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Debate on the Fed's Recent Move

ResponsiblyIrresponsible
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12/18/2015 12:53:41 PM
Posted: 11 months ago
No one at all? *Clearly* this forum isn't comprised solely of doves and "End the Fed" looney birds. Someone must think this decision was a good idea--hell, you need not even be a Fed apologists.

I'm waiting.
~ResponsiblyIrresponsible

DDO's Economics Messiah
ColeTrain
Posts: 4,292
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12/18/2015 2:06:10 PM
Posted: 11 months ago
At 12/18/2015 3:43:07 AM, ResponsiblyIrresponsible wrote:

Gotta move this to the Debate.org forum... or politics... something that actually gets traffic from remotely active and competent users. ;)

No, I'm kidding. :P But really, this forum won't sow the results you wish to reap.
"The right to 360 noscope noobs shall not be infringed!!!" -- tajshar2k
"So, to start off, I've never committed suicide." -- Vaarka
"I eat glue." -- brontoraptor
"I mean, at this rate, I'd argue for a ham sandwich presidency." -- ResponsiblyIrresponsible
"Overthrow Assad, heil jihad." -- 16kadams when trolling in hangout
"Hillary Clinton is not my favorite person ... and her campaign is as inspiring as a bowl of cottage cheese." -- YYW
ResponsiblyIrresponsible
Posts: 12,398
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12/18/2015 2:43:14 PM
Posted: 11 months ago
At 12/18/2015 2:06:10 PM, ColeTrain wrote:
At 12/18/2015 3:43:07 AM, ResponsiblyIrresponsible wrote:

Gotta move this to the Debate.org forum... or politics... something that actually gets traffic from remotely active and competent users. ;)

No, I'm kidding. :P But really, this forum won't sow the results you wish to reap.

I know, but it doesn't belong in the DDO forum (I'm not Mikal, so I don't spam stupid sh1t in the main forum), and monetary policy and politics should--they don't, but they should--have absolutely nothing to do with each other, ever.

I expected it to get some results.. just not from competent users: probably a few "End the Fed' whackjobs who doesn't even understand that Milton Friedman is *not* their ally.
~ResponsiblyIrresponsible

DDO's Economics Messiah
ColeTrain
Posts: 4,292
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12/18/2015 6:08:56 PM
Posted: 11 months ago
At 12/18/2015 2:43:14 PM, ResponsiblyIrresponsible wrote:
At 12/18/2015 2:06:10 PM, ColeTrain wrote:
At 12/18/2015 3:43:07 AM, ResponsiblyIrresponsible wrote:

Gotta move this to the Debate.org forum... or politics... something that actually gets traffic from remotely active and competent users. ;)

No, I'm kidding. :P But really, this forum won't sow the results you wish to reap.

I know, but it doesn't belong in the DDO forum (I'm not Mikal, so I don't spam stupid *censored* in the main forum), and monetary policy and politics should--they don't, but they should--have absolutely nothing to do with each other, ever.

I expected it to get some results.. just not from competent users: probably a few "End the Fed' whackjobs who doesn't even understand that Milton Friedman is *not* their ally.

Lol... okay..
"The right to 360 noscope noobs shall not be infringed!!!" -- tajshar2k
"So, to start off, I've never committed suicide." -- Vaarka
"I eat glue." -- brontoraptor
"I mean, at this rate, I'd argue for a ham sandwich presidency." -- ResponsiblyIrresponsible
"Overthrow Assad, heil jihad." -- 16kadams when trolling in hangout
"Hillary Clinton is not my favorite person ... and her campaign is as inspiring as a bowl of cottage cheese." -- YYW
walker_harris3
Posts: 273
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1/26/2016 8:10:46 PM
Posted: 10 months ago
I think it was a very foolish move by Mrs. Yellon, and really makes you wonder why she only raised interest rates to a fourth of a percent, especially after 7 years of 0%. This obviously means that the Fed was throughout those 7 years wholly unconfident in our economy to raise the rates. Then you can only ask yourself, is raising rates by .25% really showing confidence in your economy? Absolutely not. This great recovery that Obama continuously preaches, never happened. If it did, the Fed would've raised rates! Look what happens when they did raise rates, even by a very small amount. The worst start of the stock market in the history of the stock market. The Obama administration is clearly in propaganda mode. In light of this election cycle, Obama is worried that a huge economic recession coming in the last year of his presidency will alienate all the "progress," and "change" that supposedly occurred under his administration. Many cite the 2008 financial crisis under Bush's administration a huge reason a Democrat was put into office. Obama clearly knows this, and so does Yellon. They will pull all stops (QE4) to make sure that the impending gigantic economic recession will not occur under Obama, but under the next president. It's really sad that the mainstream media completely ignores all the facts and continues to spew bulls*** Obama propaganda, completely ignoring all of the economic indicators that we are pretty much already in a recession. Obama is the real peddler of fiction in this scenario, not the economic realists not living in fantasy land like our president.
ResponsiblyIrresponsible
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1/26/2016 8:31:02 PM
Posted: 10 months ago
At 1/26/2016 8:10:46 PM, walker_harris3 wrote:
I think it was a very foolish move by Mrs. Yellon, and really makes you wonder why she only raised interest rates to a fourth of a percent, especially after 7 years of 0%.

