Dear Federal Reserve: *Now* is the time to raise interest rates? RLY?? SRSLY?!?
by New Deal democrat
Dear Federal Reserve: *Now* is the time to raise interest rates? RLY?? SRSLY?!?
I am at a complete loss as to why the Federal Reserve might think that now is the moment to begin raising interest rates. I cannot see a scintilla of hard evidence in support, and potent evidence against.
The theory is that the Federal Reserve must start to “normalize” interest rates in order to stave off inflationary pressures, particularly inflationary pressures from wages.
Here is the last 65 years of consumer inflation YoY:
In that entire time, the only occasions on which there was less inflationary pressure than there is now is immediately after the 1950, 1952, and Great Recessions.
The situation is even more compelling when we look at the rolling 3 month average of consumer prices:
(h/t Doug Short for preparing this graph)
In the last half a century, there have only been 2 three-month periods, from November 2011 through February 2012, when there was less inflation than there is now.
In other words, of the last 600 measurements, only 2 of them have been less than now. That’s 1 in 300. In other words, we are in the bottom 0.05% of all measurements. 99.5% of the measurements have shown more inflationary pressure than now.
And it’s not likely, based on your own core measure, that we will see much inflationary pressure in the next 12 months. Because as you well know, just as core inflation tends to predict the direction of all prices in the next 24 to 36 months, so it takes 12 months or so for current gas prices to feed through into the rest of the economy:
In other words, it is likely that the core inflation reading is going to move lower for the rest of 2015.
Now let’s look at wage “growth.” Here is nominal YoY wage growth for the last 50 years:
Wages now are putting less pressure on prices than at any time in the last 50 years with the exception of 8 months in 2012. This is wage pressure??? Again, of the last 600 measurement periods, only 9 of them have shown less pressure than at present. That puts us in the bottom 1.5% of all time periods in the last 50 years for wage pressure.
I realize that the unemployment rate just fell to 5.5%, and you think that inflationary pressures might start to build as unemployment falls to 5%.
But your own staff has just published a paper indicating that the percentage of long-term unemployed (i.e., people unemployed 27 months or more) is an independent factor in calculating when wage pressure might begin to build. And here’s what that looks like now:
Higher than at any point in the last half century with the exception of the last few years, and coming out of the 1981-82 recession.
And 5.5% unemployment now is not the same as 5.5% unemployment 10 or 20 years ago. Here is the percentage of the labor force consisting of full-time employees (blue) compared with inflation (red):
In 1998 and 2002 when inflation started to increase off the bottom, the full time employees were 78.3% and 77.6% of the labor force. Now they are only 77.0% of the labor force.
And that’s not all. Here is that same information (red) compared with full time employees as a percentage of the labor force plus those who want a job now, but are so discouraged they have dropped out of the labor force (blue):
In 1998 and 2002 respectively, those not in the labor force who wanted a job were 2.7% and 2.5% of the total. Right now they are 3.1% of the total.
So, to summarize, inflation is in the lowest 1% of all times in the last half century, wage growth is in the lowest 1.5% of the last half century, we still have extraordinarily high long-term unemployment, and a unusually high percentage of part-time employees and discouraged workers even taking into account the current unemployment rate.
Finally, just consider the historical record, limited as it is, of when the Federal Reserve has raised interest rates in the present of out-and-out deflation.
This has happened only once since World War 2:
and three times before – in 1928, 1930, and 1937:
Correlation is not causation and all that, but that’s 3 out of 4 times with disastrous results. Do you like those odds?
In short, you know that raising rates will put additional pressure on wages and employment. So you think NOW of all times is the appropriate time to raise interest rates. Really?? Seriously?!?
cross posted with Bonddad blog
Of course the response from those who have been dead wrong about everything for almost a decade(at least) is best summed up in the words of Dean Martin:
“If you are going to hit me with logic, then I don’t want to chit chat”
I agree that high inflation is very unlikely in this environment and that raising rates will put additional pressures on wages and unemployment.
