THE FEDERAL RESERVE

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MARKETWATCH

"Fed’s Williams: Rising bond yields reflect the strength of the U.S. economy, not inflation jitters"

By Greg Robb

Published: Oct 5, 2018 12:21 p.m. ET

The rout in U.S. Treasurys this week that sent yields soaring is just a sign that market participants are coming to terms with a strong economic outlook, a key Federal Reserve official said Friday.

“From my perspective, market participants are seeing the really strong U.S. data,” said New York Fed President John Williams in an interview on Bloomberg Television.

“Looking closely at the data...I don’t see the market telling us that they are worried about inflation,” Williams said.

“It just reflects the strength of the economy,” he said.

Data back up the Williams assertion, as market-implied inflation expectations have drifted lower in October.

“We’ve seen a number of indicators showing that the economy is growing at a pretty strong rate and that there is momentum going into the end of the year,” he said.

The selloff in Treasurys took the 10-year yield up to 3.22% compared with 3.055% last Friday.

Stocks were under pressure with the Dow Jones Industrial Average off 240 points.

Asked about the September employment report, Williams said the U.S. is witnessing “a bit of a Goldilocks economy” of low unemployment, strong job growth and low and stable inflation.

The New York Fed president, a member of Fed Chairman Jerome Powell’s inner circle, said he was not worried about inflationary pressures “at least for the next year or two.”

https://www.marketwatch.com/story/feds- ... 2018-10-05

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IT'S NOT YOUR CALL, DONALD …

MARKETWATCH

"Trump says Fed going too fast in raising interest rates"

By Robert Schroeder

Published: Oct 9, 2018 4:18 p.m. ET

President Donald Trump said Tuesday he doesn't like what the Federal Reserve is doing with interest-rate policy.

"I think we don't have to go as fast," he told reporters at the White House, before leaving for a trip to Iowa.

The Federal Reserve has raised interest rates three times in 2018 and is forecasting more increases to come.

Trump said he didn't believe there's a problem with inflation.

https://www.marketwatch.com/story/trump ... ewer_click

[thelivyjr]

MARKETWATCH

"Trump says the Fed has ‘gone crazy’ after the Dow tumbles 830 points in one day"

By Mark DeCambre

Published: Oct 10, 2018 6:47 p.m. ET

"I think the Fed is making a mistake."

"It’s so tight, I think the Fed has gone crazy"

— President Donald Trump

That is the view that President Donald Trump shared of the Federal Reserve on Wednesday in the wake of a virtual bloodbath on Wall Street that resulted in the worst daily decline for the Dow Jones Industrial Average and the S&P 500 index since both U.S. equity benchmarks tumbled into correction territory back in early February.

The Nasdaq Composite Index, meanwhile, suffered its ugliest day since U.K. voters coalesced around a market-disrupting plan to exit from the European Union’s trade bloc back in June 2016.

In all, it was a withering session for an administration that has closely watched stock-market performance and views it, at least partly, as a gauge of the success of its economic policies, including corporate tax cuts and deregulation.

However, those efforts, Trump says, are imperiled by the policies of the Fed, which has raised interest rates three times this year and has signaled its intention to do so a fourth time before year-end.

Trump’s comments, made before a rally in Erie, Pa., on Wednesday, are an escalation of previous criticisms that he has leveled against the Fed and Chairman Jerome Powell, in particular.

Reuters reported in late August, that Trump was “not thrilled” with Powell, who he thought would provide “more help.”

Trump also complained to donors at a Hamptons fundraiser that Powell hasn’t been “cheap money,” Bloomberg News reported earlier in August.

Investors appear to be responding to a steady rise in borrowing costs, reflected in the 10-year Treasury note yield climbing to a high around 3.25%, marking a seven-year peak for a debt instrument used to price everything from mortgages to car loans.

It is unusual, but not unprecedented, for a U.S. president to publicly articulate the type of criticism against Fed bosses that Trump has against Powell because it can be viewed as threatening a monetary body that prides itself in its independence to make monetary-policy decisions.

In a lengthy statement following the market’s downturn on Wednesday, White House spokeswoman Sarah Sanders said:

The fundamentals and future of the U.S. economy remain incredibly strong.

