in the immediate aftermath of the crisis – explicit forward rate guidance, large-scale asset purchases, and the payment of interest on excess reserves have helped us overcome these challenges.

Second, in light of evidence suggesting that the neutral level of short-term interest rates is significantly lower than it was in previous decades, the likelihood that future monetary policymakers will have to confront those two challenges again is uncomfortably high.

For this reason, we must keep our in conventional policy tools ready to be deployed again should short-term interest rates return to their effective lower bound.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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Filed under Politics, Quantitative Easing

President Donald Trump is nearing a decision on whom to pick to lead the Federal Reserve

Fed Chair Janet Yellen`s job is coming to an end. She took over the job from Ben Bernanke who started to «print» money. Four years is over and President Donald Trump have a few but strong candidates on his table.

President Donald Trump had a meeting with Standford University economist John Taylor and according to a White House official, Mr Trump is nearing a decision on whom to pick to lead the Federal Reserve.

 

 

John Taylor is one of the candidates and Janet Yellen is the other one. Other candidates are Fed governor Kevin Warsh who is on Trumps shortlist. Current governor Jerome Powell and Trumps economic adviser Gary Cohn is also on the list.

Mr Trump has scheduled a meeting with Federal Reserve Chairwoman Janet Yellen on Thursday.

Ms Yellen`s four-year term as chairwoman expires on February next year and Mr Trump will meet her to discuss the possibility of nominating her for a second term as central-bank chief. Mr Trump is considering offering Yellen the chance to stay in the job, but will announce his nominee before leaving for a trip to Asia next month on November 3.

John Taylor said he agree with the Fed`s strategy to remove economic stimulus, and the Fed policy rate is now set at 1 percent to 1,25 percent. What the right thing to do about the rate is a matter of debate among economists, also among Taylor and his camp.

John Taylor is a Ph.D economist with a strong expertise in monetary policy and institutional leadership which is key attributes for the Fed Chair, and this is probably why Taylor is one of the biggest favorite for Mr Trump.

Donald Trump is planning to cut the taxes and monetary policy is therefore critical and important.

Former Fed Chair Ben Bernanke started the QE program after the financial crisis in 2008, and Fed governor Warsh was against further monetary stimulus in 2010 with unemployment above 9 percent and inflation decelerating.

Ben Bernanke is an expert on the stock market crash in 1929, and called Warch`s political and markets savvy «invaluable,» according to Bloomberg.

Central banks are often independent from other policy makers. This is the case with the Federal Reserve and Congress, reflecting the separation of monetary policy from fiscal policy and the latter refers to taxes and government borrowing and spending.

The Federal Reserve has what is commonly referred to as a «dual mandate»:

  • to achieve maximum employment (around 5 percent unemployment), and
  • stable prices (2-3 percent inflation).

In addition, it aims to keep long-term interest rates relatively low, and since 2009 has served as a bank regulator. Its core role is to be the lender of last resort, providing banks with liquidity in order to prevent the bank failure and panics.

The central bank of the United States is the Federal Reserve System, which Congress established with the 1913 Federal Reserve Act.

Central banks are inherently non-market-based or even anticompetitive institutions. Many central banks, including the Fed, are not government agencies, and so are often touted as being politically independent.

Monetary policy consists of the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates.

There are two types of monetary policy; expansionary and contractionary.

Expansionary monetary policy increases the money supply in order to lower unemployment, boost private-sector borrowing and consumer spending, and stimulate economic growth.

Contractionary monetary policy slows the rate of growth in the money supply or outright decreases the money supply in order to control inflation, while sometimes necessary, contractionary monetary policy can slow economic growth, increase unemployment and depress borrowing and spending by consumers and businesses.

An example would be the Fedral Reserves intervention in the early 1980s: in order to curb inflation of nearly 15 percent , the Fed raised its benchmark interest rate to 20 percent.

This hike resulted in a recession, but did keep spiraling inflation in check.

Mr Trump is planning to cut taxes and build more and better highways, and this is fiscal policy, which is trying to control inflation, stabilize business cycles and to improve unemployment rate. Sooner or later, we all know that the recession will come.

The tools will then be fiscal policy and the government will start to lower tax rates to try to fuel economic growth. If people are paying less in taxes, they have more money to spend or invest, and increased consumer spending or investment could improve economic growth.

On the other side; too much spending could increase inflation.

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

 

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Filed under Politics, Uncategorized

FOMC will evaluate whether employment and inflation are continuing to evolve in line with their expectations

What a Trump rally. The market has added $3 trillion in value since his election during the congressional address. It`s strange to see the stock market go straight up while MSM is looking in the opposite direction.

The investor sentiment has not been this high since 1987. Consumer Confidence climbed to the highest level since 2001, and all this is good news for the economy. People have been in “heaven” since the Nov 8 election of Donald Trump.

What about Fed Chair Janet Yellen? Is a rate hike on the table?

 

 

Consumer confidence is important because people`s spending accounts for about 70 percent of the U.S economic activity. The Commerce Department reported that the U.S economy grew at a sluggish 1,9 percent from October through December. Consumer spending expanded 3 percent annual rate.

The Fed kept the target range for its federal funds steady at 0,5 percent to 0,75 percent during its February 2017 meeting. It was in line with market expectations and following a 25bps hike in December.

Interest Rate in the United States saw a record low of 0,25 percent in December of 2008, but reached an all-time high of 20 percent in March of 1980.

Two things will be very important for Fed Chair Janet Yellen at the March meeting: employment and inflation.

The recovery since the adverse shocks in recent years are now looking good, and economic developments since mid-2016 have reinforced the Committee`s confidence and on the way to reach their goals.

The unemployment rate came in at 4,8 percent in January, so the job gains is quite solid, and in line with the median FOMC participants’ estimates of its longer-run normal level. The committee currently accesses that the risk to the outlook are roughly balanced.

The job market is strong and inflation is rising toward Yellen`s target. The median assessment of FOMC participants as of last December was that a cumulative 3/4 percentage point increase in the target range for the federal funds rate would likely be appropriate over the course of this year.

In light of current economic conditions, such an increase would be consistent with the Committee`s expectations that it will raise the target range for the federal funds rate at a gradual pace and would bring the real federal funds rate close to some estimates of this current neutral level.

Janet Yellen will increase the federal funds rate based on the economic date that comes in, and the committee will evaluate whether employment and inflation are continuing to evolve in line with their expectations.

I don`t think Monetary policy is sustainable in the long run. Therefore; we will probably see a shift from monetary to fiscal policy. Say goodby to Yellen and hello to Trump.

 

 

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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