Call it Taper Tantrum Two.
Two of the 12 members of the Federal Open Market Committee suggested on Thursday that it’s time to raise interest rates, causing the Dow Jones Industrial Average to drop 254 points.
To get a better idea of how ludicrous this is, consider the following:
- The two hawks represent a sixth of the board. The hawks will need to more than triple their numbers to represent a majority.
The two Fed members were speaking at a Cato Institute event called, “Rethinking Monetary Policy.” The event was not called, “Seven More Years of ZIRP,” “Zero Everlasting” or “Bring on QE4.” Why would anyone be surprised that they spoke in favor of a rate hike?- One of the two, St. Louis Federal Reserve President James Bullard, is an alternate member of the FOMC and has long been advocating for a rate hike. This is the guy who caused the Dow to drop 100 points when he suggested in June 2014 that interest rates might be hiked in the first quarter of 2015. We tried to determine the role of an alternate member, but the Federal Reserve Board’s description is about as clear as a Fed policy statement. The page says there are 12 members of the FOMC, but lists 10, as well as four alternates. So how do they come up with 12? These are the people who are managing our economy.
- The other hike hawk, Richmond Federal Reserve President Jeff Lacker, was the lone member of the FOMC who voted for a rate hike in September. His dissent was covered by media such as Reuters and even before the meeting he gave a speech to the Retail Merchants Association entitled, “The Case Against Further Delay.”
- The same day that two members said a hike is needed, New York Federal Reserve President Bill Dudley seemed to suggest that the Fed shouldn’t hike rates yet. Dudley said “that the economy is growing only slightly at an above-trend pace and inflation is too low relative to our objectives, suggests that we need to think carefully whether the time is right to begin to normalize monetary policy.”
- Interest rates have been near zero for going on seven years, so a rate hike is way, way, way overdue. Economists and journalists have been predicting one for most of 2015. Given these two facts, you would think our allegedly efficient markets would have already factored a hike into stock prices.
- If a hike took place, it would likely raise rates a measly 0.25% – 25 basis points. If you were borrowing $4, that would add a penny to the cost of your loan.
And yet the comments by Bullard and Lacker were enough to spark a 254 point drop in the DJIA.
Of course this wasn’t the first case of Fed-induced market insanity. In May 2014, when former Fed Chair Ben Bernanke announced the obvious – that the Fed would “taper” its bond purchases in the not-too-distant future – the markets went a little nuts. While it was obvious that the Fed couldn’t continue buying $70 billion worth of bonds a month, the attempt at facing reality caused stock prices to plummet.
QE Didn’t Work, Lacker Says
Speaking of reality, what Lacker had to say to support a hike is much more newsworthy than his support of a hike. While his assessment that the economy is in fine shape is questionable, he also noted “the difficulty of finding conclusive evidence of economic effects from the Fed’s large-scale asset purchases. It seems plausible that successive rounds of quantitative easing have had little or no tangible effect, apart from signaling the FOMC’s outlook for future economic growth and policy settings.”
So we have a Fed member admitting that the Fed’s easy money policy isn’t working! This is NOT going to help Ben Bernanke’s book sales! Maybe The Wall Street Journal should have had Lacker write a rebuttal to Bernanke’s op-ed, How the Fed Saved the Economy.
The comments by Bullard and Lacker, saying what they had already previously said, weren’t the only crimp last week in the market’s Fed-induced climb. As of Thursday’s close, the market was down 462 points for the week.
The October jobs report, released last week, also played a role in pushing stock prices down. The New York Times ran a story under the headline, “Strong Growth in Jobs May Encourage Fed to Raise Rates,” while U.S. News& World Report ran with, “Stellar October Jobs Report Blows Expectations Away.” Nearly as overstated was CNBC’s, “BOOM! Nonfarm payrolls up 271,000; jobs rate at 5%.”
But fear not, ZIRP lover. It’s just journalistic hyperbole. There’s still plenty of bad news for the Fed to hang ZIRP onto.
The Bureau of Labor Statistics reported that 271,000 jobs were added in October, but even if it’s true, that’s not exactly a trend. The September report showed a net loss of 22,000 jobs. And while the October jobs report is good news relative to other recent economic news, the number of workers employed part-time increased by 214,000 in October.
So, regardless of the statements of two Fed presidents, ZIRP is likely with us at least through the end of 2015.