Author: George Yacik

There’s Still Hope for the Fed

Posted on by George Yacik

George Yacik - INO.com Contributor - Fed & Interest Rates


The minutes of the December 16-17 Federal Open Market Committee meeting offer some hope that the Fed is finally getting over its seven-plus years’ worry that the U.S. runs the risk of falling into a deflationary spiral, similar to what we encountered during the Great Depression of the 1930s.

While deflation, or even disinflation, might be a legitimate concern now in Japan and the Euro Zone, the idea that we face a similar threat seems a little hard to swallow. Perhaps this was a real concern during the panicky days of the global financial meltdown in 2008, but even then it seemed to be a stretch. Now, seven years later, it just looks ridiculous.

According to the minutes of the December meeting, released last week, the Fed’s monetary policy committee brushed off the idea that inflation would remain below the Fed’s 2% target due to the declining price of oil, which it calls “transitory,” and remaining slack in the labor market. Continue reading "There’s Still Hope for the Fed" →

Best 2015 Bond Bet: Long U.S. Treasuries

Posted on by George Yacik

George Yacik - INO.com Contributor - Fed & Interest Rates


Readers of my most recent columns know that I’ve been very critical of the Federal Reserve’s sluggishness – if not actual lack of resolve – to start raising short-term interest rates now that the economy has finally started to show some staying power. The earliest projections, both from Fed officials and market prognosticators, is that the first rate hike won’t come until well after the end of the first quarter of this year, if not sometime in the second half.

But even if the Fed should start taking my advice and start raising rates sooner – it looks like the March 17-18 FOMC meeting would be the earliest – don’t draw the conclusion that I also think long-term interest rates are headed any higher anytime soon.

If anything, I think long-term rates are headed lower in 2015, meaning I think this year will be another good year for bonds, U.S. Treasuries specifically.

That makes me a bit of a contrarian, which is usually where I feel most comfortable anyway. Continue reading "Best 2015 Bond Bet: Long U.S. Treasuries" →

Does the big GDP revision get us any closer to 'normal' rates?

Posted on by George Yacik

George Yacik - INO.com Contributor - Fed & Interest Rates


Will Tuesday’s GDP upgrade to its fastest growth in more than 10 years nudge – or push – the Federal Reserve to raise interest rates earlier than Janet Yellen recently signaled, i.e., no earlier than the first quarter of next year?
Alas, probably not.

The final revised estimate for third quarter GDP showed the economy growing at a robust 5% annualized rate, the fastest pace in 11 years. That was far higher than the previous estimate of 3.9% and well above both the 4.3% rate the Street was looking for as well as the most optimistic individual forecast of 4.5%. It was also up from the second quarter’s growth rate of 4.6%.

Ninety minutes later, the Commerce Department came out with another report that showed personal spending rising 0.6% in November, the most in three months, while personal income gained 0.4%, the strongest pace in five months.

A week earlier, the Securities Industry and Financial Markets Association predicted that GDP growth would hit 3% next year, which it says “would be the strongest growth in nearly a decade.”

If this latest batch of strong economic news still doesn’t convince the Fed that it should start raising interest rates sooner than it indicated only a week before, we can only conclude that the Fed has lost sight of its statutory mandate, namely to “foster maximum employment and price stability.”

Instead, it has become how to best finesse its extrication from its near-zero interest rate policy and start raising rates without setting off a giant market selloff. So the easy thing to do, as most other major decisions are made in Washington, is to do nothing and deal with it later, whenever that is. Which of course by then the problem will have grown much worse and much more difficult to deal with.

At its FOMC monetary policy meeting the week before, the Fed said that it “judges that it can be patient” in normalizing monetary policy, adding that “it likely will be appropriate” to maintain its near zero target rate range for a Continue reading "Does the big GDP revision get us any closer to 'normal' rates?" →

Joel Horneck And Fed Policy

Posted on by George Yacik

George Yacik - INO.com Contributor - Fed & Interest Rates


Remember that classic episode from the very first season of Seinfeld, when Jerry wants to "break up" with his obnoxious friend, Joel Horneck, but just can't bring himself to do it? Jerry can't stand the guy, but the thought of actually telling Joel he doesn't want to see him anymore is just so painful that even after he gets up enough nerve and delivers the blow over lunch at the diner – after which Joel, not unexpectedly, starts to blubber and carry on in public – Jerry immediately backs off and apologizes, further prolonging his agony.

I thought of that episode (I usually think in terms of old sitcom episodes, much to my wife's annoyance) after I read the Federal Reserve's policy statement on Wednesday. It once again chose to kick the can down the road (I really hate that metaphor, but it does apply here) and put off raising interest rates until sometime into the unknown future. Apparently the Fed just can't bear the thought of having the financial markets pull a Joel Horneck on it.

Not only did the Fed not remove the "considerable time" language from its statement, as many market participants were expecting. Instead, it added a brand new noncommittal phrase, saying that "it can be patient" before it begins to "normalize the stance of monetary policy," i.e., raise interest rates from its current zero to 0.25% target range.

Of course, both being "patient" and "considerable time" can mean anything, or nothing, at all. What they absolutely don't mean is "right now" or "very soon." At her news conference following the statement, Fed Chair Janet Yellen said a rate increase won't take place for "at least the next couple of meetings," meaning well into next year, and maybe not even then. Who knows?

Perhaps Mrs. Yellen and the six of her colleagues on the Federal Open Market Committee who voted for the statement (there were an unusually high three members who didn't go along) thought they were being cute in adding another set of evasive, ambiguous words that show that it still can't make up its collective mind.

Is the Fed simply indecisive? Incompetent? Or simply afraid of what the market reaction might be if it stops prolonging a policy that is no longer necessary? Continue reading "Joel Horneck And Fed Policy" →

It’s Time To End "Considerable Time" Talk

Posted on by George Yacik

George Yacik - INO.com Contributor - Fed & Interest Rates


What do you think will happen first: The Federal Reserve starts to raise interest rates, or the Cubs win the World Series for the first time since 1908?

Richard Lehmann, writing in his Fixed–Income Watch column in the recent issue of Forbes magazine, says the odds are about the same. Lehmann expects the Fed to keep short-term rates pretty much where they are – i.e. at or near zero – for some time to come. "The Fed talks a good line and promises to act responsibly once employment and the economy improve or the threat of deflation disappears," he writes. "But that's kind of like waiting for the Chicago Cubs to win the World Series again."

Actually though, the chances of the Cubs winning the World Series soon don't look so far-fetched. Now under Theo Epstein, the principal architect of the 2004 World Champion Red Sox that broke the 86-year old Curse of the Bambino, the Cubs have put together a solid team of talented young players and added former Tampa Bay Rays manager, Joe Madden, as their skipper during the off-season. Now they've also reportedly signed free agent pitcher, Jon Lester. Las Vegas currently has the Cubs at about 14 to 1 odds to win the 2015 Series, one of the top eight or so teams in baseball.

Can we say the same thing about the Fed raising rates soon?
Continue reading "It’s Time To End "Considerable Time" Talk" →