Submitted by Tyler Durden on
09/09/2015
The growing roar of 'the establishment' crying for help
from The Fed should make investors nervous. While your friendly local
asset-getherer and TV-talking-head will proclaim how a rate-hike is so positive
for the economy and stocks, we wonder why it is that The
IMF, The
World Bank, Larry
Summers (twice), Goldman
Sachs, China
(twice), and now no lessor nobel-winner than Paul Krugman has demanded that
The Fed not hike rates for fear of - generally speaking - "panic and
turmoil," however, as Krugman notes, “I think it would be a
terrible mistake to move. But I’m not confident that they won’t make a
mistake."
The Federal Reserve should
hold off from raising interest rates until the first half of 2016, the
International Monetary Fund said as it cut its U.S. growth forecast for the
second time in three months.
The lender also said that the
dollar was “moderately overvalued” and a further marked appreciation would be
“harmful,” in a statement released in Washington on Thursday on its
annual checkup of the U.S. economy.
“The FOMC should remain data
dependent and defer its first increase in policy rates until there are greater
signs of wage or price inflation than are currently evident,” the IMF said.
Based on the fund’s economic forecast, and “barring upside surprises to
growth and inflation, this would put lift-off into the first half of 2016.”
...
“There is a risk that a
further marked appreciation of the dollar -- particularly one
that takes place in an environment where policies to address growth
deficiencies languish both in the U.S. and abroad -- would be harmful.”
The report also discussed
financial stability, with the IMF pointing to higher risks in shadow banking, a
potential lack of liquidity in fixed-income markets, and greater market
risk-taking in the insurance industry
“I don’t think the Fed lift-off
itself is going to create a major crisis but it will cause some immediate
turbulence,” Mr Basu said. “It is the compounding effect of the last two
weeks of bad news with that [China devaluation] . . . In the middle of this it
is going to cause some panic and turmoil.
- U.S.
FEDERAL RESERVE SHOULD DELAY RATE HIKE, COULD PUSH SOME EMERGING MARKETS
INTO CRISIS - CHINA OFFICIAL
"China's exchange rate
reform had nothing to do with the global stock market volatility, it was mainly
due to the upcoming U.S. Federal Reserve monetary policy move," Yao
said. "We were wronged."
Goldman
Sachs offers up 7 reasons why Yellen should stay on hold... Shouldn't
Be Close
1. We do not expect a rate
hike at the September 16-17 FOMC meeting. This call was originally based on our
interpretationof the June “dot plot” and Chair Yellen's July 10 speech, which
suggested to us that her own expectation was liftoff in December, not September. If
this interpretation was correct at the time, and if we are right in assuming
that Yellen’s views are ultimately decisive, the key question is how the
economy and the financial markets have performed relative to her expectations
of 2-3 months ago. If developments have beaten her expectations, it is possible
that she might now support a hike. In contrast, if developments have been in
line with or weaker than her expectations, she will presumably resist a hike.
2. Even if we focus only on
the economic data, it is difficult to argue that developments have beaten
expectations. Although growth has been decent and the labor
market has improved further, both wage and price inflation have fallen short of
consensus expectations. Our wage tracker stands at just 2.1% as the Q2
employment cost index surprised on the downside, and core PCE inflation just
made a four-year low of 1.24%. Moreover, the notion that the weakness in core
inflation is principally due to the temporary effects of a stronger dollar and
lower commodity prices does not look right; core PCE goods inflation, where
such effects should be concentrated, is only 0.4pp below its 20-year average, a
gap that is worth just 0.1pp for the overall core PCE index. This suggests that
most of the inflation shortfall relative to the Fed’s 2% target is due to more
persistent factors, including continued labor market slack.
