For whom is the Federal Reserve supposed to work?

From The Wall Street Journal:

Overseas Bankers, Officials Urge Fed Not to Waver on Interest-Rate Rise

Some international officials have a message for the U.S. central bank: Get on with it already

By Jon Hilsenrath | Updated Aug. 27, 2015 7:04 p.m. ET

Jacob Frenkel, chairman of J.P. Morgan Chase International and former head of the Bank of Israel, said market drama would be increased by a delay. Photo: Andrey Rudakov/Bloomberg News

JACKSON HOLE, Wyo.—After months of forewarning by Federal Reserve officials that they are preparing to raise short-term interest rates, some international officials attending the Fed’s annual retreat here this week have a message: Get on with it already.Fed policy makers are wavering on whether to move rates up in September. Volatile stock prices, falling commodities, a strong dollar and signs of a deepening economic slowdown in China have created doubts at the U.S. central bank about the outlook for global growth.

International officials have been saying for months they will be prepared when the Fed moves rates higher, a message that is being echoed as central bankers, academics, journalists and others converge now in Jackson Hole for the Federal Reserve Bank of Kansas City’s annual symposium.

“If you delay something that you were planning to do, then you leave the impression that your compass is different than what you led markets to believe,” Jacob Frenkel, chairman of J.P. Morgan Chase International and former head of the Bank of Israel, said in an interview Thursday. Market drama is increased by delay, he added.

Fed officials have said they plan to raise their benchmark short-term interest rate from near zero this year, but haven’t agreed on when to start. The Fed’s Sept. 16-17 policy meeting was shaping up as a close call for a decision to move, and then market turmoil caused some officials to waver. New York Fed President William Dudley said Wednesday that a rate increase in September had become “less compelling.”

Some observers say they will be relieved when the Fed finally acts. “It’s better for the U.S. to make a decision,” Bambang Brodjonegoro, Indonesia’s finance minister, said Wednesday in an interview in Jakarta. “What makes the financial markets volatile is the uncertainty.”

Raising rates would signal that the Fed is confident about the U.S. economy, Bank of Japan Governor Haruhiko Kuroda said Wednesday in New York, before the Fed gathering. “That is not only good for the U.S. economy, but also for the world economy, including the Japanese economy,” he said.

As always, there’s more at the original.

I have to ask: why should the Federal Reserve move to increase interest rates? Banks are already sitting on large reserves that aren’t being loaned out, in part because there is insufficient demand for loans from reasonably credit-worthy customers; how will increasing interest rates help in this regard?1

The Fed is looking at increasing interest rates in part because they want to “push inflation up from below 2%.” Given that wages have been stagnant in our economy, pushing up inflation2 without a concomitant guarantee of wage increases will only make Americans poorer in real terms.

  1. The Editor is unlikely to notice any personal effects from an interest rate increase, unless such lead to an increase in savings account interest rates. However, savings account interest isn’t a significant part of our income.
  2. By which I mean price inflation; Patterico and I have had a bit of a disagreement on the use of the term.

The Success of Socialism

From The Wall Street Journal:

Venezuela’s Food Shortages Trigger Long Lines, Hunger and Looting

Violent clashes flare in pockets of the country as citizens wait for hours for basics, such as milk and rice

By Maolis Castro and Kejal Vyas | Aug. 26, 2015 5:30 a.m. ET

LA SIBUCARA, Venezuela—Hours after they looted and set fire to a National Guard command post in this sun-baked corner of Venezuela earlier this month, a mob infuriated by worsening food shortages rammed trucks into the smoldering edifice, reducing it mostly to rubble.

The incident was just one of numerous violent clashes that have flared in pockets around the country in recent weeks as Venezuelans wait for hours in long supermarket lines for basics like milk and rice. Shortages have made hunger a palpable concern for many Wayuu Indians who live here at the northern tip of Venezuela’s 1,300-mile border with Colombia.

The soldiers had been deployed to stem rampant food smuggling and price speculation, which President Nicolás Maduro blames for triple-digit inflation and scarcity. But after they seize contraband goods, the troops themselves often become targets of increasingly desperate people.

“What’s certain is that we are going very hungry here and the children are suffering a lot,” said María Palma, a 55-year-old grandmother who on a recent blistering hot day had been standing in line at the grocery store since 3 a.m. before walking away empty-handed at midday.

In a national survey, the pollster Consultores 21 found 30% of Venezuelans eating two or fewer meals a day during the second quarter of this year, up from 20% in the first quarter. Around 70% of people in the study also said they had stopped buying some basic food item because it had become unavailable or too expensive.

