Skip to comments.Do Janet Yellen and the Fed Get The Economy?
Posted on 06/29/2014 6:56:03 PM PDT by Kaslin
Time and time again, I am amazed at how the smart money and those supposedly in the know continue to misread the economy. Im not talking about President Obama, who is most likely as out of touch with what is going on in the real world as was President George W. Bush, nor am I am pointing the finger at Congress. Lets face it with the now non-stop campaign cycle, most of them have little time to sweat the details of the economy or the needs of their constituents. If you dont believe that, perhaps you should spend some time understanding why United States Representative for Virginias seventh congressional district and Republican House Majority Leader Eric Cantor is now out of a job.
No, Im talking about the Federal Reserve, which in theory is composed of several very bright minds when it comes to monetary policy and the economy. If we look at the Feds track record on forecasting changes in the economy or impending crises, saying the Fed is out of touch is like shooting fish in a barrel. After all, I am sure youve heard by now how the Fed looks at inflation, excluding food and energy. They do so even though those two components, which have been on the rise, take a bite of 15-20% from the average weekly paycheck. Perhaps one of the benefits of being inside the Fed is you dont have to buy your own food or gas, or perhaps they are simply paid so much more than the average person that they dont even notice the upward move in prices during the last few months.
What about the overall strength of the economy? Depending on how weak or robust it is, the Fed has to step up, tack or, in some cases, cut back its stimulative efforts. It would seem then that reading the economy and doing so correctly would be crucial to getting monetary policy right.
Yet, for all the information at their fingertips, it seems the Fed has perpetually been too optimistic regarding the economy. Granted, when the Fed and other economists made their 2014 forecasts back in late 2013 or early 2014, no one expected, and therefore did not account for, the severe impact of the harsh winter weather.
As we started off the year, the St. Louis Fed issued a forecast calling for gross domestic product (GDP) growth of 3.2% in 2014, which, to be fair, was on the high side of forecasts made by the Federal Open Market Committee.
In early February, after we started to see some of the winter storms and their effects, Federal Reserve Bank of St. Louis President James Bullard said the U.S. economy was closer to being normal again and that he was optimistic about the prospects for this year. I think we can get 3% or better in terms of GDP.
Flash forward a bit to late April, and the Bureau of Economic Analysis advance estimate of 1Q 2014 GDP clocked in at 0.1%, much weaker than the 2.6% reading from the December quarter and the 1.2% growth expected for 1Q 2014.
In early May, the New York Federal Reserve Bank issued a forecast saying, The economy should grow at an annual rate of 3% over the remainder of 2014, despite a slow start to the year. Soon thereafter, however, the Bureau of Economic Analysis (BEA) published its second take on the economy during the March quarter, and it was worse than originally expected much worse! With more data, the BEA has now calculated that the economy contracted 1% during the first three months of 2014.
Even with the then-expected rebound in the second quarter and the New York Feds view of 3% growth in the back half of 2014, any grade-school student could tell you that average growth for 2014 was looking more like 2%.
Despite some of the data that showed weaker-than-expected retail sales, questions about housing and concerns with other factors, Bullard reiterated the view that GDP would grow 3% in 2Q, 3Q and 4Q 2014.
This week, the BEA furnished us with its last and final read on GDP in 1Q 2014, and it was even worse than the last reading. The BEA adjusted for new information that showed the increase in personal consumption expenditures (PCE) was smaller than previously estimated, and the decline in exports was larger than previously estimated The decrease in real GDP in the first quarter primarily reflected negative contributions from private inventory investment, exports, state and local government spending, nonresidential fixed investment, and residential fixed investment
Subsequently, the BEA revised its 1Q 2014 GDP reading to -2.9%. The 2.9% drop was the weakest growth since 1Q 2009, when GDP contracted by 5.4%.
Recent data has shown continued strength in the manufacturing economy and what looks like a turn in the housing market, given May existing home sales and new home sales data. There are reasons to be concerned about the back half of the year, and one of them is inflation, which I touched on last week. What is new on the inflation front this week was the across-the-board jump in input prices reported by the June flash PMI reports from Markit Economics and HSBC. If you are wondering if I am still concerned about the consumer, his or her disposable income and the ability to spend, spend, spend, you would be right!
If the Feds forecasts for 3% GDP growth across the current quarter and in the back half of the year pan out, it means the economy would grow at roughly 1.5% in 2014. If inflation ripples through the economy with wages remaining stagnant, that 1.5% forecast may go the way of Bullards January view of 3.2% GDP growth in 2014.
