Janet Yellen

Trump vs. Powell vs. Yellen – Same Game

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We have been here before. President Trump’s latest bashing of Fed Chair Powell isn’t without precedent. Chair Powell was the object of President Trump’s scorn during his first term, too.

It doesn’t stop there, though. Trump vs. Powell was preceded by Trump vs. Yellen.

During the 2016 campaign, Trump accused Yellen of keeping interest rates artificially low to benefit the Obama administration and predicted a market collapse once she raised rates. He claimed she was “keeping them artificially low to get Obama retired” and “she should be ashamed of herself.” (NBC News Nov 2016) 

One year later, towards the end of his first year in office, President Trump nominated Jerome Powell as the new Fed Chairman. Here is what I said then…

“President Trump nominated Jerome H. Powell as the new Chairman of the Federal Reserve Bank. Don’t look for much to change. And Janet Yellen’s announcement that she will resign from the board upon Mr. Powell’s induction as board chair is pretty much a non-event.” (New Fed Chairman, Same Old Story Nov 2017)

That was almost eight years ago. Has anything changed? Ironically, in 2016, Trump was displeased with Fed Chair Yellen for “keeping rates artificially low”. Now, he is attacking Fed Chair Powell for not lowering rates more aggressively.

THEN AND NOW

Both Ms. Yellen and Chair Powell face(d) similar situations. Their terms as Fed Chair expire(d) before their terms as board members conclude. That would mean sticking around for a couple of years as a board member after their term as board Chair ends.

I believe Ms. Yellen, as Fed Chair, was very concerned about the prospect of presiding over a financial crisis that would tarnish her reputation as Fed Chair. Here is what I said seven months prior to Jerome Powell’s assumption as Fed Chair…

“…if Ms. Yellen makes it through the current year unscathed, she won’t be hanging around afterwards. She won’t want to extend her risk of being at the helm when the ship sinks.

And don’t trouble yourself worrying about who the next Fed chief will be.  It doesn’t matter. It is too late in the game for a quarterback change to have any meaningful impact.” (The Fed’s Dilemma July 2017)

CONCLUSION 

The situation today isn’t much different from eight years ago. Jerome Powell’s term as Federal Reserve Board Chair ends May 2026. I expect him to finish his term (ends May 2026) as Chairman and voluntarily resign from the board at that time without serving the remainder of his term (ends January 31, 2028) as a member of the board, just as Chair Yellen did, for similar reasons.

Can you imagine either Janet Yellen or Jerome Powell serving as a member of the board after their term as Fed Chair ended? (also see Cruisin’ Wtih The Fed and Federal Reserve –  Conspiracy Or Not?)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

Team Fed And CPI

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As investors, analysts and commentators warm to the idea that “inflation is likely transitory”, much of what we have been hearing from the the Fed and the United States Treasury seems to encourage and support that interpretation.

Team Fed member (aka Secretary of Treasury) Janet Yellen, who has used the word ‘transitory’ on other occasions, followed up her own attempts (here and here) to introduce the word into mainstream financial vocabulary with additional comments in a press conference after the G-7 meeting in London…

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Powell And Yellen – Team Fed

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POWELL AND YELLEN…

Flashback 11/21/2017:

“President Trump nominated Jerome H. Powell as the new Chairman of the Federal Reserve Bank. Don’t look for much to change. And Janet Yellen’s announcement that she will resign from the board upon Mr. Powell’s induction as board chair is pretty much a non-event.” (see New Fed Chairman, Same Old Story)

Currently, comments by Jerome Powell last week regarding inflation and its effects spooked some investors and analysts.  Investors in leveraged Treasuries were dealt a severe blow when yields spiked and bond prices fell. Others have claimed that the sky is falling and that inflation is all around us.

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Janet Yellen Re: Cryptocurrencies and Terrorists

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JANET YELLEN RE: CRYPTOCURRENCIES AND TERRORISTS

In comments made during her confirmation hearing last month, Secretary of Treasury Janet Yellen said that transactions in cryptocurrencies, such as Bitcoin, were used “mainly for illicit financing” and suggested that lawmakers and regulators curtail their use due to terrorism concerns.

