POLL: Fed and interest rates

[shalab]

The markets tanked after the Fed chair communicated about relying on models and pretty much guaranteeing rate hikes next year. The yield curve has flattened further - https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield

 

Let us use this poll to figure out what the group is thinking

[EliG]

Yes, it had to be done, to assert Fed's independence after Trump's meddling on twitter.

 

 

[Cardboard]

LOL!

 

If that is the true reason then you prove my claim that Powell is an idiot.

 

Data is what should count, not making some assertion. Too many people depend on proper decision making.

 

My assumption is that their model is way too static and fails to take into consideration global impact on the economy or things like a very strong USD.

 

Cardboard

[Nomad]

I'm reminded here of the possibly apocryphal quotation from Zhou Enlai when asked about the impact of the French Revolution: It's too soon to tell.

 

That being said, I do think there has been too much focus on the interest rate normalization and less focus on the arguably more important process of balance sheet run-off. I think there now appears to be a general consensus among central bankers that quantitative easing tends to create significant distortions in asset prices. And they're probably right - unfortunately, much of the cash that has been pouring into the system since the financial crisis has not been used for productive investment. Just look at all of the companies buying back their stock instead of making capital expenditures and funding R&D. This spending does nothing to increase the size of the company's pie; it merely reshuffles who gets the forks. Meanwhile, on the ground, wage and productivity growth continue to be weak by historical standards.

 

I think the Powell et al would rather see short term pain in asset prices if it results in greater long-term stability for the system as a whole and have been tightening accordingly. In my personal opinion, that is probably the right calculation, but as with anything in markets, nobody knows.

[Liberty]

How about not having an opinion because fed policy is outside my circle of competence? I'd guess it's outside of the circle of many others here, including some of those with the strongest opinions.

[LC]

How about not having an opinion because fed policy is outside my circle of competence? I'd guess it's outside of the circle of many others here, including some of those with the strongest opinions.

 

I don't think you have to be an expert here. To use the WB quote about being approximately correct:

 

From a birds eye view the economy has been doing great under a low interest environment for what, 7 years? Therefore, time to start raising rates. That's my "approximately correct", 1000 ft view.

 

Regarding the minutiae as to "well they should've done XYZ 6 months ago or whatnot", well just seems like noise...trying to figure out if the guy on the scale is 200 lbs or 205 lbs.

[Liberty]

How about not having an opinion because fed policy is outside my circle of competence? I'd guess it's outside of the circle of many others here, including some of those with the strongest opinions.

 

I don't think you have to be an expert here. To use the WB quote about being approximately correct:

 

From a birds eye view the economy has been doing great under a low interest environment for what, 7 years? Therefore, time to start raising rates. That's my "approximately correct", 1000 ft view.

 

Regarding the minutiae as to "well they should've done XYZ 6 months ago or whatnot", well just seems like noise...trying to figure out if the guy on the scale is 200 lbs or 205 lbs.

 

Oh, I think you can have a 5-sec opinion like that. But to have an informed opinion on macro-economics, it's something you have to actively study for a while, and I haven't, and I don't think many here have.

[shalab]

I am surprised by how there are still more votes in support of the Fed. There are some that want even more rate hikes in 2019 - either the votes are politically motivated or people don't see what is going on. The 2018 economic gain in the US was because of the one time tax cut.

 

Canada has kept interest rates low (1.8%) eventhough there is a housing bubble.

 

https://www.theglobeandmail.com/real-estate/article-canadas-house-price-data-centre/

 

China has been cutting interest rates as well. Euro is at 0%.

 

Oil price futures 2019 - flat compared to 2018:

 

https://longforecast.com/oil-price-today-forecast-2017-2018-2019-2020-2021-brent-wti

 

Housing market cooling in 2019:

 

https://therealdeal.com/2018/12/26/us-housing-market-will-continue-to-cool-in-2019-redfin/

 

Car market under pressure:

 

https://www.bworldonline.com/mild-recovery-in-car-market-seen-in-2019-but-pressures-remain/

 

[John Hjorth]

Well, the poll does not tie well with the activity level in the Druckenmiller and Trump were right topic, right? [ : - ) ]

 

Getting back to "normal" interest territory in the US is not a bad thing at all. Yes, it creates volatility etc. [- perhaps even some pain some places -] in some markets right now, but then you avoid a multiplier effect on the pain now instead of it gets worse at a later point in time. [i think Viking has mentioned that earlier somewhere.]

