Tonic For The Temper Tantrum

One of the many memorable scenes in the 1978 comedy classic Animal House is when a 20-year-old Kevin Bacon tries to tell the crowd at the Faber College alumni parade to “remain calm, all is well!” just before he gets trampled flat by the onrushing mob.

I flashbacked to that this week watching global bond yields sink to their lowest levels in several years even as the overall economy – in the U.S., at least – seems to be in pretty good shape. The yield on the benchmark 10-year U.S. Treasury note fell below 2.22%, its lowest level since September 2017. That put it well below all of the Treasury’s securities that mature in one year or less, meaning you could get a higher yield by putting your money in a one-month T-bill (2.35%) than you could lending your money to the government for 10 years.

Still, that was a lot better yield than you could get overseas, where government bond yields sank even deeper into negative territory. The eurozone benchmark, the 10-year German bund, dropped to negative 17 basis points while the Japanese bond of the same maturity hit negative nine basis points, their lowest levels in nearly three years.

Yet, on that same day, the Conference Board’s U.S. Consumer Confidence Index for May jumped nearly five points to 134.1, its highest point since last November. The index “is now back to levels seen last fall when the index was hovering near 18-year highs,” noted Lynn Franco, the group’s senior director of economic indicators. “Consumers expect the economy to continue growing at a solid pace in the short-term, and despite weak retail sales in April, these high levels of confidence suggest no significant pullback in consumer spending in the months ahead.”

Clearly, there’s a serious disconnect between American consumers, who are in a bullish mood – not surprising, given the unemployment rate of 3.6% – and the bond market, which has pushed yields on the safest instruments down to levels you would expect in a recession. Who’s right? Continue reading "Tonic For The Temper Tantrum"

Sell In May? Wait For The Powell Put

After turning in one of its best January-April performances in more than 20 years, the stock market has suddenly run out of gas in May. We’re nowhere near correction territory – the S&P 500 is down about 2% so far this month after climbing more than 18% in the first four months of the year, and up 22% since the Christmas Eve bottom. Yet the financial press has been filled with “sell in May and go away” stories, citing the Wall Street urban legend – or historical trend, take your pick – that all the money that’s going to be made this year has already been made, so you may as well cash in your winnings and sit out the rest of the year.

The major impetus behind the dip – which doesn’t even meet the definition of a “dip” yet since few people seem to be buying on it – is President Trump’s announcement that he has upped the ante on the trade war with China, raising worries that talks between the two countries will collapse. The recent spate of high-profile IPOs from Lyft, Uber, Pinterest and other companies is also signaling that the stock market may have peaked.

Which raises the question: Is the Powell Put going to come to the stock market’s rescue again in the near future? How deep will a drop in the stock market – assuming it keeps dropping – have to get before the Federal Reserve intervenes and cuts the federal funds rate? Continue reading "Sell In May? Wait For The Powell Put"

Sweet Surrender

Janet Yellen had a pretty easy job when she was the Federal Reserve chair. By keeping interest rates at or near zero for years on end, she never heard any criticism from the president, government officials or the financial markets. Since he became Fed chair a little over a year ago, Jerome Powell has gotten nothing but flack, from President Trump – who was at it again last week – to a whole swarm of people on Wall Street complaining that the Fed was ruining their returns.

Powell got the message several months ago, and last week he handed in his formal surrender. Not only did the Fed leave interest rates alone at its monetary policy meeting, but it indicated that there would likely be no more rate hikes the rest of this year, and maybe next year, too. “It may be some time before the outlook for jobs and inflation calls clearly for a change in policy,” Powell said.

The Fed also called a halt to the runoff in its still humungous Treasury securities portfolio. Beginning in May, the Fed will slow to $15 billion – from the current $30 billion -- the monthly redemptions of its Treasury holdings, with the runoff to end in October, meaning its balance sheet will start growing again.

So now Powell and his Fed mates can sit back blissfully and listen to the silence, at least for now. Continue reading "Sweet Surrender"

Blowin' In The Wind

Federal Reserve Chair Jerome Powell last week held sacred the Fed’s “precious” independence, but he apparently forgot how quickly and easily it’s been bullied into altering its monetary policy by both politicians and influential financial markets people.

Until just a couple of months ago, the Fed was determined to “normalize” interest rates and its enormous balance sheet. But after a relative – emphasis on that word – weak patch for the economy and howls of pain from investors during last year’s correction, the Powell Fed was lighting quick to reverse course and put a halt to more rate hikes and portfolio runoff until further notice.

Not surprisingly, the financial press hasn’t given President Trump any credit for this (if credit is the right word in this instance), even though he was clearly the first and loudest basher of tightening Fed policy. Wall Street then jumped on the bandwagon, and voila, we have a new “patient” Fed and an easier monetary policy – and the best January for stocks since the 1980s.
Powell and other members of the Fed have tried to justify their abrupt about-face by noting recent weak – again, relatively speaking – economic data. But January’s robust nonfarm payrolls report – nearly double the consensus forecast – calls that into serious question. Continue reading "Blowin' In The Wind"

The Fed's 2018 New Year's Resolution

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


In February Jerome Powell takes over as chair of the Federal Reserve, succeeding Janet Yellen. His first order of business should be to get the Fed off its silly, outdated and nonsensical monetary policy target of 2% inflation. He and the other members of the Federal Open Market Committee should at the very least change the inflation target number, or, better yet, find a different measuring stick altogether.

One of the Fed’s mandates, we know, is to keep inflation “stable,” as noted on the Fed’s website, citing the Federal Reserve Act (the other two mandates are achieving maximum employment and moderate long-term interest rates). The current Fed has taken to defining price stability as 2% inflation. Given that the Fed already basically believes it has accomplished the other two objectives, and price inflation has been nothing but rock-solid stable for several years, it’s not clear why it’s still so determined to get inflation up to that 2% target rate, and letting that dictate its monetary policy. If prices are stable at about 1.5%, rather than 2%, doesn’t that meet the mandate, as long as prices are stable?

During the Great Depression of the 1930s the lack of inflation – more accurately, deflation – was a big problem, feeding the downward spiral in the economy for more than ten years. Since then, economists, both on the Fed and elsewhere, have been absolutely terrified of that happening again, even though we haven’t come close to it, not even during the depths of the recent Great Recession. Now that we have seemed to have finally pulled out of the last financial crisis, it’s time to put that deflation obsession to rest. Continue reading "The Fed's 2018 New Year's Resolution"