It doesn't make me wonder at all: she said they would move gradually because of still-low inflation and considerable downside risks to the outlook for inflation (disintegrating global economy, low inflation expectations, uncertainty over the inflation-slack relationship over even over the amount of slack, etc). Moving more than 25 bps would have spooked financial markets, and Yellen obviously wants to avoid that.

This obviously means that the Fed was throughout those 7 years wholly unconfident in our economy to raise the rates.

This isn't exactly true: that suggests that the Fed controls interest rates, or that interest rates are low because of the Fed. Bernanke has written about this extensively: the Fed cannot, on a more than temporary basis, willfully nudge interest rates up or down. They can only follow the equilibrium rate, which is a function of underlying fundamentals. Rates are low because the economy has been so weak for so long.

Then you can only ask yourself, is raising rates by .25% really showing confidence in your economy? Absolutely not.

Ah, the "confidence fairy"... where have I heard this before?

The equilibrium rate, while not directly observable, is an objective fact: there is no silly, make-believe "confidence effects" to be had from raising interest rates, unless you really think the Fed has private information that the markets don't have. That would only be the case if the Fed did a truly piss-poor job at communicating its reaction function--and, even then, markets are pricing in far fewer rate hikes even though the Fed is appearing much more "confident" by projecting 4. That unto itself is the best possible refutation of the confidence-fairy argument: markets just don't by it, and they determine the actual transmission of monetary policy to the real economy. If markets think the Fed is following a policy that is far too loose, NGDP expectations fall: that means the economy actually falls into a deeper hole.

There is literally nothing to be gained -- no confidence effects, "no ammunition," I've heard it all, NOTHING -- from raising rates, and especially from raising more than 25.

This great recovery that Obama continuously preaches, never happened.

Ahhh, mixing in political undertones. That really, really irks me.

Obama had nothing to do with this "great recovery," but without question it was the type of recovery we would expect from a deep financial crisis and the duration actually was SHORTER than what Rogoff and Reinhart's research on this suggests it would be had we followed the historical pattern. The reason it was so long was that the accumulation of private-sector debt led people to pay down their longstanding debt burdens in lieu of consuming, and that kept equilibrium rates down into negative territory for an exceptional period of time--beyond the reach of unconventional monetary policy. Obama, likewise, had nothing to do with it.

But, no, you're wrong: the unemployment rate has been cut in half from its 09 peak, most of the remaining "hidden slack" isn't actually hidden slack, but is probably structural--hysteresis, demographics, spike in educational enrollment, etc.--that is out of the control of the Fed. The economy is basically growing on trend, consistent with a new structural normal of something like 2 percent--which isn't exactly all that pretty, but it's something.

And, in raising rates, the Fed acknowledged this progress, but nevertheless is dumbfounded by the lack of a pickup in inflation when all of the other variables -- e.g., labor market -- appear to be essentially normal, which is why they want to move so slowly.

Ironically, raising rates by more than 25 would make this so-called non-recovery even freaking worse.

If it did, the Fed would've raised rates!

They did. The domestic recovery is largely insulated from, say, global uncertainty, but that sheer uncertainty itself merits cautions when the typical historical relationship between inflation and slack has cooled off. Obama can't exactly do anything if oil prices tank and send inflation spiraling downward to something like 0.

