US Economic News

[CityFarmer]

The decision is never "straight-forward"...

Federal Reserve policymakers downplay divisions on U.S. rate hike

WASHINGTON/NEW YORK - U.S. Federal Reserve policymakers are not as divided as it may appear and are generally operating under the same framework for determining when to raise interest rates, one Fed official said on Thursday, while another said the differences of opinion reflect the countervailing economic data.
...
http://www.todayonline.com/business/fede...-rate-hike

[CityFarmer]

Mr. Tharman view on the delay of Fed rate hike...

Uncertainty over Fed rate hike becoming too costly for markets: Tharman
16 Oct 2015 15:46
By Soon Weilun

UNCERTAINTY brought about by anticipation over when the US Federal Reserve is going to raise interest rates is becoming too much of a cost for markets to bear, said Singapore's Deputy Prime Minister Tharman Shanmugaratnam on Friday, in his strongest case yet in exhorting the Fed to raise interest rates.

"We've got to that point where the benefits for near zero interest rates for economic growth will be increasingly outweighed by the costs," he said at a discussion panel held during the Latin Asia Business (LAB) Forum held at the Shangri-La Hotel here.
...
Source: Business Times Breaking News

[greengiraffe]

Bond market wonders if US Federal Reserve will even lift rates in March
DateOctober 15, 2015

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Last month, the Fed forecast the tightening cycle will end with the funds rate at 3.5 per cent. Photo: Phil Carrick

First Treasuries traders were banking on September for the Federal Reserve to raise interest rates. Then they turned their focus to December. Now even March is looking like a toss-up.
The drumbeat of weaker-than-forecast global economic data continued Wednesday as September US retail sales fell short of analysts' expectations. The report came after Fed Governor Daniel Tarullo, who votes on rate decisions, said Tuesday that he doesn't currently favour an increase in 2015, even though chair Janet Yellen has said a move would probably be warranted. The Treasury sold four-week bills at a rate of zero per cent Wednesday, reflecting investors' demand for a haven.
Traders' bets that the Fed will lift its benchmark by year-end have dropped to less than a 30 per cent chance, and aren't much higher for January. For March, the probability has tumbled to about 49 per cent, from 66 per cent at the start of the month. The calculation is based on the assumption that the effective fed funds rate will average 0.375 per cent after the first increase.
The economic figures "will certainly be highly influential for the Fed, particularly in its course of policy action and whether they are able to hike this year or not, and so far this is a fairly strong vote in the negative camp," said Christopher Sullivan, who oversees $US2.4 billion as chief investment officer at United Nations Federal Credit Union in New York.
The benchmark 10-year note yield fell seven basis points, or 0.07 per centage point, to 1.97 per cent as of 5pm in New York, the lowest on a closing basis since April 27, according to Bloomberg Bond Trader data. The 2 per cent security due in August 2025 rose 5/8, or $US6.25 per $US1000 face value, to 100 7/32. The yield's dip below 2 per cent leaves it close to levels seen in the wake of the August market turmoil fuelled by China's surprise yuan devaluation.
Last month, the Fed forecast the tightening cycle will end with the funds rate at 3.5 per cent. Yet the swaps market is pricing in a terminal funds rate of 1.32 per cent in three years, according to overnight index swaps data.
The 0.1 per cent gain in retail sales followed little change in the prior month that was weaker than previously reported, Commerce Department figures showed. The median forecast of 82 economists surveyed by Bloomberg called for a 0.2 per cent advance.
In their September meeting, Fed officials kept their benchmark near zero, where it's been since 2008, to assess how slowing growth abroad is affecting the US Projections prepared for the gathering showed that 13 of 17 of the central bankers saw a rate boost as appropriate this year.
Bets on a 2015 Fed liftoff have faded since an October 2 US report showing the nation's job market was weaker in September than most economists anticipated. This week, a decline in Chinese imports underscored the headwinds to global growth.
While some Fed officials say they see a rate boost this year as appropriate, "the market obviously senses something else, whether it's the global story impacting the domestic story or something else, which makes them challenge the Fed," said David Ader, head of US government bond strategy at CRT Capital in Stamford, Connecticut.
Investors are the most bullish on Treasuries in 18 months, according to the latest JPMorgan Treasury Client Survey.

