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The Fed’s Risky Bet on Growth
September 29, 2014
A recent piece by Mohamed El-Erian published on Bloomberg.com stated that the U.S. Federal Reserve is trying to generate growth from a stimulus policy that relies heavily on artificially boosting stock and bond markets.
Through its programs, the Fed is running a higher risk of financial instability, with an increasing dependence on an inept Congress. Recently, the Fed confirmed that it will end its exceptional bond-buying program in October, yet did not change its policies to end near-zero interest rates – an outcome that was widely expected for this period of time in the recovery.
The reason? The Fed hopes to create momentum that will more than offset the increased threat of financial instability.
With the political posturing ahead of November's elections, it is unlikely that lawmakers will make much progress on any economic measure important for the country. Although the private sector is growing more confident, it still lacks much of the necessary growth to increase velocity. Time is ticking, and if growth doesn’t pick up, the Fed's policy bet could end in a large disappointment.
August 14, 2014
Over the past several years, the Federal Reserve has “seamlessly morphed from an institution that occasionally intervened in financial markets to a monster that apparently wants to control a great deal of the U.S. financial system,” according to a recent article by Brian Wesbury published by First Trust Portfolios.
In the article, Wesbury provided examples of how, throughout history, the Fed has always looked to expand its influence and power. “In the thirty years, between 1977 and 2007, its balance sheet (the monetary base) averaged 5.4% of US GDP. Today, it’s 22.4%. Never, in the history of the United States, outside of the military in World War II, has one government institution been so dominant.”
And it’s continuing to expand. The Fed is in the process of adapting a new management technique called “macroprudential regulation.” In a nutshell, this means the Fed will try to regulate specific financial system behavior to avoid economic problems. However, this technique, like many others, offers opportunities for the Fed to increase its power even more.
Click here to read more.
May 16, 2014
Over the past seven years, the Federal Reserve has increased the size of its balance sheet from about $850 billion in 2008 to $3.96 trillion in 2014.
It implemented Quantitative Easing by “creating” excess bank reserves that were above and beyond what was required. Now, it looks like the Fed will try to finish tapering then raise interest rates without decreasing its own balance sheet.
According to a recent Monday Morning Outlook report from First Trust Portfolios, these recent moves will lead to all kinds of problems, including a possible “arms race” in the financial system, where interest rates must be raised faster and higher than any of us want.
Click here to read more.
April 7, 2014
Economist Milton Friedman was known for teaching us that the “transmission mechanism” for central bank policy works through the quantity of money, or amount of money injected into or subtracted from the economy.
But several members of the Federal Reserve apparently don’t believe this anymore.
As a recent blog post by First Trust Portfolios reports, the Fed plans to end bond purchases later this year, and then, “without unwinding QE, start to raise the federal funds rate.”
Unfortunately, excess reserves are the problem, not the level of interest rates. And in the end, this new move by the Fed creates a big risk.
March 24, 2014
After reading through the Federal Reserve’s minutes from 2008, Brian Wesbury, chief economist at First Trust Portfolios, identified several mistakes the board made during that crucial year.
He shares some of his findings in a recent Wesbury 101 video.
An underlying theme, Wesbury reports, is that “the Federal Reserve never understood until the end of the year the dramatic nature of the problems facing the economy.” They thought they could fix any problem by using a “hammer” to either inject liquidity or lower interest rates. We know now that a bigger problem needed to be addressed.
Click here to watch the complete video.
March 7, 2014
Attention continues to be focused on the Federal Reserve with the nomination and subsequent confirmation hearings of Janet Yellen to replace Ben Bernanke as Chair of the Federal Reserve Board. Most commentators believe Ms. Yellen will continue the Fed’s current policy of easy money and low interest rates. The Fed has set targets of 2.5% inflation and 6.5% unemployment as they continue to purchase $85 billion of treasuries and mortgage-backed securities a month. Yet even with interest rates held at near zero for an extended period and the liquidity efforts of three rounds of quantitative easing, which have resulted in an unprecedented expansion of the Fed’s balance sheet and the money supply, we continue to experience slow economic growth, an unemployment rate in excess of 7%, and over a million fewer jobs than at the start of the recession.