Unemployment is at a fifty year low, taxes for families and businesses have been cut, regulations and red tape have been slashed, paychecks are getting fatter, consumer and small business confidence are setting records, and farmers, ranchers and manufacturers are empowered by better trade deals.

President Trump’s economic policies are the reasons for these historic successes and they have created a solid base for continued growth.

Some were quick to defend the Fed’s efforts to normalize policy in the wake of the 2007-09 financial crisis:

https://www.marketwatch.com/story/trump ... ewer_click

[thelivyjr]

MARKETWATCH

"Trump calls Fed ‘too cute’ in third straight day of criticism"

By Greg Robb

Published: Oct 11, 2018 1:31 p.m. ET

President Donald Trump kept up his steady drumbeat of criticism over the Federal Reserve, pinning the steep stock-market sell-off on their interest-rate policy.

Asked about the stock market rout in an interview on “Fox and Friends” on Thursday morning, Trump replied: “The Fed is getting a little too cute."

"That’s all."

"It’s ridiculous what they’re doing.”

On Wednesday, after the stock market closed, Trump told reporters that “the Fed is making a mistake.”

“I think the Fed has gone crazy,” he added.

In a later interview with Fox News Wednesday night, Trump said the Fed “is going loco and there is no reason for them to do it.”

Trump also criticized the Fed on Tuesday.

Since July, Trump has made clear he doesn’t like the Fed’s plans to gradually raise short-term interest rates.

The stock market sell-off seems to have intensified his anger.

Some economists think Trump has a point.

Mike Pearce, chief economist at Capital Economics , said he saw scattered signs the economy is already starting to cool off.

Analysts seem to doubt the criticism will sway policy makers.

Krishna Guha, a former top Fed staffer and now vice chairman at Evercore ISI, said in a note to clients that the criticism “will not in our view have a material impact on the path of policy,” but may impact the way Fed Chairman Jerome Powell talks about the policy path.

The wiser path for the Fed chair is to avoid talking about policy needing to move into restrictive territory until next year.

Stocks were set to tumble again after Wednesday’s broad rout.

https://www.marketwatch.com/story/trump ... ewer_click

[thelivyjr]

MARKETWATCH

"Fed's George backs further interest-rate hikes, says pace and extent uncertain"

By Greg Robb

Published: Oct 11, 2018 1:20 p.m. ET

Kansas City Fed President Esther George said Thursday she favors continued gradual interest-rate hikes, but said the timing and extent of further actions is still under discussion.

"The path of policy cannot be on a pre-set course at this stage of the expansion," George said, in a speech prepared for delivery to the Economic Forum in Tulsa, Okla.

George said the risks to the economy are currently balanced.

On the upside, fiscal policy and elevated consumer confidence could lead to higher growth and inflation.

On the downside, trade uncertainty and growing risks in emerging market economies could slow down U.S. growth.

George will be a voting member of the Fed's interest-rate committee in 2019.

https://www.marketwatch.com/story/feds- ... ewer_click

[thelivyjr]

MARKETWATCH

"Kudlow says Trump isn't dictating policy to the Federal Reserve"

By Robert Schroeder

Published: Oct 11, 2018 10:23 a.m. ET

President Donald Trump isn't dictating policy to the Federal Reserve, National Economic Council Director Larry Kudlow said Thursday on CNBC.

Kudlow was responding to questions about the president's characterization of the central bank raising interest rates as "crazy."

Trump said Thursday the Fed was "getting a little too cute" when asked about Wednesday's stock-market rout.

Kudlow said that the Fed is independent.

Stock market corrections "come and go," he said, and called the U.S. economy the hottest in the world.

"We are crushing it," he told the network.

https://www.marketwatch.com/story/kudlo ... ewer_click

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MARKETWATCH

"Fed's Evans says slightly restrictive policy stance 'makes sense'"

By Greg Robb

Published: Oct 12, 2018 9:12 a.m. ET

Chicago Fed President Charles Evans said Friday it makes sense to move interest rates up until the level of rates is slightly dampening growth.

With the economy growing strongly and the unemployment rate falling, "setting policy ever so slightly restrictively makes sense and we could hold... that level for quite some time," Evans said, in an interview on CNBC.

The Chicago Fed president said he thinks a "neutral" level of short-term rates is in a range of 2.75-3% and a restrictive policy might be 50 basis points above.

