Tag Archives: Federal Reserve

New York Fed Should Not Regulate Wall Street Investment Banks

Federal Reserve Bank of Dallas President Richard Fisher, in an article on the Wall Street Journal, is arguing for power to be shifted away from the Federal Bank of New York. Community bankers also support this weakening of the New York Fed. In a letter to the U.S. Senate by president of the ICBA (Independent Community Bankers of America, an organization representing over 6,500 community banks), one of Fisher’s main points in his proposal is that financial institutions should be supervised by Federal Reserve Banks from districts other than the ones in which they are headquartered. This is all to promote transparency and avoid regulatory capture. I believe this is an important step in increasing the efficiency of the Federal Reserve system.

I hate to be one of the naysayers of the Federal Reserve because I believe in that they are a necessary entity for a better financial sector. This is why I think Fisher’s most important point is for the regulation of financial institutions to be conducted by Federal Reserve Banks other than their region. The current president of the New York Fed, William Dudley, was formerly Goldman Sachs’s chief economist. And of course, he oversees the regulation of Wall Street banks, including Goldman Sachs. This makes room for regulatory capture to occur. In fact, Carmen Segarra’s story paints a very suspicious image of the New York Fed.

In an article on Bloomberg View by Michael Lewis (whose books have been required reading for some economics classes here at University of Michigan), Carmen Segarra was the New York Fed regulator inside Goldman Sachs who had been fired because she called out suspicious activities conducted by Goldman Sachs. A segment from his article includes the following, expressed by Carmen Segarra, “In one meeting, a Goldman employee expressed the view that ‘once clients are wealthy enough certain consumer laws don’t apply to them.’ After that meeting, Segarra turned to a fellow Fed regulator and said how surprised she was by that statement — to which the regulator replied, ‘You didn’t hear that.'” Apparently, the culture in the New York Fed is such that most employees are deferential to the banks they supervised, and unpopular opinions are hushed (ProPublica, David Beim). And Goldman Sachs is not the only case, similar events are happening at JP Morgan as well.

The cause of this culture, I would guess, is because many employees of the New York Fed will eventually seek employment in some of these investment banks, and they do want to tarnish their chances by making enemies with these companies. That’s why, in order to avoid regulatory capture, Wall Street should not be supervised by the New York Fed.

Revised Post #2 Unemployment Numbers: The Real Story

There has been a lot of talk lately about the unemployment numbers as they have been decreasing and point to a country recovering from the Great Recession as they have fallen to 5.7%. As Josh Mitchell writes in his Wall Street Journal article Job Market Looks Ripe for Liftoff, “The best three-month stretch of hiring since 1997 has positioned the U.S. labor market to start delivering stronger wage growth for a wider swath of Americans after more than five years of sluggish recovery from a deep recession.” While these numbers may look like things are all merry for Americans, they hide the real story. The real story is that a lot of Americans have taken themselves out of the job market because they are either too distraught about their job prospects, or are hidden behind the numbers of what is considered employed. To not be counted in the unemployment number, you just have to have been out of the work force and not looking for work over the past 28 days. These people who are so depressed from how long they have been looking for work, and not found anything, that they remove themselves from the work force are still as unemployed as before, but they actually IMPROVE the unemployment rate. Another hidden loophole of the official unemployment statistic provided by the U.S. Department of Labor is that if you are working part time, only 10 hours per week, you are considered employed and reduce this official statistic. There are millions of Americans who cannot find fulltime employment and are forced into working only part time, but are considered employed by the US government. Another loophole that Jim Clifton is trying to bring awareness to with his highly publicized article, The Big Lie: 5.6% Unemployment, “There’s another reason why the official rate is misleading. Say you’re an out-of-work engineer or healthcare worker or construction worker or retail manager: If you perform a minimum of one hour of work in a week and are paid at least $20 — maybe someone pays you to mow their lawn — you’re not officially counted as unemployed in the much-reported 5.6%.” This little discrepancy was unbeknown to me before I read his article. This is just further proof that “The official unemployment rate, which cruelly overlooks the suffering of the long-term and often permanently unemployed as well as the depressingly underemployed, amounts to a Big Lie.”

