Now that Atlanta Fed president Dennis Lockhart has been thoroughly discredited with his “sufficient momentum to hike as soon as April” thesis, Fed Chair Janet Yellen is on board with slower hikes.
In a speech today to the Economic Club of New York on The Outlook, Uncertainty, and Monetary Policy, Yellen stressed the need to go slow, specifically citing “other tools” if rates were to drop to zero again.
Yellen’s long-winded speech is not worth a read. Bloomberg did a respectable job of condensing it down to a few appropriate sound bites, but as is typical, Bloomberg never linked to the source as I did above.
Recall that in December and January, Yellen trumped up the case for four hikes this year. Today Yellen says Caution in Raising Rates Is ‘Especially Warranted’.
From Bloomberg …
Federal Reserve Chair Janet Yellen said it is appropriate for U.S. central bankers to “proceed cautiously” in raising interest rates because the global economy presents heightened risks.
The speech to the Economic Club of New York made a strong case for running the economy hot to push away from the zero boundary for the Federal Open Market Committee’s target rate.
“I consider it appropriate for the committee to proceed cautiously in adjusting policy,” Yellen said in the text of prepared remarks Tuesday. “This caution is especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric.”
Yellen said the FOMC “would still have considerable scope” to ease policy if rates hit zero again, pointing to forward guidance on interest rates and increases in the “size or duration of our holdings of long-term securities.”
“While these tools may entail some risks and costs that do not apply to the federal funds rate, we used them effectively to strengthen the recovery from the Great Recession, and we would do so again if needed,” she said.
“Other tools” are nothing more than forward guidance and a return to QE.
Forward guidance is useless as noted by the continual central bank rants about inflation targets. The Fed, Bank of Japan, and ECB have all given useless forward guidance on inflation.
Yellen was reluctant to use the word “QE” but that is precisely what “increases in the size or duration of our holdings of long-term securities” means.
Yellen noted the risks and costs of more QE but “would do so again if needed.”
Lockhart in Review – GDPNow – March 28
The above chart and further analysis from GDPNow Forecast Plunges to +0.6%; Tracking Lockhart’s Momentum with Pictures.
No Evidence QE Boosted Economy
Does QE boost the economy as Yellen stated?
If you think so, you may wish to consider St. Louis Fed official: “No evidence QE boosted economy”.
Lacy Hunt at Hoisington Management agrees.
- January 30, 2016: Lacy Hunt – “Inflation and 10-Year Treasury Yield Headed Lower”
- February 4, 2016: Lacy Hunt: Secular Low in Long-Term Treasury Bond Yields Remains Ahead.
From link number 1 above: “In essence the way in which it worked was by signaling that real assets were inferior to financial assets. The Fed, by going into an untested program of QE effectively ended up making things worse off,” said Hunt.
At best, the Fed temporarily shifted some demand forward by inflating financial assets.
In the process, the Fed created asset bubbles in equities and junk bonds, stimulated oil production via cheap financing to the point of a bust, and exacerbated problems of income inequality.
QE wasn’t worth the problems it created. But the Fed is prepared for more of it.
Mike “Mish” Shedlock
Tony Bennett said:
When all you have is a hammer …
Stuki Moi said:
A hammer would be one thing. Those things can at least be used for something productive. In Yellen’s case, it’s more of: If all you have, is a license to steal……
” QE wasn’t worth the problems it created. But the Fed is prepared for more of it. ”
So true. It is clear the FED has been politicized.
There have always been natural cycles, read the Bible, seven years of abundance, followed by seven years of famine. It is the natural sequence, obviously whether it is 5, 7, 10 years is irrelevant, it is simply put abundance is followed by downturn, which is indeed again followed by abundance. The natural cycle of things, as technology, education and the world grows.
That is the purpose of bankruptcy laws in the downturn, to weed out the bad, to allow the good to grow. Like a fire in the forest allowing new growth.
EG: Price of oil declines, oil company with tons of debt cannot borrow more and and is not able to properly utilize its assets, cuts back on R&D and Employees, oil company goes bankrupt, its assets are sold, another company buys them without all the debt and puts them to good use. The price of oil should in fact go down as assets are put to good use without all the debt. Everyone ( sans the oil debt holders ) profits with reduced energy cost.
The FED now appears to have a Goal of putting good money after bad. Never before would this be permitted. The corporations seem to have gotten to the FED to guarantee they do not enter bankruptcy. See the gifts to the politicians from near bankrupt companies and now you see the FED true purpose has been hijacked.
. No matter how you slice it, it cannot be denied. And is very simple.
Diminishing marginal returns.
QE 1 – OK some good investment, some corruption friends getting paid
QE 2, less so- corruption takes hold,
QE 3, near garbage filled with corruption,
QE 4 — – now the banks and scoundrels know how to take the money directly. No benefit.
QEternity. Until the Fed owns it all. Then, generations of .gov owned and controlled means of production.
When .gov spending reaches 51% of GDP, we will have reached the critical mass point. Not far to go from here, where some say total .gov spending is in the double digit range in percent of GDP already.
Socialism is a lot like toothpaste. Once it’s out of the tube, it can’t be put back. And we are most certainly over the event horizon here.
Ron J said:
“…the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric.”
Is that supposed to be code for non existent?
Ron J said:
“I consider it appropriate for the committee to proceed cautiously in adjusting policy,” Yellen said
Things are that bad, eh?
Zero Hedge headline yesterday: Dallas Fed Respondent Sums It Up: “Anyone Saying We’re Not In Recession Is Peddling Fiction”
They will not stop until a global currency crisis makes them stop.
Old Guy said:
QE back on the table is to boost the markets and not for us pleebs. Those with first access to free money are making a killing. Many have stated and have been mocked and basically called fringe nutcases about more QE coming and here it is. This is nothing more then to illegally boost the markets because they are out of crack and heroin. They need more and are addicted to it. Do not give it to them and the markets will fall.
We cannot have the markets fall dammit!!! People look there for the economy and if it falls the world will come to an end as we know it. You just cannot make this stuff up anymore.