There’s a lot more at the link, but the important statistic is a simple one: Venezuela is South America’s largest petroleum exporter.

Socialism, under the late Hugo Chavez and his hand-picked successor, Nicolás Maduro, has turned a reasonably prosperous country into one which is solving the chronic shortage of toilet paper by cutting back on food, thereby giving the people less digestive waste products to have to clean up. Meanwhile, in the United States, not a few Democrats want to elect Bernie Sanders to be our next President, so that he can lead us down the same path as the Venezuelans.

Can the Democrats really be that dumb?

Site issues

We’ve been battling accursed spammers installing malwate and site redirects. This has necessitated updating the theme — the physical appearance of the site — to get rid of it. I’ll be slowly working back to the original presentation, but I can’t do everything at once.

Obligatory Stock Market Drop Post

There’s a fairly good discussion going on on Patterico’s Pontifications. And from The Wall Street Journal:

Investors Grasp for Answers Amid Wild Stock Rout
Investors try to assess whether selloff is just a short-term pullback or a signal of deeper trouble
By Corrie Driebusch | August 24, 2015 7:58 p.m. ET

Concerns about China’s economy intensified, accelerating the selloff across global markets as investors tried to assess whether the rout was just a short-term pullback or a signal of deeper trouble.

The Dow Jones Industrial Average began Monday with a drop of 1,089 points, a bigger decline than the “flash crash” five years ago, and closed down 588.40 points, extending a slide that has left the index off 11% this year.

Few markets were spared. European and Asian stocks suffered even deeper declines, with the Shanghai Composite Index tumbling 8.5%, entering negative territory for 2015, having risen as much as 60% at its peak in June.

Oil slid below $39 a barrel in New York, and emerging-market currencies like Turkey’s lira and Russia’s ruble fell against the dollar.

The euro and U.S. Treasurys were notable exceptions, gaining in value as investors sought out safer havens for their money.

More at the link.

The Editor considers this to be a buying opportunity, at least for longer-term investors. If you aren’t looking to retire this year or next, and don’t panic and sell at a loss, my guess is that you will be alright in a couple of years. When the crash of 1987 occurred, investors who didn’t panic and sell were made whole again by the beginning of 1988. The same thing happened after the crash of 2008, though it did take longer.1

The severity of the selloff in stocks—shares of J.P. Morgan Chase & Co. were down more than 20% at one point early Monday—confounded some observers, because the U.S. economy is showing few of the red flags that preceded major market downturns in the past. The economy continues to expand, corporate earnings outside the energy sector are staying aloft, and credit remains widely available at historically low interest rates even for some junk-rated companies.

It’s really very simple: the stock market and the economy are really only tangentially connected. For example, Ford finished the day at $13.19, down $0.67, or 4.87%, but what happened to the Ford Motor Company which actually makes it worth 4.87% less than Friday? Yet, in 2008, Ford hit $1.94 per share, and the supposed economic geniuses at the Motley Fool told us that it was not a good buying opportunity.

The stock market is driven at least as much by emotion and politics as it is by actual economics. Prices move on perceptions, and it seems to me that those perceptions frequently have little to do with economic fundamentals.

  1. This assumes a portfolio which reasonably matches the various stock indices; individual portfolios would have different results, but, on the various indices, stocks made up all the ground that was lost.

The Federal Reserve Board of Governors: trying to manage the economy based on flawed theories

I’m back from vacation, and I spotted this article in The Wall Street Journal:

The Fed Has a Theory. Trouble Is, the Proof Is Patchy
As central bank ponders raising rates, it looks to the Phillips curve
By Ben Leubsdorf |August 23, 2015 2:00 p.m. ET

Federal Reserve officials and economists are meeting this week at the central bank’s annual retreat in Jackson Hole, Wyoming, shown last August. Click to enlarge. Photo: John Locher/ Associated Press

Federal Reserve officials might raise interest rates soon because they have a theory: Falling unemployment pushes up prices and wages, requiring tighter credit to keep inflation in check. What they don’t have is proof that the theory has worked consistently in the past, or evidence it is working now.The U.S. unemployment rate was 5.3% in July, just above the 5% to 5.2% range that Fed officials expect in the long run. But annual inflation readings have remained below the Fed’s 2% target, while pay raises seem stuck in low gear.

Fed Chairwoman Janet Yellen and her colleagues face a tough decision at their Sept. 16-17 policy meeting. They can assume inflation will ramp up, and raise interest rates at the risk of smothering modest economic growth, or they could wait for evidence of an inflation uptick and risk seeing prices rise too fast.

