Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Gold among Negative-Yielding Bonds - 20th Sep 19
Panicky Fed Flooding Overnight Markets with Cash - 20th Sep 19
Uber Stock Price Will Crash on November 6 - 20th Sep 19
Semiconductor Stocks Sector Market & Economic Leader - 20th Sep 19
Learning Artificial Intelligence - What is a Neural Network? - 20th Sep 19
Precious Metals Setting Up Another Momentum Base/Bottom - 20th Sep 19
Small Marketing Budget? No Problem! - 20th Sep 19
The Many Forex Trading Opportunities the Fed Day Has Dealt Us - 19th Sep 19
Fed Cuts Interest Rates and Gold Drops. Again - 19th Sep 19
Silver Still Cheap Relative to Gold, Trend Forecast Update Video - 19th Sep 19
Baby Boomers Are the Worst Investors in the World - 19th Sep 19
Your $1,229 FREE Tticket to Elliott Market Analysis & Trading Set-ups - 19th Sep 19
Is The Stock Market Other Shoe About To Drop With Fed News? - 19th Sep 19
Bitcoin Price 2019 Trend Current State - 18th Sep 19
No More Realtors… These Start-ups Will Buy Your House in Less than 20 Days - 18th Sep 19
Gold Bugs And Manipulation Theorists Unite – Another “Manipulation” Indictment - 18th Sep 19
Central Bankers' Desperate Grab for Power - 18th Sep 19
Oil Shock! Will War Drums, Inflation Fears Ignite Gold and Silver Markets? - 18th Sep 19
Importance Of Internal Rate Of Return For A Business - 18th Sep 19
Gold Bull Market Ultimate Upside Target - 17th Sep 19
Gold Spikes on the Saudi Oil Attacks: Can It Last? - 17th Sep 19
Stock Market VIX To Begin A New Uptrend and What it Means - 17th Sep 19
Philippines, China and US: Joint Exploration Vs Rearmament and Nuclear Weapons - 17th Sep 19
What Are The Real Upside Targets For Crude Oil Price Post Drone Attack? - 17th Sep 19
Curse of Technology Weapons - 17th Sep 19
Media Hypes Recession Whilst Trump Proposes a Tax on Savings - 17th Sep 19
Understanding Ways To Stretch Your Investments Further - 17th Sep 19
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19
Boris Johnson's "Do or Die, Dead in a Ditch" Brexit Strategy - 11th Sep 19
Precious Metals, US Dollar: How It All Relates – Part I - 11th Sep 19
Bank of England’s Carney Delivers Dollar Shocker at Jackson Hole meeting - 11th Sep 19
Gold and Silver Wounded Animals, Indeed - 11th Sep 19
Boris Johnson a Crippled Prime Minister - 11th Sep 19
Gold Significant Correction Has Started - 11th Sep 19
Reasons To Follow Experienced Traders In Automated Trading - 11th Sep 19
Silver's Sharp Reaction Back - 11th Sep 19
2020 Will Be the Most Volatile Market Year in History - 11th Sep 19
Westminister BrExit Extreme Chaos Puts Britain into a Pre-Civil War State - 10th Sep 19
Gold to Correct as Stocks Rally - 10th Sep 19
Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - 10th Sep 19
Stock Market Sector Rotation Giving Mixed Signals About The Future - 10th Sep 19
The Online Gaming Industry is Going Up - 10th Sep 19

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

U.S. Fed Mission Accomplished

Interest-Rates / US Interest Rates Dec 19, 2015 - 05:07 PM GMT

By: Peter_Schiff

Interest-Rates

On May 1, 2003 on the flight deck of the USS Abraham Lincoln then President George W. Bush, after becoming the first U.S. president to land on an aircraft carrier in a fixed wing aircraft (in a dashing olive drab flight suit), declared underneath an enormous "Mission Accomplished" banner that "major combat operations" in Iraq had been concluded, that regime change had been effected, and that America had prevailed in its mission to transform the Middle East. 13 years later, after years of additional combat operations in Iraq, and a Middle East that is spiraling out of control and increasingly disdainful of America's influence, we look back at the "Mission Accomplished" event as the epitome of false confidence and premature celebration.


The image of W on the flight deck comes to mind in much of the reaction to this week's decision by the Federal Reserve to raise interest rates for the first time in nearly a decade. While many in the media and on Wall Street talked of a "concluded experiment" and the "dawning of a new era," few realize that we are just as firmly caught in the thickets of failed policy as were Bush, Cheney, and Rumsfeld in the misunderstood quagmire of 2003 Iraq.

In its initial story of the day's events, The Washington Post (12/16/15) declared that by raising the Fed Funds rate to one quarter of a percent The Fed is "ending an era of easy money that helped save the nation from another Great Depression." Putting aside the fact that 25 basis points is still 175 points below the near 2.0% rate of core inflation that the government has reported over the past 12 months (and should therefore be considered undeniably easy), the more important question to ask is into what environment the Fed is apparently turning this page.

Historically, the Fed has begun its tightening cycles during the early stages of expansions, when the economy had enough forward momentum to absorb the headwinds of rate increases. But that is not at all the case this time around.