3. Once we broaden the
perspective to include financial markets, developments have been substantially
worse than almost anyone expected in June or early July, leading many
forecasters (ourselves included) to shave their expectations of future growth. Our
GS Financial Conditions Index (GSFCI) is at the tightest level since 2010, as
the dollar has appreciated further, credit spreads have widened, and stock
prices have fallen substantially. At this point, our “GSFCI Taylor rule”
suggests that actual financial conditions are much tighter than the level
suggested by the current levels of employment and inflation relative to the
Fed’s targets. In a similar vein, market inflation expectations have fallen
back to the lows of early 2015; the five-year five-year forward TIPS breakeven
stood at 1.88% on Friday, which we think is consistent with a market
expectation for PCE inflation of just 1½%, half a point below the Fed’s target.
4. So how do we explain Vice
Chairman Fischer’s relatively hawkish CNBC interview and speechat the Jackson
Hole symposium? While Fischer did not comment directly on the timing of
liftoff, he did provide a fairly upbeat interpretation of the labor market and
inflation picture, which many have interpreted as a signal that he will support
a hike on September 17.However, an alternative interpretation is a
desire to avoid pre-empting the actual FOMC meeting, at a point in time when
the market-implied probability of a September hike stood below 25%. In support
of this interpretation, we would note that Fischer also gave a speech widely
interpreted as hawkish just three weeks before the March 17-18 FOMC meeting,
which featured sizable downward revisions to the committee’s inflation and
funds rate paths.
5. There are also some
logistical difficulties with a hike on September 17. Right now,
the market-implied probability of a hike is 30%-35%. We believe that
the FOMC will want to be reasonably sure that the first rate hike in nearly a
decade is well anticipated by the market on the day it occurs. This
implies that a strong signal between now and the meeting may be necessary to
put the committee in a position where it feels it actually can hike without
potentially causing a significant amount of market disruption. But again,
the desire to avoid pre-empting the discussion at the meeting itself presumably
argues against sending such a signal. The path of least resistance is therefore
to wait, which might mean that the market-implied probability of a hike on the
day of the meeting itself will be close to current levels. If so, we
think that market pricing in itself would become a strong argument around the
FOMC table against pulling the trigger on September 16-17 [ZH:
which means that as many have suggested, it is the market's tantrums and not
the Fed, which calls the shots].
6. If we are right about the
will-they-or-won’t-they issue, the next question is what message the committee
will send about future policy on September 17. On this, it is harder
to be confident. The tightening of financial conditions has greatly strengthened
the case of commentators such as former Treasury Secretary Summers that the
committee should not be signaling a 2015 liftoff; taken literally, our GSFCI
rule implies that the committee should be looking for ways to ease, not
tighten, policy. And the simplest way to do that would be to signal a later
liftoff than the market is currently discounting. Against this, many meeting
participants will argue that the tightening of financial conditions could
reverse quickly and a 2016 liftoff is too late given the further improvement in
the labor market and the sharper-than-expected decline in the headline
unemployment rate in recent months. In the end, our baseline expectation is
that the message from the meeting, including the “leadership dots”, will remain
broadly consistent with liftoff in December but Chair Yellen will make it clear
in the press conference that financial conditions need to improve for the
committee to actually hike this year.
7. Other aspects of the
meeting are also likely to be mostly dovish. Although the
unemployment rate path will once again have to come down, we expect this to be
largely offset by a reduction in the committee’s estimate of the structural
unemployment rate. The forecasts for real GDP growth, inflation, and the
longer-term funds rate are also likely to decline modestly. That said, the
Fed’s funds rate expectations are likely to remain well above the distant
forward rate, which now suggests a market view of the equilibrium funds rate of
just 2%. We agree with the Fed’s view that this is likely too low, although the
question will not be definitively settled for several years.
a Federal Reserve decision to
raise rates in September would be a serious mistake.
Now is the time for the Fed
to do what is often hardest for policymakers. Stand still.
And now Paul Krugman joins the
fray...
“I don’t think they are moving
next week,” economist Paul Krugman says at conference in Tokyo on Wednesday
when asked about timing of possible interest rate increase by U.S. Federal
Reserve.
