Fed Does Nothing, Lacker Dissents - And the Band Played On

All is well in the US. The rest of the world, however, is a problem.

Explication to follow with Janet Yellen's press conference.

In their separate economic projections statement they appear to have lowered their inflation expectations.

Given their track record on forecasting I think this is more of a Rorschach test than a reliable guide to the future.

We're in the new normal of high employment, low wages, sluggish growth, and slack inflation.

And we're are doing just fine.   Depending on how you define 'we.'

Even though the Bloombergians were later laughing at this, I tend to lean towards Ray Dalio's prognosis.

“I don’t care whether they raise 25 basis points,” Dalio said Wednesday in an interview with Tom Keene and Michael McKee that was broadcast on Bloomberg radio and television. “What scares me, or what worries me, is what the next downturn in the economy looks like, with asset prices where they are and a lesser ability of central banks to ease monetary policy.”

He predicted that returns across asset classes over the next decade will only average 3 percent or 4 percent. Narrower spreads will make it much harder for asset purchases to have a big effect on the market, he said."

This is all a bit moot really, because except for the betting parlors it doesn't matter whether the Fed raises 25 basis points or not.  You can print money and give it to the banking system all day long.

The system is broken, the real product of the nation has been hijacked by financialization, the international monetary exchange is in chaos, and almost all of the gains are going to the top. And the Fed and the government are doing virtually nothing to change this.

And the band played on.

Release Date: September 17, 2015

For immediate release

Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.

The Decline of the Dollar as the World's Reserve Currency

The arrogant belief that you are the 'only game in town,' and indispensable, provokes reckless behaviour that takes advantage of such a belief with abusive excess.

The time for the dollar to fall from its reserve currency status is coming precisely because of the years of reckless deficit spending beginning with the Reagan Administration.

This is also a model for the Wall Street moneycenter banks, who have abused their position in the financial system egregiously since the repeal of Glass-Steagall.

The likely result of this long cycle of reckless speculation and arrogance was forecast here in 2005.

Forecast 2005: The Humpty Dumpty Economy
Jesse's Café Américain

The current trend in the United States economy is not sustainable. This is a
realization that will penetrate the national consciousness slowly and unevenly.
Most economists agree on how this cycle will end (even if it is only privately), but
the great debate is in the details of how, and most importantly, when.

If one does not accept that the situation is unsustainable, and believes that things
can continue on endlessly just as they are, with the United States consuming the
bulk of the world’s savings and production because of who we are, then perhaps
this is symptomatic of the national epidemic we now suffer which the ancient
Greeks called hubris.

"Where else will they put their surplus if not our debt? To whom will they sell their
goods if not to us? Who will teach them how to live, and govern them?" History
shows that even if such trends last far beyond most expectations, eventually a
day of reckoning arrives, in some frequently repeated patterns of systemic
failure....

Things rarely reach a turning point when we expect it. A true sea change is
slow to permeate the mentality of most people, because our experience is that
what happened yesterday will happen again tomorrow, and a long cyclical turn occurs
gradually and incrementally. We forget what happened even a few years ago.
Predictions of a continuance of recent trends are the common currency of most pundits...

However, and this is a common sense notion that has been nearly forgotten
by our generation, we have the ability to act in such a way so as to make the
improbable more likely to occur, to tempt fate by our actions. For example, there
is a certain probability of sustaining an automobile accident in the normal course of
our daily activities. High risk behaviors, such as speeding excessively or
drinking while driving, increase the chance of an accident. If one engages in high risk
activity, and nothing unusual happens, we become emboldened and think that
since we were able to drink moderately and drive last month, so we can drink
and drive this month and thereafter. Perhaps next month we drink a little more for
an indulgence, and again nothing happens. This cycle continues until something
changes our behavior, or simply ends when we literally hit the wall.

