US industrial heartland frets as Fed rate rise looms

[kscarbel2]

The Financial Times / December 15, 2015

If the Federal Reserve proceeds as expected and raises US interest rates for the first time in almost a decade on Wednesday it will be an affirmation of what Janet Yellen and her fellow policymakers see as the strength of the US recovery.

It will also be at odds with what many in the US’s industrial economy are seeing.

From manufacturing behemoths like Caterpillar and Deere & Co to companies supplying the industrial sector the common theme in recent months has been that, thanks to a strong dollar and a collapse in commodity prices, tough times are back. Some are going so far as to declare the arrival of an industrial recession.

While the Fed appears unlikely to let that stop its well-flagged move to raise rates for the first time since 2006 there are signs that concerns about the dollar and the industrial economy are likely to influence what it does after that.

“It is something that makes us more cautious in terms of raising rates,” Ms Yellen, the Fed chair, said earlier this month of the strong dollar and its drag on the economy.

The messages emerging from the US industrial heartland remain pretty stark.

At WW Grainger, an Illinois-based industrial supply company which sells everything from lightbulbs to electric motors and safety gear, sales in the US are down 5 per cent on last year with government purchases the only segment offering any growth. The company has been warning investors for months that it is facing a “tough industrial economy” which may last into 2016.

At Fastenal, which similarly relies on supplying the industrial sector, management has gone a step further. “The industrial environment is in a recession,” Fastenal’s chief financial officer told analysts on an October conference call.

For Cummins, the diesel engine maker, a collapse in US demand for trucks has added to the woes it was already facing from the slowdown in big emerging economies such as Brazil and China and forced lay-offs.

“It is a really tough time here now,” Tom Linebarger, Cummins’ CEO, said in a recent interview. “In many of our markets we are back to 2009 levels again, which is a story you are not really reading about.”

Those sorts of anecdotes translate into a broader view across US manufacturing that the Fed may be pulling the trigger too early if it raises rates now.

In a recent survey by the National Association of Manufacturers, 55 per cent of companies still considered the US economy too weak to raise rates before 2016. Less than a third thought the time was right.

“There clearly is a sense that this [a Fed hike] is going to happen,” said Chad Moutray, NAM’s chief economist. “But there still is a lot of nervousness out there about what that means.”

Much of the focus in the lead-up to the Fed move has been on strong employment numbers — where the big growth has been in professional and other services — and inflation that is creeping back up towards the Fed’s 2 per cent target rate.

But the data on America’s industrial sector have been far less encouraging. Industrial production, new figures for which will be released on Wednesday, has contracted in three of the last six months while the Institute of Supply Management’s latest monthly survey of factory orders pointed to a US manufacturing contraction.

Behind those figures are the strong dollar and falling US exports which saw US companies export $15bn less in October than at their all-time high in July 2014.

Jason Furman, chairman of the President’s Council of Economic Advisers, predicted on Tuesday that net exports would “continue to be a headwind” in 2016. “It is more likely to be taking something off our growth rate rather than adding to it.”

While the Fed has traditionally shied away from talking about the dollar, Ms Yellen and other senior Fed officials have been increasingly willing to acknowledge the importance of foreign exchange movements explicitly.

Stanley Fischer, vice-chair of the Fed’s board of governors, has dubbed the dollar upsurge since the summer of 2014 a “sizeable shock”. Lael Brainard, another Fed governor, said this month it would take a 1 percentage point cut in the federal funds rate to insulate US employment from the effects of a 15 per cent strengthening in the inflation-adjusted exchange rate. Given rates were already near zero, this implied delayed lift-off and a shallower path of future hikes, she added.

The comforting fact for the US economy may be that its industrial sector and exports are now less important than they were. Manufacturing makes up only 12 per cent of US gross domestic product. Exports of goods and services represented 13 per cent of GDP in 2014, a far smaller share of output than in other OECD countries such as Germany.

Still, the woes of US manufacturers are real and will weigh on Fed policymakers’ minds.

Kevin Logan, an economist at HSBC, argues the impact of the strong dollar is likely to be a more cautious path forward for the central bank. US GDP has risen by 2.2 per cent over the past four quarters. But, if the drag from the decline in net exports were stripped out, it would instead have expanded by 2.9 per cent, he estimates.

“It suggests to me that the Fed is not going to be very aggressive in the coming year,” he said.

.

[kscarbel2]

If the Fed raises rates tomorrow, they might fall again before long

The Washington Post / December 15, 2015

Whenever the Federal Reserve does start raising rates -- whether on Wednesday, as seems likely, or sometime next year -- the biggest question will be whether the Fed eventually ends up back where it started—at zero.