At the moment, the Fed's fed funds rate is in a range of 2-2.25%.

Evans said he wasn't worried about inflation and the price index might move up to a 2.2-2.3% range.

He had little to say about President Donald Trump's criticism of Fed policy.

"We're looking at a strong economy and we're adjusting the policy stance," Evans said.

https://www.marketwatch.com/story/feds- ... 2018-10-12

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THE WASHINGTON EXAMINER

"Larry Kudlow defends Fed as Trump bashes it"

by Colin Wilhelm

October 11, 2018 10:51 AM

National Economic Council Director Larry Kudlow defended the Federal Reserve Thursday from President Donald Trump’s criticism that the central bank is raising rates too quickly.

“I think [Fed Chairman] Jay Powell’s on target,” Kudlow said in an interview Thursday morning on CNBC.

“There’s no reason economic growth has to cause inflation,” he continued.

Kudlow noted that the Fed already raised rates seven times during the current extended stock market rally that the U.S. has enjoyed over the last two years.

The Fed has raised the baseline interest rate it sets for banks to borrow from it gradually, after years of historically low interest rates.

The Federal Reserve raises interest rates to help curb inflation, the measure of prices.

President Trump appointed Powell, but the Fed chair is granted independence to allow the central bank to make its decisions based on the health of the economy rather than political considerations.

"There’s nothing new here, as far as I can tell."

"We all know the Fed is independent,” said Kudlow, downplaying the president’s persistent criticism of the Fed’s recent decision-making on interest rates.

“The president is not dictating policy to the Fed, he didn’t say anything remotely like that.”

Trump called into "Fox and Friends" earlier Thursday morning in part to criticize the Fed for raising rates, saying that he now pays higher interest on his own debt as a result.

On Wednesday, Trump said that the Fed "has gone crazy."

"I believe there’s agreement here that strong economic growth does not cause inflationary and does not cause panic increase in interest rates,” added Kudlow.

https://www.washingtonexaminer.com/poli ... -bashes-it

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MARKETWATCH

"Inflation suddenly cools off after rapid rise, but it doesn’t mean Fed will skip a rate hike"

By Jeffry Bartash

Published: Oct 15, 2018 4:04 p.m. ET

The Federal Reserve is raising U.S. interest rates — and giving stock investors a heartburn — to head off a threat to the economy from rising inflation.

But what if inflation has already peaked?

After surging to a six-year high in July, inflation has leveled off in the past few months.

The consumer price index, for example, shows the yearly increase in the cost of living has slowed to 2.3% from a recent peak of 2.9%.

The Fed’s preferred PCE price barometer, meanwhile, softened slightly to an annual rate of 2.2% in August from 2.3%.

And the core rate that strips out food and energy has been stuck at or below the central bank’s 2% target for six months.

The relaxation in price pressures has led some economists to wonder if the Fed will reconsider how many times it will raise interest rates in 2019.

“This is the sort of data that should get the Fed to skip a rate hike next year,” wrote Neil Dutta, the head of economics at Renaissance Macro Research, in an article titled “Implications of Soft Inflation.”

For now it’s probably not in the cards.

The central bank will undoubtedly raise rates once more in 2018 and it’s signaled plans to lift interest rates three times in 2019.

Investors fretting about those rate hikes is partly what caused a big plunge last week in the Dow Jones Industrial Average and S&P 500.

Perhaps, as some economists contend, the respite in price pressures will be short-lived.

The flames of inflation will soon lick higher again owing to strong economic growth and the tightest labor market in decades, keeping the Fed on its current path.

Consider Dutta a skeptic.

He points out the pace of consumer inflation actually started to slow about six months ago.

More recently a stronger dollar has put further downward pressure on inflation by making foreign goods cheaper for Americans to buy.

And surveys of consumers indicate they don’t expect inflation to increase much over the next five to 10 years.

None of that is going to stop the Fed from raising rates in December, of course.

But if inflation doesn’t rise any further, the central bank is sure to reevaluate its strategy for the long run.

Dutta says there’s good reasons to think inflation won’t take off.

For one thing, he contends, the price of most consumer goods and services are “quite slow” to change.

Inflation-adjusted increases in wages, what’s more, tend to be closely followed historically by higher productivity.

