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Yellen Proclaims It’s Different This Time – Ep. 309

Expected Rate Hike

Today the Federal Reserve did exactly what everybody expected them to do, they once again raised interest rates by just one quarter of one percent.  This is the third rate hike of the year; this is the fourth rate hike since Donald Trump was elected President and the fifth time the Fed has raised rates since the 2008 financial crisis. The Fed raised rates only once from Obama’s election to Trump’s election eight years later.

Extraordinary Amount of Excess Stimulus

We now are at 1.25% on the low end to 1.5%. So if you take the midpoint there, 1.35%; we’re barely above 1%.  Despite five rate hikes over the course of more than 2 years.  Remember the first rate hike was in December 2015, so it has been exactly two years. It has taken the Federal Reserve two years to move the rate from zero to 1.35%. This is an extraordinary amount of excess stimulus.  To say that the Fed has been successful in normalizing rates is complete nonsense.  Two years ago, when the Fed raised rates for the first time, nobody in the mainstream believed that two years later, we would still be this low.

FOMC Press Conference

The most interesting part of the Fed’s announcement is always the press conference that follows. The most interesting thing about is, whenever Yellen was asked about inflation; whenever she opined about inflation and what the Fed’s concerns might be, the only concern that she ever expresses is that inflation may stay too low.  In fact, that’s the only question she gets about inflation.  Nobody asks her, “What if inflation is higher than you think?”  It’s always, “What if it doesn’t get to 2%?” Even though, of course it’s already well above 2%, but everybody wants to pretend it’s not, the questions are;”What if it takes longer to get to 2%?  Are you concerned it might not get to 2%>

What Happens if Interest Rates go Too High?

And the answers are, “Well, we think it will get back there, but yes, we recognize it’s a risk that maybe it won’t.”  It never dawns on anybody to actually consider the real risk.  The real risk is not that inflation stays below 2% (that’s the ideal situation for the Fed).  The real risk for the Fed is that inflation goes to 3% or 4%, but that possibility isn’t even discussed.  I know why, because they can’t deal with that.  I wish somebody would ask Yellen, “What is your plan, if inflation surprises you by spiking up? what if it jumps up to 3 or 4%?” What is she going to say?  We’re going to slam on the brakes?  We’re going to jack interest rates way up? What’s going to happen to the stock market? What’s going to happen to the bond market?  What’s going to happen to the economy?

Does Elevated Asset Prices Concern the Fed?

In fact Steve Liesman asked her a question about the stock market; about how the stock market is going up every day and he asked her: “Are you worried about this?  Does these elevated asset prices concern the Fed?” She told him, no, the Fed’s not worried at all.  Not only do we not see any flashing red lights, we don’t even see any flashing orange lights.  There’s nothing to worry about.  She specifically said that, this is very different than it was last time.

Yellen: Nothing to Worry About the Debt

Yellen said that last time when we had an elevated stock market or real estate market, it was because we had too much credit, we had too much debt, but that we don’t have that today. Is she kidding me? We actually have more debt! This is a bigger bubble that has been fueled by even more cheep money.  The Fed is force-feeding cheap money into the economy; interest rates now are 1.3%; we’ve been going on a borrowing binge – corporations are levered up, they’ve been buying back stock, consumer debt is at all time high, auto debt, student debt, government debt is exploding, the national debt is twice as big as it was when we had the 2008 financial crisis, and Yellen is saying that there is nothing to worry about because there’s not debt?