Get Ready for the Mother of All Corrections

From Jeremy Warner, at the Telegraph U.K., "Get ready for the mother of all stock market corrections once central banks cease their money printing."

A great piece.

Read it all at the link.

Federal Reserve's Missteps Fueled Populist Disillusion on the Economy and Political Class

I don't know? Seems like blaming the Fed is letting a lot of people off the hook.

Interesting, in any case.

At WSJ, "Years of Fed Missteps Fueled Disillusion With the Economy and Washington":

Once-revered central bank failed to foresee the crisis and has struggled in its aftermath, fostering the rise of populism and distrust of institutions.

In the past decade Federal Reserve officials have been flummoxed by a housing bubble that cratered the financial system, a long stretch of slow growth they failed to foresee and inflation persistently undershooting their goal. In response they engineered unpopular financial rescues, launched start-and-stop bond buying and delayed planned interest-rate boosts.

“There are a lot of things that we thought we knew that haven’t turned out quite as we expected,” said Eric Rosengren, president of the Federal Reserve Bank of Boston. “The economy and financial markets are not as stable as we previously assumed.”

In the 1990s, a period known in economics as the “Great Moderation,” it seemed the Fed could do no wrong. Policy makers and voters saw it as a machine, with buttons officials could push to heat or cool the economy as needed. Now, after more than a decade of economic disappointment, the central bank confronts hardened public skepticism and growing self-doubt about its own understanding of how the U.S. economy works.

For anyone seeking to explain one of the most unpredictable political seasons in modern history, with the rise of Donald Trump and Bernie Sanders, a prime suspect is public dismay in institutions guiding the economy and government. The Fed in particular is a case study in how the conventional wisdom of the late 1990s on a wide range of economic issues, including trade, technology and central banking, has since slowly unraveled.

Once admired globally for their command of the economic system, central bankers now are blamed by the left and right for bailouts during the financial crisis and for failing to foresee and manage forces suffocating the global economy in its aftermath.

Populist protest movements called “Fed Up,” “End the Fed” and “Occupy Wall Street” lashed out at the bank’s policies, and in the case of End the Fed, its very existence. Lawmakers of both parties want to subject it to more scrutiny or curb its powers.

David Einhorn, founder of the hedge fund Greenlight Capital, cites the fable of the ant and the grasshopper, in which a famished grasshopper begs a thrifty ant for help in wintertime after failing to stockpile food during warmer weather.

“We had the grasshoppers party from 2002 to 2007 and winter came and the Fed bailed them out,” said Mr. Einhorn, referring to financial firms and individuals who lived above their means. “Now the ants are pissed.”

The Fed’s struggles will be on display from Friday to Sunday when it gathers for an annual retreat in Jackson Hole, Wyo. On issues of growth, inflation, interest rates, unemployment and how to fight a recession, basic assumptions inside the central bank’s complex computer models have been upended.

“I certainly myself couldn’t have imagined six, seven years ago that we would be employing the policies we are now,” Fed Chairwoman Janet Yellen said to a packed ballroom in New York earlier this year. She lamented the government has leaned so heavily on the Fed to stimulate the economy while tax and spending policies were stymied by disagreements between Congress and the White House.

Many Fed officials believe—and private economists agree—their responses to the crisis helped avert a second Depression, outweighing any unfairness in the bailout process. Fed leaders believe low rates helped, too. “Inflation would be lower and unemployment higher now by noticeable amounts had we not employed those policies,” Ms. Yellen said in March.

Regardless, confidence in the central bank’s leadership has dropped. An April Gallup poll found 38% of Americans had a great deal or fair amount of confidence in Ms. Yellen, while 35% had little or none. In the early 2000s, confidence in Chairman Alan Greenspan often exceeded 70%...

Keep reading.

The Mystery of Missing Inflation

Following-up, "Federal Reserve Raises Short-Term Interest Rates."

At the Wall Street Journal, "The Mystery of Missing Inflation Weighs on Fed Rate Move":

Federal Reserve officials this week are expected to raise interest rates for the first time in nine years on the expectation that employment and inflation will hit targets reflecting a healthy U.S. economy.

But Fed officials face a troubling question: Jobs are on track, but inflation isn’t behaving as predicted and they don’t know why. Unemployment has fallen to 5%, a figure close to estimates of full employment, while inflation remains stuck at less than 1%, well below the Fed’s 2% target.

Central bank officials predict inflation will approach their target in 2016. The trouble is they have made the same prediction for the past four years. If the Fed is again fooled, it may find it raised rates too soon, risking recession.

Low inflation—and low prices—sound beneficial but can stall growth in wages and profits. Debts are harder to pay off without inflation shrinking their burden. For central banks, when inflation is very low, so are interest rates, leaving little room to cut rates to spur the economy during downturns.

The Fed’s poor record of predicting inflation has set off debate within the central bank over the economic models used by central bank officials. Fed Chairwoman Janet Yellen, in a 31-page September speech on the subject, acknowledged “significant uncertainty” about her prediction that inflation would rise. Conventional models, she said, have become “a subject of controversy.”

Ms. Yellen faces dissent from Fed officials who want to keep interest rates near zero until there is concrete evidence of inflation rising, voices likely to try to put a drag on future rate increases.

While the job market is near normal, “I am far less confident about reaching our inflation goal within a reasonable time frame,” Charles Evans, president of the Chicago Fed, said in a speech this month. “Inflation has been too low for too long.”

For a generation, economists believed central banks had control over the rate of inflation and could use it as a policy guide: If inflation was too low, then lower interest rates could boost the economy; high inflation could be checked by raising rates.

