Post Jackson Hole complacency

Post Jackson Hole complacency reminds me of the last time around.

"Release Date: August 7, 2007

For immediate release

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.

Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Michael H. Moskow; William Poole; Eric Rosengren; and Kevin M. Warsh."

THREE DAYS later:

"Release Date: August 10, 2007

For immediate release

The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets.

The Federal Reserve will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the Federal Open Market Committee's target rate of 5-1/4 percent. In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets. As always, the discount window is available as a source of funding."

It was the US then, Japan this time around. The BoJ intervened as the Fed had done then, but we saw the asset markets in the US responding. Now, like then, tremors are warnings.

ONE WEEK later:

"Release Date: August 17, 2007

For immediate release

Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.

Voting in favor of the policy announcement were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Richard W. Fisher; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Michael H. Moskow; Eric Rosengren; and Kevin M. Warsh."

Then, the September meeting 50bps cut.

"Release Date: September 18, 2007

For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent.

Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally.? Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.?

Readings on core inflation have improved modestly this year.? However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.?

Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook.? The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric Rosengren; and Kevin M. Warsh. ?"

Then October complacency:

Release Date: October 31, 2007

For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance.? However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.? Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation.? In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.?

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.? The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were:? Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh.? Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting."

At that point in October 2007, the FOMC saw the release of GDP having slowed from 2.5% long term trend to 2.3% in Q3 2007. September PCE-PI Core inflation at 2.1% and Unemployment at 4.5%. What needs to be understood is that the Fed was at Neutral on average in Q3 2007. Today, the Fed is 200 bps Restrictive. The Fed Funds less UST10 Yield had sounded a recession warning since Q3 2006. This time around, the spread has warned of recession since Q1 2023. The indicator warns of recession 4 - 9 quarters ahead of the onset.

I would argue that the global financial markets now are inherently unstable, with most of the risk emanating from Japan and China. This has been evident for a few years and nothing has improved, but we had the first quake. If assets are withdrawn from the US as a consequence of domestic jitters in Japan (- and who's next?), US financial markets and institutions will not be helped by a restrictive Fed funds policy.

"Release Date: December 11, 2007

For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent.

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks.? Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.

Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation.? In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation.? The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were:? Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; and Kevin M. Warsh.? Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting."

The December meeting took place in a setting where the GDP was deemed to grow at a 2.5% annualized rate q-o-q. The GFC Recession was deemed by the Committe to have started that month. Notable the consensus broke as Rosengren wanted a deeper cut.

In Q4 2007, Unemployment DROPPED from 4.7% to 4.6%. PCE-PI Core inflation ROSE to 2.3%.

The Policy Stance for Q4 2007 averaged 0.8% STIMULUS, and the FOMC was 100 bps ahead of Taylor First Difference. Not bad, a pre-emptive Fed. The problem with the Fed's policy record is that it is biased towards inflation, and 98.8% of decisions reflect the Price Stability Mandate. If your models are trained on this bias, they will always be behind the curve when recessions come as you underestimate the unemployment surge at slowdown. Fed policies work with a 6 - 24 month transmission lag, while Employers fire people with little or no notice.

Then, the Day after the FOMC cut, the announcement of coordinated action. Not much money in the swap lines, but they saw "something" coming. Not so sure Central Banks announce their concerted actions anymore, but if they do, run for shelter.

"Release Date: December 12, 2007

For immediate release

Today, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing measures designed to address elevated pressures in short-term funding markets.

Federal Reserve Actions Actions taken by the Federal Reserve include the establishment of a temporary Term Auction Facility (approved by the Board of Governors of the Federal Reserve System) and the establishment of foreign exchange swap lines with the European Central Bank and the Swiss National Bank (approved by the Federal Open Market Committee).?

Under the Term Auction Facility (TAF) program, the Federal Reserve will auction term funds to depository institutions against the wide variety of collateral that can be used to secure loans at the discount window.? All depository institutions that are judged to be in generally sound financial condition by their local Reserve Bank and that are eligible to borrow under the primary credit discount window program will be eligible to participate in TAF auctions.? All advances must be fully collateralized.? By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress.

Each TAF auction will be for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate).? The first TAF auction of $20 billion is scheduled for Monday, December 17, with settlement on Thursday, December 20; this auction will provide 28-day term funds, maturing Thursday, January 17, 2008.? The second auction of up to $20 billion is scheduled for Thursday, December 20, with settlement on Thursday, December 27; this auction will provide 35-day funds, maturing Thursday, January 31, 2008.? The third and fourth auctions will be held on January 14 and 28, with settlement on the following Thursdays.? The amounts of those auctions will be determined in January.? The Federal Reserve may conduct additional auctions in subsequent months, depending in part on evolving market conditions.?

Depositories will submit bids through their local Reserve Banks.? The minimum bid rate for the auctions will be established at the overnight indexed swap (OIS) rate corresponding to the maturity of the credit being auctioned.? The OIS rate is a measure of market participants’ expected average federal funds rate over the relevant term. ?The minimum rate for the December 17 auction along with other auction details will be announced on Friday, December 14.? Noncompetitive tenders may be accepted beginning with the third auction.? The results of the first auction will be announced at 10 a.m. Eastern Time on December?19.? The schedule for releasing the results of later auctions will be determined subsequently.? Detailed terms of the auction and summary auction results will be available at https://www.federalreserve.gov/monetarypolicy/taf.htm.?