But our current economy is distorted by low interest rates. It is not what it seems. It no longer reacts as it has since World War II.
These low interest rates encourage speculators to create speculative bubbles and encourage high debt levels. It can be argued that they are making income and wealth inequality worse. I believe that this process began in the late 1980s and has gotten progressively worse. The FED was moving interest rates lower and lower during that period.
See: http://research.stlouisfed.org/fred2/series/FEDFUNDS/
Sooner or later we will have to return to normal interest rates and the private economy will have to stand on its own.
Assuming that things will improve and then the FED can raise interest rates seems to be wishful thinking. It has been 7 years since the beginning of the Great Recession.
My mantra has been “Consumers can not spend what they do not have and producers will not produce what they can not sell.” I believe that the implications are obvious. Edward Lambert has been documenting the effect of low labor share, now and in earlier recessions.
If you believe either one of these then you must conclude that the distortion in our economy is due to poorer consumers.
They staved off the effects off for quite a while by running up total household debt, but that growth rate of debt can no longer happen. In fact, total household debt is down from it previous high in the 3rd quarter of 2008.
See: http://www.newyorkfed.org/householdcredit/2014-Q4/data/pdf/HHDC_2014Q4.pdf
Regardless of the cause, something is fundamentally wrong with this economy and the sooner we face that reality, the better. Sometimes we have to hit bottom before we are prepared for change. The wealthiest among us favor the existing system, they have profited handsomely from it. So they will resist any change.
Japan has refused to accept the realities present in their economy. We should not follow their example.
Something is wrong with this economy? What a shock.
I also love the “natural interest rate” thing. Though I have to admit I have absolutely no idea what that is.
The vast majority of the workers in the US have seen no real income gains in three decades. I’d say that is the “something” that is wrong with the economy.
Every economist should play the game “Monopoly” and see what happens when someone wins.
Well I can not say that I have been zipping through Capital in the 21st Century, but I have gotten far enough to know that the interest rates and labor’s declining share might be the “old normal” before a couple of world wars and the Great Depression not recession. Capital is accumulating rapidly and taking a larger and larger share of national income. For the wealthy this is a feature not a bug and for everyone else it means that debt is deadly because absent inflation we will never pay it off. I think the Fed has played into this by keeping interest rates low but you have a hard time pushing on a string and all it has done is make the rich richer and everyone else poorer. This is not to say that there were and are not government policies that would reduce inequality and help the economy grow, but they have little chance of being implemented in today’s political environment. As for Japan, it is an aging country with no population growth and there is little reason for its gross national product to grow. All in all I do not think the Fed raising interest rates is going to have much effect on anything good or bad. Further, if it did crash the economy maybe, just maybe the politicians in Washington would actually do something to help the economy not just the rich. I realize that sounds naïve, but I have to believe in the possibility or I would become an ex pat.
JimH,
You nailed it.
Fed policy is the worst of trickle-down-economics; it provides unfair gains to the owners of capital and assets, stocks, etc while injecting distortion into the market. This will not end well for the majority of Americans but the top will laugh all the way to the bank in the process.
Japan now spends 43% of its budget on servicing its debt and they are no better off for it. They are the poster child for the polices we have been adopting lately.
Time to wind back the Fed, take our pain, and let the economy adjust and rebuild if solid fundamentals….not continue with fake economic activity that only benefits the few.
K
Hi Dan,
I keep in mind that the Fed is watching very carefully how much investment increases ahead of an expected rate hike. Also the kind of investment will tell them some important things about the economy. They are also watching how many businesses are borderline. I do not expect any rate hike to trigger a recession in 2015. But the economy needs a drop of discipline going forward from here.
Nobody gets it. Real inflation or prices to actual paid increases is the only thing that counts. There is no “discipline” that can be rebuilt. There is no “pain to take. There is no such thing as “solid fundamentals”. Capital is awash because of massive economic growth. Not because of some “unbalance”.
