Countdown To Catastrophe

If you believe Treasury Secretary Janet Yellen, the U.S. is headed to “an economic and financial catastrophe” if Congress doesn’t agree to increase the federal debt ceiling.

Even worse, she warned in an interview with ABC News, we are headed to a “constitutional crisis.”

You know something is purely political and not to be taken too seriously when a prominent official in Washington warns that something is a “constitutional crisis,” as if that is the absolute worst thing that can possibly happen, short of war or some other real calamity.

According to Yellen, doomsday will occur around June 1, at which time the government will purportedly be unable to pay its bills, unless the Republicans in the House knuckle under and agree to increase the debt limit.

For good measure, she wrote in a letter to Congress that “we have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States.”

All of which has never happened.

When the government “defaulted” back in 2011 I seem to remember that the biggest imposition was that the national parks were closed for a few days. Anyone who was owed money, such as federal employees who had their paychecks delayed, soon got all the money that was coming to them.

Yes, Standard & Poor’s lowered the U.S. government’s credit rating to AA-plus from triple A - where it still stands - but did anyone really care? (Moody’s, Fitch and DBRS all still rate the government’s credit rating at triple-A).

If you were wondering, other countries with AA-plus ratings from S&P include Austria, Finland, New Zealand, and Taiwan. Canada, Germany and the Netherlands, among others, sport AAA ratings. With all due respect to those countries, does anyone seriously believe that you run a greater a risk lending money to Uncle Sam than you do to those nations? Continue reading "Countdown To Catastrophe"

A Depressing Situation

A year and a half before the election, and a little less than a year before the first primary, the Wall Street Journal is already proclaiming that “Another Biden-Trump Presidential Race in 2024 Looks More Likely.”

Doesn’t that get you excited?

It’s pretty sad that out of more than 260 million adults the best the two parties could come up with is the current president, octogenarian Joe Biden, and his predecessor, Donald Trump, who is 76.

And advanced age isn’t their only drawback: both are, shall we say, not very popular.

Yet only a few people, so far, seem to have the guts to stand up and challenge them—no serious Democrats so far and only a handful of Republicans. But it’s early yet, so let’s not lose hope that others will step into the ring.

As Winston Churchill is credited with saying, “Democracy is the worst form of government, except for all the others.”

There are good reasons why the best and brightest people shun politics and have no desire to be president. Politics played at that level is an ugly sport. Few smart and ambitious people want to put themselves or their families through that. It’s a lot more lucrative and less painful to be CEO of a large corporation than to sully your name in politics. It’s also a lot easier to look yourself in the mirror every morning.

If you are willing to mix it up and eventually succeed into the Oval Office, you often have to do things you may not be proud of. In the spirit of “compromise,” you often have to lie and make empty promises—or worse—in order to get a fraction of what you really wanted. So it’s understandable why the government often botches things—we never get the best people or the best policies, so problems just seem to fester and get worse.

Which brings me to my point and how it applies to the Federal Reserve. Continue reading "A Depressing Situation"

What Happened To Reducing The Fed’s Balance Sheet?

Over the past year the Federal Reserve has driven up interest rates by nearly 500 basis points in its quest to try to tamp down inflation.

From a range of 0.25%-0.50% back on March 17, 2022, the Fed since then has steadily raised its target for its benchmark federal funds rate to 4.75%-5.00%, with the possibility of more to come. Over that time the Fed has raised rates nine times—four times by 75 basis points, twice by 50 bps, and three times by 25 bps.

At its two most recent meetings, in February and March, the Fed raised rates by only 25 bps each, possibly because it saw fit to take a slight pause and measure the effect of all these rate increases to see if they are having the desired effect of slowing the economy in order to bring down inflation.

Of course, as we know, the rate hikes haven’t done a whole lot in reining in inflation.

Rather, they created a panic among some fairly large regional banks that has unsettled the entire banking industry, the effect of which has done more to slow the economy than raising rates has done.

