In the TV show Mission Impossible, Mr. Phelps is assigned a difficult mission on a weekly basis.
For the Federal Reserve, their mission was to achieve a target rate of core inflation of 2%. Unfortunately, this was Mission Impossible!
If we look back to the summer of 2012, core inflaton had actually more than doubled since January 2011 when core inflation was under 1% to March 2012 when core inflation hit 2.1%.
But core inflation started to plunge after March 2012.
Enter QE3, The Fed’s 3rd attempt at quantitative easing. Despite the growth in The Fed’s balance sheet, core inflation kept falling to today where it stands at 1.235%.
In other words, The Fed seems incapable of generating core inflation.
Why? Simply put, the employment to population ratio is lower than it was in 2007 as are real median household income and average wage growth YoY. It is difficult to generate core inflation under these conditions.
“As always, should you or any of your Fed Board of Governors fail in your mission to create core inflation of 2%, the Treasury Secretary will disavow any knowledge of your actions. This tape will self-destruct in 5 seconds.”
The U.S. Census Bureau recently released the U.S. homeownership rate figure. It has fallen to 63.4%, a 50 year low.
Mortgage purchase applications are up 25% YoY (orange line) even as the homeownership rate continues to decline. And homeownership continues to decline despite a Fed Funds Target rate of 0.25% (which likely will be raised soon).
A new 50 year low signals that US housing policy for homeownership has become undone.
Global growth concerns are rocking the markets while Fed Vice Chair Stanley Fischer teases about a rate increase.
Remarks by Federal Reserve Vice Chairman Stanley Fischer last week suggested the central bank hasn’t ruled out raising interest rates when the Federal Open Market Committee gathers on Sept. 16-17. That has heightened concerns that the Fed may increase rates even as growth slows around the world. Traders are now pricing in a 38 percent chance that it will act this month, up from 24 percent last Wednesday.
Overnight, the Nikkei index fell 4% and the Shenzhen index fell 4.6% on China slowdown concerns.
The Dow opened down 2%.
Crude oil futures prices dropped around 4%.
While not a slam dunk for a September rate increase, The Fed is thinking about it. I call this a Stanley Steamer.
The Federal Reserve hasn’t raised its Fed Funds target rate since the latter half of 2006. Even with near zero Fed Funds effective rates, US 1-4 family mortgages outstanding (red line) have only just turned positive in YoY growth.
Here is a chart of 1-4 family mortgages outstanding and The Fed Funds Effective Rate. Zero rate policies haven’t really helped the 1-4 family residential mortgage market (partly because a number of the mortgage products during the last decade have been curtailed such as pay option ARMs and NINJA (no income, no job) loans.
Even bank credit in general is still growing more slowly than during the last decade. The slow growth is a combination of increased regulation of the banking system (Dodd-Frank, Consumer Financial Protection Bureau) and lower household incomes (and slower wage growth).
The slower growth of bank credit in this decade (coupled with lower household income and tighter consumer lending regulation) has resulted in historically low levels of the M1 Money Multiplier and M2 Money Velocity.
Will The Fed raise the Fed Funds target in September? Vice Chair Stanley Fischer stated in Jackson Hole Wyoming that The Fed shouldn’t wait for the economy to hit 2% inflation.
Great. Now that 1-4 family mortgages outstanding growth has FINALLY become positive, The Fed wants to raise rates.
It is indeed a wild ride!
The annual Federal Reserve retreat in Jackson Hole is underway and the theme of the conference is Inflation Dynamics and Monetary Policy.
I wonder if any of the participants noticed that Core Inflation for July was released this morning and it shows that it has been dropping since 2012 … and is only 1.235% YoY?
The core PCE deflator — the Fed’s preferred metric of core inflation — rose 0.1 percent in July (0.07221 unrounded). This was sufficiently weak to allow the year-on-year growth rate to slip to 1.2 percent from 1.3 percent previously. While a one-tenth deceleration is certainly not dramatic, it is unusual given that this metric has held steady at 1.3 percent in every month of the first half of 2015. It has not been below 1.3 percent since March 2011. It is hard to see how the July income and spending report will reinforce policy makers’ confidence in a rebound in inflation toward their target.
And the economic surprise index is painfully negative.
So will The Fed raise the Fed Funds rate in September? The futures data says no. The implied probability of a hate hike is 30%.
Finally, Q3 GDP according to the Atlanta Fed’s GDP NOW tracker has fallen to a measly 1.2%.
I wonder if any of the participants at Jackson Hole are looking out the windows for Jackalopes? Here is a photo of Fed Chair Janet Yellen riding one.
Apparently, The Fed has been jawboning a possible Fed Funds Target increase so often that interest rates have actually increased. Much like the old EF Hutton ads.
According to Reuters, China’s Peoples’ Bank of China official blames planned U.S. interest rate rise for volatility. In fact, the PBOC is calling on The Fed to delay any increase in the Fed Funds Target Rate.
At the same time, China is dumping US Treasury bonds to support the Yuan.
And today the Q2 2015 revision was released showing that Q2 2007 GDP growth jumped to 3.7% from 2.3% leading to speculation that The Fed may indeed raise rates in September.
Too late PBOC! The 2 year Treasury yield has already risen 25 basis points since January 31. Call this the stealth Fed rate increase.
The yield curve has risen as well since January 2015.
Apparently, the relentless jawboning by Yellen, Fischer, and the other Fed governors have helped achieve the 25 basis point rise in rates already.
When The Fed governors talk, people listen.
Existing home sales for July are out and … they are at the highest since February 2007.
However, mortgage purchase applications, average wage growth and real median household income are all lower than in February 2007. In fact, mortgage purchase applications are 49% lower than in February 2007 and average wage growth is 42% lower than in March 2007.
Talk about divergence! If traditional borrowers aren’t driving the rise in existing home sales, who is? Not owner-occupants. As RealtyTrac points out, the share of homes sold to owner-occupants dropped to a new low in Q1 2015.
Low interest rates courtesy of The Fed have certainly helped investors!!
So, will The Fed raise rates in September, despite all the negative economic news? According to Fed Funds Futures data, there is only a 36% of a rate increase to 0.50%. Although there is only a 10% chance of that.
Where have I seen this graph before?