Eventually, you run out of areas to grow in at the speed needed to build up your balance sheet and you start consuming more of income to meet the price your market demands you provide. Capitalism is a system of bubbles and has always been a system of bubbles. Interest rates are overrated.
Real wages are in a higher state than now and most of the 95-2007. Your point is invalid.
Please read up on Pam Martens.com for greater insight and clarity. Raising the rate will only maintain the status quo much longer where everything is at the bottom and the disparity between the 99% and the 1% becomes much greater. All I see are massive stock buy back programs that only benefit the rich. To me this is not investing in our future but only ones personal greed. This will only help to insure that the too big to fail corporation will be able to weather out the next bubble burst always at the tax payer expense…I’m really beginning to think that the Apple will become our next government if they have not already…
Japan is an export driven economy. They buy raw materials, produce consumer goods, and export most of them to the US or Europe.
In the 1980s the US became alarmed with the amount of Japanese auto imports. The result was voluntary quotas and the Japanese moved some auto production to the US.
By 1990 their economy was faltering and they began lowering interest rates which encouraged a huge bubble in real estate. (and the carry trade)
But things got much worse as the rest of southeast Asia ramped up the production and sales of consumer goods to the US and Europe. The Japanese have not been able to counter that competition for the US import market.
Instead they have tried one monetary or government fiscal policy after another. The results has been dismal.
Eventually the Japanese will have to deal with their fundamental problem and so will we.
“Japan now spends 43% of its budget on servicing its debt and they are no better off for it” -kai-
I have see nothing that shows this is even remotely accurate. Do you have a link?
“Eventually the Japanese will have to deal with their fundamental problem and so will we.” JimH
Were you saying this in 2002? 1995? 1985? 1975? You know, when our interest payments were higher/GDP?
Dan, Relax, not to worry. The Fed is not going to raise rates to anything close to a level that would influence economic activity. A 1/2% rise in the Fed Funds rate (IOER) is all you will see over the next 18 months.
The reason? The US economy is struggling. Follow the real time performance of GDP so far this year from the Atlanta Fed. The answer is that the economy is growing at a very sub par 1.2%. Today’s data on retails sales will bring the estimate lower. Look at how far off projections the economy is growing.
The Fed will keep printing based on those numbers.
Fed link:
https://www.frbatlanta.org/cqer/researchcq/gdpnow.cfm
EMichael,
“Were you saying this in 2002? 1995? 1985? 1975? You know, when our interest payments were higher/GDP?”
What are you talking about? The Japanese did not have their current problems in 1975 or 1985, and no one appreciated the magnitude of their problems in 1995.
And I have not been discussing interest payments, theirs or ours.
JimH,
Umm, “Instead they have tried one monetary or government fiscal policy after another”.
Ya’ think this does not include deficits and interest payments on the deficits?
When I say “our”, I am talking about the US.
EMicheal,
For the record, when I want to say interest payments or payments on the debt, I will say it. Until I do that, please assume that I am not discussing interest payments.
I do NOT regard monetary policy or government fiscal policy as evil, in and of themselves. I saw no problems with them in the several years after the beginning of the Great Recession in 2008. In the short term you throw everything at the problem.
But I do NOT favor continuing these policies since they do not deal with our fundamental problems. And that has NOTHING to do with interest payments.
It has been over 7 years since the beginning of the Great Recession.
Ever notice how when a troll makes a totally inaccurate statement to “make his point” that the troll disappears when he is called out for an inaccurate statement?
Course, with my reading comprehension problem. perhaps ““Japan now spends 43% of its budget on servicing its debt and they are no better off for it” doesn’t mean what I think it means.
EMichael,
Sorry. Wasn’t following this thread so closely.
Here you go,
http://www.zerohedge.com/news/2015-03-05/japan-now-spends-43-tax-revenue-fund-interest-debt
‘At one quadrillion yen, the debt level is so high that it now takes the government 43% of its central tax revenue just to pay interest this year.’