Here are the statements she made in response to a question from Sen. Maggie Hassan, who asked Yellen during her confirmation hearing on Tuesday about the dangers of terrorists using cryptocurrencies:

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New Fed Chairman, Same Old Story

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President Trump nominated Jerome H. Powell as the new Chairman of the Federal Reserve Bank. Don’t look for much to change. And Janet Yellen’s announcement that she will resign from the board upon Mr. Powell’s induction as board chair is pretty much a non-event.

Where we are today is the culmination of decades of irresponsible financial/fiscal policies and a complete abdication of fundamental economics.
But that should not be a surprise. The self-proclaimed purpose of the Federal Reserve Bank is to manage the stages of the economic cycle. This is an impossibly presumptive task and a violation of fundamental economic theory.

In addition, the Federal Reserve Bank is also charged with ensuring the financial operation of the US Government.  Or, in other words, maintaining their (the U.S. Government’s) ability to borrow money by issuing more and more debt in the form of Treasury securities. In my opinion, this is the sole and overriding purpose behind the existence of the Federal Reserve. And it drives every decision they make.  It is not about the economic effects of their policies on US citizens (individually or collectively).  It is all about keeping the U.S. Government solvent.

The US Government is not solvent, of course, but maintaining and reinforcing the confidence in their financial viability is absolutely essential.  And nothing else takes precedence.

In the late 1970s the effects of government inflation threatened to cripple the US dollar and bring the US economy to its knees.  U.S. Treasury Bonds were losing value faster than most stocks, which were also declining at precipitous rates.  Actions taken at that time averted disaster – temporarily.  We have had periods of relative stability since; as well as more volatility and financial crises. The cycle continues. And things will get worse.

The US dollar is in a state of perpetual decline (by intention) which will ultimately end in complete repudiation.  Whether or not the Federal Reserve continues to raise interest rates is not the real issue.  They will do – or not do – whatever they think will keep the charade going for a while longer.

But the point of no return has been passed. We may well see more periods of relative financial and economic stability. However, regardless of whether or not we do, we will see the U.S. dollar continue to decline in value/purchasing power and we will be subjected to more erosion of our economic freedom by virtue of more regulations and restrictions. (This is true even without Janet Yellen’s endorsement of financial regulation in her recent speech at Jackson Hole, Wyoming.)

The US Federal Reserve Bank does not control interest rates.  They definitely can influence the direction and level of nominal interest rates by their actions and verbiage regarding the Fed Funds rate  (the rate that member banks of the Federal Reserve System charge each other to borrow funds on a overnight basis) and the Discount rate (the rate that the Federal Reserve charges member banks to borrow funds directly from the Federal Reserve). By virtue of their efforts they hope to  encourage economic activity that meets their objective of “managing the economic cycles”.

Interest rates are determined in the market place. Investors buy and sell bonds continually, all over the world. The transaction price for a bond is determined by an agreed upon yield (interest rate) between the buyer and the seller. If investors are suspicious about the credit worthiness of the bond issuer, or are concerned about effects of higher inflation, then they tend to want a higher yield/return for tying up their money for a longer period. Hence, bond prices would decline until interest rates reach a higher level that is acceptable to both buyers and sellers.

So why has the bond market responded so willingly to the efforts of the US Federal Reserve Bank?  Why have we not seen a similar response from the bond market such as that cited above regarding the 1970s?  There are a couple of reasons.

For one thing, the Federal Reserve Bank has purchased a lot of debt since the crisis of 2008.  They have actively acquired various debt securities and their purchases helped stem the aggressive selling of various bonds.  Also, it is quite possible that bond holders do not see as much risk involved (especially interest rate risk on a projected basis) and are more patient – or more naive.

In addition, foreign governments are among the largest holders of US Treasury debt. Hugely so. Trying to sell seemingly small amounts of their own holdings would still be large enough amounts to be disruptive to daily trading and would likely feed any weakness in the market causing further erosion of their own remaining holdings.  And this is in light of the fact that the US Treasury Bond Market is the largest financial market in the world.

Finally, cheap credit is a money drug which has, for the most part, had its intended effect – to goose economic activity. Nobody wants to give back.

