Whatever Janet Yellen Says On Wednesday Is Going to Be Wrong

At 2pm EST on Wednesday, the Fed will release its infamous “dot plot” showing projected interest rates, along with economic forecasts and a policy statement.  It should be noted that the Fed has a terrible forecasting record.  Nonetheless, markets will continue to hang on every utterance of the gnomes in the Eccles Building.  Fed Chair Janet Yellen said prior to May’s disappointing jobs report that a rate hike would make sense “in the coming months.” After the May report, she started to backtrack.  The Fed originally projected four rate hikes in 2016, but now we are more likely to see only one.

And we aren’t going to learn much of anything on Wednesday – unless you think the opinions of people who are consistently wrong are worth knowing.

Eight years after the financial crisis, virtually all of the central banks are still engaging in crisis era policies with little prospect of reviving economic growth. But not the Fed. The Fed is talking seriously about raising rates, something it should have done more than two years ago. But it is choosing an incredibly awkward time to get religion. And it is moving at the pace of a tortoise crossing the road to actually do something.

The truth is, no matter what Yellen decides, we’re still up a creek without a paddle. She can tinker with interest rates all she likes, but she’s waited too long. She can’t fix the mess we’re in.

And now may be a terrible time to raise rates. Here’s why…

There Couldn’t Be A Worse Time To Raise Rates

Leaving the fate of the world in the hands of a bunch of former tenured economics professors proved to be nothing short of disastrous.


The Fed’s infamous “dot plot” (via CNN Money)

While the Fed and mainstream financial media keep telling us that the U.S. economy is healthy, the facts tell a different story. In the U.S., trade and demand are weak while manufacturing is hovering just above recession levels. Globally the story is much worse -trade is collapsing, manufacturing is in recession, and demand for goods and services is falling. In fact, global trade is at its second-lowest level since 1958 and is falling in both dollar and local currency terms.

As Gluskin Sheff’s David Rosenberg points out, the labor market is anemic despite headline numbers suggesting otherwise. Mr. Rosenberg believes that the lack of strong wage growth is a sign that we are far from full employment: “There are officially eight million unemployed, but in reality, when all the underemployment is accounted for, that number is far closer to 20 million. The definition of the labour force renders the unemployment rate a meaningless statistic. There are a ton of folks not in the traditional labour force who would readily take a job if offered one.”

The employment-to-population ratio is a disappointing 77.7% for those aged 25-54 years old compared to 80% in early 2008 and 78.8% in September 2008 at the time Lehman Brothers collapsed. This means the Fed may be about to embark on a tightening cycle with the employment-to-population ratio at its lowest level in decades.   It has never made such a move before with this ratio below 80%.

This important information appears to have escaped the attention of the who-knows-how-many (but it’s surely too many) economics PhDs laboring away at the Fed in Washington, D.C. and around the country. I have argued for years that America suffers from a structural and not a cyclical employment problem; underemployment is not merely a result of a sluggish economy (i.e. insufficient demand) but also due to a mismatch between available jobs and the skills needed to fill them (partially due to our inane immigration policies). The Fed is fumbling the employment half of its dual mandate. It clings to models that tell it that the economy is approaching full employment while it actually suffers from high structural unemployment. Then again, what good is a doctorate if it doesn’t produce a useful idiot (I write that speaking as a former PhD candidate at Yale)?

There are other factors that render this an awkward time for the Fed to wake up and start raising rates. Delinquency rates on auto loans and student loans are increasing. Low commodity prices are causing higher delinquency rates on agricultural loans. Over 70 oil and gas companies have already filed for bankruptcy and there are more to come.  And delinquencies on business loans are rising as well. And of course the default rate in the high yield bond market is rising sharply (and not just in energy).

This is what happens at the end of a credit cycle. The Fed is choosing a terrible time to wake up from its torpor and gather the courage to impose the necessary discipline of normalized interest rates on a spoiled economy. My bet is that it won’t get very far before it feels compelled to back off as stocks and other risk assets sell off sharply as the cost of capital starts rising.

In addition to the high yield bond market, we are also seeing this occur in other inflated pockets such as the grossly inflated Miami condo market, where every lunatic builder from around the world figured he could plant a disgustingly ugly piece of Damien Hurst “art” in the lobby of a building and con people with too much money (for now) into overpaying for apartments whose first two floors are going to be underwater in a couple of decades. Believe me, America’s voters aren’t the only ones suffering from a form of mass delusion.



