The Fed Is Freaked Out

by Larry Kudlow January 29, 2016

Early in the new year, on Sunday, January 3, Federal Reserve vice chair Stanley Fischer delivered a hawkish speech to the American Economic Association. Completely misreading the economy, which is woefully weak while inflation is virtually nil, Fischer strongly hinted that the Fed would be raising its target rate by a quarter of a percent every quarter for the next three years.

The next day the S&P 500 dropped 1.5 percent. In the week that followed, the broad index fell 6 percent. The week after that it fell over 2 percent. During that two-week period, the Dow Jones dropped 1,437 points.

The dollar went up. Oil plunged 21 percent. Raw-material commodities dropped. And credit risk spreads in the high-yield junk market rose substantially.

Actually, it was a global event, as stock markets around the world plunged. Utter chaos.

This past week, the Fed retreated in its FOMC policy statement. For the first time in a long while, it didn’t bother with a risk assessment between inflation and employment. The whole statement had a much softer tone. It reminded me of the prevent defense of the old Bill Parcells New York Giants.

Putting it more starkly, I’d say the Fed is completely freaked out by financial markets that are turning against it.

The central bank says its policies are “data driven.” But the recent FOMC statement suggests the Fed is looking at everything. It has a hundred indicators — domestic, international, jobs, and inflation. In truth, it doesn’t know what its next move is going to be because it can’t read the economy. Fed policy is opaque, confusing, and rudderless.

Take a look at the new GDP report for the fourth quarter of last year. A mere 0.7 percent growth. Across 2015, real GDP grew 1.8 percent. It’s not a recession. But any shock could push us into recession.

Business investment fell. Commercial building fell. Inventories fell. Inflation came in less than 1 percent.

Nominal GDP — real output plus inflation — registered a small 1.5 percent gain. In normal times, money GDP should be between 4 and 5 percent.

Perhaps most troublesome to the stock market and the economy is the decline in corporate profits. According to most estimates, profits are set to drop for the third straight quarter while business sales look to be falling for the fourth straight quarter. Add this to less than 1 percent economic growth, and the risk of recession is surely rising.

The recession threat is a risk, not a fact. With ultra-weak economic growth and ultra-low inflation, how could the Fed, or any central bank, think about tightening policy? For Fed policy makers to tell us the economy is healthy is a complete misreading of the situation.

Federal Reserve: Credibility on the line

As Janet Yellen, chair of the Federal Reserve, was preparing last month for the first increase in US interest rates for a decade, protesters in New York’s financial district were holding a candlelight vigil bemoaning the end of near-zero monetary policy.

In the crowd bearing illuminated signs saying “what recovery?” and “wage growth is good” was Mauricio Jimenez, a 44-year-old construction worker from Queens, who warned against the move as he stood outside the New York Fed.

“It was a mistake,” he said this week, arguing the central bank should have paid more attention to working families and minorities who had seen paltry wage growth, and that the Fed should reverse course. “We are the people most affected.”

Complaints about the prospect of higher rates had long been levelled by left-of-centre groups such as Fed Up, which arranged the protest, as well as Democratic politicians including Bernie Sanders.

1. A host of central banks, including the European Central Bank, the Bank of Japan and the Swedish Riksbank, have tightened policy only to reverse the decision. The BoJ on Friday adopted negative interest rates.
2. It will be a painful and serious blow to the Fed’s credibility if it turned out that it lifted rates on the cusp of a slowdown and is forced to backtrack.
3. Lael Brainard, a Fed governor, argued before the decision that the risks of tightening may be higher than sticking with near-zero rates because there would be little scope to stimulate the economy with further monetary easing if policymakers had to reverse course.
4. Adam Posen, the president of the Peterson Institute for International Economics, says raising rates has been a mistake and that none of the developments in global markets or China had changed the picture.
5. The US has turned out to be vulnerable to the fall in crude prices. The boost from cheap energy to consumer spending has not met expectations while the associated drop in investment in the sector hurts growth. Jim O’Sullivan of High Frequency Economics describes the oil price decline as “a wash” for the US economy instead of the lift that many had hoped to see.
6. Confirming concerns about the impact of the high dollar and oil price plunge on US industry, the first reading for fourth-quarter US gross domestic product yesterday showed a slowdown in growth to an annualised pace of 0.7 per cent, compared with an expansion of 2 per cent in the previous three months.
7. Narayana Kocherlakota, who was president of the Minneapolis Fed until December, is calling for a “hard U-turn” in monetary policy. He thinks the central bank is underestimating the risks of sinking inflation expectations and says the credibility of its target is under threat. The dovish former policymaker says the world faces a “global demand shortfall” and tighter US monetary policy could exacerbate uncertainties outside the country.
8. Inflation has been lower than the Fed target for more than three years
   
9. A few weeks after the Fed lifted rates in a flurry of optimism, the ground has shifted beneath the feet of Ms Yellen and her policy committee. Whether or not their gamble on higher rates ends up being vindicated will depend heavily on global developments, many of them well beyond America’s control.

Federal Reserve: Credibility on the line - FT.com

US layoffs surge to 6-month high

Layoffs surged in January to the highest levels since July as employers in the retail and energy sectors pulled out the pink slips, according to a private survey out Thursday.

U.S.-based companies announced 75,114 planned job cuts last month, up more than 200 percent from a 15-year low in December, according to global outplacement firm Challenger, Gray & Christmas. That figure was also 42 percent higher from a year ago.


US layoffs surge to 6-month high

Citibank: World economy seems trapped in 'death spiral'

2 hours ago

The global economy seems trapped in a "death spiral" that could lead to further weakness in oil prices, recession and a serious equity bear market, Citi strategists have warned.

Some analysts — including those at Citi — have turned bearish on the world economy this year, following an equity rout in January and weaker economic data out of China and the U.S.

"The world appears to be trapped in a circular reference death spiral," Citi strategists led by Jonathan Stubbs said in a report on Thursday.

"Stronger U.S. dollar, weaker oil/commodity prices, weaker world trade/petrodollar liquidity, weaker EM (and global growth)... and repeat. Ad infinitum, this would lead to Oilmageddon, a 'significant and synchronized' global recession and a proper modern-day equity bear market."

Stubbs added that policymakers would likely attempt to "regain credibility" in the coming weeks and months.

"This is fundamental to avoiding a proper/full global recession and dangerous disorder across financial markets. The stakes are high, perhaps higher than they have ever been in the post-World War II era," he said.

Citi: World economy trapped in 'death spiral'

What jobs? BLS says 665,000 job LOSSES

2/05/16 <------See that date right there?

New Bureau of Labor Statistics shows that there were 665,000 jobs lost in January, a blunt finding that confuses the heralded report that 151,000 jobs were created in January in non-farm payrolls.

Analysts note that there are several ways to count jobs created and lost...

What jobs? BLS says 665,000 job LOSSES | Washington Examiner