Janet Yellen's excuses for not raising interest rates will keep coming - The Daily Reckoning
The Daily Reckoning by Vivek Kaul
On This Day - 20 March 2015
PRINTER FRIENDLY | ARCHIVES
Janet Yellen's excuses for not raising interest rates will keep coming A  A  A

- By Vivek Kaul

Vivek Kaul
The Federal Open Market Committee (FOMC) of the Federal Reserve of the United States, which is mandated to decide on the federal funds rate, met on March 17-18, 2015.

The federal funds rate is the interest rate at which one bank lends funds maintained at the Federal Reserve to another bank on an overnight basis. It acts as a sort of a benchmark for the interest rates that banks charge on their short and medium term loans.

In the meeting the FOMC decided to keep the federal funds rate in the range of 0-0.25%, as has been in the case in the aftermath of the financial crisis which broke out in September 2008. Janet Yellen, the chairperson of the Federal Reserve also clarified that "an increase in the target range for the federal funds rate remains unlikely at our next meeting in April." The next meeting of the FOMC is scheduled on April 27-28, 2015.

The question is when will the Federal Reserve start raising the federal funds rate? As the FOMC statement released on March 18 points out: "In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 % inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."

--- Advertisement ---
Strike It Rich With Stocks... These Investors Made 288 Percent In Less Than 3 Years!

Striking it rich with stocks is the desire of every investor... but only a handful of them manage to accomplish that.

Now a certain group of investors in the recent past experienced the joys of striking it rich when they made 288% in 2 years and 5 months.

And that's not all...

A few other stocks also gave them returns like 217% in 3 years and 11 months, 100% in just 1 year 8 months and 240% in 3 years and 3 months.

And what did these investors do to get such amazing returns?

Well, they focused on stocks (which we recommended) that belonged to a very special segment of the market.

And because of the immense potential in stocks of this special segment, and also because these investors had got hold of those stocks at the right time, they managed to multiply their investment many times.

So today we are going to show you how YOU could get access to such high-potential stocks as well, and truly strike it rich in the stock market.

Just click here for full details...
---------------------------

Other than a clear inflation target of 2%, this is as vague as it can get. The inflation number in January 2015 came in at 1.3%, well below the Fed's 2% target. The Fed's forecast for inflation for 2015 is between 0.6% to 0.8%. At such low inflation levels, the interest rates cannot be raised.

But the Federal Reserve wasn't as vague in the past as it is now. In December 2012, the Federal Reserve decided to follow the Evans rule (named after Charles Evans, who is the President of the Federal Reserve Bank of Chicago and also a part of the FOMC). As per the Evans rule, the Federal Reserve would keep interest rates low till the rate of unemployment fell below 6.5 % or the rate of inflation went above 2.5 %.

As the FOMC statement released on December 12, 2012 said: " the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 % and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2% longer-run goal, and longer-term inflation expectations continue to be well anchored."

This is how things continued until March 2014, when the Federal Reserve dropped the Evans rule. In a statement released on March 19, 2014, one year back, the FOMC said: "In determining how long to maintain the current 0 to 1/4 % target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 % inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments." In fact, this is exactly the wording the FOMC has used in the statement released on March 18, 2015.

What the FOMC meant in the March 2014 statement was that instead of just looking at the rate of unemployment and the rate of inflation, the Federal Reserve would also take into account other factors before deciding to raise the federal funds rate. So what made the Federal Reserve junk the Evans rule?

In February 2014, the rate of unemployment was at 6.7% and was closing in on the Evans rule target of 6.5%. In April 2014, the rate of unemployment had fallen to 6.2%.

If the Fed would have still been following the Evans rule, it would have to start raising the Federal Funds rate. This would have meant jeopardising the stock market rally which has been on in the United States. In the aftermath of the financial crisis, the Federal Reserve had cut the federal funds rate to 0-0.25%, in the hope of encouraging people to borrow and spend more, to get their moribund economies going again.

While people did borrow and spend to some extent, a lot of money was borrowed at low interest rates in the United States and other developed countries where central banks had cut rates, and it found its way into stock markets and other financial markets all over the world. This led to a massive rallies in prices of financial assets. In an era of close to zero interest rates the stock market in the United States has seen the longest bull market after the Second World War.

Any increase in the federal funds rate would jeopardise the stock market rally. And that is something that the American economy can ill-afford to. So, it is in the interest of the Federal Reserve to just let the stock market rally on.

Interestingly, the Federal Reserve has been changing the so-called "forward guidance" on raising the federal funds rate for a while now. In March 2009, it had said that short-term interest rates will stay low for an "extended period." In August 2011, it said that short-term interest rates would stay low till "mid-2013." In January 2012, the Fed said that short-term interest rates would remain low till "late 2014." And by September 2012, this had gone up to "mid-2015."

In March 2014, it junked the Evans rule. So, what this means is that the Federal Reserve will ensure that interest rates in the United States continue to stay low. Peter Schiff, the Chief Executive of Euro Pacific Capital, summarized the situation best when he said that the Federal Reserve would "keep manufacturing excuses as to why rates cannot be raised" and this was simply because it had "built an economy completely dependent on zero % interest rates."

Given this, be prepared for Janet Yellen offering more excuses for not raising the federal funds rate in the days to come.

When do you think will the Federal Reserve start raising interest rates? Post your comments or share your views in the Equitymaster Club.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Get The Daily Reckoning directly
in your mail box.
Just enter your e-mail address » 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "Janet Yellen's excuses for not raising interest rates will keep coming". Click here!

2 Responses to "Janet Yellen's excuses for not raising interest rates will keep coming"

Govind

Mar 21, 2015

Very good article and well researched one. I was surprised by Fed's decision and now i understand the whole pic. Not sure how long they will manufacture new excuses and who will pay the final price which would be quite heavy for every one

Like 

Baridbaran Das

Mar 20, 2015

Rate will start increase gradually when Americans will feel the world market is moderately under control.

Like 
  
Equitymaster requests your view! Post a comment on "Janet Yellen's excuses for not raising interest rates will keep coming". Click here!

Recent Articles:
Deep State First
August 23, 2017
Nowhere was the darkness deeper than in the nation's capital. There, no light shone. No flicker of awareness...observation...learning...or reflection appeared.
A Darkness Is Spreading Across the US
August 22, 2017
Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.
Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working
August 21, 2017
Most Indians who cannot find jobs, look at becoming self-employed.
Trump Takes a Beating
August 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.