Yellen Goes for Tight Dollar Policies

[EdwardBaiamonte]

good boy , and can you say why it would not be good and how you got to be smarter than Janet Yellen?

Sure, princess. The job markets are still recovering from the Bush/GOP economic disaster, and are still vulnerable to higher interest rates. If it were me, I'd shoot for a 4%-4 1/2% inflation target, proving the job markets resilient, and bringing inflation up to spur investment.

Why would 4% inflation spur investment?

its so simple, you print money, people invest it and the recession goes away, and, if it ever threatens to come back you just print more money!

I'm going to write Yellen and tell her all about it!

 

[oldfart]

So we have yet another article from the inflationista press proclaiming that inflation and interest rates are about to rise. Despite being completely wrong for six straight years and having put forward dozens of entertaining reasons for being wrong (the latest being "miracles") they have the same prediction again, and yes, it includes the BIS.

But go ahead, invest based on these people. They are likely to be right sometime in the next two decades. If you have anything left to invest.

I'm not sure why interest rates wouldn't rise.

OK, short term interest rates are determined by Federal Reserve policy, and predicting that is about 30% economic argument, 40% political calculation, 20% anticipating election results, 30% pressure from the business community, 20% astrology, and the remainder is the effect of international money markets. FWIW, the CBO has lowered its estimate of borrowing costs on the US debt recently. Let's call it even and say that any forecast of short or medium-term interest rates is a SWAG.

The Fed has already begun it's tightening cycle. Unemployment has fallen a lot. The economy is doing well. Labor markets amongst skilled workers are tight. By most accounts, QE has depressed the long-end by 150-200 bps. BB-rated debt has a 4-handle. I'm not in the inflation camp (at least not yet), but with the end of QE on the horizon and slack coming out of the economy, I'd be shocked if rates didn't start rising within the next few years.

I would agree that long term rates are likely to rise modestly in the next 3--5 years. I don't see that QE will have much to do with it. We have a roughly $4 Trillion cash hoard in the system and we would have to work off a lot of that before interest rates would respond. The yield on the ten year Treasury has fallen from 3.0% at the beginning of the year to 2.5% currently.

Today's yield curve on treasuries goes from 0.11% for one year to 3.25% for thirty years. These aren't the numbers for accelerating inflation expectations.

 

[oldfart]

good boy , and can you say why it would not be good and how you got to be smarter than Janet Yellen?

Sure, princess. The job markets are still recovering from the Bush/GOP economic disaster, and are still vulnerable to higher interest rates. If it were me, I'd shoot for a 4%-4 1/2% inflation target, proving the job markets resilient, and bringing inflation up to spur investment.

Why would 4% inflation spur investment?

The best economic argument is Irving Fisher's. In an economy where demand is largely constrained by private debt overhang, anything that reduces the real burden of servicing debt will increase demand and therefore the demand for real investment. Of course in different circumstances other measures (larger public spending, tax cuts, export expansion) might work better. But higher inflation in the short term will definitely lower the burden of real debt and lessen the deflationary pressure we see now.

In the longer run, inflation will also raise nominal interest rates and nominal prices as economic actors build in inflationary expectations, so this benefit is self-limiting and only really works in an economy with low inflation and inflationary expectations, lots of excess capacity, ineffective traditional monetary policy (in a liquidity trap), and with heavy constraints on expansionary fiscal policy; which is where we are at.

 

[SteadyMercury]

OK, short term interest rates are determined by Federal Reserve policy, and predicting that is about 30% economic argument, 40% political calculation, 20% anticipating election results, 30% pressure from the business community, 20% astrology, and the remainder is the effect of international money markets.

I'd put it 70% as trying to read anything you can from celebrity fed chair(wo)man, these days seems like Yellen can spit on the sidewalk the DIJA would swing 70 pts.

 

[EdwardBaiamonte]

If it were me, I'd shoot for a 4%-4 1/2% inflation target, proving the job markets resilient, and bringing inflation up to spur investment.

why not 10-20% to really spur investment? Do you think back in the stone age when a lot of investment was needed that liberal govt could have caused it by printing money? Do you think history could have progressed 10 times faster if only they had known how to spur investment with inflation? Real investment comes from egotistic capitalistic Republican animal spirits and real investment is inhibited when liberals like the French president say they don't like rich people and when people like Obama say you'didn't build that!