“I still think it would be a
terrible mistake to move. But I’m not confident that they won’t make a
mistake"
Fed keeps sounding like it’s
eager to raise rates.
It’s almost as if there
exists an urge at the Fed to repeat the mistakes of the BOJ and ECB.
* * *
Now Yellen is really cornered.. and just exactly how are the
talking heads going to spin any of this as positive?
However,
Saxo Bank offers four reasons why The Fed should hike rates in September... The
probability of a rate hike in September is stronger than is generally believed.
There is no perfect timing for the tightening monetary policy but several
arguments confirm that the Fedis able to begin this month if it so
desires. Here are the four we can see:
1. The Fed is on its way to
achieving its dual mandate
With a 5.1% unemployment rate,
the US economy is very near "full employment" and is preparing to
enter its seventh year of expansion. Notably, the current period of growth is
already 16 months longer than the average seen since 1945.
As for inflation, the Fed has
nearly achieved its goal as inflation (excluding oil and energy) lies at 1.8%,
very close to the 2% target.
Taking oil into account, of
course, inflation is down significantly. But this near-deflation situation is
an external factor on which the central bank has little influence and it cannot
be the only driver of US monetary policy strategy.
2. The Fed is aware of the
'speculative bubbles' risk
Even if preventing speculative bubbles
is not officially part of the Fed's dual mandate, this legitimate preoccupation
is strengthened by the financialisation of the economy.
Economic literature dating from
the beginning of the previous century underlines the necessity of central bankers'
including the price of financial assets and real estate to get a more
comprehensive view on actual inflation.
Recent speculative bubbles on
stocks or real estate in several industrialised countries confirm this
necessity.
In the United States, the excesses
that led to the 2007 crisis appear to be drawing near again. Many stock prices
are disconnected from companies’ balance sheets and first-time buyers can once
again take out a loan worth 97% of the price of the property they intend to
purchase.
Coming back to a more orthodox
monetary policy implies obvious dangers, but the first benefit would be to
return “real” value to money.
3. Credit conditions will
remain durably flexible
Even if the coordination of
monetary policies between the main central banks is just an illusion, it does
exist to a certain extent. It can be witnessed in the Swiss National Bank’s
decision to give up its three-year-old cap on the value of the Swiss franc last
January, just a few days before the official announcement of the European
Central Bank's QE programme.
In the event of the Fed raising
its rates in September, the global monetary printing will go on. The tightening
in America will be very gradual. In addition, the ECB shouldn’t hike its rates
before the end of 2016, at least, and the Bank of Japan is involved in a
similar process which is not intended to end any time soon.
4. The Fed’s credibility
depends on it
A rate hike in September has
been in the consensus for months and has led to a repositioning of portfolios
in favour of USD-denominated assets since last Spring. Any backward step from
the Fed could weaken its credibility, its forward guidance strategy introduced
in 2008, and support the idea that market upheavals drive its decisions.
Since the Swiss franc case
occurred early 2015, central bankers’ credibility has been notably affected. A
postponed rate hike might then blur the American central bank’s message.
If the Fed should decide to stick with the status quo
this month – perhaps because of China’s situation – it is hard to see how the
rate hike could wait until the end of the year. The Fed would quickly be short
of valid arguments to justify this change in its strategy.
* * *
Finally, just in case there is still any confusion
what a Fed rate hike means, we repeat what Bank
of America said last week:
Should the Fed decide to raise
interest rates, it will be the first Fed hike since June 29th 2006. In the
110 months that have since past, global central banks have cut interest rates
697 times, central banks have bought $15 trillion of financial assets, zero [or
negative] interest rates policies have been adopted in the US, Europe &
Japan. And, following the Great Financial Crisis of 2008, both stocks and
corporate bonds have soared to all-time highs thanks in great part to this
extraordinary monetary regime.
As noted above, a rate hike
with a stroke ends this era.
…
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