That, after all, is what has happened to every other country that has tried to "lift off" from what economists call "the zero lower bound." The simple story is that central bankers, who pride themselves on choosing the hard right over the easy inflationary wrong, tend to look for any excuse to end zero interest rates, even if they have to invent one. But raising rates before the economy is ready means you will have to cut them back down to zero in rather short order — which has been the case in Europe, Japan, Sweden and Israel. And it might happen here, considering the Fed looks like it's going to start increasing interest rates even though inflation is far below its 2 percent target and isn't really rising.

But even if it doesn't, the Fed still might find itself back at zero in just a few years. That's because the central bank thinks the aftereffects of the financial crisis have made the economy susceptible to slowing down at interest rates above 2 percent, instead of the previous 4 percent. And since the Fed usually needs to cut rates by 4 or 5 percentage points to fight a recession, simple math tells us there's a good chance interest rates will end up at zero whenever that is. If it does, the Fed will have to rethink how it does things.

It's harder for the Fed to do its job when interest rates are zero. Sure, it can buy bonds with newly-printed money, promise not to raise rates for a long time, or even, as other countries have shown, cut rates ever-so-slightly into negative territory. But none of those work as well as a regular, old rate cut. That's why a central bank that's been forced to reduce rates down to zero is one that probably has more unemployment and less inflation than it wants. That bank has used up its best tool for getting the economy moving again, leaving it no choice but to turn to less effective options. So a future where zero interest rates are a recurring phenomenon would be one where both recessions and recoveries are nasty, brutish, and take too long.

The Fed thinks it can avoid this fate, and maybe it can. It has done a better job than almost every other central bank since the crisis hit. But that's the point. If even the Fed can't lift off without crashing back down to zero, the bank needs more than better policy -- it needs a better target. Boston Fed President Eric Rosengren, for one, thinks the Fed would have to seriously consider increasing its inflation target if it returns to the lower zero bound next recession. That would require higher interest rates to keep higher inflation in check, which, in turn, would give the bank the room it needs to later cut rates without getting too close to zero.

There's some question whether the Fed could just create as much inflation as it wants, but Japan, at least, shows that a determined central bank can indeed push it up, albeit at a plodding pace.

In other words, this might be the Fed's only chance of returning to normalcy. Maybe it can get us back to the economic nirvana of good growth, shallow slumps and 2 percent inflation. But maybe not. It is possible that the financial crisis has changed things forever. The Fed might find out that it has to choose between longer recessions and higher inflation. That, then, is what's really at stake when the central bank starts increasing interest rates in the near future. Is this the beginning of the end of the crisis era or the end of the end of the pre-crisis one?

It depends on whether we ever hear the words "zero interest rates" again.

[kscarbel2]

Janet Yellen: An orthodox economist for unorthodox times

Reuters / December 15, 2015

Janet Yellen is guiding the Federal Reserve towards its first rate rise in a decade armed with traditional economic models that some economists worry could fail her in a world of massive money printing and near zero rates.

The 69-year-old economist argues the time is coming for a rate-lift-off even though inflation has yet to accelerate, trusting decades of studies that suggest a tight labor market eventually creates inflationary pressures.

It is a risky wager considering that global inflation is at historic lows and many central banks remain in an easing mode as their economies struggle to get any traction.

If she is right, Yellen, who has already presided over the end of the Fed's bond-buying stimulus program, will cement her reputation and that of her "dashboard" that relies on long-established relationships between jobs, wages and prices.

If she is wrong, the Fed could join the European Central Bank and the central banks of Sweden, Israel and Canada, which have all tried, but failed, to escape the drag of zero rates in the wake of the 2007-09 financial crisis.

There are reasons to doubt conventional economic theory. Many economists predicted a spiral of falling prices when the U.S. jobless rate soared during the crisis and then thought inflation would rise when unemployment plunged. Neither happened, though Yellen has maintained this year that the Fed was on course for rate increases, which would be "data dependent," likely gradual, and with no pre-set path.

This shows Yellen "is grounded in traditional modeling but she is well aware that there is uncertainty," said Randall Kroszner, who served with Yellen as a Fed governor between 2006 and 2009.

"It is possible, though unlikely, the traditional models are just all wrong (and) we're in a whole new world. But she's not going to fly by the seat of her pants," Kroszner said.

Yellen has made clear that models only serve as guideposts in a complicated decision-making process.

MODELS AND HUNCHES

Interviews with the Fed chief's former colleagues paint a picture of Yellen as a pragmatic economist who is ready to adjust course when necessary, but one who relies on data and economic theory rather than guesswork or hunches.

(Yellen's dashboard. See the graphic here: here)

That could mean sometimes missing signals that are either too new or too hard to measure for traditional models and yet possibly relevant for policy.