[greengiraffe]

• Oct 21 2015 at 6:18 PM 
  

Maverick Capital's Lee Ainslee says Fed is letting future risks build

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[img=620x0]http://www.afr.com/content/dam/images/g/k/e/q/u/w/image.related.afrArticleLead.620x350.gkelst.png/1445420267687.jpg[/img]Maverick Capital founder and CIO, Lee Ainslee. Dominic Lorrimer
[Image: 1425525330490.png]

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by Jonathan Shapiro
American hedge fund star Lee Ainslee says the Federal Reserve must share much of the blame for recent market volatility and its hesitancy to raise rates is allowing future risks to build in the global financial system. 
Ainslee, the founder of $US10 billion hedge fund Maverick Capital said he was "mildly surprised and very disappointed" the Federal Reserve failed to raise interest rates in September.
"It's hard to defend zero interest rates with 1.5 to 2 per cent GDP growth," he told an audience at the Annual Citi Australian Investment Conference on Wednesday.
An inability to raise rates had led the market to question "the stability of Fed policy".

"The longer this continues the bigger the eventual problem is going to be. And recent volatility is in part driven by the Fed, and most investors were shocked and mildly disappointed."  
Maverick formed in 1993 manages around $US10 billion. Mr Ainslee is a "tiger cub" an elite group of hedge fund managers that worked under Julian Robertson's famed hedge fund Tiger Management before setting up their own fund.  
In a presentation at Citi's annual investment conference, Mr Ainslee told investors that conditions were becoming more favourable for hedge funds as volatility increased while dispersion among stocks, which measures the difference in price moves of the best and worst stocks, was rising.
This favours stock pickers that buy and sell short shares based on research. A measure of dispersion against correlation was at its highest point since the mid-1990s when many long/short hedge funds including Maverick were set up.  


"We all thought we were geniuses but there were clearly other factors at work," he said.
But Mr Ainslee is looking like a genius of late. In a period where many high flying hedge funds such as Pershing Square and Third Point have nursed large losses, Maverick has posted positive returns.
 "We recognised that we had unusually high ownership of stocks that were heavily owned by hedge funds. Stocks with high beta, stocks momentum and growth; all factors that do perform with stressed market conditions."   
In stress testing, Maverick realised its April positioning meant it would have been hit as hard as the market in a sell-off which, coupled with some risk alerts flashing red, led the fund to adjust its portfolio.

CROWDED TRADES
But Mr Ainslee said it discovered that it was in many crowded trades along with other hedge funds that were likely to get belted in a deleveraging phase.
"[Hedge funds] were overly exposed and the valuations of those stocks was reaching peak levels so we took a step back and made some pretty dramatic changes to the portfolio."
Mr Ainslee said that the fund's proprietary economic data showed that Europe's economy had staged a recovery while the US had stalled. China however was in the midst of a sharp downturn.

"We have a cautious view and the thesis is China is worse than people recognise," but had a neutral portfolio positioning as much of the bear-case for China was reflected in market pricing.
Mr Ainslee said while he was "scared to death'" about liquidity in the bond market and while there were concerns in equity markets too, the fund's positions were modest.  
He said the fund is embracing electronic market markers that allowed the fund to trade anonymously.
Maverick was "tied into 53 different electronic pipes" which Mr Ainslee said made it easier to move large volumes of stocks than before.
When asked about whether the fund had long or short positions in Australia, he said the abundance of superannuation capital directed to the sharemarket meant most stocks were too expensive.
"That it leads to valuations that do not compete well on a global basis. So we can look at very similar businesses but because they're based in Europe or the US I can buy it at that much more of an attractive price," he said.  
"But I don't think there's some bubble that's going to burst so on the short side we've not done anything too compelling [to short]." 