This problem could have long-term consequences by making our economy appear better than it truly is because the Federal Reserve uses this statistic (among many, many others) when they decide whether or not to raise interest rates. We need a better statistic to rely on, which more thoroughly represents the entirety of the United States population than this current method. This is of pressing concern so that we don’t overestimate the health of our economy just to have it crumble again.  This can be accomplished by having the Fed set policy based off of the underreported U-6 Unemployment rate which takes into account “Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force” (from the Bureau of Labor Statistics). This number better covers the entire population of workers and better represents the entire job force as a whole. This number is currently 11.3%, significantly higher than the 5.7% reported officially. The Fed should tie all of its monetary policy and economic gauge measurements to this U-6 number so that more of the unemployed are represented. This 11.3% is still significantly higher than it has been in over 20 years (see figure below). Let’s hope that Janet Yellen realizes this and uses this, more useful, U-6 unemployment statistic when she moves to rise rates this summer.

Screen Shot 2015-02-13 at 4.58.26 PM

The Fed’s Static January Press Release

The Federal Reserve Board’s January 28 press release released no concrete timeline for when they plan to begin raising rates. The statement has a positive economic outlook, claiming that the Fed’s data since December suggests that “economic activity has been expanding at a solid pace” (http://www.federalreserve.gov/newsevents/press/monetary/20150128a.htm). Investors are analyzing this announcement closely to determine what it might imply for rate raising. The announcement reads: “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy…  the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.”

According to Paul R. La Monica’s article for CNN Money titled “Fed stays ‘patient’ but rate hikes are coming,” economists such as Michael Gapen for Barclay’s believe the first rate hike will come in the summer (http://money.cnn.com/2015/01/28/investing/federal-reserve-statement-patient/). The announcement led to slips in the Dow Jones, the S&P 500, and the Nasdaq, with the latter falling almost 200 points.

The announcement explains that this expected stagnation is flexible to the natural timeline of recovery of the economy.

“However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.  Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.”

The above sentence seems to me to have been included to give the OMC the leeway to keep decisions to raise rates flexible.Professor Kimball posted a guest blogger’s post on his blog Confessions of a Supply Side Liberal titled “Greg Shill: So What Are the Federal Reserve’s Legal Constraints, Anyway?” in which the flexibility of the Fed in making decisions on monetary policy are discussed. Shill believes “the bank has significantly more monetary policy discretion than is commonly assumed. I personally believe this expansive power is a good thing: the Fed is charged by statute with a dual mission of promoting full employment and “price stability” (http://blog.supplysideliberal.com/post/109369743080/greg-shill-so-what-are-the-federal-reserves).

All in all, this report seems to be one of unvarying progress. This could be because the Fed believes they are on the best possible trajectory or because they are confined by the Zero Lower Bound problem. Either way, I do not believe too much should be read into this announcement as I think it was meant to tell investors that the Fed will not be raising rates any time in the immediate future.

The Federal Reserve’s recent decision

Before I talk about the Fed’s decision on Wednesday, I think it is crucial to talk about what the Federal Reserve is so we can have a better picture of what is going on. As most people know, the Federal Reserve is the central bank of the United States. However, some people do not know its important roles of the Federal Reserve. In the United State’s history, a Federal Reserve Bank did not exist for very long time until they encountered with the event when the New York Stock Exchange fell over 40 %. People finally wanted to introduce the idea of a central bank that can control the money supply, interest rates, and overall banking system.

Then what does the Federal Reserve do now? Simply, the Fed has the ability to control or execute “monetary policy”, which is an economic policy that promotes the economic health of the United States. Monetary policy is one of the ways that the Federal Reserve uses, which controls the growth of money supply. Therefore, the Fed regulates the discount rate, reserve requirements and open market operations through monetary policy. According to the Federal Reserve, “The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility- the discount window”. Reserve requirements are the amount that a bank has to hold in reserves.

