Morning Report – FOMC data dump 6/19/14

Vital Statistics:


Last Change Percent
S&P Futures 1950.2 1.1 0.06%
Eurostoxx Index 3322.3 43.1 1.31%
Oil (WTI) 105.7 -0.2 -0.22%
LIBOR 0.23 -0.001 -0.61%
US Dollar Index (DXY) 80.25 -0.331 -0.41%
10 Year Govt Bond Yield 2.57% -0.01%
Current Coupon Ginnie Mae TBA 106.2 0.1
Current Coupon Fannie Mae TBA 105.5 0.0
BankRate 30 Year Fixed Rate Mortgage 4.26


Stocks and bonds are higher this morning after the FOMC meeting.
Some more economic data this am. Initial Jobless Claims came in at 312k, more or less in line with expectations. The Bloomberg Consumer Comfort Index rose to 37.1 from 35.5.
The FOMC meeting didn’t have any major bombshells, although the Fed took down its 2014 GDP forecast pretty aggressively, from a 2.9% estimate in March to a 2.2% estimate in June. The weather-related drag on the economy was worse than thought. Note that next week we will get the third and final revision to Q1 GDP, and the Street is forecasting it gets revised from -1% to -1.8%. Bonds rallied hard on the announcement, closing on their highs. In the press conference, Janet Yellen was asked about the latest CPI reading and she said that the CPI tends to be noisy. FWIW, the Fed uses a different inflation measure – Personal Consumption Expenditures for that very reason. The market took that statement to mean that the Fed is sanguine about inflation which gave bonds another excuse to rally. The forecast for the Fed Funds rate (Yellen’s dot graph) did not change from the March meeting. Overall, it was a “Goldilocks” type report, which gave stock and bond investors something to cheer about. Take a look at the chart below, and see how much the Fed has been overestimating future growth. This is their forecast for 2014 GDP growth going back to 2012.

Why does the Fed keep getting the GDP forecast wrong? It is probably because their models were built based on the typical garden variety post-Depression recession, which follows a Fed-induced recession process. The process is that the economy grows -> inflation picks up -> the Fed raises rates to quell inflation -> the economy begins to slow -> inventory builds -> people get laid off -> we go into a recession -> the inventory gets drawn down -> the laid off workers get re-hired -> and the economy recovers. The issue is that what happened in 2008 is that we had to deal with the fall out of a burst residential real estate market, and those happen every other generation. The recession is caused by a glut of bad debt, not a glut of inventory. And bad debt takes a lot longer to work off than a warehouse full of widgets.

There are 2 million “missing households” in the US – which represents pent up demand for new residences in the US. These are Millennials who are living with their parents or rooming together in an apartment. That represents 2 years of housing starts at the current pace. Rents are increasing, jobs are tough to get, and student debt is high. Fun fact – we haven’t been building this few homes since World War II, according to the NAHB. Let that sink in.

What does the declining labor force participation rate mean for the economy? There are two schools of thought going on here and this encapsulates the debate going on at the Fed. Does the long-term unemployed represent people who are essentially retired and will never return to the work force? If so, then there is less slack in the labor market that initially appears and therefore more stimulus will be inflationary. In essence that means the economy’s “speed limit” is lower than normal. Or is there a possibility that the long-term unemployed could return to the work force? If so, then more stimulus is not only necessary (though one can debate the efficacy of ZIRP on unemployment), but also will be non-inflationary. Note that we have been getting the worst of all worlds lately – increasing commodity prices, especially food prices combined with stagnant wage growth and slow job creation. While this is nothing like the stagflation of the late 70s, it still is painful.
FWIW, I personally think the long-term unemployed want (and need) to work and will enter the workforce as the economy improves. Employers have the luxury or choosing people with the wisdom of a 50 year old, skills of a 40 year old, the drive of a 30 year old, and the pay of a 20 year old. That won’t last forever. Also, the low capacity utilization rate means that inflation is a way’s off, and if anything increasing commodity prices are recessionary, not inflationary. They can only be truly inflationary if wages increase. Otherwise, people’s disposable incomes drop, spending decreases, and the economy slows, which lowers commodity prices. That said, I don’t think QE and ZIRP are having much of an effect on the economy, and the longer we stay with excess stimulus the harder normalization will be.

28 Responses

  1. Notice that when someone sides with Obama, he’s no longer a rightwing war monger but rather a sage.

    “For the staunchest defenders of the war in Iraq and the “surge” that quelled the last major insurgency there, no name garnered more deference than Gen. David Petraeus, the four-star general who led the U.S. effort.