 

It also - gradually - brings back the interest tool in the toolbox of the FED.

[shalab]

John - you are right that all else being equal, it is good for the fed to have the tools at their disposal.

 

However, it is not clear to me that they understand the economic machine and the interaction between various components.

 

A fed chief once said Ray Dalio had better statistics than the federal reserve, so I will be watching Ray Dalio closely.

 

Europe looks like it will have a secular decline for a long period of time - here is a projection of Germany's population in 2050.

 

https://www.pop.org/germany-to-shrink-by-10-million-people-by-2050/

 

 

Well, the poll does not tie well with the activity level in the Druckenmiller and Trump were right topic, right? [ : - ) ]

 

Getting back to "normal" interest territory in the US is not a bad thing at all. Yes, it creates volatility etc. [- perhaps even some pain some places -] in some markets right now, but then you avoid a multiplier effect on the pain now instead of it gets worse at a later point in time. [i think Viking has mentioned that earlier somewhere.]

 

It also - gradually - brings back the interest tool in the toolbox of the FED.

[shalab]

Ray Dalio on the fed rate hikes

 

https://www.cnbc.com/2018/11/15/billionaire-ray-dalio-fed-raised-rates-to-a-point-where-theyre-hurting-asset-prices.html

 

    Hedge fund billionaire Ray Dalio argues the Fed has raised rates to a point where they’re hurting asset prices.

    The central bank needs to start looking at monetary policy’s impact on asset prices before economic conditions, Dalio says.

    Dalio also laughs off the notion that the Fed needs to raise rates so it would have room to make cuts if the economy were to take a major downturn.

 

John - you are right that all else being equal, it is good for the fed to have the tools at their disposal.

 

However, it is not clear to me that they understand the economic machine and the interaction between various components.

 

A fed chief once said Ray Dalio had better statistics than the federal reserve, so I will be watching Ray Dalio closely.

 

Europe looks like it will have a secular decline for a long period of time - here is a projection of Germany's population in 2050.

 

https://www.pop.org/germany-to-shrink-by-10-million-people-by-2050/

 

 

Well, the poll does not tie well with the activity level in the Druckenmiller and Trump were right topic, right? [ : - ) ]

 

Getting back to "normal" interest territory in the US is not a bad thing at all. Yes, it creates volatility etc. [- perhaps even some pain some places -] in some markets right now, but then you avoid a multiplier effect on the pain now instead of it gets worse at a later point in time. [i think Viking has mentioned that earlier somewhere.]

 

It also - gradually - brings back the interest tool in the toolbox of the FED.

[Gregmal]

https://www.cnbc.com/2018/12/28/el-erian-hold-the-fed-accountable-for-its-messaging-not-rate-hike.html

 

This sums it up. I don't disagree with the hike, but the communication sucks and is tone deaf. Which IMO is Powell's way of trying to play politics and stick it to Trump....Which is more or less a "way to go asshole, stick it to Trump at the expense of the rest of the country"...

 

[John Hjorth]

Ray Dalio on the fed rate hikes

 

https://www.cnbc.com/2018/11/15/billionaire-ray-dalio-fed-raised-rates-to-a-point-where-theyre-hurting-asset-prices.html

 

    Hedge fund billionaire Ray Dalio argues the Fed has raised rates to a point where they’re hurting asset prices.

    The central bank needs to start looking at monetary policy’s impact on asset prices before economic conditions, Dalio says.

    Dalio also laughs off the notion that the Fed needs to raise rates so it would have room to make cuts if the economy were to take a major downturn. ...