[greengiraffe]

Mountain of packages delivers problem for US apartment landlords

• LAURA KUSISTO
  
• THE WALL STREET JOURNAL
  
• OCTOBER 24, 2015 12:00AM
  

0

[Image: 558306-8a09055a-7975-11e5-80ed-95011193132b.jpg]
The surge in package deliveries is causing a problem for apartment landlords. Source: News Corp Australia
[b]The biggest landlords in the US are being crushed under a mountain of packages, leading one large apartment operator to stop ­accepting deliveries and others to experiment with ways to minimise the clutter.[/b]
The moves are at the centre of two colliding trends: an increase in apartment living and a surge in online shopping. The result is a rising tide of packages with no good place to go.
US online retail sales are expected to swell to $US334 billion ($460bn) in 2015, up from $US263bn in 2013, according to Forrester Research, a research and advisory firm. Analysts at Forrester expect that number to increase to $US480bn in 2019.
The onslaught has turned management offices of apartment buildings into de facto receiving centres as landlords grapple with recording packages, tracking tenants down to pick them up and finding places to store the parcels.
Camden Property Trust, the 14th-largest US apartment operator by number of units, stopped accepting parcels at all of its 169 properties nationwide this year. Executives said the Houston-based landlord, which has roughly 59,000 units in 10 states and the District of Columbia, had received almost a million packages last year, and the rate was increasing by 50 per cent a year.
Each package results in about 10 minutes of lost productivity, Camden executives estimated. At a rate of $US20 an hour for employee wages, that amounts to about $US3.3 million a year.
“Ultimately, this was going to eat our lunch,” said Keith Oden, president of Camden. He refers to the situation as “package-gate”.
Camden rolled out the policy earlier this year and fully implemented it this northern summer.
Other big landlords are looking for solutions. AvalonBay Communities, the 10th-largest operator with 83,000 apartments, has experimented with installing electronic lockers in about a dozen properties. Delivery people leave packages in a locker and residents get a code to open it.
Some landlords are starting to allow tenants direct access to the package room, protected by a keypad and security cameras. Some higher-end buildings have a 24-hour concierge staff dedicated to making sure residents get packages. In some cases, building managers seek permission from tenants to enter their units to drop off packages.
“The goal is for us to work out a system where our associates aren’t having to touch and deal with those packages. We want to get out of being the middleman,” said Cristina Sullivan, executive vice-president at Atlanta-based Gables Residential, which manages 31,000 units.
Equity Residential, the largest publicly traded apartment landlord with some 108,000 units, now has height and weight restrictions to help manage the 3 million packages it expects to receive this year. “When I went to a property and saw a wooden crate that had about a five-foot statue in it and weighed about 500 pounds, we kind of said 50 pounds is about as much as we will go,” said David Santee, the company’s chief operating officer.
Many landlords were likely to monitor Camden’s experience closely, some observers said.
“They’re realising that it can’t continue as it is,” said Rick Haughey, vice-president of industry technology initiatives at the ­National Multifamily Housing Council, a trade group.
“It’s just becoming too much.”
The number of renter households has increased by 770,000 on average annually since 2004, according to Harvard University’s Joint Centre for Housing Studies.
Landlords have more power to impose restrictions these days, with low vacancy rates giving tenants fewer options. But analysts noted that with a surge in new apartment supply in the pipeline, especially in higher-end markets, landlords who refuse package-delivery services run the risk of alienating tenants as the market slows.
The Wall Street Journal

[greengiraffe]

