The Screws Tighten On The Fed As The Fed Readies To Tighten

George Yacik - Contributor - Fed & Interest Rates

If we can believe Janet Yellen – or rather those who believe in what they think she means – then the Federal Reserve is going to raise interest rates at its next monetary policy meeting in December. This is perhaps an appropriate time for it to do so, as it looks like the Fed is about to enter a new era. Pressure is growing on the central bank to reform itself and the way it does business, including making monetary policy.

Once again, the Fed has shown itself to be following rather than leading the market. Last week, in congressional testimony, Yellen said the Fed may raise interest rates “relatively soon,” which most people expect means at its December 13-14 meeting. This in the wake of the recent 60 basis point surge in long-term interest rates since Donald Trump was elected president. The yield on the Treasury’s benchmark 10-year note is up 100 bps since July 8, during which time the Fed has kept rates unchanged.

Yellen told the Joint Economic Committee that “the economy has made further progress this year” toward the Fed’s employment and inflation goals. And indeed recent economic reports have borne that out, including those released last week:

  • Retail sales rose 0.8% in October after climbing an upwardly revised 1.0% the prior month. That marks the best two-month stretch for sales in at least two years. Sales have increased 4.3% in the past 12 months, the best annual increase in nearly two years.
  • Housing starts jumped nearly 26% to an annual rate of 1.323 million, the strongest pace since August 2007 and the biggest monthly increase since 1982. The increase was skewed by a 75% jump in the volatile multifamily category, but single-family starts, the biggest category, rose nearly 11% to an annual pace of 869,000, also a nine-year high. It’s not clear, however, if this pace can be maintained if interest rates continue to climb.
  • Jobless claims plunged by 19,000 to 235,000, the lowest level in 43 years.
  • This was preceded by the initial estimate of third-quarter GDP growth, which came in at a better-than-expected 2.9% annual rate, more than double the previous quarter’s 1.4% pace.

Looking at these numbers, it’s well to ask: What took so long? As the Obama Administration sails into the sunset, it’s probably only fitting that the economy, which has suffered through the weakest expansion since World War II, would finally gain traction just in the past month or so. I suppose now we’ll hear from our supposedly reformed mainstream press that if President Trump succeeds he’ll have inherited Obama’s booming economy.

While this economic improvement may provide the Fed with the green light to tighten monetary policy, it also may be feeling the heat to change the way it operates.

Last week the Government Accountability Office released its review of the Fed’s annual bank stress tests. The congressional agency recommended that the Fed share more information on the models it uses and the reasons why it gives banks failing grades.

“The GAO report confirms the secrecy surrounding the stress tests makes it almost impossible to measure the effectiveness of the Fed’s regulatory oversight or the integrity of the tests’ findings,” commented Jeb Hensarling, the chairman of the House Financial Services Committee, who ordered the study. Putting the GAO proposals into action would be his top priority in the next Congress, he said. Hensarling is also under consideration to be Treasury secretary under Trump.

Also last week, the Fed acted to close the revolving door between bank employees and Wall Street. The Fed expanded from 100 to 250 the number of its senior examiners who have to wait a year before working for firms they’ve been regulating. The reform is largely in response to a recent $36.3 million settlement with Goldman Sachs over allegations that a Fed employee passed along confidential documents to a former Fed colleague who worked at Goldman.

Trump’s election may also breathe new life into Sen. Rand Paul’s “Audit the Fed” bill, which has gone nowhere in previous Congresses. The bill would subject the Fed's monetary policy discussions and decisions to audits by the GAO. Previous versions of Paul's bill – originally sponsored by his father, former presidential hopeful Ron Paul, and others – have gotten nowhere, largely because Democrats controlled the Senate. Now, of course, both houses of Congress are both controlled by Republicans, and we’ll have a president who will no doubt be happy to sign the bill into law.

So what’s the upshot of all this? The Fed’s too-cozy relationship with the Obama Administration is about to end, along with its accommodative monetary policy. After a rate increase next month, look for the Fed to finally embark on a series of regular rate increases – quarterly if not more frequently – in 2017, the same rate increases it promised this time last year but never delivered even as the financial markets passed it by.

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George Yacik Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.

3 thoughts on “The Screws Tighten On The Fed As The Fed Readies To Tighten

  1. Accomodative policy dating back to post 9/11 and following Greenspan's doubling of rate to kill irrational exuberance?

  2. Of course, the Fed's ability to raise rates depends on the strength of the economy and financial markets. GDP growth ticked up last quarter, but it's hardly going gangbusters, as you point out. We've been limping along on that front for eight years now. In fact, with inflation ticking up - check out the CRB index YTD - real GDP growth could easily begin moving in the wrong direction. Also, it's hardly a foregone conclusion that the Fed can hike the FFR serially if the bond market rout continues. With the cost of money having exploded higher very quickly, our inflated equity and real estate markets haven't repriced a thing. Indeed, the infrastructure spending orgy that's been promised by Trump has goosed equities even higher. So, if GDP growth merely stagnates and asset markets begin to price in the gargantuan bond move, it's unclear that the Fed will have the cover to move at all, much less serially.

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