{"id":16023,"date":"2017-10-23T02:57:36","date_gmt":"2017-10-23T02:57:36","guid":{"rendered":"http:\/\/thepatientinvestor.com\/?p=16023"},"modified":"2017-10-23T02:57:36","modified_gmt":"2017-10-23T02:57:36","slug":"fed-flunks-econ-101","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2017\/10\/23\/fed-flunks-econ-101\/","title":{"rendered":"Fed flunks econ 101?"},"content":{"rendered":"<p>Caroline Baum&#8217;s opinion on the Fed&#8217;s approach to inflation:<\/p>\n<blockquote><p>For all the sturm und drang about the Fed debasing the dollar and sowing the seeds of the next great inflation, the public\u2019s demand for money has increased. The increased desire to hold cash and checkable deposits has risen to meet the increased supply. Velocity, or the rate at which money turns over, has plummeted.<\/p><\/blockquote>\n<p><a href=\"http:\/\/www.marketwatch.com\/story\/fed-flunks-econ-101-understanding-inflation-2017-10-18?mod=mw_share_twitter\"><img data-recalc-dims=\"1\" decoding=\"async\" class=\"alignnone size-full\" src=\"https:\/\/goldstocksforex.files.wordpress.com\/2017\/10\/mw-fw460_inflat_20171017155126_mg.png?w=525\" alt=\"\" \/><\/a><\/p>\n<blockquote><p>The Fed has two choices. It can adopt the Dr. Strangelove approach and learn to stop worrying and live with low inflation and low unemployment. Or it can do something about it, which runs counter to its stated intention to raise the funds rate and reduce the size of its balance sheet.<\/p>\n<p>Option #1 involves learning to live with a low, stable inflation rate about 0.5 percentage point below the Fed\u2019s explicit 2% target.<\/p>\n<p>Not only has the Fed has achieved price stability in objective terms, but it has also fulfilled former Fed Chairman Alan Greenspan\u2019s subjective definition of price stability: a rate of inflation low enough that it is not a factor in business or household decision-making.<\/p>\n<p>Option #2 means taking some additional actions to increase the money supply by lowering interest rates or resuming bond purchases. The Fed is taking the opposite approach. It began its balance sheet normalization this month, allowing $10 billion of securities to mature each month and gradually increasing the amount every quarter. And it has guided markets to expect another 25-basis-point rate increase in December&#8230;.<\/p><\/blockquote>\n<p>The Fed faces a delicate balancing act. Unemployment is low but capacity utilization is also low, indicating an absence of inflationary pressure. <\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" alt=\"Capacity Utilization\" src=\"https:\/\/goldstocksforex.files.wordpress.com\/2017\/10\/2017-10-22-capacity.png?w=525\" \/><\/p>\n<p>Janet Yellen understandably wants to normalize interest rates ahead of the next recession but she can afford to take her time. The economy is unlikely to tip into recession unless the Fed hikes rates too quickly, causing a monetary contraction.<\/p>\n<p>I believe the Fed chair is relying on the outflow from more than $2 trillion of excess reserves held by banks on deposit with the Fed to offset the contractionary effect of any rate hikes.   <\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" alt=\"Capacity Utilization\" src=\"https:\/\/goldstocksforex.files.wordpress.com\/2017\/10\/2017-10-22-mbase.png?w=525\" \/><\/p>\n<p>If pushed, the Fed could lower the interest rate paid on excess reserves in order to encourage banks to withdraw excess deposits. But so far this hasn&#8217;t been necessary. The attraction of higher interest rates in financial markets has been sufficient to encourage a steady outflow from excess reserves, keeping the monetary base (net of reserves) growing at a steady clip of close to 7.5% p.a. despite rate hikes so far.<\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" alt=\"Capacity Utilization\" src=\"https:\/\/goldstocksforex.files.wordpress.com\/2017\/10\/2017-10-22-mbase-net.png?w=525\" \/><\/p>\n<p>Makes you wonder why Donald Trump would even consider replacing the Fed chair when she is doing a great job of managing the recovery. <\/p>\n<p>Source: <a href=\"http:\/\/www.marketwatch.com\/story\/fed-flunks-econ-101-understanding-inflation-2017-10-18\">Fed flunks econ 101: understanding inflation &#8211; MarketWatch<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Caroline Baum&#8217;s opinion on the Fed&#8217;s approach to inflation: For all the sturm und drang about the Fed debasing the dollar and sowing the seeds of the next great inflation, the public\u2019s demand for money has increased. The increased desire to hold cash and checkable deposits has risen to meet the increased supply. Velocity, or &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/thepatientinvestor.com\/index.php\/2017\/10\/23\/fed-flunks-econ-101\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;Fed flunks econ 101?&#8221;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31,13,34],"tags":[566,1313,1352,1828,2340,2356],"class_list":["post-16023","post","type-post","status-publish","format-standard","hentry","category-the-fed-banks-interest-rates","category-inflation-economy","category-us-canada-countries-regions","tag-capacity-utilization","tag-excess-reserves","tag-fed","tag-inflation","tag-monetary-base","tag-money-supply"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Fed flunks econ 101? - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Fed flunks econ 101? - the patient investor\" \/>\n<meta property=\"og:description\" content=\"Caroline Baum&#8217;s opinion on the Fed&#8217;s approach to inflation: For all the sturm und drang about the Fed debasing the dollar and sowing the seeds of the next great inflation, the public\u2019s demand for money has increased. 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He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters. Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis. Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008\/2009 and 2020 bear markets well ahead of actual events. He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.","sameAs":["https:\/\/facebook.com\/people\/The-Patient-Investor\/61572934660810\/","https:\/\/www.instagram.com\/colin_thepatientinvestor","https:\/\/au.linkedin.com\/in\/colintwiggs"],"url":"https:\/\/thepatientinvestor.com\/index.php\/author\/investor\/"}]}},"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p9tQ4n-4ar","jetpack_likes_enabled":false,"jetpack-related-posts":[{"id":41671,"url":"https:\/\/thepatientinvestor.com\/index.php\/2023\/04\/17\/fed-has-not-yet-tamed-inflation\/","url_meta":{"origin":16023,"position":0},"title":"The Fed has not yet tamed inflation","author":"Colin Twiggs","date":"April 17, 2023","format":false,"excerpt":"We see three signs that Fed interest rate hikes have not yet succeeded in taming inflation: Retail Sales Real retail and food services sales remain stubbornly above their pre-pandemic trend (dotted line below). While real sales have not increased since early 2021, they have held steady at $230 billion, after\u2026","rel":"","context":"In &quot;Deficit Spending &amp; Employment&quot;","block_context":{"text":"Deficit Spending &amp; Employment","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/deficit-spending-employment\/"},"img":{"alt_text":"Real Retail Sales","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-04-17-realretail.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-04-17-realretail.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-04-17-realretail.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":34739,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/06\/25\/jay-powell-is-selling-but-the-bond-market-isnt-buying\/","url_meta":{"origin":16023,"position":1},"title":"Jay Powell is selling but the bond market isn&#8217;t buying","author":"Colin Twiggs","date":"June 25, 2022","format":false,"excerpt":"Fed Chairman Jerome Powell declared that the Fed's commitment to taming inflation is \"unconditional\": June 23 (Reuters) - The Federal Reserve's commitment to reining in 40-year-high inflation is \"unconditional,\" Powell told lawmakers on Thursday, even as he acknowledged that sharply higher interest rates may push up unemployment. \"We really need\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"Treasury Yield Curve","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-06-24-yields2.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-06-24-yields2.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-06-24-yields2.png?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-06-24-yields2.png?resize=700%2C400&ssl=1 2x"},"classes":[]},{"id":27011,"url":"https:\/\/thepatientinvestor.com\/index.php\/2021\/07\/24\/elvira-nabiullina-for-next-fed-chair\/","url_meta":{"origin":16023,"position":2},"title":"Nabiullina for next Fed Chair","author":"Colin Twiggs","date":"July 24, 2021","format":false,"excerpt":"The Bank of Russia announced a 1% hike in its policy rate, to 6.5%, citing \u201cthe contribution of persistent factors to inflation increased due to faster growth of demand compared to output expansion capacity.\u201d Governor Elvira Nabiullina had warned markets on June 28 of a possible hike of up to\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":37928,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/10\/06\/gold-the-dollar-and-inflation-2\/","url_meta":{"origin":16023,"position":3},"title":"Gold, the Dollar and inflation","author":"Colin Twiggs","date":"October 6, 2022","format":false,"excerpt":"A hawkish Fed will strengthen the Dollar, and a strong Dollar weakens Gold, but strong inflation will weaken the Dollar. To make sense of this, we need to break it down into two parts: whether Gold or the Dollar wins, will ultimately be determined by the struggle between the Fed\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"Dollar Decline","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-10-01-cpi-purchasingpower.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-10-01-cpi-purchasingpower.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-10-01-cpi-purchasingpower.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":42875,"url":"https:\/\/thepatientinvestor.com\/index.php\/2023\/07\/06\/fed-faces-three-uncomfortable-truths\/","url_meta":{"origin":16023,"position":4},"title":"Fed Faces Three Uncomfortable Truths","author":"Colin Twiggs","date":"July 6, 2023","format":false,"excerpt":"IMF deputy head, Gita Gopinath, recently highlighted three uncomfortable truths for monetary policy: Inflation is taking too long to get back to target. Financial conditions may not be tight enough and sustained high inflation could make the task of bringing inflation down more difficult. Central banks' price and financial stability\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"IMF deputy head Gita Gopinath","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/gita-gopinath-150x200.jpg?resize=350%2C200&ssl=1","width":350,"height":200},"classes":[]},{"id":38270,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/10\/22\/brazil-shows-the-way-but-can-we-follow\/","url_meta":{"origin":16023,"position":5},"title":"Brazil shows the way but can we follow?","author":"Colin Twiggs","date":"October 22, 2022","format":false,"excerpt":"Brazil reported that domestic inflation fell to 7.2% in September, from a peak of 12.1% in April. The Banco Central do Brasil (BCB) is the first major central bank to achieve a significant fall in the inflation rate. Brazil: Inflation Rate The reason is not hard to find.\u00a0 BCB is\u2026","rel":"","context":"In &quot;Africa &amp; South America&quot;","block_context":{"text":"Africa &amp; South America","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/africa-south-america\/"},"img":{"alt_text":"Brazil: Inflation Rate","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-10-21-brazil-inflation.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-10-21-brazil-inflation.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-10-21-brazil-inflation.png?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-10-21-brazil-inflation.png?resize=700%2C400&ssl=1 2x"},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/16023","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=16023"}],"version-history":[{"count":1,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/16023\/revisions"}],"predecessor-version":[{"id":16024,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/16023\/revisions\/16024"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=16023"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=16023"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=16023"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}