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posted on 28 November 2015

Federal Reserve

from EconMatters,

Rate Hike

The Federal Reserve has been telegraphing to markets that they are going to raise the fed funds rate by 25 basis points next month at its December Fed Meeting. The financial markets think they are serious this time and have been pricing in this 25 basis point rate hike for the past 6 weeks.

The real question is that since the Fed has told us that they are Data Dependent for the past 7 years regarding changes to monetary policy, what has really changed in the economic data for the positive? Why now of all times do they decide to raise rates? Are they raising rates for the right reasons? These are just some of our concerns as the Federal Reserve embarks upon their final FOMC Meeting on December 16th 2015.

John Williams

It is hilarious watching Federal Reserve Bank of San Francisco President John Williams flip flop on rate hikes faster than a politician on an issue after a new poll comes out. It has become obvious that this Fed member has no views of his own regarding monetary policy, he is basically Janet Yellen`s mouth piece, and is not an independent Fed member. If one just reads his statements over the course of 2015 regarding possible rate hikes, with an economy that hasn`t dramatically changed much in 2015, one would demand immediate and supervised drug tests on a monthly basis. Maybe I am being too hard on this guy, and that he has a difficult job of navigating Fed Policy politics, but he sure is coming across as an incompetent and unqualified board member that adds no real value to the committee.

Neel Kashkari

Any maybe that is why Neel Kashkari, has been chosen as head of the Federal Reserve's regional bank in Minneapolis to make everyone else appear more qualified in comparison. I am not sure why this Fed move hasn`t garnered more attention by the mainstream financial media, but what has Neel Kashkari ever done that makes him qualified to be a Federal Reserve Board member? And yes it is too easy a cynical softball setup for the peanut gallery to shout out "He worked at Goldman Sachs!" here. But he has accomplished very little in the Hedge Fund community, Investment Banking, his small time as a Portfolio manager at PIMCO, he made an unsuccessful run for governor of California in 2014, and was an unsuccessful aerospace engineer at TRW Corp. So unsuccessful in fact at TRW Corporation that he went to Wharton to get his MBA to reinvent himself at Goldman Sachs.

It seems the only thing this guy has succeeded at is kissing up to Hank Paulson while at Goldman Sachs, which landed him a high profile position at the Treasury Department during the TARP bailout program, by the way another colossal failure both in terms of policy creation and implementation. The guy has literally failed at every job he has ever done, and keeps getting promoted to better jobs with higher required responsibilities and required competencies. It is not like this guy has written extensively on monetary policy in his career or has a PhD in economics from a respected academic institution. This guy was literally pushing defense stocks on CNBC a couple of years ago while learning Portfolio Management at PIMCO. I realize that often employment success in life is knowing the right people and connections, but this is the Federal Reserve we are talking about, and not the Vice President of some obscure department in a sleepy corporation. Consequently the Peter Principle is alive and well at the Federal Reserve, has the Federal Reserve become one giant example of the Peter Principle?

Inconsistent Message

This brings us back to the fact that the Fed now is so motivated to raise rates just to show that they can actually raise rates, even when it is obvious to everyone in financial markets that there is no need to raise rates here. In fact, the Fed should have raised rates 3 or 4 years ago, and at the very least last year when GDP was more robust during the second half of 2014. In short, for the near term the Fed missed their opportunity window to raise rates, according to the economic data and overall global economic environment - them being 'Data-Dependent' and all.

Therefore, this rate rise is purely for show, the Federal Reserve has had 7 plus years to raise rates and they pick the time when China is struggling, and the ECB, Japan, and almost every other EM country is trying to weaken their currency. And they are going to do it, as they have extended so much credibility the last 6 weeks talking up this rate cut, that they would become a complete laughing stock by their most diehard supporters if they bailed out on this one. The Federal Reserve isn`t even consistent with their messaging within the same calendar year. As the reason they couldn`t raise rates back in June, another heavily telegraphed Fed Rate Rise Meeting, was because the US Dollar was too strong. They were worried about the effects of a strong dollar on the US Economy from a trade and corporate profits standpoint; not to mention its effects on emerging markets. Hello Federal Reserve, just six months later we have the same conditions with a strong US Dollar, it is not like anything has changed from a data standpoint to now suddenly merit a 25 basis point rate hike. I realize it is easy for me to sit back and criticize their actions, but it seems that from a logical reasoning standpoint if they can raise rates now, then they should have raised rates back in June.

Reasons Not to Raise Rates

The main reason the Federal Reserve shouldn`t raise rates now is that the ECB, which the Euro makes up the largest part of the US Dollar Index, is going full scale nuclear on devaluing their currency for trade competitive advantages over the United States. The second reason is that Emerging Markets haven`t shown a real pickup yet from their latest stimulus attempts, and are still hampered by being in the early stages of financial reform and structural rebalancing. The third reason is that commodities are being hammered with a strong dollar, further reinforcing deflationary pressures from a "Data-Dependent" standpoint given that the Fed wants to stimulate 'inflation' in the economy. The fourth reason is that there really is no need to now, that ship has sailed about 5 years ago, for all we know we have reached the other side of the business cycle, and are headed back into recession.


In fact, there can even be a case for QE4 as the inflation in the economy is coming mainly from Housing, (not enough affordable housing), and healthcare. Thus buying new bonds and lowering interest rates further might stimulate the housing industry in helping additional buyers move from apartment living into buying their first home; thereby lowering the steep rise in apartment rents of the last several years. This might also stimulate loan growth for both commercial builders and banks now that some have started to up their commitment to consumer home loans. Moreover, with regard to healthcare, raising rates isn`t going to promote or reduce inflation as this inflation is purely institutional to the absolute structural nightmare that is the healthcare industry today. A major overhaul will be required in the healthcare business over the next five years. The recent college try at reform has been a total and unmitigated disaster; we have only begun to see the fallout from this failed policy initiative.

The Gang that couldn`t Shoot Straight

The Federal Reserve is increasingly looking like the scared kid who is egged on to show his bravery by jumping from a high cliff to regain his 'manhood' in the eyes of the cool kids only to make a reckless decision with negative consequences. Yes the Federal Reserve needed to raise rates, but they probably should have started 7 years ago. After 7 plus years of being 'Data Dependent' why now?

In case the Fed hasn`t been paying attention, the world has devolved into a full out currency war, what the ECB has done to devalue the Euro in 2015 is not in the United States best interests. It makes for bad Fed Policy to raise rates now, it puts the US at a competitive disadvantage. All one has to do is look at the hit to the retail sector from the drop in tourism spending of this year due to the stronger dollar and compare this with the latest economic upturn in the European economic data with a weaker Euro to realize that currency devaluation as a strategy works and confers a strategic advantage for countries.

Really Federal Reserve, you pick now of all times to raise rates? I think I know why Neel Kashkari was recently selected to head the Federal Reserve's regional bank in Minneapolis, he makes the rest of the brain dead zombie Fed Members feel 'comfortable' and not threatened by actually making competent and sound monetary decisions for the US economy.

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