More Central Banking Lunacy

US Rate Hike: The Back-Pedaling Brigade

Last week’s payrolls report was “stronger than expected”, which should actually be fairly meaningless, given how many times it will be revised and considering that it is a lagging economic indicator. However, in light of the Fed’s absurd employment mandate, it does slightly increase the chances of a token rate hike at some point this year.

IMF chief Lagarde – a political operator and bureaucrat since 2005, thinks monetary policy should remain as loose as possible. No-one seems to really know why.

Photo credit: Reuters

To this it should be noted that whether the Federal Funds rate is or isn’t 25 basis points higher shouldn’t make much difference either, but it would certainly have some symbolic significance if the Fed were to move away from its current zero interest rate policy. In the meantime, the broad US money supply TMS-2 has most recently recorded an approx. 7.8% year-on-year growth rate, which remains a historically very high level. Only in the context of the ever wilder oscillations since the Nasdaq bubble blow-out in 2000 can it be considered a “middling” rate of money supply growth:

The broad US money supply aggregate TMS-2 (true money supply) is growing at 7.8% y/y at last count – click to enlarge.

Given that the Fed has stopped “QE” and its balance sheet growth has turned slightly negative, current money supply growth is the result of credit creation by commercial banks – especially industrial and commercial loans are essentially back at typical boom growth rates. Most recently they clocked in at a rate of 12.45% annualized.

US corporations are essentially drowning in debt these days. Bank loans to companies have increased to new all time highs more than 20% above the previous peak attained in 2008 (which in turn was an extreme caused by the panicky drawing down of available credit lines), while over the past three years immense amounts (approx. $3 trillion worth) of junk debt and leveraged loans have been issued in addition to this. To argue that monetary policy should stay loose seems absurd under such circumstances, even of one accepts (which we don’t) the mainstream premise that money and credit should be subject to central planning by a bunch of bureaucrats.

Commercial and industrial loans are at a record high and are currently growing at a boom-like rate of 12.45% annualized – click to enlarge.

And yet, the IMF let it be known last week that the Federal Reserve should postpone rate hikes. The arguments forwarded in favor of this are nothing new, but they are no less bizarre for that.

“The U.S. Federal Reserve should delay a rate hike until the first half of 2016 until there are signs of a pickup in wages and inflation, the International Monetary Fund said in its annual assessment of the economy on Thursday.

The fund’s report comes amid signs that some rate setters at the U.S. central bank are also pushing for rate hikes to be delayed until there are clearer signs of a sustained recovery. U.S. data has been mixed and the economy shrank 0.7 percent in the first quarter.

“Based on the mission’s macroeconomic forecast, and barring upside surprises to growth and inflation, this would put lift-off into the first half of 2016,” the fund said.

Fed chair Janet Yellen has insisted the economy remains on track and that a rate rise this year is on the cards, although others including Fed governor Lael Brainard, viewed as a centrist on the rate-setting committee, have raised concerns over growth.

The fund forecast that the Fed’s favored measure of inflation, the personal consumption expenditures (PCE) reading, would hit the central bank’s 2 percent target only in mid-2017.

“A later lift-off could imply a faster pace of rate increases following lift-off and may create a modest overshooting of inflation above the Fed’s medium-term goal (perhaps up toward 2.5 percent),” the Fund said.

“However, deferring rate increases would provide valuable insurance against the risk of disinflation, policy reversal, and ending back at zero policy rates.”

Several Fed governors were essentially taking a similar line, such as the above mentioned new Fed board member Lael Brainard and veteran member Daniel Tarullo, both of whom appear to be getting worried about the storyline that recent US economic weakness is “transitory”. We will refrain from looking up what Messrs. Charles Evans and Eric Rosengren are currently saying, as it is nigh certain that their tune remains unchanged.