Inflation’s about-face

Today’s conundrum over low inflation marks a turnabout. Former Fed Chairman Paul Volcker tamed persistently high double-digit inflation in the 1980s, after a decade of stagflation—a period of rising prices, slow growth and high unemployment that confounded economists. For years afterward, central banks adopted slow and steady inflation growth targets of 2%.

The Fed’s preferred measure of inflation rose an average of 2.038% a year between 1992 and 2007, bolstering confidence that economists understood how inflation worked. The price of a Fourth of July barbecue, for example, closely tracked the 2% annual target over that period: Average prices for a pound of ground beef went to $2.70 from $1.91; American cheese climbed to $3.91 a pound from $3.01; a 16-oz bag of potato chips rose to $3.65 from $2.84. Wages also rose modestly so workers kept pace.

Central bankers “thought that it must be their own doing,” said Jon Faust, the director of the Center for Financial Economics at Johns Hopkins University, who served two stints at the Fed during that period. “We thought we figured out macro policy, and we could deliver low, stable inflation and stable output and low unemployment and all things good.”

The financial crisis deflated that confidence. Confronted by low inflation and sluggish economic growth, the U.S. and U.K. nearly seven years ago—and the eurozone three years later—slashed interest rates to near zero...

Raising rates might restore a little stability to the economy, especially on housing. It's not a bad thing. And for goodness' sake, a 1/4 point increase is virtually unnoticeable.

More.

Federal Reserve Raises Short-Term Interest Rates

It's not that big of a deal. And it wasn't unexpected. The Fed's been telegraphing this move for some time.

At WSJ, "Quarter-Point Increase Marks First Rise in Almost a Decade."

And, "Fed Raises Rates After Seven Years at Zero, Expects ‘Gradual’ Tightening Path":

The Federal Reserve said it would raise its benchmark interest rate from near zero for the first time since December 2008, and emphasized it will likely lift it gradually thereafter in a test of the economy’s capacity to stand on its own with less support from super-easy monetary policy.

Fed officials said they would move up the federal funds rate by a quarter percentage point on Thursday, to between 0.25% and 0.5%, and would adjust their strategy as they see how the economy performs. At these low rates, they added, policy remains accommodative.

“The [Fed] expects economic conditions will evolve in a manner that will warrant only gradual increases in the fed funds rate,” the Fed said in a statement following its two-day meeting. To hammer home this point, officials added in a second place in their statement that they anticipated “gradual adjustments” in rates.

Fed Chairwoman Janet Yellen won a unanimous vote.

New projections show officials expect their benchmark rate to creep up to 1.375% by the end of 2016, according to the median projection of 17 officials, to 2.375% by the end of 2017 and 3.25% in three years. That implies four quarter-percentage-point interest rate increases next year, four the next and three or four the following.

That is a slower pace than projected by officials in September and much slower compared to earlier series of Fed rate increases. In the 2004-06 period, for example, the Fed raised rates 17 times in succession, an approach Fed officials don’t intend to repeat. In September seven Fed officials believed the fed funds rate could rise to 3% or higher by 2017; now just four do.

When the Fed moves next will depend importantly on how inflation evolves. The Fed’s preferred measure of inflation has run below its 2% objective for more than three years. The central bank focused extra attention on the inflation outlook in its statement, saying it would “carefully monitor” actual and expected progress toward the goal. This point implied the Fed will be reluctant to raise rates again unless it sees inflation actually moving up. For now, officials said they were “reasonably confident” inflation would rise.

Ms. Yellen, in a speech and in testimony earlier this month, said a rate increase represented a vote of confidence in the U.S. economy after the deep 2007-09 recession and a long, often-disappointing recovery. Still, uncertainties abound about how markets and the economy will respond in the months ahead.

Any number of factors might throw the central bank off its plans...

Keep reading.

Republican Senators Challenge Janet Yellen

I taught congressional oversight today, so this is interesting.

At NYT, "With Elections Nearing, Republican Senators Take On Yellen on Jobs":

WASHINGTON — Senate Republicans on Thursday sharply questioned Janet L. Yellen, chairwoman of the Federal Reserve, about the persistence of unemployment and the slow pace of the economic recovery during a hearing that highlighted the growing prominence of election-year considerations on Capitol Hill.

The hearing before the Senate Budget Committee flipped the standard script of congressional sessions in recent years with Ms. Yellen and her predecessor, Ben S. Bernanke. Generally, Democrats are the ones who fret about unemployment and the weak economy, while Republicans question whether the Fed will lose control of inflation or destabilize financial markets.

With the midterm elections approaching, however, Democrats are increasingly eager to claim credit for the progress of the economic recovery, while Republicans are emphasizing that the recovery remains weak and incomplete.

Senator Jeff Sessions of Alabama, the ranking Republican on the committee, was particularly critical of the Fed’s performance, sharply questioning Ms. Yellen’s statement that the labor market was showing signs of progress.

“We’ve got fewer people working today than there were in 2007 and the population has increased by 15 million,” he said. “So how is this progress? Please tell me.”

When Ms. Yellen responded that things were getting better, but were still not good, Mr. Sessions suggested the Fed should not overstate the improvement. “From the point of view of working Americans, this is the slowest, most anemic recovery that we’ve seen, ever,” he said. “Whatever we’re doing, we need to get better at it.”

More.

Here's Sessions' opening statement, "Jeff Sessions: Fed Stimulus Has Failed American Workers."

And a brief Yellen clip here (love the accent, heh), "Yellen Details Economic Views to Senate Panel."