Fear! Yellen wants to leave the Fed’s balance sheet alone for now

Pedro da Costa had a nice piece for Business Insider on Yellen wanting to leave the Fed’s balance sheet alone.

Essentially, Yellen is extremely cautious about unwinding The Fed’s almost $4.5 TRILLION balance sheet for fear on upsetting the proverbial apple cart.

Since The Fed’s started expanding its balance sheet back in late 2008, the stock market and both residential and commercial real estate prices have been going gangbusters. Only recently has retail real estate suffered downturns (thanks primarily to Amazon).

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Critics of the bond buying programs, known as quantitative easing or QE, warned that it would lead to runaway inflation. They were very wrong. Instead, inflation has struggled to even reach the Fed’s 2% target, suggesting the labor market is still too weak to push up wages significantly.

True, the labor market remains weak despite glowing adulation from the media cheerleaders about low unemployment rates. Which is not helping retails sales for the big box stores.

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Yes, Yellen and The Feds are fearful of a fundamentally weak economy and its sensitivity to winding down The Fed’s balance sheet.

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Cones Of Dunshire: Yellen Speaks As M2 Money Velocity Lowest In History Despite Doubling Of Federal Debt And Fed Expansion

Fed Chair Janet Yellen spoke to Congress this morning at her semi-annual monetary policy testimony. Trying to juggle inflation and unemployment (Humphrey-Hawkins) is difficult … like the Parks and Recreation’s game Cones of Dunshire.  Yellen testified  “waiting too long to hike (rates) is unwise.”

Well, the 10 year Treasury yield jumped on her statement.

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Oddly, Yellen forget to mention that the US Public debt has doubled since 2008 while M2 Money Velocity has crashed to an all-time low.

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Although little has been discussed about the unwinding of the Fed’s balance sheet other than “the Committee has continued its policy of reinvesting proceeds from maturing Treasury securities and principal payments from agency debt and mortgage-backed securities. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, has helped maintain accommodative financial conditions.”

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Or what to do about the exploding pension liabilities and how The Fed’s zero interest rate policies have helped increase the vulnerability of state pension funds.

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Or that average hourly earnings have gotten progressively worse with the additional Federal debt and all The Fed’s easing.

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Here is The Fed’s Assistant Chair Stanley Fischer explaining the rules of the economy to Fed Chair Janet Yellen.

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My Kuroda! “Powerful Monetary Easing” To Accelerate Japan’s Inflation To 2% Target(?)

My Kuroda! 

TOKYO, Feb 3 (Reuters) – Bank of Japan Governor Haruhiko Kuroda said on Friday that the central bank would pursue “powerful” monetary easing to accelerate inflation to its 2 percent target, describing the current situation as being half way to hitting that goal.

Apparently,  the powerful monetary easing hasn’t been released yet (or even priced into the market) since the Japanese Sovereign yield curve has only dropped 3.53 basis points at the 3 month tenor.

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But inflation has been ellusive since Q1 2015, the last quarter that inflation YoY was 2.0%.

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And house price growth has been ellusive as well after peaking in 1991. Population growth also remains ellusive.

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And not even declining mortgage rates are leading to rising home prices. Further “powerful” monetary easing isn’t likely to start increasing home prices thanks to declining (and aging) population.

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And don’t forget that Japan’s debt to GDP ratio is 234.70% making it one of the most indebted nations in the world.

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With declining population and declining home prices, Kuroda and the Bank of Japan are going to have a hard time getting to their 2% inflation target again. But even if they do, their staggering debt load and aging population are a perpetual drag.

Maybe it should be OH MY! (Kuroda). 

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South Of The Border: Mexico Consumer Confidence Plummets (Mexican Oil Rises 107% In 1 Year)

South of the border, down Mexico way, where consumer confidence is falling like a rock.

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A closer look reveals this chart:

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Look at the Mexican Peso!

And then the is Mexican oil prices rising 107% in just one year.

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Mexico has a plethora of problems, including rising inflation and a potential rewrite/scrapping of the Clinton-era NAFTA agreement. Not to mention Gene Autrey singing songs about Mexico.