As shown above, the Federal Reserve serves a substantial role in the economy of the United States that can stimulate the economic health of the United States. This is why it is important to understand what decision the Federal Reserve made on January 28.

For 2015, the Fed said that they would not heavily rely on hyper-expansionary monetary policies. Moreover, the Federal Reserve made a decision to keep short-term interest rates low until at least the summer. Economic activity shows a good pace and unemployment rate has been decreasing compared to last year. However, the central bank is also expecting low inflation, slow global growth, a stronger U.S. dollar and international market turbulence. Although other central banks of other countries lowered their own interest rate and weaken their currencies to fight against inflation and soft growth, Michael Gapen, Chief U.S. economist at Barclays Capital and a former researcher in the central bank’s monetary affairs division said, “The Fed is in a wait-and-see mode”. But the real question we have to ask ourselves is “can capitalism works without a presumed minimum level of inflation”?

 

 

Get Zero Interest Rates Till June!

The Fed held its FOMC meeting this past Tuesday and Wednesday, January 27th to the 28th of 2015, discussing several different aspects of monetary policy to “foster maximum employment and price stability.” Lately, there has been a lot of talk about a rumored interest rate increase that is forecasted to occur sometime this year. Fortunately, the Fed has decided to leave interest rates where they are on account of the falling inflation rates throughout the US, for which they listed several reasons. They spoke on the falling oil prices, the ECB’s decision to buy over a trillion Euros worth of bonds, and the dollar’s appreciating value. Ultimately, interest rates are still expected to increase in June of this year, and many still fear this day.

A USA Today article titled “Fed likely to continue to signal mid-2015 rate hike” states “The Fed typically raises interest rates to keep inflation from spiraling too high as the economy and labor market heat up and lowers rates to spur growth. The unemployment rate has fallen from 6.7% to a near-normal 5.6% over the past year, providing support for adhering to Fed policymakers’ forecast for the first rate hike in June.” Should the Fed increase interest rates, many negative events may occur. The most likely result of this increase would be an immediate shock to the stock market. Investors like conditions where money is cheap, and higher interest rates mean it is effectively more expensive to borrow. The same goes for mortgages, loans, and credit. People would ultimately see a decrease in the purchasing power of their dollars, and a rise in prices everywhere. Historically, higher interest rates have been signs of an economic recession, however the Fed doesn’t have much of a choice.

Some expect that the Fed shall continue printing money and buying securities to keep interest rates artificially low. That is entirely within the realm of possibility, however eventually the Fed has to raise interest rates or inflation will devalue the dollar to a worthless status. It’s going to be a risky decision for the Fed, and had they raised interest rates a long time ago, it may have been a smarter move. Economic crashes have always occurred cyclically. Never for the same exact reason, always the same way. As with the 2008 subprime mortgage bubble, we are now faced with an even greater bubble that must be deflated. What remains to be seen is which needle the Fed chooses to use this time.

The Waiting Game

“The Federal Reserve signaled this past week that it is unlikely to raise short-term interest rates until at least June” (http://blogs.wsj.com/moneybeat/2015/01/30/fed-up-do-rising-rates-matter-after-all/).

This came as a surprise to most people, it seems, but I am not completely surprised based on the underlying motivation of the Fed.

“…The Fed will raise interest rates only when it is confident that the economic recovery is robust and companies have regained the ability to raise prices” (http://blogs.wsj.com/moneybeat/2015/01/30/fed-up-do-rising-rates-matter-after-all/).

Although it seems that the Fed is not in touch with everyday citizens, like you and I, I believe their decision to delay the rise of interest rates is in tune with the best interests of everyday citizens. Although we have been told for a while that the recession is over, it seems that from the perspective of everyday people that is not necessarily the case. It seems like the wealth of the upper class has been rising since post recession, but the middle class and below has not had the same fortune.

The Federal Reserve clearly believes that the economy is not in full rebound yet, hence the delay of raising rates until mid summer. I am happy with the decision the Federal Reserve made, their focus seems to be more on the well being of everyday Americans, rather than worrying about creating high returns for investors. This is not really the common perception of the Federal Reserve; most people seem to think they do not have to best interest of the people in mind. There seems to be this notion or belief that the Federal Reserve is just a group of wealthy bankers in an ivory tower playing with everyone’s money, acting according to the best interest of a few. Their recent decision, however, points to the opposite.