It has become clear that the tools available to the Federal Reserve (interest rates and quantity of money) can’t solve the unemployment problem. Even so, the media continues to speculate on when the Fed may begin to taper or phase out their massive purchases, and how the economy will be impacted by that change. In reality, if the Fed were to stop the $85 billion per month of QE3 purchases overnight and not tell anyone, we would see very little change in business as usual. The reason: the money is held in bank reserves and is not in circulation. This is the same reason we currently have very low inflation.
Companies have hundreds of thousands of open jobs because they can’t find qualified employees. The manufacturing jobs of today are not the manufacturing job my father had. Today’s jobs require technical skills. The United States’ manufacturing sector is as large as it has ever been, but because of technology, we make more with fewer workers. Bureau of Labor Statistics data indicates that the 2012 unemployment rate for individuals with a bachelor’s degree was 4.5%. For high school dropouts, the unemployment rate was 12.4%. The challenge we face is how to train people to do the jobs that are open. Why are businesses not training the people they need? This leads us to the bigger problem: fiscal policy.
As I mentioned earlier, the Federal Reserve’s tools for monetary policy are interest rates and the quantity of money. Fiscal policy is set by the U.S. Congress and the president. The tools for fiscal policy are taxation and spending.
The Small Business Administration data indicates that small business “accounted for 64 percent of the net new jobs created between 1993 and 2011.” Yet today, small businesses are not adding people. The No. 1 fear of small business people today is regulation with taxes second. The biggest regulation fear appears to be the Affordable Care Act. Small business owners are afraid to borrow money to grow their business and hire new employees.
And while our government continues its spending spree, large companies are hoarding cash. Moody’s currently estimates that non-financial companies are holding almost $1.5 trillion on their balance sheets, up 81% since 2006. The reason: “zero clarity” with respect to U.S. fiscal policy. Macroeconomic Advisors estimates that fiscal policy uncertainty has cost the U.S. 900,000 jobs since 2009 and shaved three-tenths of a percent per year from economic growth.
The solution to the unemployment problem boils down to fiscal policy and a reduced regulatory burden on business. History tells us when government gets out of the way, business grows, employment grows, and the economy grows. The Federal Reserve can’t fix fiscal policy - congress and the president can. Remember that one of President Kennedy’s first acts was to cut taxes so that the economy would grow.
Unless noted, labor market figures courtesy of U.S. Department of Labor.
Manarin Investment Counsel Offers Special Screening of “Money for Nothing: Inside the Federal Reserve”
February 18, 2014
One hundred years after its creation, the power of the Federal Reserve has never been greater. Markets around the world hold their breath in anticipation of the Fed Chairman’s every word. Yet the average American knows very little about the most powerful financial institution on earth.
You’re invited to learn more during a special screening of “Money for Nothing: Inside the Federal Reserve,” dubbed “the first film about the next crisis,” on Monday, Feb. 24 at 7 p.m. and Tuesday, Feb. 25 at 2 p.m. at the Manarin Investment Counsel offices, 505 N. 210th St.
Click here to view a special video invitation from Roland Manarin.
The movie is the first film to take viewers inside America’s central bank and reveal the impact of Fed policies – past, present and future – on our lives. As Ben Bernanke’s tumultuous tenure comes to a close, join Paul Volcker, Janet Yellen, and many of the world’s best financial minds as they debate the decisions that led the global economy to the brink of collapse and ask whether we might be headed there again.
Space is limited, so call the office at 402-330-1166 by Friday to reserve your spot. See you there!
November 26, 2013
With her confirmation hearing behind her, it’s only a matter of time before Janet Yellen replaces Ben Bernanke as head of the Federal Reserve.
Many people wonder: will Yellen continue her quantitative easing program when she begins her term in January?
In a recent Wesbury 101, Brian Webury, chief economist at First Trust Portfolios, argues that Yellen is in “no way ready to end quantitative easing,” especially as she calls it “a positive contribution to growth,” impacting housing, bonds and the stock market.
Wesbury disagrees with Yellen’s view and explains why. He also offers his thoughts on what else might be on the Chairwoman’s agenda when she begins her term in January.
October 23, 2013
The problem with the Federal Reserve does not lie in President Obama’s recent decision to choose Federal Reserve Vice chairman Janet Yellen to replace Fed Chairman Ben Bernanke when he departs in January.