It would be our contention that the US is like such a driver, and we have been
economically tempting fate with increasingly risky behaviors. We are persuaded
that there is almost nothing we cannot do, almost nothing that can happen, that is
beyond our control. It is the propensity for people to increase and
repeat what they have been doing over time, to tempt fate through repeated and
increasingly risky behavior, and to forget the possibility of a sequence of
unfortunate events if you will, that gives rise to memorable events in history...

Predicting the failure of a complex system is not easy. One can examine it as a
whole, and determine that it will fail, and often calculate what must change in
order to allow the system to function more reliably. But it is often beyond our power to
calculate exactly how it will fail, and consequently when it will fail. This does not
invalidate the observation that the system will ultimately fail. It merely
underscores the unpredictability of timing a failure with the degrees of freedom
inherent in a calculation with a large number of exogenous variables. It is not
easy to predict exactly when a chronic DWI will demolish their automobile, but it
remains relatively predictable to say that they will do so as long as they maintain
their current mode of behavior....

There are four major types of tipping points:

o Demand: a break in the level of consumption in the US caused by the
unwillingness or ability of households to incur further debt to support
consumption beyond real wage growth

o Supply: a major disruption in the supply of an essential commodity like
energy, food, or raw materials, or even the realization that a major
commodity is in shorter supply than expected, such as silver or oil.

o Monetary: an inability of foreign central banks to continue to
monetize the US trade deficit and budget deficit through the recycling of
their trade surplus into US debt securities.

o Systemic failure: the failure of a major counter party that threatens the
US financial system, particularly in the hugely leveraged derivatives
market.

Two of the seals, Demand and Systemic Failure, have been broken, and the horsemen unleashed. Next comes Monetary, and then Supply, which is a Pale Horse.

There is still time to end this spiral of decline.


Reuters
U.N. panel says world should ditch dollar
By Jeremy Gaunt, European Investment Correspondent
Wed Mar 18, 2009 11:16am EDT

LUXEMBOURG (Reuters) - A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.

Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.

"It is a good moment to move to a shared reserve currency," he said.

Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value -- though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits.

Some analysts said news of the U.N. panel's recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings.

"Speculation that major central banks would begin rebalancing their FX reserves has risen since the intensification of the dollar's slide between 2002 and mid-2008," CMC Markets said in a note.

Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting, according to the text of its proposals published on Monday.

It has significantly reduced the dollar's share in its own reserves in recent years....

Reuters
China backs talks on dollar as reserve -Russian source
By Gleb Bryanski
Thu Mar 19, 2009 11:24am

MOSCOW, March 19 (Reuters) - China and other emerging nations back Russia's call for a discussion on how to replace the dollar as the world's primary reserve currency, a senior Russian government source said on Thursday. Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.

Calls for a rethink of the dollar's status as world's sole benchmark currency come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.

Russia met representatives of China, India and Brazil ahead of the G20 finance ministers meeting last week, as the big emerging powers seek to up their influence on decisionmaking globally. Their first ever joint communique did not mention a new currency but the source said the issue was discussed.

"They (China) did not formally put forward their position for the G20 summit but unofficially they had distributed their paper regarding the same ideas (the need for the new currency)," the source told Reuters, speaking on condition of anonymity.

The source said the Chinese paper envisaged the International Monetary Fund's Special Drawing Rights (SDRs) being first assigned a role of a clearing currency on some transactions and then gradually becoming the main global reserve currency. "They said that the role of reserve currency should be given to SDR," the source said.

A U.N. panel of experts is also looking at using expanded SDRs, originally created by the International Monetary Fund in 1969, but now used mainly as an accounting unit within similar organisations as a new reserve currency instead of the dollar.

Currency specialist Avinash Persaud, a member of the U.N. panel, told a Reuters Funds Summit on Wednesday that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

The SDR and the old Ecu are essentially combinations of currencies, weighted to a constituent's economic clout, which can be valued against other currencies and against those inside the basket....

Ten Things We Might Expect to See in 2009