 

shalab,

 

I actually had to read the quotation of Mr. Dalio three times and think a bit about it before posting this. Taking it verbatim [the second line], it could be understood as Mr. Dalio just wants the FED to divert from its mandate. [And I don't think that it should be understood that way, actually, but that was how I read it while reading it the first time.] After reading it the third time, I think it means, that asset prices effects from FED rate decisions are a logical and natural part of considering the total effects on the economy via the feedback loops to the real economy from the financial markets, and thus such effects should be taken into consideration under the FED's interest rate decisions. [And that is actually also what I get from reading Cardboard's last post in this topic.]

 

The reason for this is there exist feedback loops from asset prices to the activity level in the real economy [i.e.: think real estate].

 

If this is what Mr. Dalio meant, then I think every CoBF member agree on that.

 

With regard to Mr. Dalio's last sentence: I think that should be read exactly the same way as what I have phrased above about the first two lines. It is a fact [at least to me], that it must  easier for the FED to be downward flexible with interest rates, if you already are in an interest rate territory, where being downward flexible with interest rates don't bring in a territory, where interest rates doesn't bring you in a territory, where the FED start screwing up healthy incentives & things by creating a negative price on money. So, in short: Yes, it's "just" a side effect, but to me certainly not a laughable one.

 

- - - o 0 o - - -

 

Edit: And after reading it the fourth time, I just think : "Yes, naturally, Mr. Dalio is just yet another money manager with his personal incentives."

[John Hjorth]

https://www.cnbc.com/2018/12/28/el-erian-hold-the-fed-accountable-for-its-messaging-not-rate-hike.html

 

This sums it up. I don't disagree with the hike, but the communication sucks and is tone deaf. Which IMO is Powell's way of trying to play politics and stick it to Trump....Which is more or less a "way to go asshole, stick it to Trump at the expense of the rest of the country"...

 

Greg,

 

Personally, I think : "Is Mr. Powell really that bad at communication?" [but that's naturally just me. ...]

 

To me, in short, being FED chairman is a Uriah post. [Please don't take that too seriously about who screws who! [ : - ) ]]

 

Also, CNBC - Federal Reserve [June 13^th 2018] : Fed’s Powell says he will begin news conferences following each meeting starting in January.

[shalab]

John, appreciate your thoughts

 

Dalio could be wrong overall - but Dalio is right about asset price weakness.

 

Asset prices have contracted in the last quarter - in all major metros from LA, DC, Boston, Chicago and Seattle. As we know, the stock prices have also dropped.

 

https://www.redfin.com/blog/data-center

 

Overall, the projection for next year is for tepid rise of about 3%. One can compare against the asset prices in Canada as an example:

 

https://www.livingin-canada.com/house-prices-canada.html

 

Regarding rate hikes next year:

 

https://www.cnbc.com/video/2018/12/31/we-are-at-neutral-rate-fed-shouldnt-go-higher-strategist.html

 

Economy activity contracts in December:

 

https://www.bloomberg.com/news/articles/2018-12-31/humming-u-s-factories-end-2018-on-a-sour-note-amid-trade-war?srnd=premium

 

Ray Dalio on the fed rate hikes

 

https://www.cnbc.com/2018/11/15/billionaire-ray-dalio-fed-raised-rates-to-a-point-where-theyre-hurting-asset-prices.html

 

    Hedge fund billionaire Ray Dalio argues the Fed has raised rates to a point where they’re hurting asset prices.

    The central bank needs to start looking at monetary policy’s impact on asset prices before economic conditions, Dalio says.

    Dalio also laughs off the notion that the Fed needs to raise rates so it would have room to make cuts if the economy were to take a major downturn. ...

 

shalab,

 

I actually had to read the quotation of Mr. Dalio three times and think a bit about it before posting this. Taking it verbatim [the second line], it could be understood as Mr. Dalio just wants the FED to divert from its mandate. [And I don't think that it should be understood that way, actually, but that was how I read it while reading it the first time.] After reading it the third time, I think it means, that asset prices effects from FED rate decisions are a logical and natural part of considering the total effects on the economy via the feedback loops to the real economy from the financial markets, and thus such effects should be taken into consideration under the FED's interest rate decisions. [And that is actually also what I get from reading Cardboard's last post in this topic.]