Betting against a Fed rate rise

• MIN ZENG
  
• THE WALL STREET JOURNAL
  
• OCTOBER 26, 2015 8:12AM
  

[b]The global economy’s troubles are casting a long shadow over this week’s Federal Reserve meeting.[/b]
Over the past week, China posted its softest gross-domestic-product growth since the financial crisis, Japan reported a sharp decline in export growth and European forecasters cut their projections for eurozone inflation.
The developments, together with mixed US economic data in recent months, increase the likelihood that the Fed will keep interest rates near zero for the rest of 2015, according to analysts and traders. The slowdown and expansive central-bank policy overseas are likely to keep US long-term interest rates down while at least initially fuelling purchases of riskier assets such as stocks, corporate bonds and commodities, they said.
While Fed officials have repeatedly said an increase in the federal-funds rate this year isn’t off the table, many analysts believe US policy makers are loath to raise rates too soon. By acting too aggressively, they warn, the central bank risks thwarting an already sluggish economic recovery or rekindling an emerging-markets sell-off that rattled investor sentiment this past summer.
“The bond market is not buying the Fed’s talk of a rate hike before the end of the year,’’ said Jason Evans, co-founder of hedge fund NineAlpha Capital in New York. “The Fed is in a tough spot.”
Even if investors are wrong, their positioning means the Fed runs the risk of a bad reaction if it moves ahead, say money managers and traders.
Fed-funds futures, used by investors and traders to place bets on US central-bank policy, on Friday showed an 8 per cent likelihood of a rate increase at the Federal Open Market Committee policy meeting ending Wednesday, according to data from CME Group.
The odds on Friday were measured at 37 per cent for an increase at the December 15-16 policy meeting, compared with 44 per cent last month. The odds of that were seen above 50 per cent earlier this year.
The net value of eurodollar futures contracts hit about $US526 billion for the week ending October 13, the highest level since May 2013. Eurodollar futures are a popular tool for investors seeking to hedge against rising rates or to speculate on the path and timing of Fed policy. An investor buying a futures contract is betting that the fed-funds target rate will remain near zero for a longer period of time, which would boost the value of the contract.
The yield on the benchmark 10-year Treasury note settled at 2.081 per cent Friday, down from this year’s high of 2.5 per cent in June. The decline reflects soft economic growth, low inflation and expectations that rates won’t rise rapidly.
Expectations for those yields have continued to fall, reflecting slumping global growth. JPMorgan Chasein January expected the 10-year Treasury yield to end the year at 2.4 per cent, but now projects 2.25 per cent. Morgan Stanley has reduced its forecast to 2.3 per cent from 2.85 per cent in January, while Bank of America’s has come down to 2.35 per cent from 2.75 per cent. Goldman Sachs Group has cut its forecast to 2.3 per cent from 2.5 per cent.
Bond yields in Europe and Japan were even lower. The 10-year German government bond yielded 0.510 per cent late Friday and 10-year U.K. debt yielded 1.866 per cent. Japan’s 10-year bond yielded 0.307 per cent.
“US Treasury bonds look like high-yielding assets” by comparison, said Nick Gartside, chief investment officer of fixed income for JPMorgan Asset Management, with $US1.8 trillion in assets under management.
To be sure, no one is ruling out a rate increase. The Fed could yet raise rates in December if US data paint a brighter growth picture in the next two months, many investors said.
But US readings have shown softness recently, raising concerns that global turmoil is weighing on the domestic economy. Employers added a modest 142,000 jobs in September, while job gains in July and August were revised down by a combined 59,000 positions, the Labor Department said this month. Unemployment was at a seven-year low of 5.1 per cent in September, but that number has been driven lower in recent years as more people stopped looking for work or otherwise dropped out of the labour pool.
The caution signs have been clearer overseas. Forecasters polled by the European Central Bank cut their inflation outlook for the current year and the next two, the ECB said Friday.
Central banks abroad are positioning to juice their economies in response to the dimming economic picture: The ECB signalled on Thursday the door was open for expanding its bond-buying program. Meanwhile, the People’s Bank of China on Friday cut interest rates for the sixth time in 12 months. The Bank of Japan will meet this Friday amid growing expectations that it, too, will loosen policy.
China’s decision to cut interest rates has reinvigorated fears that capital will leave the country at an accelerating rate as economic growth slows, adding to pressure on the currency and ultimately forcing officials to further devalue the yuan against the US dollar, after a surprise devaluation on August 11. China, after spending years buying Treasurys to contain the appreciation of its currency, is now selling US debt in a bid to prop up the yuan amid large capital outflows.
One key risk of any Fed rate increase is that it could revive a strong-dollar trade that rattled global markets earlier this year. A stronger dollar hurts US exports and US multinational companies’ earnings from overseas markets. It also weighs on prices of imported goods in the US, making it more difficult for the Fed to push up inflation to its 2 per cent target in the medium term.
An unexpected Fed rate increase would raise the prospect that “the US dollar will rally, emerging markets and commodities will be under pressure, and we are going to go through the turmoil in August again,” said Zhiwei Ren, managing director and portfolio manager at Penn Mutual Asset Management, which has $US20 billion in assets under management.
Krishna Memani, chief investment officer at OppenheimerFunds, which oversees $US214 billion, said a rate increase by the Fed in December was the biggest risk for his asset-allocation outlook.
“A rate hike in December serves no purpose in a deflationary world with low growth,’’ he said. “It would be a catastrophic mistake.”

[greengiraffe]

Central bankers have been held hostage by financial mkts and they need to restore confidence and wealth effect before they can move on...