In case you missed it, I encourage you to read my PowerTrend Brief article posted last week on Eagle Daily Investor about why you should watch the cheeseburger inflation index.
NO, they don’t have any idea .Wall Street and the real economy have nothing to do with each other. Bernanke and Yellen don’t know sh-t about running a normal main street small business .or the real economy. They are both academia nuts.
It is not about the “economy.” It is about power and control and money. The “Fed” is not federal, it is a private bank that has never been audited and has no reason to fear anyone except its own bottom line.
I raise my flags, don my clothes
It’s a revolution, I suppose
We’ll paint it red to fit right in
Borrow, print, tax, regulate, squander capital, contract carbon energy sources, attack productive capitalism, encourage dependency, encourage drug use, discourage saving and thrift, subsidize politically correct economically hopeless schemes.....what could possibly go wrong?
Interesting article, very good thread. Thanks for posting, Kaslin. Almost 6 years into “fundamental transformation” FReepers should be doing good. Tending to your individual economy is fun, productive, makes for better preparedness and brings about many teachable moments to family, friends and work acquaintances.
Fed Reserve faces a very complicated strategic challenge that may require draconian remedies. First problem is the US gov debt is huge, and not all of it is from low taxes and high social spending, it is all about the US gov making guarantees to the Fed Reserve as they made successive bailout loans to corporations and bankers who screwed up. Problem is corporate America and bankers never learn from each bad investment, because the amount that needed to be bailout increased after each financial crisis till 2008 when the US financial system imploded taking the world and national economy with it. At this point the US gov should let the errant Wall Street bankers go bankrupt and let the regional US banks divide up the large bankrupt banks. Wall Street CEO do not want to give up their prime position in the financial market. Instead of doing what true capitalists do, Wall Street CEO demand a bailout or they will go hands off and let the economical implosion be worst then it should be. The US gov and politicians do not want to take a hit at the polls, so together with Wall Street and political desire to win elections, the Fed Reserve is basically told to print money, use it to bailout the bankers, and dump the debt on the taxpayers. Problem with money printing and zero interest policy is the gamble did not revive the US economy and now inflation is reeling its head. The other problem with a US gov who may not be able to pay off its debt complemented by currency printing, is many nations in the world see holding onto US T Bills and using US dollar a losing proposition. Russia and China are starting an alternative trade system that uses Yuan, Rouble and Euro. These two countries are settling trade with individual nations via direct currency exchange without using the US dollar. Approximately 60 percent of existing US dollars are held overseas. if nation overseas stop using the US dollar and start returning it to the US via by buying hard assets in the US (real estate, farmland, mines, etc etc) plus gold/silver. The flood of US dollars back into the US will cause inflation. Right now the US and nations heavilly imbedded in the US dollar system/usage (EU and Japan) have worked with the US in supporting the dollar system, but all three (US, EU, Japan) can only do so much because all three nations are in debt and going broke. So how is Yellen going to stop the madness. Her biggest problem is not that the Fed Reserve tapered its monthly repurchase of unsold US T Bills and mortgages, but how to unload the $ 4 trillion in debt and toxic notes the Fed Reserve currently holds without collapsing the bond market and causing nations to dump the dollar (causing hyperinflation)??? And all these problems are hung around the US taxpayers neck because the US gov guarantees the business deals made by the Fed Reserve. When Bernanke claimed his policies were at the brink of succeeding, but he suddenly retires letting Yellen take over that was a red flag for me. No Fed Reserve chair would resign when their policies are at the brink of succeeding.
To the Fed and their elite friends, the economy IS the stock market. As long as they can continue growing their wealth and only pay capital gains tax rates, everything looks rosy.
The stock market used to reflect the economy as a whole, tracking production and jobs and general welfare. But now the stock market is free of all those “encumbrances”. Through outsourcing and modern technology, companies can make more money by creating practically no American jobs. And much of the money the Fed continues to generate is invested in the continuing profitability produced by this strategy. The people and institutions who own stock get richer, while the average American — unemployed or underemployed — gets poorer.
The Fed no longer has any power to improve the economy, so it supports the increasingly disconnected proxy measure, the Dow Jones average, to the delight of the Fed’s friends and to the detriment of the American people.
I think you could do a history check and find that not a single FED chief ever (in the history of the US)....has ever been anything other than a professor. I seriously doubt if any have ever owned a business. It might explain why no one really listens to the FED.