 

The reason for this is there exist feedback loops from asset prices to the activity level in the real economy [i.e.: think real estate].

 

If this is what Mr. Dalio meant, then I think every CoBF member agree on that.

 

With regard to Mr. Dalio's last sentence: I think that should be read exactly the same way as what I have phrased above about the first two lines. It is a fact [at least to me], that it must  easier for the FED to be downward flexible with interest rates, if you already are in an interest rate territory, where being downward flexible with interest rates don't bring in a territory, where interest rates doesn't bring you in a territory, where the FED start screwing up healthy incentives & things by creating a negative price on money. So, in short: Yes, it's "just" a side effect, but to me certainly not a laughable one.

 

- - - o 0 o - - -

 

Edit: And after reading it the fourth time, I just think : "Yes, naturally, Mr. Dalio is just yet another money manager with his personal incentives."

[Spekulatius]

The Redfin chart shows some seasonal cyclicity for real estate prices, but no proof of a downturn yet. It is normal for RE to rise in early in the year and and recede a bit in fall. It‘s clear that RE has slowed, but I don’t think this is visible from the charts yet. Besides that, the Fed supposedly doesn’t care about asset prices, also I think it should at least to take into account housing prices, because they translate into cost of living for the majority of people ( 2/3 of the people in the US own rather than rent). The only central bank that actively looks at RE prices (to my knowledge)  is the central bank of Hongkong, probably, because RE is such an important part of their economy.

[rkbabang]

How about not having an opinion because fed policy is outside my circle of competence? I'd guess it's outside of the circle of many others here, including some of those with the strongest opinions.

 

It's outside the feds circle of competence too. Interests rates, the time value of money, are a market phenomenon. You might as well have a government board set the daily price of Avocados.

[LC]

How about not having an opinion because fed policy is outside my circle of competence? I'd guess it's outside of the circle of many others here, including some of those with the strongest opinions.

 

It's outside the feds circle of competence too. Interests rates, the time value of money, are a market phenomenon. You might as well have a government board set the daily price of Avocados.

 

Can I ask your opinion on the Fed slashing interest rates in the 2009-2013 period. This was most certainly not a market phenomenon, as credit was drying up. The Fed's action essentially re-started the US economy and prevented a depression. Beautiful deleveraging and all that. Do you think they were wrong, or lucky, or something else?

[maybe4less]

How about not having an opinion because fed policy is outside my circle of competence? I'd guess it's outside of the circle of many others here, including some of those with the strongest opinions.

 

It's outside the feds circle of competence too. Interests rates, the time value of money, are a market phenomenon. You might as well have a government board set the daily price of Avocados.

 

Can I ask your opinion on the Fed slashing interest rates in the 2009-2013 period. This was most certainly not a market phenomenon, as credit was drying up. The Fed's action essentially re-started the US economy and prevented a depression. Beautiful deleveraging and all that. Do you think they were wrong, or lucky, or something else?

 

It was a market phenomenon. The demand for risk-free assets soared, pushing down interest rates. The Fed was following/supporting that.

[rkbabang]

How about not having an opinion because fed policy is outside my circle of competence? I'd guess it's outside of the circle of many others here, including some of those with the strongest opinions.

 

It's outside the feds circle of competence too. Interests rates, the time value of money, are a market phenomenon. You might as well have a government board set the daily price of Avocados.

 

Can I ask your opinion on the Fed slashing interest rates in the 2009-2013 period. This was most certainly not a market phenomenon, as credit was drying up. The Fed's action essentially re-started the US economy and prevented a depression. Beautiful deleveraging and all that. Do you think they were wrong, or lucky, or something else?

 

Nothing the fed does is a market phenomenon.  It is government setting rates. No different from the USSR setting prices in their economy either by their own opinions or sometimes by looking at ads in London Newspapers. If the rate is set by the fed then it isn't being set by the market. If the price of Avocados was set by a government board and you asked me "What do you think about the Federal Avocado Board reducing prices in 2009-2013?  Did they do the right thing?"  My answer would be the same.  I don't know. The market should be setting the rate not some board of bureaucrats/experts.

