Tag: Federal Open Market Committee (FOMC)

The Fed Makes It Official

Posted on by George Yacik

The Fed recently enacted what the experts are calling a historic policy change. More accurately, it’s the official acknowledgment of what the Fed has already been doing, namely keeping interest low, seemingly forever. What it also means is that it sharply alters the old 60-40 investment mix, to something more like 80-20 or 80-10-10.

The Fed is basically assuming that inflation will be nonexistent – or, at least manageable – for the foreseeable future and is, therefore, willing to let it run “hotter” for longer than it used to before it steps in and raises interest rates. But is that a realistic assumption? Nearly unanimously, Fed officials have been touting the party line that the economy is bad – despite numerous reports that show it is snapping back pretty strongly – and is likely to stay that way or get even worse – which may not be the case. The stock market certainly doesn’t seem to be buying that.

What the Fed seems to be doing is baking in the cake its already oversized role in the economy (and society) and keeping it that way “for as far as the eye can see.”

As I noted in my previous column, cynics might draw the conclusion that the Fed is purposely dumbing down its economic forecasts so as to cement its role for the long-term. Jerome Powell’s streamed announcement at the Jackson Hole summit pretty much made that de facto.

So what does that do for your portfolio? Given that the Fed has now determined that rates will stay low for the foreseeable future, do bonds have any place in your portfolio? What would be the point? Continue reading "The Fed Makes It Official" →

Fed Rules Out Yield Curve Control (For Now)

Posted on by Gary Tanashian

That we are even having this conversation is proof that we are and have been in…

alice in wonderland

…Wonderland for years now.

Since at least 2001, actually. Back then Alan the Wizard Greenspan (mixing classic fairy stories, I know) began pulling levers that could never be un-pulled. There were no breadcrumbs with which to find our way back. Off the charts is off the charts. Exponential is exponential. And that’s when funny munny out of thin air entered the realm of normalcy; new normalcy where the financial system is concerned.

I assume that the ‘tool’ known as yield curve control (per this article) is part of MMT (Modern Monetary Theory) TMM (Total Market Manipulation) that the eggheads promote with not an ounce of historical monetary grounding, caution or even human-like soul. They are monetary Humanoids, AKA bureaucrats, AKA economic Ph.Ds with more statistical and theoretical knowledge than common sense. They released the FOMC minutes and policy micro-managers offer their interpretations. Continue reading "Fed Rules Out Yield Curve Control (For Now)" →

Reasons To Be Cheerful

Posted on by George Yacik

According to the Federal Reserve, the economy is in danger of hurtling over another cliff. Still, recent economic statistics and market indicators paint a much more hopeful picture – the S&P 500 just hit a new all-time high, gold is falling, and bond yields are rising. Which story are we supposed to believe?

On the one hand, we have the recent economic statistics. On Friday, the Commerce Department reported that retail sales rose another 1.2% in July, pushing them above pre-pandemic levels. If that’s not a classic V-shaped recovery, I don’t know what is. While the headline sales figure came in below expectations of a 2.0% rise, the prior month’s 7.5% increase was revised upward to show an 8.4% jump. Excluding autos, July sales actually beat estimates, rising 1.9% versus a Street forecast of 1.5%.

Also, on Friday, the Fed itself reported that industrial production rose 3.0% last month, in line with estimates. In comparison, the capacity utilization rate rose more than two percentage points from the previous month to 70.6% and its fourth big monthly increase in a row.

The day before, the Labor Department said initial unemployment claims continued to drop, falling well below one million for the first time in several months and down sharply from a peak of near seven million in March, a reverse V-shaped drop.

The financial markets seem to be buying it. Last week the yield on the benchmark 10-year Treasury note rose above 0.70% for the first time since late June, putting it up 20 basis points just in the previous 10 days. Gold is down more than 5% from its August 6 high. And of course, the S&P 500 has wiped out all of this year’s losses, including the 33% drop in February and March, when a good portion of the U.S. was going into lockdown. Continue reading "Reasons To Be Cheerful" →

Let's Move Forward, Not Back

Posted on by George Yacik

Since the beginning of the coronavirus crisis, the Federal Reserve has probably done more to try to ease the financial pain of businesses, consumers, and institutions than just about any other organization on earth with their monetary policy. It’s lowered interest rates, purchased trillions of dollars of assets – some of which, like corporate bonds, it’s never bought before – eased bank capital requirements, and increased existing or created new lending programs to help Americans weather the storm and get back on their feet.

Now the president of the Minneapolis Fed and a current voting member of the Fed’s monetary policy committee is calling on people to suffer a few more weeks in quarantine in order to get the virus under control and the economy back on an upward trajectory – as if it weren’t on that already.

“If we were to lock down really hard, I know I hate to even suggest it. People will be frustrated by it,” Neel Kashkari told CBS’s Face the Nation program. “But if we were to lock down hard for a month or six weeks, we could get the case count down so that our testing and our contact tracing was actually enough to control it the way that it's happening in the Northeast right now. That’s the only way we’re really going to have a real robust economic recovery.”

“Now, if we don't do that and we just have this raging virus spreading throughout the country with flare-ups and local lockdowns for the next year or two, which is entirely possible, we're going to see many, many more business bankruptcies, small businesses, big businesses, and that's going to take a lot of time to recover from to rebuild those businesses and then to bring workers back in and re-engage them in the workforce. That's going to be a much slower recovery for all of us.”

If we take his advice and do another “hard lockdown” for six weeks or a month, how many more businesses will fail, and how many more people will be laid off or lose their jobs permanently in the meantime? Continue reading "Let's Move Forward, Not Back" →

Disconnect? What Disconnect?

Posted on by George Yacik

Over the past few weeks, the financial news media has been marveling at what it calls the “disconnect” between stock prices and the economy. Economic and health statistics are likely to go from bad – 30 million unemployed in the past month, a 4.8% drop in first-quarter GDP, an 8.7% drop in retail sales in April, more reported coronavirus cases and deaths – to worse – a nearly 40% drop in GDP and around 15% unemployment in the second quarter, according to the Congressional Budget Office’s latest projections. Yet the stock market has blissfully regained about half of the 34% drop it sustained between mid-February and mid-March.

But is there really a disconnect? Does the economy – now largely controlled by the Federal Reserve and the U.S. Treasury Department – still have any correlation to what happens in the stock market anymore, and vice versa? Well, the answer is yes, but not in the way it used to. What’s happening is that as the economy goes deeper into the red, the more it prompts the government to pump in more money and for the Fed to intervene more in the financial markets. That is unquestionably good for stocks.

We have been in an environment since the 2008 financial crisis where the Fed has played an unprecedented activist role in the bond market and, indirectly, the stock market. That role has grown further under Chair Jerome Powell, who seems to believe it’s the Fed’s job to rescue equity investors any time stock prices correct, never mind what’s going on in the economy. Now that we’re in the middle of an economic downturn that makes 2008 look like a garden-variety recession, the Fed has put its monetary policy and quantitative-easing engines into Continue reading "Disconnect? What Disconnect?" →