The dollar did a big drop today after the FOMC announcement left rates unchanged. The Federal Reserve said the reduction of the balance sheet will begin relatively soon. I think relatively soon means September 2017.
The US economy is healthy enough to absorb gradual rate increases and the reduction of the Federal Reserve’s balance sheet, Fed Chair Janet Yellen testimony before Congress on July 12, 2017.
Federal Reserve Chair Janet Yellen told Congress on Wednesday that the bank hopes to keep raising a key interest rate and also intends to begin this year, the reduction of its bond holdings.
Yellen took note of several factors, such as household wealth and job gains that she said should fuel growth.
In what could be one of her last appearances on Capitol Hill, Yellen portrayed a market that, while growing gradually, continued to add jobs, gained from continuous household consumption and a recent leap in business investment, and was currently being supported too by stronger economic conditions overseas.
She blamed the economic slowdown in the first half of 2017 on inflation. She said Fed officials are watching developments closely to be certain price gains go back toward the 2 percent inflation target of the Fed.
Janet Yellen Testimony Freak Out Over Inflation
Janet Yellen seemed a little freaked out over the big drop in inflation over the last few months.
I take Yellen’s comments on inflation to mean that the economy should not have the CPI plunging in this part of the economic cycle. In fact, just the opposite should be occurring. But she added that it was considered by officials as an anomaly; inflation is predicted by the Fed next year.
Many economists believe the Fed, which has raised rates three times, will increase rates yet another time this year.
The Fed continues to anticipate that the development of the market economy will justify gradual increases in the federal funds rate over time while reductions in the Fed’s holdings of more than $4 trillion in securities will probably start “this year”.
In her prepared testimony before the House Financial Services Committee, Janet Yellen testimony repeated the message she’s been sending: the market has improved enough that it no longer requires the support the central bank began providing in 2008 in the aftermath of a serious financial crisis and the deepest recession since the 1930s.
In light of the continuing expansion, the Fed plans to keep raising its benchmark rate of interest and to lower its investment holdings, Ms. Yellen said in prepared testimony. She did not offer details concerning the time of the next actions of the Fed. Analysts expect the Fed to begin shaving its bond portfolio before the end of 2017.
The economy began the year with a slow growth rate of just 1.4 percent, it has regained momentum in recent months, aided by strong job gains, a revival of business investment and a strengthening of international markets.
Bottom line: the market is at full employment and the Fed is moving rates. As the Fed reinvests some of the bond holdings which mature monthly, they will decrease that reinvestment to reduce their balance sheet which will mark the beginning of QT (quantitative tightening). Many believe that QT began this year when the Fed did a series of rate hikes.
The Fed needs to keep policy accommodative to keep on supporting the recovery, but may hit a “neutral” rate quicker than anticipated. Estimates are that inflation has been dropping so fast that we could be near zero right now. Yellen has said the Fed expects estimates of the inflation rate to grow over time.
Yellen said in her testimony that as it stands rates “might not need to rise all that much farther” to reach neutral.
Yellen said growth remains moderate with business investment and consumer spending picking up, and the US economy is benefiting from growth in other countries too.
A strengthening in economic development abroad has provided significant support for U.S. manufacturing production and exports, Yellen said.
The Fed slashed its key policy rate to near zero to fight the worst economic recession since the 1930s, and kept it there for seven years before nudging it higher in December 2015. It left the rate unchanged before increasing it again in December 2016, March 2017, and June 2017 of this year.
At its June meeting, the Fed indicated that it expected to start decreasing its $4.5 trillion balance sheet after this year, a measure that could put slow upward pressure on longer-term prices for such things as home mortgages.
Yellen said, the market seemed to be in a virtuous loop of hiring, investment and spending which should increase resource usage somewhat further, thereby fostering a quicker rate of wage growth and price increases.
The Janet Yellen testimony was fairly uneventful except for her comments on falling inflation which seemed to baffle the Fed as to why this was happening at this point during the economic cycle.
One does not simply reduce a $4.5 trillion Fed balance sheet in the background, you know, like watching paint dry. Janet Yellen a.k.a Lady Strange, did not disappoint with her carefully crafted words so as not to pop the stock market bubble.
Fed Balance Sheet Reduction Plan
The Fed plans to reduce reinvestments in Treasuries and MBS’ by $10 billion a month. Every 3 months they will raise the amount until it gets to $50 billion a month.
In the video below, I talk more about the Fed balance sheet reduction plan and then we look at the how the major indices responded today to the news.
Something important happened on the Consumer Price Index today and if you’re not following it, you’re a rookie. Don’t be a rookie. Listen to what the CPI is saying.