14 Responses to “Whatever Janet Yellen Says On Wednesday Is Going to Be Wrong”

  1. andrew efstratis

    She looks like one of the characters from the Hobbit movies. Is she a hobbit in a Janet Yellen dress? She might has well be a hobbit but she certainly does NOT have the magic ring. She has no answers for the current monetary situation. She might as well go back to her Hobbit hole and come out next year.

  2. I agree with your assessment that the Fed has probably waited too long to do “corrections” (should have been done incrementally for the past 6 years during the “recovery” period).
    The real issues with our economy are in lack of “cash flow” here in the U.S.A., and a shrinking middle class over the past 30 years. Sending jobs overseas into the “global economy” hasn’t helped much either. The recent “gains” for the lowest 10% and the highest 1% of our population gives a “false positive” spin to “things are gradually improving” statements from government economists. Trump’s claim to “bring back good paying jobs from overseas” is a fabrication. Unless Congress requires profits to be taxed at the same level and/or lowers the corporate rate (say from 35% to 20%) we will continue in this slow, downward death spiral until a catastrophic event, like major war or unbridled weather devastation occurs on a mammoth level. Then, we’ll all be screwed!
    Creating “service” jobs in the lowest paying rungs and hiring “temps” to make the job situation look better just doesn’t get it! We need REAL jobs. Fixing the infrastructure of this Nation would be a start. Investing in “other than fossil fuels” would be another. Maybe, something like the old Works Progress Program (think Roosevelt) back in the 30’s might be a start. The Government helped create this mess, they can surely muster the balls and ovaries to get us out of it. Our Representatives, big banks, Wall Street, and others with political sway, need to get their collective heads out of their asses, look away from their “bottom” lines long enough to see what the real problems are and, pitch in to fix them. Our people, most of them, in this country have always been great AND willing to work to make things better. All they need is a chance and a system not bent on usury, greed, predatory fees, and egregious profit taking, hiding profit in off-shore accounts, all at the expense of a sick economy. Time to get REAL folks and fix this mess!!

  3. Well done Micheal precise writing, your pick on Deutsche bank has just gone south again, I would imagine if it closes under 1300 it’s look out below. If in the UK we leave the EU that would just about finish Deutsche bank, no wonder the Germans are so keen to keep us in.

  4. It is like answering the multiple choice question game of nonsense.
    How many miles is it from the earth to the moon?
    A) Blue
    B) Upside down
    C) Don’t know
    D) All the above

    Fact is: There is no solution to the dilemma the FED, gov’t and banks
    have created. It will have to run its course over several years so you
    better be in the right position now before the economy falls from the
    cliff they have pushed it to. Precious metals and cash.
    Then wait for an opportunity after extreme diligence
    in your investment research. Be smart, be patient.

  5. Michael, you are spot on. All the stats you quote indicate that our economy is in real trouble and will only likely get worse when housing collapses, which is beginning to look like it’s inevitable. Unemployment numbers are certainly extremely misleading, considering the labor participation rate, and the avaiability of full time jobs at the lower end and much of the middle class. Further rate increases at this time will surely push it off the cliff.

  6. I freely admit that I am not an “expert” but the article effectively highlights the reasons why we are in such a worrying position. I am very pessimistic about the next few years and am getting concerned about the “friction” building up on the Russian border with the rest of Europe and of course, another possible confrontational problem building up in the Spratly Islands in the South China sea.

    Well, have a happy Thanksgiving – it may be a long time before you will be able to get turkey again……….

  7. What you say is fact. It has been said by many since the great recession started and even before that. Our leaders of both parties want the situation to remain as it is and apparently no election will change it. And it appears at this point by the polls, a majority of the American people couldn’t care less. So why continue giving us the facts of the situation. Only the days of the calendar change but the content of the story remains he same.

  8. Kristi Pattison

    I agree that in a healthy economy the interset rates should have been incrementally increased. However, I had been denied a home loan modification due to the gross neglegence of Wells Fargo’s incompetancy in real world economic understanding. When a business owner or say a sales person receives a reimbursement check for business expences it is not income. These are expences that are for business purposes, not income. I was denied a modification because they said I made too much money. Bullsh……. they pull this crap with too many people and now they are reeping what they started. As far as I am concerned everyone should pull all of there money from the banks and let them fail. Supply and demand. The bank that can create real capital for customers and not greedy ceo’s or shareholders will make more money than they know qhat to do with!

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