US Fed keeps 2015 rate hike on table

• JON HILSENRATH
  
• THE WALL STREET JOURNAL
  
• OCTOBER 29, 2015 6:36AM
  

[Image: 290120-3be768e0-7dac-11e5-a3c1-26b6cf13ef5f.jpg]
US Federal Reserve chair Janet Yellen. Changes in the Fed statement hint a rate hike is possible in December.Source: Reuters
[b]US Federal Reserve officials have kept short-term interest rates unchanged near zero, but they opened the door more explicitly than before to raising rates at their final 2015 meeting in December.[/b]
In a statement following a two-day policy meeting, Fed officials suggested they had become less concerned in recent weeks about turbulent financial markets and uncertain economic developments overseas. They also pointed specifically to the next meeting as a time when they would be assessing whether it was finally time to raise rates.
“In determining whether it will be appropriate to raise the target (fed-funds interest rate) at its next meeting, the (Fed) will assess progress — both realised and expected — toward its objectives of maximum employment and 2 per cent inflation,” the Fed said in its statement.
The explicit reference to the next meeting effectively meant the Fed’s decisions about rates are now being made on a meeting-to-meeting basis, though Fed officials stopped short of committing to an immediate move.
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• MOREDollar falls below US71c on Fed
  

End of sidebar. Return to start of sidebar.
Officials struck from the statement a sentence introduced in September that pointed to market turbulence and global developments as potential restraints on US economic activity.
That reduces an impediment officials had stressed in September as standing in their way.
The central bank said that it is still monitoring financial markets and developments abroad, meaning it isn’t yet confident these threats — such as the economic slowdown in China — have fully receded.
Still, officials pointed to “solid” growth rates in consumer spending and business investment and improvements in housing as bright spots in recent economic developments.
The Fed pushed short-term interest rates to zero in December 2008 and has kept them there for 82 straight months.
Officials began the year signalling a rate increase was likely in 2015 as the job market improved and slack in the economy diminished. Though job growth largely lived up to hopes, inflation has been lower than officials expected, stalling the Fed’s plans to raise interest rates. Their plans were further undermined by market volatility in August and uncertainty about the path of China, the world’s second-largest economy, and other emerging markets.
The air has cleared a bit since September. For example, the Dow Jones Industrial Average is up 5 per cent since the last meeting, a sign financial-market stress has dissipated. Yields on 10-year Treasury notes have dropped, as has the cost of investment-grade corporate debt, while the dollar has strengthened.
Moreover, the People’s Bank of China has cut its own interest rates and the European Central Bank has signalled it could extend its bond-buying program, steps that might ease some of the Fed’s worries about the global economic outlook.
However, the Fed’s plans could be scrambled again.
US economic data have been unsteady, a point officials acknowledged in their statement.
Most notably, the Labor Department issued a disappointing jobs report earlier this month. The Fed said job gains had slowed. On balance, however, Fed officials didn’t appear very alarmed about the soft jobs report.
“Labor market indicators, on balance, show that underutilization of labour resources has diminished since early this year,” the Fed said.
Other obstacles potentially stand in the Fed’s way. Officials noted in their statement that expectations for future inflation — as measured in bond markets — had receded “slightly” in recent weeks, a sign investors don’t expect a rebound in consumer prices soon.
Fed officials watch inflation expectations closely, because expectations can affect the prices individuals, businesses and investors actually demand for goods and services.
Fed officials said, as they have before, that they won’t raise rates until they become “reasonably confident” inflation will raise to their 2 per cent objective after running below it for more than three years.
They also want to see “some further improvement” in the job market.
Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissented, as he did in September. He wanted to raise the Fed’s target interest rate, called the federal-funds rate, by a quarter percentage point.
The Fed’s next meeting is December 15-16, the final meeting before year-end. Officials will update their forecasts for the economy before the meeting, and Fed Chairwoman Janet Yellen will hold a news conference after its conclusion.

* Comparing the US Fed’s views on the economy, from its meeting overnight and its meeting in September.