K
Nice if that guy bothered to define his terms. Nah, that does not fit into his ideology. Whoever he is.
http://www.bondeconomics.com/2014/12/for-japanese-mof-debt-service-does-not.html
EMichael,
I said Debt Service (as put forward by the MOF), not simply interest expense only. How you want to break it down from there is open to debate. Regardless of the base measurement, the amount is high, and with nothing to show for it.
The initial statement stands, high debt servicing, little to show for it.
You have failed to dismiss that criticism.
Wanna try again?
K
Kai,
The notion that you would make a reference to a specific economic/finance phrase which is defined/accepted by the:
• OECD – http://stats.oecd.org/glossary/detail.asp?ID=5938
• World Bank – http://data.worldbank.org/indicator/DT.TDS.DLXF.CD
• IMF – http://www.imf.org/external/pubs/ft/eds/eng/guide/file4.pdf (warning PDF), and
• UN – http://mdgs.un.org/unsd/mi/wiki/8-12-Debt-service-as-a-percentage-of-exports-of-goods-and-services.ashx
and that the data as presented by the sovereign issuer is specifically in compliance with this definition demonstrates just how misleading, partisan, and ideological you are. [/sarcasm]
Kai-HK,
You wrote “spending”. Rolling over existing debt, which is the bulk of what MoF considers “debt service”, is not considered “spending” under any reasonable definition of the word. You quoted some yahoo at ZeroHedge that equated “debt servicing” with “interest”.
Nobody outside of the MoF defines “debt service” in this fashion. Most countries have very large 2-year bond issuance, of which 50% has to be rolled over every year. If other countries defined “debt service” in the same fashion as the BoJ, their percentages might in fact be around 40% of revenue. Since you have not properly compared to any other countries, you have no way of arguing that the Japanese ratio is “too high”.
M.Jed,
Like I said, you can debate it. When I analyse debt service, and I do it for a living for a large US financial firm in Hong Kong (though I mostly look at corporate debt not sovereign), I look at the ability to pay maturing principle and interest (which is the OECD definition) without the issuance of new debt. The DSCR (Debt Service Coverage Ratio) for Japan is bad.
Looking at page 2 of the MOF report,
http://www.mof.go.jp/english/budget/budget/fy2014/01.pdf
Tax Revenues, JPY50Tn, debt service JPY23.3Tn, or about 46.6% of tax revenue, they have revenue of another JPY5Tn (probably interest), which is not much help, bringing their total revenue to just under JPY55Tn and their debt service to about 42%-43%. Uh oh!!!
The DSCR, the ability to service debt after paying operating costs, which are JPY72.6Tn, is negative. It must issue JPY41Tn in bonds to make up the shortfall in its budget, which is no small amount when your total tax receipts are only JPY55Tn. Yikes! Assuming they did not pay pension, did not operate government, etc, they would just have enough to pay for their debt and interest with a little left over for a bento box of sushi.
No matter how you look at it. It is DIRE. And, as stated above and as is still holding, ‘high debt servicing, and little to show for it’ No?
Is that not the case? Is there some major Japan economic renaissance going on. I am here now. Tell me where it is and I will rush there and photograph it for you.
Page 3 says it all, Bond Dependency Ration: 43.0%….eh. And they have no wars, no large military expenses, etc. It all goes into their economy but none of that Keynesian payola is doing any heavy lifting.
K
Brian,
Please take a look at my response to M.jed.I welcome your further comments.
K
You are looking at possibly the worst metric possible for analyzing sovereign fiscal ratios. Countries routinely issue very large amounts of TBills, which have to be rolled between 1-12 times per year. The Japanese “debt service” metric does not include this, which would make your numbers even worse! After all, the principal on a TBill is still principal. Since no other country publishes that ratio, we have no idea whether the Japanese percentage is particularly high.
Sovereigns routinely roll short-dated debt, as do entities like banks. The central bank is there to ensure liquidity which allows them to roll paper without incident. Corporations do not have a central bank to backstop their liquidity needs, at best they have a credit line with a bank.
