The Kelley Monetary Policy Rule

Everybody hates rules but this is a breakthrough policy to free the fearful Fed.

fear

Background

The Federal Reserve Board (Fed) has held the Fed Funds Rate (the interest rate the Fed charges banks) below 1 percent for 7 years.  That is unprecedented.   The Fed originally lowered the Fed Funds Rate to 0.25% to counteract the last Great Recession.

When the Fed lowered its primary interest rate, it also started Quantitative Easing (QE) by buying securities in order to pump money into the economy to stimulate it.  Now the Fed has stopped buying securities via QE.

Today

The next step according to the standard Fed playbook is to raise the Fed Funds Rate, completing the unwinding of the previous actions.

Unfortunately the Fed Funds Rate has not risen to normal levels because the Fed is afraid to hurt the economy.

What Is Normal?

https://michaelekelley.com/2015/02/11/fed-inflation-target-is-abnormal/

According to the above website, if the Fed wanted the Inflation Target to be 2%, then the Fed Fund Rate should be 2% plus 1.44% or 3.44%.  Then 3.44% should be the normal Fed Funds Rate.

What Are The Fed’s Options?

How does the Fed get back up to the normal 3.44% Fed Funds Rate?  It can do one of these:

1.  Reverse QE by selling securities OR

2. Set the long-term interest rate to set a goal OR

3. Simultaneously raise the Fed Fund Rate AND offer another round of QE.

Ideally, the Fed should have raised the Fed Funds Rate while phasing out QE from 2011 to 2014.

The best is option 3 which has the most influence and least fear.

But How Fast?

A return to normal Fed Funds Rate involves small baby steps in a gradually higher Fed Funds Rate while offering a phased out QE.

If the Fed only raised the rate .25% each quarter, it would take 13 quarters or over 3 years to get to 3.50%.

Kelley Monetary Policy Rule

The Taylor Rule involves raising the Fed Funds Rate 1 percent for each 1 percent in inflation.  We have no inflation so the Taylor Rule is of no help.  The Kelley Monetary Policy Rule states the Fed Funds Rate will be increased gradually and QE will be reduced gradually to zero at a rate inversely proportional to the Fed Funds Rate.

This should eliminate any fear by the Fed or the financial market and get us back to normal.

Good luck.

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Stop In the Name of Love

This is the Federal Reserve Board (Fed) Chairwoman, Janet Yellen.

yellen (2)

She probably doesn’t dance like she used to, but she still gets around.

Pick your favorite caption to go with this photo.

1. I have 5 grandkids.  How many do you have?

2. You know the cop on the Monopoly board that sticks his hand out and says, “Go to jail”?  Well, I am nothing like him.

3. Congress, you silly old goats, will you stop harassing me?

4. Let’s make a deal.  I will not increase interest rates for 5 months in exchange for less harassment.

5. We give you five five mints in one. You know, five money printing presses in one country.

You have to hand it to Janet, she has a nice smile.

Have a great day!

 

Fed Warns of Two Bubbles

Hidden in recent Fed remarks by Yellen, are fears that CDM and CRE are bubbles.

comm_real_estate_2015

CRE stands for Commercial Real Estate. In terms of CRE prices and change, the above chart from Gerdau shows investments across the country are soaring.

For example the General Motors building just sold for an amount that values it at $3.4 billion, the most expensive office building in the United States.

Also William Ackman and other investors purchased a penthouse apartment at One57 in Manhattan for over $90 million, the highest price ever paid in New York City, as an investment to flip for a profit.

The CRE bubble did not burst in 2008, but evidently is bigger now.

corp_debt_mkt_2015

CDM stands for Corporate Debt Markets also known as Debt Capital Markets. In terms of CDM, the above chart by Dealogic, dated February 5th, 2015, shows a 30% increase in the spread for the year.

Specifically, the average spread to benchmark on 30-year global debt issuance peaked at 193bps in January 2015, a 30% increase on January 2014 (148bps), marking the highest monthly average benchmark spread since October 2009 (206bps).

Here is exactly what the Fed minutes said on 2/19/2015.

“However, the staff report noted valuation pressures in some asset markets. Such pressures were most notable in corporate debt markets (CDMs), despite some easing in recent months. In addition, valuation pressures appear to be building in the CRE sector.”

At least the Fed is aware of the bubbles and not totally focused on interest rates.

 

Federal Reserve Can Create Jobs

THE FED has increasing employment as part of its charter. Yes, inflation is not the only goal in the charter.

underinvestment As this chart shows,US businesses are NOT INVESTING in capital for the future and consequently few new jobs are being created.

The Center for American Progress (americanprogress.org) has recommended creating a NATIONAL INFRASTRUCTURE BANK to fix our crumbling national infrastructure.

THE FED can use the LENDER OF LAST RESORT powers which allow lending to any institution including states and cities not just the financial institutions which are only using the loans to pump up the stock market.  THE FED could loan to the NATIONAL INFRASTRUCTURE BANK.

States and cities could use the loans for infrastructure which would CREATE JOBS similar to the Civilian Conservation Corps.  For example the Fed could have used these powers to bail out Detroit.

Read about it on wikipedia:

http://en.wikipedia.org/wiki/Federal_Reserve_System#Lender_of_last_resort

Thanks