Fed Statement:

Janet Yellen’s big question is how can the Fed continue to reinvest T Bonds, Raise Fed Funds and ensure a good economy. After reading 10 single spaced pages in the statement, my summation is the Fed wants to raise yet also wants to maintain a high balance sheet as protection against a Fed Funds hike. Yellen prefers both ways, high balance sheet and raise Fed Funds. But then the economy question persists. How can an economy maintain an upward trajectory under a high balance sheet. How can interest rates continue to rise under a high balance sheet. The problem is not raising Fed Funds or the economy but its the high balance sheet. A high balance sheet and interest rate rises fails to travel together. A high balance sheet and stimulus is why Fed Funds remain at practically zero. Yellen must eliminate the balance sheet by not reinvesting in T Bonds and allow the Fed Funds rise and economy to perform its functions. it will, it always does as the economy based on the statement is doing just fine. But Yellen is a Keynesian, apt to experiments and wishes to find a method to have her cake. She thought she found it in the new Repo Rate experiments but Fed Funds at 0.13 from 0.06 when she started the Repo program says yet again another experiment / tool failed. If the central bankers would just get back to basic economics, all would be fine. I see the Fed Funds rise coming but under a high balance sheet, the Fed could easily remain at one and done for quite some time.

The Fed is beginning to speak about a topic I’ve written about extensively, the natural Rate of Interest. Knut Wiksell believed in 1898 an economy operates based on its natural rate of interest. The natural rate is found between 20 – 50 year averages. This is r found in all economic models. Last I checked, the 25 year average is found at about 1.5 Fed Funds. We are at 0.13 and economically under performing overall. The Fed’s question in my estimation is at what point does Fed Funds rises become terminal or where does rises stop in light of continual high balance sheets. Yellen is finally telling us the degree of her Keynesian loyalty as they must look at the old Keynesian IS / LM Models last employed in the 1990’s by central banks and highlighted extensively in my book Inside the Currency Market. The interest rate vs Money Supply plots vs investment and Savings. At some point on the plot, equilibrium is found. Equilibrium would be found the Terminal interest rate, GDP and targets.

The Fed from the statement is looking at OIS rates, Libor minus Fed Funds. OIS stands at 0.0010, fed funds at current 0.13 or 0.0013. Life for Yellen’s raise is not looking very good until we see OIS turning higher.

Again the DXY comments. A high DXY says the Fed won’t see Inflation meet the 2% target. But remember this statement is 1 month old and its essentially old news. PCE hit 2% target at a 99.00 DXY, another losing argument for Big Sis Yellen.

Imagine Savers under a Fed Funds rise. Savers haven’t existed in 7 years, almost 8.

Brian Twomey, Inside the Currency Market, btwomey.com

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s