Look what happens when they did raise rates, even by a very small amount. The worst start of the stock market in the history of the stock market.

Again, reasoning from a price change--and the worst KIND of reasoning from a price change: this is one where you work backwards from your aversion to the Fed. If stock prices were doing great at the moment--as they did the day the Fed *did* raise rates--you wouldn't credit the Fed; but, because they're doing so poorly due to factors totally out of the Fed's control (China, falling oil, corporate earnings, manufacturing perhaps--though the Fed has no control over the shifting composition of the economy, and largely 'looks through' this number in favor of looking at services, which are a far better metric of underlying fundamentals--etc), you'll selectively condemn Fed policymakers when they've done absolutely zilch since December, when things were a whole lot better. They even published a super-dovvy statement, which is perhaps why financial markets rallied.

Not to mention, your conclusion is totally out of step with fed funds futures prices--again, if the volatility were a "correction" due to the expectation of future rate hikes (and the reason there were hardly any movement in financial markets in December is because it was "priced in"), they would be projecting more rate hikes. They're not: they expect the Fed to cool off. The 10-year has also dipped below 2 a few times in recent weeks, totally out of step with the expectation that the Fed is going to slam on the breaks.

[ Giant block of bullsh1t on Obama, and Yellen, and the Illimunati]

This is just complete, incomprehensible fcking dribble that you probably read on some propaganda website like ZeroHedge. This is clear evidence--as are my above refutations--that you haven't the faintest idea of what you're talking about and conflating issues as fundamental as the state of the economy and the Obama Administration's role. The underpinning, of course, is a total lack of understanding of how the economy works, what indicators we ought to look at, the influence of the Fed on market prices and what we can readily glean from them, and how exactly we could tell whether the economy is "doing well."

Unlike you, I've studied this in a lot of depth--I'm pretty fcking accomplished on it, actually. I can tell you, without a shadow of a doubt, that you have no idea what you're talking about and should just stop.
~ResponsiblyIrresponsible

DDO's Economics Messiah
slo1
Posts: 4,320
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1/29/2016 1:28:31 PM
Posted: 10 months ago
RI,

I think quite honestly the Fed was feeling pressure that rates have to go up if just because they need to reload their gun. The bigger issue is how can they deleverage their balance sheet by selling treasuries and mortgage securities they own

Now that the world economies, China and other are pressured, oil is low, it looks like they are on hold.

If recession were to hit the US would be in trouble as their tool set to influence the economy is very limited. They have been waiting 6 years to start raising interest rates and we are not any closer as deflation remains the biggest threat.

We have created a modern model where business is normal when cheap credit is growing and sustaining the economy, so much that we can't even deleverage debt to get back to a growth cycle.

All the gold bugs and rail against the Fed printing money types are wrong. Inflation is not the threat because we can't get past the threat of deflation due to policies including taxation and lack of controls that encourage excessive risk taking and debt growth.
ResponsiblyIrresponsible
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2/4/2016 1:57:21 AM
Posted: 10 months ago
At 1/29/2016 1:28:31 PM, slo1 wrote:
RI,

I think quite honestly the Fed was feeling pressure that rates have to go up if just because they need to reload their gun.

I certainly hope this wasn't the case, because it just isn't true--there is absolutely no ammunition to be gained by raising nominal rates. Equilibrium rates are endogenous functions of the state of the economy, namely financial conditions, and obviously those tighten considerably after the Fed hikes; suggesting that they gain ammunition from a hike in nominal rates, rather than in the equilibrium rates (which is a function of looser, not tighter, policy) is to hold constant the economic conditions that would have prevailed in the absence of such a rate hike and casually nudge the counterfactual nominal rate upward.

John Taylor made a similar argument recently--and his rule, notwithstanding the inertial coefficient and assuming a fairly stable intercept term, would've recommended a funds rate of about 1.5 percent. Obviously he doesn't get to take credit for the economic progress that's taken place over the past year (have his cake) *in the context of higher nominal rates* (eating it too).