HINT ON TIMING?:
Now: Fed policymakers add a specific reference to their December meeting: “In determining whether it will be appropriate to raise the target range at its next meeting, the committee will assess progress — both realised and expected — toward its objectives of maximum employment and 2 per cent inflation.”
Then: “In determining how long to maintain this target range, the committee will assess progress — both realised and expected — toward its objectives of maximum employment and 2 per cent inflation.”
HIRING:
October: The Federal Reserve is taking a less optimistic view: “The pace of job gains slowed and the unemployment rate held steady.”
September: “The labour market continued to improve, with solid job gains and declining unemployment.”
ECONOMY:
October: The Fed sees some parts of the economy doing better than last month: “Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further.”
September: “Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further.”
GLOBAL ECONOMY:
October: Fed policymakers have dropped language that suggested a global slowdown threatens the US economy: “The committee continues to see the risks to the outlook for economic activity and the labour market as nearly balanced but is monitoring global economic and financial developments.”
September: “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. The committee continues to see the risks to the outlook for economic activity and the labour market as nearly balanced but is monitoring developments abroad.”

Wall Street Journal, AP

[greengiraffe]

Federal Reserve: trillions of reasons why US Fed no longer master of interest rates

• THE AUSTRALIAN
  
• OCTOBER 30, 2015 12:00AM
  

0

Adam Carr
[Image: adam_carr.png]
Chief Economist Eureka Report
Sydney

[b]The real issue confronting the market isn’t whether the US Federal Reserve will hike rates in ­December — not likely — but whether they can hike at all. The answer isn’t so clear cut by the way and, to be honest, it leans towards a no.[/b]
The way the Fed used to set rates was to control the quantity of money that came in and out of the federal funds market. In this market, banks lend or borrow from each other to ensure that they have sufficient reserves held at the Fed each day. If they don’t have enough in reserve as they should, then they borrow a bit from a bank that might have too many reserves. If the Fed wanted higher rates, they took money out of the funds market by selling securities to banks, and if they wanted to lower rates, they added money by buying securities from banks.
Things won’t work like that now, though. This is because reserves held at the Fed (by the banks) are so huge that there really isn’t a scenario where a major bank would need to borrow from the federal funds market. Excess reserves, above and beyond what the banks need to have, are $US2.4 trillion ($3.4 trillion). To give you a sense as to how large that actually is, banks could lend freely for the next decade and not have to top up their reserves once.
So how does the Fed hope to influence the federal funds rate, with all that cash sloshing around?
The trick is to try to drain that money held in reserve and get the federal funds market back to normality. That is, so that banks will need to borrow and lend in the federal funds market.
The main way the Fed intends to do that is to start paying interest on those reserves that are held at the Fed. The theory is that if they pay interest on the excess reserves, then no bank will lend their excess reserves into the system for less than what the Fed is paying. Control over interest rates will have been restored.
Simple, and it sounds good. Except that it won’t work. Why? Because it doesn’t change the fact that banks have excess reserves in the first place. That is, they don’t need to borrow from each other. Well, most of them in any case and certainly the bigger ones. So paying interest on reserves to prevent banks using excess funds to lend to each other won’t work! There is no market.
Paying interest to affect the supply of funds would only be a ­solution if there was already functioning market, if banks actually needed to borrow from each other to begin with.
The Fed already pays interest on reserves by the way — 0.25 per cent — and the Fed funds rate is materially below that. To be fair that’s also because some of the non-banks, with plenty of cash, are lending into the short-term market, which is driving rates lower. Although the Fed’s plan to pay interest on reserves won’t ­actually stop that.
Which is why the Fed also plans to use other tools to supplement this program. Yet these too have flaws which, by the Fed’s own admission, will limit their use and size. So they are unlikely to be sufficient to mop up that $US2.4 trillion in excess cash.
So for instance, the plan for the Fed to drain cash by selling bonds to the market (with promise to buy them back at a higher price in the future — a “reverse repo”) can only be allowed to operate on a small scale. There are several reasons for that, although the main one is the fear that this facility will become the new safe haven asset of choice in times of panic, which might spark or exacerbate a credit crunch. Especially for money market funds that might choose to lend into that reverse repo facility rather than corporates. So the market has to be limited.
In any case, even if reverse repos were used widely outside of a crisis, it might simply see cash shift from one market to another without actually influencing the available supply of loanable funds — or its overall cost.
Which raises the more important question as to whether, even if by some miracle the Fed can reassert control on overnight interest rates, rates elsewhere would respond. Treasury bills for instance don’t pay much above zero, not to forget that there is so much cash sloshing around in Europe and Japan that it’s possible a lift in US overnight rates won’t do much at all. Recall that during the last tightening cycle in 2004, the big puzzle of the time was why the 10-year US Treasury bond yield remained largely unchanged.