Productivity refers to the ability of workers to use new tools, techniques, technology or their own work experience to produce more goods and services in the same amount of time.

When productivity rises companies can pay workers more without adding to inflation.

Even after its recent runup, the rate of inflation is still quite low by historical standards.

To Dutta that means the economy can probably grow faster than 2% a year and even cope with an unemployment rate below 4% without sharply stoking inflation.

“We see limited evidence that underlying inflation is picking up much in the coming year or two,” Dutta concluded.

https://www.marketwatch.com/story/infla ... ewer_click

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MARKETWATCH

"Opinion: Powell has lost his North Star, and the Fed is flying blind"

By Peter Morici

Published: Oct 15, 2018 6:01 a.m. ET

Federal Reserve Chairman Jerome Powell is in an unenviable position.

Folks expect him to fine-tune interest rates to keep the economy going and inflation tame but he can’t make things much better — only worse.

Growth is nearly 3% and unemployment is at its lowest level since 1969.

What inflation we have above the Fed target of 2% is driven largely by oil prices and those by forces beyond the influence of U.S. economic conditions — OPEC politics, U.S. sanctions on Iran, and dystopian political forces in Venezuela and a few other garden spots.

When the current turbulence in oil markets recedes, we are likely in for a period of headline inflation below 2%, just as those forces are now driving prices higher now.

Overall, long-term inflation has settled in at the Fed target of about 2%.

The Fed should not obsess about it but keep a watchful eye.

Amid all this, Powell’s inflation compass has gone missing.

The Phillips curve, as he puts it, may not be dead but just resting.

To my thinking, it’s in a coma if it was ever alive at all.

That contraption is a shorthand equation sitting atop a pyramid of more fundamental behavioral relationships.

Those include the supply and demand for domestic workers and in turn, an historically large contingent labor force of healthy prime-age adults sitting on the sidelines, the shifting skill requirements of a workplace transformed by artificial intelligence and robotics, import prices influenced by weak growth in Europe and China, and immigration.

Of course, Mariner Powell has his North Star — what economists affectionately call R* (R-Star), but it is no longer at a fixed position in Powell’s sky.

R* is the federal funds rate that neither encourages the economy to speed up or slow down.

However, with businesses needing much less capital to get started or grow these days and for decades China and Germany—the second and fourth largest economies globally—racking up current account surpluses and savings to invest abroad, it is no wonder the forces of supply and demand have been driving R* down to historically low levels.

With long-run inflation at 2%, current estimates put the nominal R* at a bit below 3%.

That’s just three more quarter-point rate increases away.

Overshooting could kill the recovery but how is Powell to know?

Miner Powell’s canary has gone AWOL.

Historically, economists and financial types have looked to the yield curve for the warning croak that the economy is headed for recession.

When I wrote about a flattening yield curve on MarketWatch early last December, the 10-year less 30-day Treasurys spread was about 120 basis points.

Now it’s about 100, and folks are even more nervous.

Although the gap is supposed to tell us about investor expectations for growth—a wide spread meaning optimism and a narrowing gap the threat of recession — these days, long rates are significantly affected by factors quite beyond the U.S. economy.

Increasingly, the dollar is the currency of payment for import contracts — 40% of imports worldwide are invoiced in dollars even though the United States is only about one-tenth of the market.

And populist movements in Europe and political uncertainty elsewhere have driven private-asset managers and savers into dollars.

Consequently, foreign private actors — not just foreign central banks — have a ravenous appetite for Treasurys and dollar-denominated deposits.

The economists at the Fed are really econometricians bent on estimating all these relationships with ever-more-complex statistical techniques but they only have historical data.

The parameters keep shifting, and historical information can only inadequately tell us their values.

All the Fed can do is feel its way with an eye toward price pressure in the core.

In the 1950s, we hit unemployment below 3%, and it could go much lower than 3.7% without much inflation.

We have strong reason to believe the equilibrium short-term rate is no more than 3% — though on that Chairman Powell is agnostic.

And if we take Federal Open Market Committee policy statements and the plot chart at face value, Powell and his colleagues intend to drive the federal funds rate to well above that by 2020.

That’s dangerous stuff.

https://www.marketwatch.com/story/powel ... 2018-10-15