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Fed Keeps Rates Constant At 465 Basis Points Below Where It Should Be (Or Not)

Meanwhile, down at the Snakehole Lounge,

 (Bloomberg) — Federal Reserve officials left interest rates unchanged while acknowledging rising confidence among consumers and businesses following Donald Trump’s election victory.

“Measures of consumer and business sentiment have improved of late,” the Federal Open Market Committee said in its statement Wednesday following a two-day meeting in Washington. Policy makers reiterated their expectations for moderate economic growth, “some further strengthening” in the labor market and a return to 2 percent inflation.

The Fed provided little direction on when it might next raise borrowing costs, as officials grapple with the uncertainty created by a new presidential administration. Policy makers in December penciled three rate hikes into their 2017 forecasts, but committee members differ over assumptions regarding the extent to which tax cuts, spending and regulatory rollbacks proposed by Trump and Republicans might boost growth and inflation.

So, Janet and the folks at the Snakehole Lounge aren’t cutting back on the Snakejuice quite yet. The Fed Funds Target rate (upper bound) remains at 75 basis points. The discount rate remains the same as well.

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This leaves the Fed Funds Target Rate a whopping 465 basis points below where the Taylor Rule (Rudebusch calibration) says it should be.

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On the other hand, the Evans calibration of the Taylor Rule points to the rate being too high by 15 basis points.

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That is a long time keeping the target rate below 1%. The last time we saw a 1% Fed Funds Target rate was in December 2008. It is now 2017!

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There were minor flucuations in the US Treasury 10 year yield and the US Dollar around the announcement, as is typical. First, the US Dollar:

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Now the US Treasury 10 year yield:

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But the bottom line? The Fed isn’t cutting back on the snake juice at the Snakehole Lounge.

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Is The Fed REALLY Tightening? The Monetary Shell Game (Hint: M1 Money Growing at 8-10% YoY)

The Federal Reservc Open Market Committee (FOMC) has “tightened” the Fed Funds Target rate twice since December 2015. One in December 2015 and once in December 2016.

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Well, 75 basis points is hardly “tight.” But what about The Fed’s asset purchases? The Fed ended their third round of asset purchases in October 2014.  While QE expansion has stoppped (for the moment), The Fed’s balance sheet is being reduced very slowly. Hardly monetary tightening, but not loosening either.

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But if we look at a third measure of monetary easing, M1 money supply, it is growing at a rapid rate.

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M1 money is growing at around 8-10% YoY. M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Seasonally adjusted M1 is calculated by summing currency, traveler’s checks, demand deposits, and OCDs, each seasonally adjusted separately.

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So while The Fed Funds Target rate is slowly risening and Fed asset purchases have curtailed, M1 Money Stock continues to grow at an unpredented rate YoY since the end of The Great Recession in June 2009.

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The M1 Money Multiplier remains below 1 thanks to The Fed’s easing efforts. An M1 Money Multiplier of less than 1 means that every dollar created by the FED (an increase in the monetary base M0) will result in a <1 dollar increase of the money supply (M1). So, the credit and deposit creation of commercial banks is limited in this case. The banks are still holding on to a lot of excess reserves.

At least Excess Reserves of Depository Institutions has been falling since August 2014.

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It is a shame that while M1 money grows at 8-10% YoY, average hourly earnings for 84% of the population are growing at only 2.5% YoY.

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So while The Fed signals monetary “tightening,” check the third cup to find the EXPANSION pea!

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Case-Shiller Home Price Index Hits All-time High! (Despite Record Low Wage Recovery After A Recession)

What an incredible “recovery” from The Great Recession!

The Case-Shiller 20 Metro home price index hit an all-time high!

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Despite home price growth YoY of 5.10% being over 2x average hourly earnings growth for production and non-supervisory workers of 2.40%.

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The WORST wage recovery from a recession since 1965.

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The big loser? The Big Apple!!

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Seattle is the biggest winner, followed by Portland.

Foreign investors and super low interest rates make for unaffordable housing for 82% of the population.

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But the cheap money does make a nice gift for current homeowners!!!

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