    “But now, Petraeus is at odds with former admirers, who say that immediate military action is necessary to stabilize the country.” – NBCNews


  2. It’s pretty obvious that either party’s FP is fundamentally wrong.

    The question is, can we as a country afford to have any level of influence in the world? If we want American hegemony, then can we agree it needs to be done without further adding to the debt? If that is politically unfeasible what is your remaining option?

    I say we cannot afford it. It’s not a question of isolationism, it’s a question of can we survive as a nation with The debt to GDP ratio we currently have?


    • Let’s assume the absolute very worst about the IRS scandal. Let’s assume that it transpires that there was direct communications between the White House and the IRS instructing the IRS to go after conservative organizations, that the IRS deliberately “lost” the e-mails that documented that communication, and that Obama has known about all of this all along.

      Under that assumption, how many D’s do you think would vote to impeach?


  3. I’m pretty sure that Senate Dems don’t want to be seen as complicit in a impeachment of the first minority President.

    With that being the case, logic says don’t bother.


  4. Zero…


  5. Good Joan Walsh piece in Salon:

    “The Gonzo option” and other Democratic dead ends
    Schweitzer’s rough rollout shows the Democrats’ 2016 bench is weak if Clinton doesn’t run — except for Joe Biden

    Joan Walsh
    Thursday, Jun 19, 2014 01:39 PM EST”


  6. You should ask that question on PL


    • Brent:

      You should ask that question on PL

      Please do! I haven’t tried to get into PL in a long time, but last time I tried I couldn’t get it to work at the office.


  7. ok, i just asked it….


  8. I said it depended on Obama’s approval ratings.


    • jnc:

      I said it depended on Obama’s approval ratings

      A better question for PLers would have been how many of them would support impeachment at that point.


  9. One actually did. I also got a non-sequitur response. I guess the rest of them must have me on ignore…


    • Has anyone said yet exactly when these e-mails got wiped out? The request for the e-mails was issued 2years ago. If it was recently, the question is why the IRS hadn’t yet collected those e-mails to turn them over. And if it was two years ago, why haven’t they revealed it until now?


  10. Prolly cause you post over here with KNOWN BIGOTS AND/OR HOMOPHOBES!!!11!!!11


  11. This kind of competency screams Ingle Payer to me.


  12. Has anyone said yet exactly when these e-mails got wiped out? The request for the e-mails was issued 2years ago. If it was recently, the question is why the IRS hadn’t yet collected those e-mails to turn them over. And if it was two years ago, why haven’t they revealed it until now?

    Just an honest bureaucratic snafu… Nothing to see here.. What, do you hate obama or something? Is that why you keep trying to turn this into a scandal? Racist.



    Megan McCardle, who apparently was a systems administrator, has two stories on the IRS. the 2nd one is above. first is linked within that story.

    See bullet point 9


  14. Worth a note on the Dave Brat victory and immigration as an issue in Virginia:

    “Brunswick community blasts immigrant plan
    About 1,000 residents cheer when HHS administrator says project is on hold
    Posted: Thursday, June 19, 2014 10:30 pm | Updated: 6:45 am, Fri Jun 20, 2014.

    BY KARIN KAPSIDELIS Richmond Times-Dispatch

    LAWRENCEVILLE — Admitting missteps and apologizing, federal officials sought to sell their plan to shelter immigrant children at Saint Paul’s College to an unreceptive, overflow crowd of more than 1,000 people Thursday night.

    Residents jammed the auditorium of Brunswick High School to question why federal dollars are being spent on alien children rather than native-born children in their economically depressed community.”

    Note the picture with the piece showing who it is who is angry about the plan.


    • jnc:

      Note the picture with the piece showing who it is who is angry about the plan.

      What are the chances, though, that it will change voting patterns?


  15. They should move them to Fairfax and Arlington.


  16. For what it’s worth, there really isn’t serious enforcement at the border anymore. We now have a unofficial “feet wet” policy.


  17. Doesn’t have to. They just have to pressure their own representatives. Note the bipartisan cooperation here:

    “U.S. Sen. Mark R. Warner, D-Va., and Rep. Robert Hurt, R-5th, interceded with the Department of Health and Human Services to put the plan on hold Monday so the public hearing could be held.”

    HHS also stepped in it by picking a historically black college to house the immigrants.

    This was good:

    “They jeered when they were told Homeland Security had screened the young immigrants to ensure that they would pose no security threat, questioning how a college built in 1888 could be made secure.

    They wondered why “a perfectly good mothballed prison next door” could not be used instead and groaned at the explanation that legally the children could not be placed in an adult prison.”


  18. What’s their complaint? I guess I don’t understand the concern over women and kids. Neither will be job competitors will they?


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