If you used a sensible metric, like net interest as a percentage of GDP, the number is nice and low. If Japan started to grow rapidly in nominal terms, it is easy for the government to impose taxes that can be a few percent of GDP.
Corporations cannot do this. They can only get revenue at the expense of other corporations’ revenue, which is never a sure thing. This is why you cannot apply corporate debt analysis principles to sovereigns.
I worked as a rates analyst at a large Canadian asset manager, and I never ran into analysis from corporate credit analysts that was useful for the analysis of sovereigns. How government finance works is radically different than for businesses.
As an addendum: the OECD “debt service ratio” is defined for external debt, that is, debt denominated in a foreign currency, relative to imports. This ratio makes sense, as the country is no longer sovereign in the currency it is borrowing in, hence it is similar to a corporation.
But for Japan, the number is 0%, since they have no foreign currency debt.
Brian,
The OECD definition is indeed for external debt:
“Gross external debt, at any given time, is the outstanding amount of those current, and not contingent liabilities owed to non-residents by residents of an economy that require payment(s) either of principal and/or interest by the debtor at some point(s) in the future.” http://stats.oecd.org/glossary/detail.asp?ID=924
but there’s no reference to the currency in their definition, and according to the World Factbook, Japan’s external debt is roughly 25-30% of their total debt:
https://www.cia.gov/library/publications/the-world-factbook/fields/2079.html#ja
“And, as stated above and as is still holding, ‘high debt servicing, and little to show for it’ No?”
Yeah, cause everyone knows that Japan took the cash from their bond sales and just burned it.
geez
M,Jed
People do look at foreign holdings of domestic currency debt. In my view, that’s a mistake, but it is defensible. It mattered during the euro sovereign crisis (banks unwound their cross-country exposures) but I cannot think of a case where it makes any difference for free-floating currency sovereigns.
But since Japanese debt is denominated in JPY, it is unclear that we can determine what part of the principal held by foreigners needs to be repaid. The MoF figures are all long-term debt principal, including that held by domestic holders.
The MoF puts foreign holders of JGBs and TBills at around 9% (based on the latest newsletter from the MoF). This number is much more plausible than the CIA Factbook number. They may include private sector debt, where ownership is hard to measure.
Brian,
The BOJ website shows external debt at ~330 trilion yen:
https://www.boj.or.jp/en/statistics/br/bop_06/edp.htm/
and the MOF shows total debt at 1,030 trillion yen
http://www.mof.go.jp/english/jgbs/reference/gbb/201412.html
Brian:
You make a lot of good points. I never claimed that Japan is in danger of an imminent default, nor that foreign bond vigilantes will force them into penury. Instead, I am simply stating that Japan has a lot of debt (it does), and it is spending a lot of its tax revenue on debt service (it is) and debt servicing is a substantial part of the budget and will continue to grow (it is and will).
Are you denying any of that?
Debt servicing is already crowding out spending on other more important items and is forcing them to borrow more. This is not my opinion; this is the opinion of the Minister of Finance. He is proposes more (economic retarding) increases in taxes to rectify the DIRE situation of public spending and the the accrual of economic growth destroying debt.
You can deny that it is a proximal you want. Refer to ridiculous metrics like ‘net interest to GDP’. Who does that as a measure of a countries ability to service debt (you look at net interest to tax revenue or net interest to Budget if you are honest).
The fact that interest is already 10.6% of budget and approximately 20% of tax revenue in a low/no/negative interest environment is alarming. And again, not just to me but to the Japanese finance ministry. Which is why they are not fully on board with more Keynesian nonsense to create inflation and grow the economy. Inflation would require increases in interest rates they cannot afford to make.
K
EMichael,
You state, ‘Yeah, cause everyone knows that Japan took the cash from their bond sales and just burned it.’
Exactly! They didn’t burn it. They dumped it all into their economy. And how did that work out for them? How is their economy doing after nearly two decades of aggressive government spending growth? What do they have to show for it.
Thanks for playing…maybe time for you tap out again? 🙂
K