Like many Americans, Federal Reserve Chairwoman, Janet Yellen, made some positive New Year’s resolutions that have recently become known.
Her goal for 2016 is to accomplish the Fed’s goals of 2015, which should have been completed in 2014 because of promises made in 2013 from plans that were made in 2012.
But already her resolutions are in trouble…
According to the Bureau of Labor Statistics, the Fed’s favorite measure of inflation, the core PCE, remains stuck at 1.3% – well below the Fed’s stated goal of 2%. The core PCE, or personal consumption expenditures, measures the average prices of goods and services targeted towards individuals, but excludes food and energy prices.
And this is a problem for the Fed. You see, the Fed has two mandates from Congress.
First, they are to work towards full employment, which translates to a 5% unemployment rate. If you discount the record number of Americans who are not in the labor force, the Fed has achieved one of its primary objectives.
Of course, it’s a Pyrrhic victory. Currently, the labor force participation rate is about equal to the number of working Americans while I was a high school student in the late 1970s. That leaves upwards of about 90 million able bodied Americans out of the labor force.
Please don’t ask me to explain how we can have 90 million Americans NOT in the labor force and yet still have full employment. I don’t understand government math either.
But the second Fed mandate is where Janet Yellen is having trouble…
You see, the Fed signaled last month that it intends to raise the fed funds rate four times this year by as much as 250 basis points. While I don’t expect Yellen to pay too much attention to falling stock prices, she can’t ignore the accumulating evidence for a global slowdown.
There is no way she will be able to stick to her plans for four interest rate hikes. The economy is barely growing now, and any stubborn insistence to maintain the resolution risks tipping the economy into full-blown recession. Using Bayes’ Theorem, the chance for four rate hikes in 2016 are less than 20%.
But there’s another headwind to higher rates…
Should the global slowdown hit the U.S. sooner than expected, Janet Yellen won’t have any ammunition available to avoid recession in the U.S. Lowering rates will have a minimal impact since they’ve been so low for so long.
And any benefits of negative rates will do little to quell recessionary fears while decimating the returns of seniors trying to earn interest on their pensions and other assets.
So that leaves one terrible possibility…
The Fed could potentially accomplish a stealth quantitative easing via a technique called debt monetization. The government could create massive spending programs to stimulate growth and then incur huge deficits to support the spending. The deficits would be financed with government debt printed by the Fed.
This would likely be the beginning of terrible consequences for America if we were to go down than long dark road. In 10 years, the government would have just enough money to pay for two budget items only: interest and entitlements! There would be no money left for defense, infrastructure, or government salaries.
Not exactly a positive outcome…
Until Janet Yellen throws out her New Year’s resolutions, expect 2016 to see a lower stock market, higher Treasuries, and flat precious metals (gold) prices.
At the end of the day, maybe it’s a good thing her resolutions are in trouble. The alternative could be much worse!