Unfortunately, the Federal Reserve’s efforts have brought us to a point which is not very ‘manageable’.  If interest rates continue to rise from here, it could likely usher in a period of withdrawal – financially speaking.  We might see a huge implosion of the debt pyramid accompanied by a collapse in the nominal US dollar price of all assets (stocks, bonds, real estate, commodities, etc.).

And maintaining interest rates at artificially low levels will eventually result in rejection and repudiation of the US dollar. The continual injection of drug money could kill the patient. More likely sooner, rather than later, too. The Fed knows this. And whether the Chair is Janet Yellen or Jerome Powell, they have their hands full.

Currently, the Fed is attempting to steer a course between two alternatives; neither of which are acceptable. Hence, we get incremental, irregular increases in the discount rate coupled with efforts to begin (passively) to unwind their massive balance sheet.

There is an additional problem.  The Fed knows that the reason they are falling short of their intended 2% inflation target is because their efforts at priming the pump are not having the intended effect.  Each successive infusion of money and cheap credit has less and less impact. The patient is showing signs of rejection.

Stock, bond and real estate prices have benefited from the hugely inflationary expansion of money and credit over the past 8-10 years. But their prices do not reflect true fundamental value. This is particularly true of bonds and other debt securities. Hence, they are more vulnerable to large-scale declines.

Now people expect the Federal Reserve to solve a problem which they – the Federal Reserve – created. They can’t.

Any changes of note – which are considerably different in terms of Federal Reserve policy or activity in the financial markets –  will be rooted in negative circumstances. In other words, actions will be taken in order to prevent or avoid economic calamity or in response to it.

Until such a time, the descriptive term applicable to the Federal Reserve is ‘status quo’.

 

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

The Fed’s 2% Inflation Target Is Pointless

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FED’S 2% INFLATION TARGET

Within the Federal Reserve sometime in 1996, a discussion took place among FOMC (Federal Open Market Committee) members regarding the subject of inflation targeting. Federal Reserve District Governor (San Francisco) Janet Yellen believed that a little inflation “greases the wheels” of the labor market. Her preferred “target” was 2%. She asked Chairman (at the time) Alan Greenspan his preference.

The Chairman replied.  “I would say the number is zero, if inflation is properly measured.”

On the surface, it might seem that Chairman Greenspan is indicating that no inflation is preferable to “a little” inflation.  But that is contradictory to the actual mechanics of ongoing monetary action by the Fed since its inception in 1913.

The Federal Reserve creates inflation through ongoing expansion of the  supply of money and credit. Our fractional-reserve banking system is intrinsically inflationary – at the very least. And what did he mean by the parenthetical comment, “if inflation is properly measured”.

More likely, he was adopting the role of devil’s advocate and trying to promote further, active discussion among FOMC members. The results seem to indicate this.

In meetings the next day, Greenspan summarized the discussion: “We have now all agreed on 2 percent.” The Federal Reserve now had an internally stated, unofficial inflation target. Their own “guiding light”. But they didn’t want to talk about it publicly.  At least Greenspan didn’t.

He termed their discussion “highly confidential (in) nature” and said: “I will tell you that if the 2 percent inflation figure gets out of this room, its going to create more problems for us than I think any of you might anticipate.”

Ben Bernanke didn’t share Greenspan’s reservations.  He wanted everyone to know that the Fed’s inflation target was 2%.  But why?

One possibility is the need for justification.

Actions by the Federal Reserve are historically unclear as to logic and purpose. That allows for a modicum of privacy and the false descriptive of an independent Fed. It also suggests an aura of ‘special dispensation’ surrounding the Fed.

By late 2010, however, those notions were unravelling quickly as people wallowed in the after effects of the financial crises of 2007-08. Mr. Bernanke and his fellow practitioners of monetary medicine were seen as ineffective, at best, and appeared as if they did not know what they were doing.

Action was, in effect, demanded. And they were not afraid to pull the trigger. But they needed a clear, publicly observable target. How does anyone know you hit the target if they don’t know what you are aiming at?

Having a clearly acknowledged target changes the focus. Judgment is restricted to the new area of focus.  Did you hit the target or didn’t you?