“…Investors seemed mildly disappointed when the Fed reiterated on Wednesday that it would remain “patient”” (http://blogs.wsj.com/moneybeat/2015/01/30/fed-up-do-rising-rates-matter-after-all/).

Although investors seem to be upset with the Federal Reserve’s decision. Most people are not investors so this decision by the Fed to not act does not affect them in the same way as those who speculate based on the Fed’s actions.

“More than three-quarters of Americans say the five-year bull market in U.S. stocks has had little or no effect on their financial well-being, according to a Bloomberg National Poll” (http://www.bloomberg.com/news/articles/2014-03-12/stock-market-surge-bypasses-most-americans-poll-shows).

Bull market is a term used to signal positive beliefs about the market, while bear market is used to signal the exact opposite, pessimism towards the market. Although the stock market, like explained above has been labeled a bull market for the past five years, this has not improved the financial well being of everyday Americans, most who do not own stocks, or at least not a significant amount anyways. With the lower and middle class of America still struggling, it seems that the fed made the appropriate decision to delay raising interest rates.

“Don’t worry about the Fed; be happy” (http://blogs.wsj.com/moneybeat/2015/01/30/fed-up-do-rising-rates-matter-after-all/).

You can be happy; the Fed seems to be thinking about you and I, not just the wealthy elite.

Fed Remains on Track, Remains Patient

The Federal Reserve had their first meeting of the new year on January 28th. The meeting did not yield too much news as the Fed announced they would stay on track for raising short term interest rates starting this June. The summer of 2015 has been the expected time the Fed would being to raise these short term rates. However, due to recent slowing inflation, many investors feel that the Fed will not raise rates until this fall. These near 0 short term interest rates have held steady for six years as the US economy continues to recover from its greatest recession since the Great Depression. The Fed was overall very optimistic about the economy given solid economic and job growth. These strong numbers coupled with falling oil prices and rising consumer confidence were enough to offset the inflationary concerns, enabling the Fed to keep summer 2015 as their goal. One of the Feds main jobs is to control for inflation. I believe this role will make the Fed wait until the fall to begin raising rates unless something remarkable happens in the next six months. The articles notes, “The Fed’s stated goal is to keep prices rising at an annual rate of about 2 percent, part of its effort to support economic growth and grease the wheels of commerce. But it has not hit that target in more than two years, and it is increasingly unlikely to achieve it this year.” http://www.nytimes.com/2015/01/29/business/federal-reserve-rate-decision.html?_r=0. With the eurozone and emerging markets struggling, their is no need to rush into raising rates. The US has shown strong growth the last couple years and it would be idiotic to rush into things just to “stay on track.” These inflationary concerns are most likely due to falling oil prices and not an overall sign of economic weakness. The Fed is remaining patient and said they will continue to monitor the state of the economy before the rush into a decision. Regarding the long term, the Fed said, “Even after employment and inflation get to their targets, economic conditions, may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” http://www.businessinsider.com/federal-reserve-announcement-january-28-2015-1. This Fed announcement will most likely continue to spur economic growth. If the Fed came out and said they saw signs of economic weakness, that could potentially be detrimental to economic development and consumer confidence. While I never think the Fed would actually say something that frank and blunt, they could have beaten around the bush. Fortunately, they, along with with many experts, view the US economy as strong as it continues its recovery. If the Fed said they thought the economy was doing so well they would start raising rates next month, that could also hurt the US economy and confidence. When the Fed does beginning raising rates, I expect the market to go down as investors becoming frightened about the unknown future. These are uncharted waters the Fed and US economy are navigating right now. Hopefully the Fed has been thinking ahead and is able to raise rates without harming the economy and confidence. Overall, this recent Fed announcement was positive as it indicated the Fed was on track with its plan to raise rates starting this summer.