Consumer Price Index Is Saying Fed Should Not Raise Rates
A common theme that you will continue to hear me drive home is that the economy is too weak for the Federal Reserve to hike rates. Today, the CPI confirms that IMO.
The CPI missed. The CPI forecast was for no change at 0%, the actual number was -0.1%. That is a big miss for this indicator folks.
Don’t be that rookie that follows the Fed press conferences after rate hikes where Yellen says the economy is growing at a moderate pace and everything is fine. Everything is not fine and I think the CPI release today confirms that.
Maneco64 posted this video on YouTube today about the Consumer Price Index and I think he nails the analysis.
President Trump told Janet Yellen he thinks she’s a low interest rate person like himself according to a CNBC report (link above). Yellen has been raising current interest rates and so I’m thinking the President is less likely to keep her on-board when her term expires in February 2018.
Citing a Wall Street Journal article, President Trump told Janet Yellen back in January that she was doing a good job, according to people familiar with the exchange. However, the President also told Yellen that he thinks she’s a low interest rate person like himself.
Deviate From Low Current Interest Rates Else You’re Fired
I’m thinking that President Trump asked his legal advisor if he has the power to flat out order Yellen to keep interest rates low. I know I’m reading tea-leaves regarding current interest rates but it’s important we get the conversation going as the Fed is the single most important factor in the direction of the stock market.
President Trump was probably told that he can’t directly order the democrat Yellen to keep rates low but that he could make it clear to her that he favors lower rates. I think this was a clever way of communicating to Yellen what he wants her to do if he’s going to keep her on after February 2018.
Yellen has been raising current interest rates and slowing down the economy. If the US economy keeps deteriorating in the second half of 2017, you can bet that the President fires her when her term expires in February 2018. Again, I’m reading tea-leaves here so take this speculation with a grain of salt.
Before you dismiss this as just another gold/silver bug predicting gloom and doom so that they can profit, consider Caterpillar’s recent announcement that they are closing their Chicago plant and cutting 800 jobs along with it.
Caterpillar make’s large construction equipment and they’ve been struggling for a few years now. How can the companies that produce construction machines be going out of business when according to Janet Yellen the economy is getting stronger? Silver Report did a show discussing Caterpillar and the disconnect between soft data and hard data and makes some excellent points IMO.
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A weekly Saturday financial show that attempts to predict market direction for the week ahead by looking at a variety of fundamental and technical charts. This week’s show features commentary on Janet Yellen and the Federal Reserve’s strange timing of a rate hike, how Obama Administration diverted FNMA money and investors dividends into Affordable Care Act to keep it solvent, and the collapsing pension funds across America.
The less volatile sticky CPI confirms the uptrend.
ObamaCare has exploded the cost of medical care higher.
Medical care commodities, which are prescription and non-prescription medications, have exploded higher.
Inflation is finally trending higher which is what the Federal Reserve has been trying to engineer for years through monetary policy. The WSJ writes…
Fed Chairwoman Janet Yellen herself said last week that letting the economy run hot for a while might have some benefits… None of this is enough to take a rate increase at the Fed’s December meeting off the table. But it does mean that, even as prices pick up, further rate increases will be slow to come. Investors accustomed to inflation running below the Fed’s target may be in for some retraining.
Folks, this is another reason why we need to start getting more bullish on the stock market as we head into November and the start of the best six months of the year. Remember, a big part of the bearish scenario was a slowing US economy pressured downward by deflation as a result of Saudi Arabia destroying our shale oil industry. Lots of good jobs were lost and replaced by lower paying service sector ones as a massive wave of disinflation hit our economy. The latest inflation numbers suggest that the worst is behind us as the price of oil is in a slow fade upward, and more oil rigs are brought back online as evidenced by the upward trend on the weekly Baker Huges rig count.
All traders are watching this earnings season closely to see if the falling earnings streak is over. That’s the confirmation data point that is needed. In an inflationary environment, businesses are raising prices to keep up with the growing demand from a strengthening consumer. Traders want confirmation that the inflation we are now seeing is signaling a bottom in the earnings recession we have been in since Q1 of 2015.
I’ve been asking traders what causes low-interest rates. The consensus is that the Federal Reserve is what causes low-interest rates. That is not entirely true and believing that could be harmful to your trading account.
Some 250 years ago, David Hume was the very first economist to explain what causes low-interest rates.
The three things that cause low-interest rates are:
1. Small demand for borrowing
2. Great riches to supply that demand
3. Small profits arising from commerce
In other words, the most important things that cause low-interest rates are factors going on in the economy. It’s the weak economy that is most responsible for why we have low-interest rates. While this may seem like common sense to some of you, I was surprised by how many traders were more focused on monetary policy than on macroeconomics.