Fed transcripts show that at a Fed policy meeting in September 1996, Yellen, then a Fed board member, said she was "quite willing" to support an increase in rates because her analysis suggested inflation was poised to rise.

However, Alan Greenspan, the Fed's chairman at the time, convinced policymakers to hold fire at that meeting arguing that he saw changes in the economy that were holding back prices and it later turned out that inflation indeed stayed low.

"It was intuition more than anything else," said Alice Rivlin, fellow board member at the time, referring to Greenspan's hunch that U.S. productivity was rising.

A wrong call on inflation now could stunt job growth and possibly keep rates stuck near zero or even force the Fed to reverse course and cut rates.

"If they don't see any pickup in costs or prices, that would cause them to be even more gradual than they think they are going to be," said Donald Kohn, who served on the Fed's board when Yellen headed the San Francisco Fed between 2004 and 2010.

Fed policymakers saw higher inflation around the corner in 2013 and 2014 that did not materialize. Yellen has argued this year that temporary factors such as low oil prices and a strong dollar will fade while a tight labor market sparks price pressures.

"It's straightforward analysis but the issue is they have been saying this for years, so they are not hitting something right in their story," said Timothy Duy, an economist at the University of Oregon. Hiking rates too early could make it more likely the U.S. economy tips into recession, he said.

The Fed's preferred inflation measure stripped of food and energy prices is now at 1.3 percent and its policymakers on average see the gauge accelerating next year but not quite hitting their 2 percent target.

Jon Faust, a former special adviser to the Fed board whose inflation forecasting research has been cited by Yellen, says he doubts any policymakers have a firm view how to get inflation back to target and keep it there even if they agree that a tightening job market will help.

With the jobless rate at 5 percent, half its 2009 level, Yellen was confident enough to warn lawmakers on Dec. 3 that inflation could rise "significantly" above the Fed's 2 percent target if rate-setters aren't ahead of the curve.

However, some policymakers, including Fed Governor Lael Brainard, argue that the relationship between unemployment and inflation is not as straightforward as it used to be and that global economic weakness could knock the United States off course.

Many analysts expect Brainard, who has emerged as the leader of the Fed's cautious faction, will accept a first hike without dissenting, but could need more convincing for subsequent rate rises.

Brainard said on Dec. 1 the U.S. dollar's appreciation, driven in part by global economic weakness, could argue for a "delay in the date of lift-off and a shallower path for the federal funds rate over several years."

On the other side of the policy debate is Charles Plosser, who led the Philadelphia Fed from 2006 until March 2015. Plosser would have preferred to raise rates "a year ago" but was glad that the Fed chief facilitated the debate over liftoff.

"The fact that she can articulate the rationale, that's really important," he said. "Because then you can debate."

[Outbehindthebarn]

The cynic in me wonders if the move to raise interest rates has more to do with an attempt to score political points in an election year for Democrats.. . 'willing' the economy to improve by raising rates in the hopes that it won't stifle perceived (imaginary?) growth.

[david wild]

Once again the Government is out of touch with main street, they see a rosy economy, main street sees gloom, Have you tried to hire a worker today, should not call them worker because that is the farthest thing on their mind, can't call them help, they cannot help themselves never mind you, how about person demanding money because they can breathe air. I like that, oxygen thief. Anyway O crap for brains has the lowest fuel prices in like ever (recent memory) some people are trying to get ahead and still the economy can't even get out of bed, and the clown in charge is clueless to what is going on, we can't bomb the bad guys because it will be a environmental disaster, we can't build the pipeline because Buffets trains need to haul the oil so they can derail and spill oil but that is not a problem, we can't mine coal because we might make pollution and our engineers are too stupid according to the loon in charge to build a clean coal plant while the world is full steam ahead on building coal plants. but we can lie to the public and tell them how great wind and solar are, but forget to mention they can't survive with out heavy tax dollar support, and the 30 million uninsured, 8 million bought insurance the other 22 million disappeared, but hey we killed Bin Laden but then it seems we knew his hiding spot for quite awhile but it was good PR for the reelection bid, I call that murder, not justice. and Trump comes along ruffles a few feathers and he is called a Nazi, if he is a Nazi what the hell is O crap for brains ??????? Don't be a lump on the log, speak up, be heard or at least walk around the house nude, your wife might like it or then maybe not.

[41chevy]

Like Herr Hitlers last days in Berlin moving imaginary armies, advisers telling him of winning great victories on all fronts, factories turning out tens of thousand of products every month and all happy people out side the bunker. . .so the current images the administrations czars tell "O" of life outside the Rainbow/Unicorn Command Center