Their trust in the late economist A.W. Phillips, whose work on the relationship between the job market and wages remains popular but controversial four decades after his death, might matter as much as hard data on consumer prices and worker pay.

“We haven’t lost faith in the framework” described by Mr. Phillips and his successors, that a tight labor market generates higher inflation, said David Altig, research director at the Atlanta Fed. But “the numbers that you would plug into that framework and the exact levels at which the pressures begin to emerge, we’re not so clear on those.”

The murky links among unemployment, wages and prices will be in the mountain air this week at the central bank’s annual retreat in Jackson Hole, Wyo. Fed officials will join central bankers and economists from around the world to discuss inflation dynamics and monetary policy, the apt topic of this year’s conference.

You can read the rest at the link.

The Eccles Building in Washington, D.C., which serves as the Federal Reserve System’s headquarters, 20th St. and Constitution Ave. N.W., Washington, DC. I saw this building on Saturday.

Of course, your Editor first wondered just why the Fed is paying for an “annual retreat in Jackson Hole,” when the Fed has perfectly good offices, complete with computers, staff, and all of the research that would be needed for such discussions. What can they accomplish in Wyoming that they can’t get done at the Eccles Building? Other than looking at the gorgeous scenery, of course, but doesn’t that take time away from the work that they are supposed to do?

But that’s a minor concern; the real concern is why the Federal Reserve Board of Governors has been making policy based on a theory which hasn’t been demonstrably true?

Oh, it has matched reality at points in the past, and Chairman Janet Yellen is a long-time supporter of the theory:

But the simple link between U.S. unemployment and inflation described by the Phillips curve appeared to break down after the 1960s. High inflation coexisted with high unemployment in the 1970s. In the 1990s, the jobless rate fell as price pressures weakened. Over the past three years, inflation has declined despite a falling jobless rate.

Critics including Milton Friedman argued the Phillips curve’s suggested trade-off between unemployment and inflation was only temporary. In other words, the Fed couldn’t permanently lower unemployment by accepting higher inflation. Today, the curve’s advocates acknowledge that, but maintain a relationship exists in the short run. Yet even this pattern has proved ever more elusive. By 2007, Fed officials had come to believe that because the public’s expectations of inflation were so stable, it took much larger changes in unemployment than before to alter how prices and wages were set. Other forces, such as commodity prices, can have a bigger impact on inflation, but one that quickly fades.

The practical value of the curve as a tool to predict the future or fine-tune policy can rightly be questioned since economists don’t know how low unemployment can go before it crosses the theoretical threshold when inflation will start to rise, or how fast inflation will respond.

Plainly put, the operating theory hasn’t been consistently matched by actual economic results for the past two generations! Nevertheless, it is included in the Fed’s primary economic model. If the theory is flawed, if the theory has failed to predict economic results consistently, and it is part of the Fed’s economic calculations, then anytime that Fed action actually works the way the FOMC plans, it’s just pure dumb luck. And when the Fed’s actions haven’t worked, the FOMC shouldn’t be surprised . . . and neither should anybody else.

I have said it before: the federal government really can’t micromanage the economy, and when it tries, things are more likely to get fouled up than better. Perhaps we’d be better off if they didn’t even try.

We’ve Been Had

I made two related comments on FacelessBook.

I keep wondering how much our Frenimies like Soros is behind, or is financing groups home and from abroad to stir this crap up. Afterall, it was a few months ago protesters who went to Ferguson complained they weren’t PAID by Soros. If it is this organized, there is someone behind this pulling the strings and supplying the money.

No, the vote was counted in favor of Obola for other reasons than he is Black. I think if you look not too hard at his actions with certain parts of the world and certain countries, like say Iran, one understands why he was selected.

Then this showed up today:
Obama has changed his game plan and is openly showing the American people and the world his true colors…

by Michael Connelly, U.S. Constitutional Attorney

Barack Hussein Obama masquerades as the President of the United States when in fact he considers himself Emperor of the World. He took an oath of office to “preserve, protect, and defend the Constitution of the United States” and then began violating that oath as soon as he was sworn in.

In previous articles on my blog I have listed his impeachable offenses and have drawn up legal Articles of Impeachment that are now in the Judiciary Committee of the U.S. House of Representatives. In addition, I have posted an article titled “Aid and Comfort” pointing out how Obama has committed acts that are clearly treasonous under the definition of treason provided in Article 3, Section 3 of the Constitution.