Experience gained under this temporary program will be helpful in assessing the potential usefulness of augmenting the Federal Reserve’s current monetary policy tools--open market operations and the primary credit facility--with a permanent facility for auctioning term discount window credit.? The Board anticipates that it would seek public comment on any proposal for a permanent term auction facility.?

The Federal Open Market Committee has authorized temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB).? These arrangements will provide dollars in amounts of up to $20 billion and $4?billion to the ECB and the SNB, respectively, for use in their jurisdictions.? The FOMC approved these swap lines for a period of up to six months.

Information on Related Actions Being Taken by Other Central Banks Information on the actions that will be taken by other central banks is available at the following websites.

Bank of Canada??? Bank of England European Central Bank Swiss National Bank (61 KB PDF)?

Statements by Other Central Banks Bank of Japan Swedish Riksbank"

Then, the shit hit the fan and the Fed did a 75bps INTERMEETING cut, just ONE WEEK before the scheduled FOMC meeting.

"Release Date: January 22, 2008

For immediate release

The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent.

The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth.? While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households.? Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Appreciable downside risks to growth remain.? The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Eric S. Rosengren; and Kevin M. Warsh.? Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin."

In the ensuing regularly scheduled January FOMC meeting, the January 125 bps total cut was completed, completing the September - January 225 bps reduction in Fed Funds from 5.25% to 3%. REPORTED Unemployment (known to the FOMC) had risen from 4.6% to 4.8%. PCE-PI Core had risen from 2.0% to 2.4%. GDP had remained CONSTANT at 2.5%. The Fed Policy Stance went from Neutral to 2% Stimulus. Looking out the window is a poor way to understand what is going on in the economy. Most economists still point to what they see outside the window as justification for doing little or nothing.

"Release Date: January 30, 2008

For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households.? Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity.? However, downside risks to growth remain.? The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.? Voting against was Richard W. Fisher, who preferred no change in the target for the federal funds rate at this meeting."

By March 2008 , the Central Banks 10Xed their efforts. The reason for this is evident in the next FOMC release of March 14 below.

Release Date: March 11, 2008

For immediate release

Since the coordinated actions taken in December 2007, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in funding markets. Pressures in some of these markets have recently increased again. We all continue to work together and will take appropriate steps to address those liquidity pressures. ?

To that end, today the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing specific measures.

Federal Reserve Actions The Federal Reserve announced today an expansion of its securities lending program.? Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS.? The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally.? As is the case with the current securities lending program, securities will be made available through an auction process.? Auctions will be held on a weekly basis, beginning on March 27, 2008.? The Federal Reserve will consult with primary dealers on technical design features of the TSLF.

In addition, the Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB).? These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion.? The FOMC extended the term of these swap lines through September 30, 2008.

The actions announced today supplement the measures announced by the Federal Reserve on Friday to boost the size of the Term Auction Facility to $100 billion and to undertake a series of term repurchase transactions that will cumulate to $100 billion.

Information on Related Actions Being Taken by Other Central Banks Information on the actions that will be taken by other central banks is available at the following websites:

Bank of Canada? Bank of England? European Central Bank Swiss National Bank (61 KB PDF)?

Statements by Other Central Banks Bank of Japan Sveriges Riksbank"

"Release Date: March 14, 2008

For immediate release

The Federal Reserve is monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system. The Board voted unanimously to approve the arrangement announced by JPMorgan Chase and Bear Stearns this morning."

The Death of Bear Stearns was the first of the Biggies. After that one, the 3X Fed funds cuts were inevitable.

"Release Date: March 18, 2008

For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened.? Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Inflation has been elevated, and some indicators of inflation expectations have risen.? The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization.? Still, uncertainty about the inflation outlook has increased.? It will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity.? However, downside risks to growth remain.? The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh.? Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting."

I will not bother you with the lengthy story of the following year of Fed policy rate cuts to 0% and financial sector bankruptcies and shocks. All of the above took place in the course of August 2007 - March 2008. The economic backdrop was similar to the present - recession alarm ringing for the required minimum 4 quarters, a complacent Fed, albeit at Neutral, not 200bps restrictive. Inflation and Unemployment largely where we are today, and growth at long term trend as we see today (a bit better if Q2 second revision holds.)

For those who argue for 25 bps cut in September 2024, as the FOMC "has time to act", or "should not cause panic", the above is what you will get down the road, if the FOMC defers what is evident. 2024 is not 2007, but the discussion is about what we learn about the need to be preemptive, and what happens if you sequence the cuts from small to large rather than large to small, if you can see the recession coming. If you are complacent, you will be seen panicking down the road. Trying to "not cause panic" is exactly what causes the conditions of general and omnipresent panic down the road.

There is no harm done by cutting the current policy rate from 200bps restrictive to neutral by the end of the year, given current Fed mandate parameters and their outlook.

Our projections are now for 5% unemployment by year-end. 6.2% by end of January 2025, and 7% by July 2025. We may change that outlook next Friday September 6, and we hope that revisions and August data will provide for an alternative future. Our proposals are based on this 12 - month outlook, not on current conditions. We have also tried to make explicit that GDP forecasts tend to be very unreliable just ahead of recession inception. There is no linearity, but a sudden fall off a cliff. Yet, these macro GDP numbers and their components are what people use to justify complacency. The savings rate (2.9%) tells you what you need to know about the maxed out consumer.

We are in an election year, and the real reason for getting rid of Biden was to take the Oval Office furniture and throw it on the bonfire that drives the US economy - it is that close to disaster. We just need to get the economy through the first days of November, and then all hell can break loose.

And it probably will.