[greengiraffe]

Why the market is misreading the Fed statement
Jeff Cox | @JeffCoxCNBCcom
4 Hours AgoCNBC.com

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COMMENTSJoin the Discussion

Should the economy show signs of improvement and global conditions do not worsen, the Federal Reserve has indicated it will raise interest rates soon.
The above sentence could have been written after virtually any Federal Open Market Committee meeting over the past year, as officials have been looking for reasons to justify a change in monetary policy.
For whatever reason, the sentiment seems to have taken on greater significance since it was expressed after this week's FOMC gathering.
Read More[url=http://www.cnbc.com/2015/10/28/fed-leaves-rate-unchanged.html]Fed holds steady; few clues about future rate hike
Perhaps it's because there is only one more meeting left in a year that at one time was almost certain to end with a rate hike, or maybe it really was a few tweaks in the statement issued afterward. In either event, the buzz around Wall Street was that the Fed is leaning strongly toward hiking in December.
Ultimately, though, what may transpire is that markets have just been treated to the latest sleight of hand by a central bank waiting for an ideal time to hike that may never come.
[Image: 103002760-RTS1E7T.530x298.jpg?v=1446136298]Kevin Lamarque | Reuters
The Federal Reserve Bank building in Washington, D.C.
"Knowing that they were not going to raise rates today, the Fed did the right thing by leaving themselves plenty of flexibility to either punt again in December or FINALLY hike if the data nudges them in that direction. If they leaned in any one direction today, they would again have put themselves in a corner," Peter Boockvar, chief market analyst at The Lindsey Group, said in a note after Wednesday's FOMC statement.
Then, writing in all-caps (we'll spare your eyes the strain), Boockvar, who has advocated for a rate increase, implored clients not to read too much into the Fed's latest verbal gymastics: "I do not think the Fed is saying today that they are ready to hike in December. I just believe they left themselves the option to do so if they choose to and are adjusting market expectations for the possibility."
Boockvar concluded, ominously, "All we need is more economic weakness and (a rate hike) won't be happening."
That weakness arrived again Thursday, with a government report showing that gross domestic product grew at just a 1.5 percent pace in the third quarter, a tenth of a point below expectations, with internal data showing decently strong consumer behavior but still anemic levels of business investment.
Read MoreInventories hurt GDP, but demand strong
Still, traders went on a hawkish frenzy, boosting chances of a December hike from just 6 percent a month ago to 50 percent Thursday. Where the CME's FedWatch gauge earlier this week had been figuring in no rate hike until at least March, December is now well back in play and the chance for a January move is at 59 percent.
All this from an FOMC statement that held economic growth as simply "moderate," with a "slowed" pace of hiring and inflation that remains well below Fed targets. 
While futures traders were pricing in a December increase, gold plunged Thursday and the U.S. dollar fell, events that should not happen in tandem. A hike should trigger a stronger greenback and weaker gold, which traditionally is a hedge against inflation and would fall when rates rise.
"It was one of these where it was yes, no, maybe so, leaving the door maybe open" for a December rate rise, said Quincy Krosby, market strategist at Prudential Financial. "You have to make the assumption that the data coming in between now and then is sufficient for the Fed to move."
Read MoreThis is the big reason the Fed didn't hike rates
Data points, of course, haven't been very cooperative. In addition to the anemic GDP growth, productivity remains muted, the jobs numbers have softened considerably and a report Thursday even brought bad news for the housing market, with pending sales declining 2.3 percent in September, the second straight down month after the August numbers were revised.
Key numbers ahead will be Friday's labor cost index reading and the Nov. 6 release of the nonfarm payrolls report.
For the Fed, the devil remains in the data. If the economy doesn't pick up momentum in the final two months of the year, the central bank won't move, regardless of what the FOMC language tweaks might suggest.
"The FOMC did not have the Q3 data when they met earlier this week. Our best guess is that the data on balance were a bit weaker than what policymakers had assumed," Joseph LaVorgna, chief U.S. economist at Deutsche Bank, said in a note to clients Thursday. "After all, the economy cannot be very healthy when nominal activity is growing at a sub-3 percent pace. Hopefully, this will not go unnoticed by the Fed, which may have lost its window to nudge official interest rates higher."
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Jeff CoxFinance Editor