The bigger issue is how can they deleverage their balance sheet by selling treasuries and mortgage securities they own

I see this as an issue further out -- perhaps 2017 or 2018. They indicated in their December statement, probably as a way to entice Lael Brainard (who was the only policymaker on the Fed that I know of who advocated this) to vote for liftoff, that they wouldn't begin to wind down reinvestment of principle until funds-rate normalization was well underway (and the argument, as I understand it, was that an increase in *equilibrium rates* that merited a proportional rise in the funds rate would give them the ammunition they need to begin to wind down reinvestment). Even then, it'll probably take far longer for them to actually physically sell off their portfolio.

To be perfectly honest, I'm sort of with Bernanke on this: I'd consider keeping it elevated in perpetuity. Their estimates for the long-run funds rate (which are far, far too optimistic) assume a steady-state balance sheet, but they don't have to: the literature suggests that permanent monetary injections are a plausible policy tool at the ZLB, the frequency of which will be far greater in the future per given shock. So I see no real reason to rush into unwinding the balance sheet when QE will be a necessary policy tool, anyway--not to mention, the idea that they'll have this smooth rate normalization that will actually allow them to start selling off, even though this has been something like the fourth longest expansion on record (which isn't to say that we're long overdue as much as it is that the Fed rushing to normalize will surely kill it off in due time), at a fairly rapid clip in the future, with no blips or need to slash rates again, just seems silly to me.

Now that the world economies, China and other are pressured, oil is low, it looks like they are on hold.

Very true--markets were 50/50 on March at the start of the year, and now are only projecting two rate hikes this year to the Fed's four. I wouldn't be surprised if they delay their second hike until June or even longer.

If recession were to hit the US would be in trouble as their tool set to influence the economy is very limited. They have been waiting 6 years to start raising interest rates and we are not any closer as deflation remains the biggest threat.

This I obviously disagree, though we've discussed this extensively in the past. I think their toolkit at the ZLB is far more diverse than many of them readily acknowledge. Hell, I read an article today pointing out that they're including a negative policy in the 2016 stress tests. That's incredible: the hallmark of the last seven years, ZIRP, evidently turned out to be one giant farce.

We have created a modern model where business is normal when cheap credit is growing and sustaining the economy, so much that we can't even deleverage debt to get back to a growth cycle.

I'm unconvinced that credit is cheap--and I'm make a crucial distinction between "easy credit" and "easy money": easy credit led to 07-09, not easy money. Credit standards are still incredibly tight, whereas monetary policy is arguably too tight as well.

All the gold bugs and rail against the Fed printing money types are wrong. Inflation is not the threat because we can't get past the threat of deflation due to policies including taxation and lack of controls that encourage excessive risk taking and debt growth.

I agree here 100%.
~ResponsiblyIrresponsible

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Naturalmoney.org
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2/4/2016 7:42:27 PM
Posted: 10 months ago
At 12/18/2015 12:53:41 PM, ResponsiblyIrresponsible wrote:
No one at all? *Clearly* this forum isn't comprised solely of doves and "End the Fed" looney birds. Someone must think this decision was a good idea--hell, you need not even be a Fed apologists.

I'm waiting.

I am interested. I will read your posts the coming days. So, don't be discouraged.
ResponsiblyIrresponsible
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2/5/2016 12:29:04 AM
Posted: 10 months ago
At 2/4/2016 7:42:27 PM, Naturalmoney.org wrote:
At 12/18/2015 12:53:41 PM, ResponsiblyIrresponsible wrote:
No one at all? *Clearly* this forum isn't comprised solely of doves and "End the Fed" looney birds. Someone must think this decision was a good idea--hell, you need not even be a Fed apologists.

I'm waiting.

I am interested. I will read your posts the coming days. So, don't be discouraged.

Awesome.
~ResponsiblyIrresponsible

DDO's Economics Messiah
ResponsiblyIrresponsible
Posts: 12,398
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2/5/2016 12:29:04 AM
Posted: 10 months ago
At 2/4/2016 7:42:27 PM, Naturalmoney.org wrote:
At 12/18/2015 12:53:41 PM, ResponsiblyIrresponsible wrote:
No one at all? *Clearly* this forum isn't comprised solely of doves and "End the Fed" looney birds. Someone must think this decision was a good idea--hell, you need not even be a Fed apologists.

I'm waiting.

I am interested. I will read your posts the coming days. So, don't be discouraged.

Awesome.
~ResponsiblyIrresponsible

DDO's Economics Messiah