Because I’m that kind of guy, I’ll spare you the need to watch Janet Yellen’s press conference from today (06.15.2016) after the Federal Reserve held interest rates steady and significantly reduced their interest rate forecast. Here’s the two word summary: it’s over.
So what exactly is over and what’s with the lack of professional economic tone?
Wonderful questions astute amateur!
What’s over is the confidence in the Fed and the economic recovery narrative. I touched on why this is critical in my article from yesterday. As for the tone, after drudging through phony formal economics speak all day – I’ll subject you to some of it shortly – I just need to be real with you all.
For a quick laugh, it looks like CNBC’s Steve Liesman – yes his last name really is lies man – has finally run out of patience with Janet Yellen dodging his questions about the Fed’s credibility:
As a reminder, here is what Liesman – to his credit – asked Janet Yellen in March when all the ‘data’ seemed just fine but the Fed did not raise interest rates like many had expected followed by Yellen’s response:
LIESMAN: Madam Chair, as you know, inflation has gone up the last two months. We had another strong jobs report. The tracking forecasts for GDP have returned to two percent. And yet the Fed stands pat while it’s in a process of what it said at launch in December was a process of normalization. So I have two questions about this. Does the Fed have a credibility problem in the sense that it says it will do one thing under certain conditions, but doesn’t end up doing it? And then, frankly, if the current conditions are not sufficient for the Fed to raise rates, well, what would those conditions ever look like
YELLEN: Well, let me start — let me start with the question of the Fed’s credibility. And you used the word “promises” in connection with that. And as I tried to emphasize in my opening statement, the paths that the participants project for the federal funds rate and how it will evolve are not a pre-set plan or commitment or promise of the committee. Indeed, they are not even — the median should not be interpreted as a committee-endorsed forecast. And there’s a lot of uncertainty around each participant’s projection. And they will evolve. Those assessments of appropriate policy are completely contingent on each participant’s forecasts of the economy and how economic events will unfold. And they are, of course, uncertain. And you should fully expect that forecasts for the appropriate path of policy on the part of all participants will evolve over time as shocks, positive or negative, hit the economy that alter those forecasts. So, you have seen a shift this time in most participants’ assessments of the appropriate path for policy. And as I tried to indicate, I think that largely reflects a somewhat slower projected path for global growth — for growth in the global economy outside the United States, and for some tightening in credit conditions in the form of an increase in spreads. And those changes in financial conditions and in the path of the global economy have induced changes in the assessment of individual participants in what path is appropriate to achieve our objectives. So that’s what you see — that’s what you see now.
Translation: I have no idea what’s going on.
Don’t worry everyone; these geniuses know what’s best for us and have everything under control. Credibility problem? Never. They always get things wrong because there’s so much uncertainty. That’s sure to make everyone fully confident in the system. If you’re still conscious having read that, then do me the honor of eliminating either your insomnia or your sanity once and for all. Fast forward to today:
LIESMAN: The Fed’s outlook for rates has come down sharply for 2018 especially, but it’s been coming down gradually over time almost a full percentage point in some cases compared to a year ago. And yet the GDP outlook remains the same. What has happened, in say just the past quarter, to the Committee’s outlook for rates to bring it down so much for say 2018 where it is now just 2.4% and further from the long run than it was say in the prior estimate that was out there? Has there been a dramatic change in the Committee’s view on the relationship of GDP to rates? And maybe you could also explain why the Fed has to keep lowering these rates and getting that forecast wrong.
YELLEN: So as I mentioned in my opening remarks, there is really a great deal of uncertainty around each individual’s assessment of the appropriate level of rates particularly as we go further out in the forecast horizon and when we come to the long term. And I think what we can see in what many econometric and other studies show is that the so-called neutral rate, namely the level of the federal funds rate that is consistent with the economy growing roughly at trend and operating near full employment, that rate is quite depressed by historical standards. Many estimates would put it in real or inflation adjusted terms near zero. Now – um – the path that you see in the dot plot for rates over time is importantly influenced – uh – there is accommodation and – uh – as we – um – achieve our objectives I think most participants feel that the accommodation in the current stance of policy needs to be gradually removed, but a very important influence in the out years is what will happen to that neutral rate that will just keep the economy operating on an even keel. And I’ve often in my – um – statements and remarks talked about headwinds – um – that reflect – um – lingering effects of the financial crisis – um – to the extent that there are headwinds I think – um – many of us expect that these headwinds will gradually diminish over time and that’s – uh – a reason why you see the upward path for rates. But there are also more long lasting or persistent factors that may be at work that are holding down – um – the longer run level of neutral rates. For example – um – slow productivity growth, which is not just a US phenomenon but a global phenomenon. You know obviously there is a lot of uncertainty about what will happen to productivity growth, but – uh – productivity growth could stay low for a prolonged time and we have – um – an aging – aging societies – um – in many parts of the world that could depress this neutral rate, and I think all of us are involved in a process of constantly reevaluating – um – where’s that neutral rate going and I think what you see is a down – a downward shift in that assessment over time in the sense that maybe – um – more of what’s causing this neutral rate to be low are factors that are not going to be rapidly disappearing but will be part of the new normal. Now you still see an assessment that that neutral rate will move up somewhat, but it has been coming down and I think it continues to – uh – it continues to be marked lower. And – and it is highly uncertain – for all of the dots.
Translation: Nobody has any idea what’s going on and I want to go home.
If you’re confused, that’s precisely the point. Tomorrow (06.16.2016) on Brothers on the Wall at 7:00pm EST I will be going through an overview of why economic jargon is essentially impossible to understand without advanced study in the subject – not to mention extremely challenging even with years of study, instruction, and experience. Hint: it’s purposeful.
I’d like to give a quick shout out to everyone who is still alive and especially to those who appreciate the irony of an uber-dovish Keynesian like Janet Yellen appealing to the neutral rate, an Austrian economics concept pertaining to the business cycle that the Fed supposedly eliminated through their expert application of monetary policy. Great news everyone; there’s no forecast of a recession in the next decade at least! Go back to your bread and circuses…
But here come a few more obvious and astute amateur questions. What about the robust economic recovery? Was the Fed wrong about that also? Hasn’t the current regime already solved – or at least taken credit for solving – all the problems from the financial crisis almost a decade ago? How can an answer almost 500 words long not say anything? Is this really the person who is supposed to be in charge of predominant global economy?
If it’s not clear at this point that there is no legitimate reason for confidence in the Federal Reserve, then it’s literally going to take losing everything people have in order for them to wake up. Most will fall into that trap because, quite frankly, they can’t be bothered to pay attention. More concerning are those who have no confidence in these institutions but won’t do anything about it. Hint: Bible, water, food, protection, cash, energy, silver, and gold.
I don’t have anything against Janet Yellen. In fact, I feel sorry for her. She must be living a nightmare right now, but it’s a nightmare we’re all going to face sooner rather than later. We are now officially in the economic endgame of the current system. Diversify out of paper and into real, tangible assets while you have the opportunity.