Should the Fed then say that the ends justify the means, even if the means—creating the panic—were totally accidental? Should the Fed now brand its “policy normalization” program a success even if a couple of banks failed in the process? Let’s hope not.

This fiasco does call attention to the other prong of that normalization process, namely a reduction in the Fed’s massive balance sheet, which was supposed to help raise long-term interest rates gradually and lessen the Fed’s presence in the U.S. economy.

On that score, there has been negligible progress.

Back in the good old days, before the 2008 financial crisis, the Fed’s balance sheet never totaled more than $1 trillion, a figure that now looks fairly quaint, yet it was a mere 15 years ago. Continue reading "What Happened To Reducing The Fed’s Balance Sheet?"

Did The Fed "Pull A Homer"?

In an early episode of The Simpsons, “Homer Defined,” Homer saves the nuclear plant from meltdown by randomly pushing a button on the control panel. Soon “to pull a Homer,” meaning to “succeed despite idiocy," becomes a popular catchphrase.

Is that what happened last week? Did Jerome Powell and the Federal Reserve inadvertently “pull a Homer” by helping to create a bank panic that actually might accelerate their desire to slow down the economy? That might not have been their intention, but it sure looks like it.

At least it does to former White House adviser and Goldman Sachs President Gary Cohn (although he didn’t reference The Simpsons).

"We're almost getting to a point right now where he's outsourcing monetary policy," Cohn told CNBC, referring to Powell. “I don't believe they [the banks] are going to loan money, or as much money, and therefore we're going to see a natural contraction in the economy.”

Minneapolis Fed president Neel Kashkari said basically the same thing on CBS’s Face the Nation Sunday.

"It definitely brings us closer [to recession]," Kashkari said. "What's unclear for us is how much of these banking stresses are leading to a widespread credit crunch. That credit crunch ... would then slow down the economy.”

Now, I sincerely doubt that the Fed deliberately phonied up a banking panic in order to put the brakes on the economy.

Just the same, though, it certainly did play a major role in creating one not just through monetary policy — by raising interest rates so high and so fast — but also through neglect.

Just as it did in the road leading up to the global financial crisis, the Fed allowed problems at several banks it regulated to reach the point that generated an electronic run on deposits and the banks’ eventual failure. Continue reading "Did The Fed "Pull A Homer"?"

What Will The Fed Do In March?

The Federal Open Market Committee meets next week, at which time it is expected to raise its benchmark interest rate another 50 basis points, to a range of 4.75% to 5.00%, if we correctly interpret Fed Chair Jerome Powell’s testimony to Congress last week, when he said “the ultimate level of interest rates is likely to be higher than previously anticipated.”

Before that, the market had expected a 25-basis point increase, equivalent to its most recent hike at the Jan. 31-February 1 meeting. As we know, his comments sent stock and bond prices sharply lower.

Since then, though, we’ve had some serious news coming out of the banking system, namely the failure of SVB Bank and the closure of Silvergate Capital (both regulated by the Fed!) and worries that some of the largest U.S. banks (also regulated by the Fed) are sitting on some huge, unrealized losses in their government bond portfolios.

In this atmosphere, is a larger than expected rate increase next week—i.e., 50 bps rather than 25—justified?

Or should the Fed maybe show a little restraint and raise the fed funds rate only a quarter point?

And if it does, what will be the likely market reaction?

In his Capitol Hill testimony, Powell focused – as you would expect – on the U.S. economy, namely its stronger than expected recent performance, particularly in the jobs market, which in February gained another 311,000 jobs even as the unemployment rate rose slightly to 3.6%.

The Fed seems hellbent on making up for its past errors of overly long, overly loose monetary policy by ramming through rate increases no matter how much harm they might cause.

Ignoring the second component of its Congressional mandate, namely promoting full employment, the Fed is instead totally focused on slaying inflation as fast as possible, even though getting from the current rate of inflation – 6.4% in January — back down to its 2% target will no doubt take some time.

After all, the Fed only started raising interest rates back in March 2022, when the fed funds rate was at or near zero. Continue reading "What Will The Fed Do In March?"