 

[shalab]

Market expecting the fed to stay pat on rates - with 80% probability

 

https://www.wsj.com/articles/investors-are-betting-that-the-fed-hits-pause-on-rate-hikes-11546449520?mod=hp_lead_pos2#comments_sector

 

Apple CEO also came out and said the dollar appreciation is impacting profits.

 

[LC]

Nothing the fed does is a market phenomenon.  It is government setting rates. No different from the USSR setting prices in their economy either by their own opinions or sometimes by looking at ads in London Newspapers. If the rate is set by the fed then it isn't being set by the market. If the price of Avocados was set by a government board and you asked me "What do you think about the Federal Avocado Board reducing prices in 2009-2013?  Did they do the right thing?"  My answer would be the same.  I don't know. The market should be setting the rate not some board of bureaucrats/experts.

My point is that it was a period of time where market pricing would have made things worse.

 

Credit was incredibly tight. If the market had set rates, they would have risen or stayed at spiked levels:

 

https://voxeu.org/article/credit-conditions-and-great-trade-collapse

 

Interbank rates (here, the one-month rate) spiked in September 2008 in many economies, as banks became extremely averse to lending and the supply of financing tightened. There are nevertheless key differences in the severity and timing of the credit crunch. In countries such as Germany and Bulgaria, the interbank rate was on an upward trend until an abrupt reversal in November 2008. In contrast, these rates were declining from a much earlier date in Canada and Singapore, reflecting earlier interventions made by central bankers there to cope with the impending downturn.

 

Our results suggest that the impact of credit conditions was sizeable. The decline in trade volumes would have been about twice as large in percentage terms had interbank rates instead remained at the high levels of September 2008 throughout the rest of our sample period.

 

 

 

Central Banker's/Avocado's decision to cut rates has been universally acclaimed and is evidence of a Central Bank's positive contribution.

[JimBowerman]

 

 

Nothing the fed does is a market phenomenon.  It is government setting rates. No different from the USSR setting prices in their economy either by their own opinions or sometimes by looking at ads in London Newspapers. If the rate is set by the fed then it isn't being set by the market. If the price of Avocados was set by a government board and you asked me "What do you think about the Federal Avocado Board reducing prices in 2009-2013?  Did they do the right thing?"  My answer would be the same.  I don't know. The market should be setting the rate not some board of bureaucrats/experts.

 

The fed controls the supply of base money, so how can the market ever truly be setting rates?  If you're going to have a national currency, someone has to decide how quickly to grow money supply, no?

[rkbabang]

 

 

Nothing the fed does is a market phenomenon.  It is government setting rates. No different from the USSR setting prices in their economy either by their own opinions or sometimes by looking at ads in London Newspapers. If the rate is set by the fed then it isn't being set by the market. If the price of Avocados was set by a government board and you asked me "What do you think about the Federal Avocado Board reducing prices in 2009-2013?  Did they do the right thing?"  My answer would be the same.  I don't know. The market should be setting the rate not some board of bureaucrats/experts.

 

The fed controls the supply of base money, so how can the market ever truly be setting rates?  If you're going to have a national currency, someone has to decide how quickly to grow money supply, no?

 

Bingo.

 

Money should also be a market phenomenon.

 

[shalab]

Looks like sanity is prevailing with some folks - Dallas Fed thinks we shouldn't raise rates:

 

https://www.cnbc.com/2019/01/03/robert-kaplan-says-central-bank-should-pause-rate-hikes-amid-turmoil-in-markets.html

 

WSJ chimes in with the prospect for rate hikes -

 

A bond-market indicator also is sending a bad signal. The difference between the three-month Treasury bill and the 10-year note has narrowed considerably. With the former at 2.41% and the latter at 2.58% midday Thursday, an inversion in the yield curve is a real possibility.

 

Inversions have often preceded recessions, even as economists still debate whether they correlate with downturns, or cause them. A recent San Francisco Fed paper said a sustained three-month to 10-year inversion is the most reliable market indicator of recession.

https://www.wsj.com/articles/analysis-bad-news-barrage-dims-hopes-fed-can-deliver-2019-rate-hikes-11546545691