Prior to the recent Great Recession, there had been six recessions since 1969, and over those episodes, on average 13.3 months passed from the time the recession ended to when the Fed felt confident enough in the recovery to raise rates. (The lag time was just 3.5 months in the four recessions between 1971 and 1991). (The National Bureau of Economic Research, US Business Cycle Expansions and Contractions, 4/23/12)

But after the recession of 2008 - 2009, the Fed waited a staggering 78 months to tighten the monetary levers. Those prior tightening cycles also occurred at times when GDP was much higher than it is today. Over the prior six occasions GDP, in the quarter when the Fed moved, averaged a robust 5.3%. While the current quarterly GDP is still unknown, the data suggests that we will get a figure between 1% and 2% annualized. (Bureau of Economic Analysis)

Another key difference is the level of unemployment at the time the hikes occurred. As they started tightening much earlier in the expansion cycles, unemployment at the times of those prior recoveries tended to be high but falling. The average unemployment rate at the time the six prior tightenings occurred was 7.5%. But that average rate had fallen to 5.1% (a level that most economists consider to be "full employment") an average of 42 months after the initial Fed tightening. In other words, those expansions were young enough and strong enough to absorb the rate hikes while still bringing down unemployment. (Bureau of Labor Statistics; Federal Reserve Bank of NY)

Our current unemployment rate has already fallen to 5.0% (mostly because workers have dropped out of the labor force). Few economists allow for the possibility that it could fall much lower. This is particularly true when you acknowledge the rapidly deteriorating economic conditions that we are seeing today.

As I stated in my most recent commentary , there is a growing troth of data that shows that the U.S. economy is rapidly losing momentum. Some data points, such as the inventory to sales ratio and the ISM manufacturing data suggest that a bona fide recession may be right around the corner (among them, this week's truly terrible manufacturing PMI and industrial production numbers, a very weak Philly Fed Outlook, the weakest service sector PMI of the year, a big drop in the Kansas City Fed Manufacturing Index, and the announcement that the Third Quarter current account deficit had "unexpectedly" increased 11.7% to post the widest gap since the fourth quarter of 2008, are just the latest such indicators).

Given that the U.S. economy has, on average, experienced a recession every six years, the 6.5-year longevity of the current "expansion" should be raising eyebrows, even if the data wasn't falling faster than a bowling ball with wings.

So what happens when the Fed postpones its first rate hike until the death throes of a tepid recovery rather than doing so at the beginning of a strong one? If unemployment starts ticking up during an election cycle, can anyone really expect the Fed to follow through with its projected additional rate hikes and allow a full-blown recession to take hold prior to voters casting their ballots? All of this strongly suggests that this week's rate hike was a "one-and-done" scenario that does nothing to extricate the Fed from the monetary trap it has created for itself.

Another big question is why the Fed decided to move in December, after doing nothing for so long. Clearly the markets were surprised and confused by the Fed's failure to pull the trigger in September, when the economy appeared, at least to those who chose to ignore the bad data, to be on relatively solid footing. At that time, the Fed suggested that it needed to see more improvement before green lighting a liftoff. And while I tend not to place much stock in the pronouncements of most economists, one would be hard-pressed to find anyone who would claim that the data in December looks better than it did in September.

A much more likely explanation is that through its rhetoric the Fed had inadvertently backed itself into a corner. Even though the Fed would have preferred to leave rates at zero, the fear was that failure to raise them would damage its credibility. After having indicated for much of the past year that they had believed that the economy had improved enough to merit a rate increase later in 2015, to continue do to nothing would suggest that the Fed did not actually believe what it was saying. This was an outcome that they could not abide. If we could doubt them about their economic pronouncements, perhaps they have been equally disingenuous with their professed ability to shrink their balance sheet over the next few years, contain inflation if it ever reared its ugly head, or to prevent financial contagion from spreading during a new recession.

In truth there should be very little confidence that a new era has begun. A symbolic 25 basis point credibility-saving gesture, coming just two weeks before year-end, is really a non-event. It's the equivalent of a credibility Hail Mary, with the Fed desperately trying to infuse confidence into a "recovery" that for all practical purposes has already ended.

The question will be whether such a small move will be enough to push an already slowing economy into recession that much sooner. Over the past seven years the U.S. economy has become dependent on zero percent interest rates. But as with the famous Warren Buffet bathing suit maxim, these dependencies won't be fully revealed until the tide rolls out and those zero percent rates are taken away. The bigger question is how quickly the Fed will reverse course. Will it move once it becomes painfully obvious to everyone that we are headed into another recession, or will it wait until we are officially knee deep in a contraction that is even bigger than the last one?

The new rounds of rate cutting and Quantitative Easing that the Fed will have to unleash will echo the military "surge" in Iraq in 2007. Those fresh troops were needed to roll back the chaos that the Administration had ignored for so long. But just as that surge only bought us a few years of relative calm, look for the gains brought about by our next monetary surge to be even more transitory. That is a development for which virtually no one on Wall Street is preparing.

Best Selling author Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital. His podcasts are available on The Peter Schiff Channel on Youtube

Catch Peter's latest thoughts on the U.S. and International markets in the Euro Pacific Capital Summer 2015 Global Investor Newsletter!

Read the original article at Euro Pacific Capital

Regards,
Peter Schiff

Euro Pacific Capital
http://www.europac.net/

Peter Schiff Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules