Best of the Week
Most Popular
1. Five Charts That Show We Are on the Brink of an Unthinkable Financial Crisis- John_Mauldin
2.Bitcoin Parabolic Mania - Zeal_LLC
3.Bitcoin Doesn’t Exist – 2 - Raul_I_Meijer
4.Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - Nadeem_Walayat
5.Labour Sheffield City Council Election Panic Could Prompt Suspension of Tree Felling's Private Security - N_Walayat
6.War on Gold Intensifies: It Betrays the Elitists’ Panic and Augurs Their Coming Defeat Part2 - Stewart_Dougherty
7.How High Will Gold Go? - Harry_Dent
8.Bitcoin Doesn’t Exist – Forks and Mad Max - Raul_I_Meijer
9.UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - GoldCore
10.New EU Rules For Cross-Border Cash, Gold Bullion Movements - GoldCore
Last 7 days
Jim Rickards: Next Financial Panic Will Be the Biggest of All, with Only One Place to Turn… - 20th Jan 18
Macro Trend Changes for Gold in 2018 and Beyond - Empire Club of Canada - 20th Jan 18
Top 5 Trader Information Sources for Timely, Successful Investing - 20th Jan 18
Bond Market Bear Creating Gold Bull Market - 19th Jan 18
Gold Stocks GDX $25 Breakout on Earnings - 19th Jan 18
SPX is Higher But No Breakout - 19th Jan 18
Game Changer for Bitcoin - 19th Jan 18
Upside Risk for Gold in 2018 - 19th Jan 18
Money Minute - A 60-second snapshot of the UK Economy - 19th Jan 18
Discovery Sport Real MPG Fuel Economy Vs Land Rover 53.3 MPG Sales Pitch - 19th Jan 18
For Americans Buying Gold and Silver: Still a Big U.S. Pricing Advantage - 19th Jan 18
5 Maps And Charts That Predict Geopolitical Trends In 2018 - 19th Jan 18
North Korean Quagmire: Part 2. Bombing, Nuclear Threats, and Resolution - 19th Jan 18
Complete Guide On Forex Trading Market - 19th Jan 18
Bitcoin Crash Sees Flight To Physical Gold Coins and Bars - 18th Jan 18
The Interest Rates Are What Matter In This Market - 18th Jan 18
Crude Oil Sweat, Blood and Tears - 18th Jan 18
Land Rover Discovery Sport - Week 3 HSE Black Test Review - 18th Jan 18
The North Korea Quagmire: Part 1, A Contest of Colonialism and Communism - 18th Jan 18
Understand Currency Trade and Make Plenty of Money - 18th Jan 18
Bitcoin Price Crash Below $10,000. What's Next? We have answers… - 18th Jan 18
How to Trade Gold During Second Half of January, Daily Cycle Prediction - 18th Jan 18
More U.S. States Are Knocking Down Gold & Silver Barriers - 18th Jan 18
5 Economic Predictions for 2018 - 18th Jan 18
Land Rover Discovery Sport - What You Need to Know Before Buying - Owning Week 2 - 17th Jan 18
Bitcoin and Stock Prices, Both Symptoms of Speculative Extremes! - 17th Jan 18
So That’s What Stock Market Volatility Looks Like - 17th Jan 18
Tips On Choosing the Right Forex Dealer - 17th Jan 18
Crude Oil is Starting 2018 Strong but there's Undeniable Risk to the Downside - 16th Jan 18
SPX, NDX, INDU and RUT Stock Indices all at Resistance Levels - 16th Jan 18
Silver Prices To Surge – JP Morgan Has Acquired A “Massive Quantity of Physical Silver” - 16th Jan 18
Carillion Bankruptcy and the PFI Sector Spiraling Costs Crisis, Amey, G4S, Balfour Beatty, Serco.... - 16th Jan 18
Artificial Intelligence - Extermination of Humanity - 16th Jan 18
Carillion Goes Bust, as Government Refuses to Bailout PFI Contractors Debt and Pensions Liabilities - 15th Jan 18
What Really Happens in Iran?  - 15th Jan 18
Stock Market Near an Intermediate Top? - 15th Jan 18
The Key Economic Indicator You Should Watch in 2018 - 15th Jan 18
London Property Market Crash Looms As Prices Drop To 2 1/2 Year Low - 15th Jan 18
Some Fascinating Stock Market Fibonacci Relationships... - 15th Jan 18
How to Know If This Stock Market Rally Will Continue for Two More Months? - 14th Jan 18
Everything SMIGGLE from Pencil Cases to Water Bottles, Pens and Springs! - 14th Jan 18
Land Rover Discovery Sport Very Bad MPG Fuel Economy! Real Owner's Review - 14th Jan 18
Gold Miners’ Status Updated - 13th Jan 18
Gold And Silver – Review of Annual, Qrtly, Monthly, Weekly Charts. Reality v Sentiment - 13th Jan 18
Gold GLD ETF Update.. Bear Market Reversal Watch - 13th Jan 18
Stock Market Leadership In 2018 To Come From Oil & Gas - 13th Jan 18
Stock Market Primed for a Reversal - 13th Jan 18
Live Trading Webinar: Discover 3 High-Confidence Trade Set-Ups - 13th Jan 18
Optimum Entry Point for Gold and Silver Stocks - 12th Jan 18
Stock Selloffs Great for Gold - 12th Jan 18
These 3 Facts Show Gold Is Set to Surge in 2018 - 12th Jan 18
How China is Locking Up Critical Resources in the US’s Own Backyard - 12th Jan 18
Stock futures are struggling. May reverse Today - 12th Jan 18
Three Surprising Places You See Cryptocurrency - 12th Jan 18
Semi Seconductor Stocks Canary Still Chirping, But He’s Gonna Croak in 2018 - 12th Jan 18
Land Rover Discovery Sport Panoramic Sunroof Questions Answered - 12th Jan 18
Information About Trading With Alpari And Its Advantages - 12th Jan 18

Market Oracle FREE Newsletter

6 Critical Money Making Rules

Here’s Why Robots Should Take the Fed’s Job

Interest-Rates / US Federal Reserve Bank Jun 27, 2017 - 03:14 PM GMT

By: John_Mauldin

Interest-Rates

BY PATRICK WATSON : The Federal Reserve hiked interest rates again last week.

Higher rates aren’t entirely bad. They might help savers holding cash—though I wonder why anyone would still hold cash after almost a decade of punishment. The Fed has forced Americans into riskier assets, using every tool but horsewhips.


The bigger question is what this tells us about future Fed policy. Given that the Fed’s composition will probably change in the next year, what if we let the math decide?

Fed Formulas

In 2006, Harvard economist Greg Mankiw designed a formula to assess what interest rate the Fed should target, based on inflation and unemployment.

At the time, the unemployment rate hovered around 4.6% and core inflation 2.4%. Plug those numbers into Mankiw’s formula, and you get a 5.42% rate target. The actual fed funds rate was 5.25%, so not far off.

However, that picture has changed dramatically.

The Fed’s preferred inflation gauge, core PCE, is up 1.7% since this time last year, and the unemployment rate is 4.3%. So according to Mankiw’s formula, we would expect a fed funds rate of 4.86% right now.

It’s not even close. Last week, the Fed raised the rate to the 1.0–1.25% range.

Even the most hawkish FOMC voter (whoever it is) doesn’t foresee rates touching 4% before 2019. And all the others predicted much lower rates than that.

Clearly, this means the rules have changed.

Faith vs. Data

The real reason Yellen and others want to raise rates: they want to be able to cut rates in the next recession without going below zero.

In other words, they need breathing room. But acquiring it may bring on the very recession they’re preparing for.

Minneapolis Fed President Neel Kashkari disagreed with last week’s decision and explained why in a long blog post. Here’s his main point:

For me, deciding whether to raise rates or hold steady came down to a tension between faith and data.

On one hand, intuitively, I am inclined to believe in the logic of the Phillips curve: A tight labor market should lead to competition for workers, which should lead to higher wages. Eventually, firms will have to pass some of those costs on to their customers, which should lead to higher inflation. That makes intuitive sense. That’s the faith part.

On the other hand, unfortunately, the data aren’t supporting this story, with the FOMC coming up short on its inflation target for many years in a row, and now with core inflation actually falling even as the labor market is tightening. If we base our outlook for inflation on these actual data, we shouldn’t have raised rates this week. Instead, we should have waited to see if the recent drop in inflation is transitory to ensure that we are fulfilling our inflation mandate.

Kashkari considers the risk of above-2% inflation returning to be low—and manageable even if it happens.

But why are we even having this argument?

Algorithmic Central Banking?

We talk all the time about robots taking our jobs. Could they take the Fed’s job?

Presently, the Federal Open Market Committee (FOMC) spends thousands of work hours trying to solve the same problem Professor Mankiw’s equation answers in about one minute.

Some economists think the Fed should just follow fixed rules—not necessarily Mankiw’s formula, but something like it. Put rates on autopilot and get out of the way.

An attractive idea that might even yield better results. But, much like a plane’s autopilot, we need at least one skilled human aboard to take the stick if necessary.

The output—that is, monetary policy rules—would highly depend on the input. Incorrect inflation or unemployment data might produce unexpected results.

President Trump hasn’t yet nominated anyone for the three vacant Fed seats, so a whole different crew could be in charge next year.

Meanwhile, names floating around to replace Janet Yellen include advocates of rules-based policymaking. A recent Bloomberg survey of economists pegged Stanford economist John Taylor, author of the “Taylor Rule,” as a likely candidate for the job. Mankiw got a few votes too.

But whoever occupies the top seat, they will still need a transition plan. An overnight jump from today’s 1% range to nearly 5% would be disruptive, to say the least.

That leaves us back at the same conclusion.

Maximum Monetary Uncertainty

We live in a time of maximum monetary uncertainty. US interest rates drive the US dollar, which in turn drives just about every financial market on the globe. It’s that important.

For example, dividend-paying US stocks will be relatively less attractive if new Fed policies drive long-term interest rates higher. But they could also gain value if bond yields move lower. What do you do?

I look for income-generating investments that can adjust to fast-changing conditions. They exist, if you have an open mind and know where to look. 

Only one thing is sure in this transition: Anything can happen - so be ready for anything.

Subscribe to Connecting the Dots—and Get a Glimpse of the Future

We live in an era of rapid change… and only those who see and understand the shifting market, economic, and political trends can make wise investment decisions. Macroeconomic forecaster Patrick Watson spots the trends and spells what they mean every week in the free e-letter, Connecting the Dots. Subscribe now for his seasoned insight into the surprising forces driving global markets.

John Mauldin Archive

© 2005-2018 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