 

[Toro]

Sure, princess. The job markets are still recovering from the Bush/GOP economic disaster, and are still vulnerable to higher interest rates. If it were me, I'd shoot for a 4%-4 1/2% inflation target, proving the job markets resilient, and bringing inflation up to spur investment.

Why would 4% inflation spur investment?

The best economic argument is Irving Fisher's. In an economy where demand is largely constrained by private debt overhang, anything that reduces the real burden of servicing debt will increase demand and therefore the demand for real investment. Of course in different circumstances other measures (larger public spending, tax cuts, export expansion) might work better. But higher inflation in the short term will definitely lower the burden of real debt and lessen the deflationary pressure we see now.

In the longer run, inflation will also raise nominal interest rates and nominal prices as economic actors build in inflationary expectations, so this benefit is self-limiting and only really works in an economy with low inflation and inflationary expectations, lots of excess capacity, ineffective traditional monetary policy (in a liquidity trap), and with heavy constraints on expansionary fiscal policy; which is where we are at.

What's the empirical evidence? We've had inflationary periods in the past. Has it spurred investment?

So we have yet another article from the inflationista press proclaiming that inflation and interest rates are about to rise. Despite being completely wrong for six straight years and having put forward dozens of entertaining reasons for being wrong (the latest being "miracles") they have the same prediction again, and yes, it includes the BIS.

But go ahead, invest based on these people. They are likely to be right sometime in the next two decades. If you have anything left to invest.

I'm not sure why interest rates wouldn't rise.

OK, short term interest rates are determined by Federal Reserve policy, and predicting that is about 30% economic argument, 40% political calculation, 20% anticipating election results, 30% pressure from the business community, 20% astrology, and the remainder is the effect of international money markets. FWIW, the CBO has lowered its estimate of borrowing costs on the US debt recently. Let's call it even and say that any forecast of short or medium-term interest rates is a SWAG.

The Fed has already begun it's tightening cycle. Unemployment has fallen a lot. The economy is doing well. Labor markets amongst skilled workers are tight. By most accounts, QE has depressed the long-end by 150-200 bps. BB-rated debt has a 4-handle. I'm not in the inflation camp (at least not yet), but with the end of QE on the horizon and slack coming out of the economy, I'd be shocked if rates didn't start rising within the next few years.

I would agree that long term rates are likely to rise modestly in the next 3--5 years. I don't see that QE will have much to do with it. We have a roughly $4 Trillion cash hoard in the system and we would have to work off a lot of that before interest rates would respond. The yield on the ten year Treasury has fallen from 3.0% at the beginning of the year to 2.5% currently.

Today's yield curve on treasuries goes from 0.11% for one year to 3.25% for thirty years. These aren't the numbers for accelerating inflation expectations.

Kingdom of the Netherlands bonds hit 495-year, i.e. all-time, low yields a few years ago. The Bank of England has its lowest rate in 300 years. Think about all the history England has been through during that time, which is amazing. Several countries are at 200-year lows in rates. Are rates going to stay at 200, 300 or 500 year lows for an indefinite period of time? I'd say it's highly unlikely.

However, most everyone I speak to thinks rates will rise. That makes me think I'm wrong.

For a number of reasons, Fed actions have created inflation in asset markets, not labour or consumer price markets. Since the Fed bailed out Long-Term Capital Management in 1998 - or perhaps as far back as the market crash in 1987 - the Fed has targeted asset markets, which is greatly affecting asset markets. Markets behave differently now than they did a few decades ago. Each Fed action of the past 15-20 years has been larger and has created smaller responses in the broad economy. However, they are affecting asset markets more and more. I think they are again today, and I think the end-game won't be pretty.

I did talk to a guy yesterday who has his name on one of the biggest macro hedge funds in the world. He was in New York talking to the Fed. He said that the Fed really has no idea what will happen to asset markets when they withdraw their stimulus.

 

[EdwardBaiamonte]

He said that the Fed really has no idea what will happen to asset markets when they withdraw their stimulus.

I suspect the Fed will withdraw slowly enough so that there will be no easily visible sign and even restimulate if there is a easily visible sign. If they can pull it it off it will herald a new age in central banking it seems to me.