As a recent article published on forbes.com points out, the real problem lies in the “conceit” of the Federal Reserve itself. Namely, the fact that the Fed is not currently bound by any monetary rule and the supply of money is not determined by market demand.
Steps toward fixing the core of the Fed’s problems would involve recognizing the limits of monetary policy and “the danger of concentrating power in a few individuals who have complete discretion to dictate monetary policy in a world of pure fiat money.”
May 3, 2012
A recent report from the Tillman Stock and Bond Hotline offers some promising data and statistics that bode well for the rest of 2012! Enjoy!
Reprinted with permission from the Tillman Stock and Bond Hotline
For: Wednesday, April 25, 2012
(800) 219-1333. firstname.lastname@example.org
A few weeks ago, some of the skeptics on Wall Street pointed at April 25 as a possible trigger point for a new bear market in U.S. stocks. That's because investors were due to digest both an earnings report from Apple (AAPL) and the post FOMC meeting statement. Not surprisingly, the bears expected both of those news events to go badly. Instead, Apple handily beat expectations and the stock gained nearly nine percent on the day - putting the shares only 4.1% below their recent lofty all-time closing high of $636.23. As for the latest news out of the Federal Reserve - the FOMC did not throw any curveballs at the market. Basically, the Fed said that the economy has been stronger than expected so far this year but acknowledged that conditions could become more challenging next year - once tax cuts expire at the end of 2012 (and certain spending cuts take place). As a result, Ben Bernanke and Company repeated the earlier pledge to keep interest rates low into 2014 or later and to offer the U.S. economy some new help if conditions call for it. With first quarter earnings running stronger than expected (so far), buying pressure overwhelmed the sellers today - sending the broad stock market up by 1.4%. The Nasdaq gained 2.3% on the day. The Wilshire 5000 is now down by only 2.1% from its April 2 multi-year high. That must be quite discouraging for the people that recently declared that a new correction is underway.
The stock market is already up by about 10 percent so far this year (basically matching our expectations for the entire year). As you know, there are plenty of people looking for the stock market to turn lower soon and enter full crash mode as problems in Europe spread to America and pull the rug out from beneath the market. The debt problems in Europe remain very much alive and well. However, what the overly enthusiastic bears seem to be doing (again) is to underestimate the ability of financial officials in Europe to handle the crisis in the near-term. The European Central Bank took steps earlier this year to provide ample liquidity to the system. Such measures have already helped to avert the kind of cash crunch that paralyzed much of the global financial system back in 2008. Here in America, the economy should do okay during 2012. Earlier today, the durable goods report came out much weaker than expected (with ex-transportation orders posting a decline of 1.1%). The headline number fell by a hefty 4.2%. It is going to take a lot more than one month of weakness in a notoriously volatile economic statistic to convince us that the economy is suddenly slipping into a new recession.
Tomorrow, we will get a look at the latest weekly jobless claims report. Many economists are looking for jobless claims to drop back by 10,000 or more from the previous week's total of 386,000. If jobless claims trend higher during the month ahead, it would be a troubling sign for the economy and the near-term outlook of the U.S. stock market. Many of the bears have been jumping the gun regarding such economic data. They have been celebrating the slightest signs of weakness and even making silly claims about how some of the recent data has been a disaster. Data regarding the housing market has been an especially popular topic of misinformation coming out of the bears' camp. The broad data on home sales and home prices have been showing stability and even some improvement. However, we have heard a number of commentators say that the recent reports on housing show that the sector is leading the economy back into recession. When analysts have to exaggerate in order to make their point, they are asking for trouble. Quite a few of the corporations that have already released their first quarter results have beaten expectations. Not so long ago, many analysts were looking for S&P 500 companies to come in with flat year-over-year earnings. With the results to date in hand though, there are indications that earnings could grow by five percent or more. That bodes well for the bull market trend remaining intact during 2012. The Wilshire 5000 closed today at 14,549.38, up by 77.08(0.5%) in the past week. The Volatility Index (VIX) closed at 16.82, down from 18.64 a week ago. The yield on the 10-year Treasury note closed at 1.98%, unchanged. More next week.