Clearly the Fed is tightening, raising short term rates, to fight the stock market bubble and not because of inflation. It is inevitable that it will end in a recession as did other acts of Fed tightening. The Conference Board’s labor conditions index “jobs harder to fill” will provoke the Fed to raise rates when data released is released next month. Rates went up today because of a slight upward revision of GDP. This is normal for GDP to get revised several times. I think the new paradigm is that real reference rates (Treasuries and Fed funds) return to more normal levels, because it was a dangerous deflationary mistake for central banks to make real rates so low, and
$1.3 Trillion annual interest expense deduction may be removed by Congress which would result in extra tax of $150 Billion a year for corporations. The tax would reduce corporate profits after-tax by 9% for the average corporation. Today corporate profit margins are at record highs, in part, because of more aggressive use of legal offshore subsidiaries that reduce taxes. The proposed new tax would reduce profits after tax by 9% which would act to cool off the overpriced stock market bubble. Stocks are (in theory) fundamentally valued based on long term after-tax profits, so a 9% decrease in profits implies a reason for stocks to go down. The bigger multinational companies often use borrowed money to avoid repatriating offshore profits.
A key component of CPI inflation is rent. 62% of “rent” comes from owner-occupied homes that the BLS uses to calculate a theoretical “owner’s equivalent rent” and is not actual rent. This figure comes from estimates offered by naïve homeowners who get surveyed by the BLS. These homeowners look to actually rented comparable buildings to estimate what their hypothetical rent should be. The fair market value of rent on owner occupied homes should be higher than that of a generic apartment house since they are better quality properties. If the affluent upper-end rental properties suddenly experience a sharp drop in rents then this change will influence owner-occupied hypothetical rent. In recent years much of the new construction of homes and
The Federal Reserve raised the Fed funds rate by 0.25% today, making it float in a range of 1.0% to 1.25%. This is close to what the two year Treasury Note has yielded (its yield is 1.33%) so the marketplace already anticipated and adjusted for this. Long term Treasuries bond yield dropped from 2.2 to 2.13% today’s a result. The Fed’s rate increase means they are fighting inflation which makes long term bonds more desirable, which explains why they went up in price even though normally bonds go down in price when rates go up. In theory the Fed funds rate should be at least as high as inflation so using a PCE estimate of 1.7% inflation then the Fed
Recently some comments from House of Representatives members of the House Freedom Caucus (somewhat similar to the Tea Party except the Freedom Caucus membership is limited to members of the House) implied they would tolerate an increased budget deficit to help some of Trump’s stimulus goals. Since this sector of House members usually are Hard Money types rather than the type that would advocate inflationary policies this is a shock. If the defenders of a strong currency change policies 180 degrees towards an inflation causing increase in the federal deficit then this would lead to an increase in inflation. For this to happen spending plans need to be approved by both houses of Congress. The Senate has the filibuster
The monthly employment payroll based report was released by the BLS today showing only a 138,000 jobs gain. When netted against the 125,000 monthly population increase this is almost no net gain at all. The labor force participation rate continues to be about 2% below normal which implies 2% of the population are the hidden unemployed and thus the real unemployment rate is about 6.3% instead of the official 4.3%. The normal trend for wages is for them to increase about 4.5% a year at the top of an economic cycle, yet now despite being near the top of a cycle the wages are only increasing 2.5% a year. This 2% shortfall below expected wage inflation is a sign
The economic cycle bottomed in 2009 and should have had a recession in about seven or eight years (about now) but there are no signs of warning of an imminent recession. Why has the cycle lasted so long? One reason is that the dysfunctionality of Japan and the EU's economies allows the U.S. to prosper by default. Another reason is that the U.S. is more entrepreneurial and welcoming to skilled immigrants. Also there was enormous stimulus from Quantitative Easing, although that ended over two years ago. Monetary stimulus has a two year lag so perhaps so about now the benefit of QE will end. There is stimulus from the stock market going up so much. One key reason for