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•  Nov 4 2015 at 8:38 AM 
   
  

Chorus builds telling Fed to raise rates to spur the US economy

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[img=620x0]http://www.afr.com/content/dam/images/g/j/7/o/h/t/image.related.afrArticleLead.620x350.gkq42c.png/1446587061831.jpg[/img]JP Morgan chief global strategist David Kelly says zero interest rates have undermined investor sentiment, and says that raising short-term rates would spur US economic activity. Bloomberg
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by Karen Maley
If the US Federal Reserve actually raises rates next month, the move may stem from the growing chorus of commentators questioning the benefits of zero interest rates.
US bond yields overnight climbed to their highest levels in more than a month overnight as investors prepare themselves for the possibility the Fed could take the historic step of raising rates from close to zero at its policy meeting on December 15-16 (Bond yields rise as bond prices fall). The Fed slashed its key rate to close to zero at the end of 2008 in a bid to boost asset prices and spur the economy.
But a growing number of financial market analysts believe that seven years of extremely low interest rates have hindered, rather than supported, economic growth.
JP Morgan's chief global strategist, David Kelly, argues that zero interest rates have undermined sentiment, and that raising short-term interest rates would help the US economy by boosting confidence.

Raising interest rates, he says, will boost the income of savers, while borrowers with variable interest rate loans would see the costs of servicing their loans rise. But because households have a far greater amount of short-term interest rate assets than variable rate loans, raising short-term interest rates should boost income.
 "Raising short-term interest rates from very low levels could actually increase aggregate demand as positive income, wealth, expectations and confidence effects outweigh relatively innocuous price effects and ambiguous exchange rate effects", he said in a presentation last week.
 Kelly argues that this increase in income for savers is likely to translate into stronger demand.
 "Right now, the economy could do with a little more demand. We believe that the positive impacts of income, wealth, confidence and expectations effects are only slightly offset by negative price effects and thus the first few rate increases would actually boost demand."


Kelly also points to the "dismal recent history" of zero interest rates.
"Japan has wallowed for 20 years with zero interest rates without showing the slightest evidence of "stimulated" demand", he said.
And there's the US experience since interest rates were slashed in the wake of the financial crisis. "Perhaps most damning of all has been this miserably slow expansion - the slowest of all the economic recoveries since World War II.
"While some will argue that this is due to extensive damage to the financial system, it isn't. American financial institutions have been very well capitalised for years. Rather, America's recovery may well have been hobbled by repeated bouts of monetary "stimulus" that have starved households of interest income, undermined confidence and undercut any incentive to borrow ahead of higher rates."

Legendary bond investor Bill Gross is also a strident critic of the Fed's zero interest rate policies. He argues that capitalism simply doesn't work well if the gap between short-term and long-term interest rates – the yield curve - is reduced by central policies because investors "have no incentive to invest long-term." 
Gross abruptly quit the giant bond fund PIMCO last year to join smaller rival Janus Capital but has this year struggled with poor performance and outflows, including around $US 500 million from the billionaire investor George Soros.
In his latest Investment Outlook, Gross argues that by pushing interest rates close to zero and promising to keep them there, central banks cause the yield curve to flatten.
A flatter yield curve squeezes banks' interest rate margins and this depresses the profitability of financial firms. "It stands to reason that when bank/finance profit margins resulting from maturity extension are squeezed (curve flattening) then overall corporate profits are squeezed as well."

At the same time, a flatter yield curve makes it harder for pension funds and insurance companies to earn an acceptable return on their investments to cover their future liabilities. As a result, pension funds are forced to cut benefit payments, and corporate profits may be threatened as companies with defined benefit plans are forced to top up their pension schemes.
Households are also hit, because they "must also save more and consume less if the return on their savings is reduced by a flatter yield curve."
As a result, Gross argues that "capitalism does not function well, and profit growth is stunted, if short-term and long-term yields near the zero bound are low and the yield curve inappropriately flat."
Gross also argues the experience in the wake of the financial crisis shows that zero interest rates have failed to kindle a strong economic recovery.
"All central banks should now commonsensically question whether ultra-cheap money continually creates expansions as opposed to reducing profit margins and hindering recovery. Recent experience would confirm the latter thesis," he said.