This presumes that the target is justified, of course.  And if an inflation target is justified, why 2%?  Why not a lower number? Or any other number? In truth, it probably doesn’t make any difference.

From the Fed’s perspective, it gives them a license to openly discharge their firearms in the public square. If they miss, they can just reload and fire again.

Should they happen to hit the target, they can either maintain their current posture, or tweak it accordingly so as not to overshoot in the future.

But they will never “hit” their target.  Especially this one.  Why not?

Because it is a moving target, comprised of moving parts. And it is the result of the Fed’s own previous actions.

There is only one cause of inflation: government.  The term government also includes central banks, especially the US Federal Reserve Bank.

What most people refer to as ‘inflation’ or its causes are neither. They are the effects of inflation.   The “increase in the general level of prices for goods and services” is the result of the inflation that was already created.  …Kelsey Williams

Bernanke pushed until he got his way. A formal, precise inflation target rate of 2% was adopted at the FOMC meeting on January 24, 2012.

Five years later…

HEADLINE: The Fed’s Janet Yellen could use some target practice…

Quote: Ever since the Federal Reserve adopted an explicit inflation target of 2% in 2012, the central bank has had limited success in hitting it. Only once, in fact, in the months between April 2012 and today, did the year-over-year increase in the personal consumption expenditures (PCE) price index breach 2%. …MarketWatch/Caroline Baum 12July2017

That shouldn’t be a surprise given that it’s a moving target.  But there is more to it than that.

Right now, the inability to hit the target serves as the Fed’s perfect excuse for not acting more decisively.  This is especially true with respect to raising interest rates. In addition, Ms. Yellen is afraid to do anything. Here’s why.

The bigger risk to the economy and financial stability is another credit collapse.  And they can’t claim ignorance as they did the last time. They know its coming. They just don’t know when.

The levels of debt, the convoluted intricacies of the derivatives market, the interwoven relationships within the shadow banking system are all at hugely more precarious tipping points than ten years ago.

And it is the Fed’s own inability to hit the 2% inflation target that is warning them.

Think of all the hundreds of billions of dollars that went into saving the system from collapse before. And then force feeding the money drug into the patient for another nine years.

The problem is that all of the beneficiaries (i.e patients) of the Fed’s assistance are now hard-core addicts. If the Fed tries to raise rates they could very easily trigger another collapse much worse than before.

The Fed continues to look for the effects of all of those hundreds of billions of dollars to show up in the ‘rate’ of inflation. Supposedly that would be a sign to them of improved economic activity and growth. That isn’t happening.

The reason is because most of the ‘help’ effects showed up in ever higher prices for financial assets (stocks and bonds) and real estate.

And all of those toxic assets (CDOs of every letter and color, and various other esoteric derivatives) have swollen in price to levels far beyond any reasonable value. In addition, far too many of them are resting quietly on the Fed’s balance sheet.

The Fed has actually blown another bubble much bigger than the previous one. Nothing fundamental has changed. The only difference is that the situation is worse than before. Now, out of fear, they are trying to steer a course between action and inaction.

The action, of course, is raising interest rates and offloading their own balance sheet. But their actions could trigger events similar to 2007-08. In which case the Fed’s image would forever be tainted. (I think this is more of a concern for Janet Yellen than her fellow board members.)

The inaction – doing nothing – is pretty much where things are currently. If the Fed maintains ZIRP (zero interest rate policy), the patient could overdose and slip into a coma.

The Fed’s 2% inflation target is an attempt to predict the effects of inflation. That’s impossible. It is also unwise as it reinforces the acceptance of a “little inflation” as normal, necessary. It isn’t.

A “little inflation” is why the U.S. dollar is worth ninety-eight percent less than in 1913 when the Federal Reserve originated.

(Read more about the Federal Reserve here

 

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

The Fed’s Dilemma – Doing The Right Thing Won’t Help Janet Yellen Or Us

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THE FED’S DILEMMA

The Federal Reserve doesn’t know what to do.  That’s too bad.  For all of us.

The bigger problem is that it probably doesn’t make much difference what they do – or don’t do. 

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