To raise, or not to raise rates? Critics assail Fed Chair

Mr. Powell

In what seems to be pressure from the White House the FOMC of the Federal Reserve on Wednesday announced that the last rate hike would be a quarter of a point, and then announced, based in part, from other members that the Feds would look at a neutral rate, causing many observers to wonder what that meant, and why, now.

For some that pressure, in the form of either public shaming by the president, or private meetings with administration officials, makes some economists nervous that the Federal Reserve in its mission to keep inflation at 2 percent, and the nation at full employment, a basic in every undergraduate macroeconomics course, and some high school curricula, might be at risk.

President Trump seems not to have absorbed this, at best, and his remarks about the Fed and its chair, Jerome Powell not only break precedent, but also good manners.

To wit: “Mr. Trump's main beef with the central bank is that its ongoing policy of hiking interest rates is curbing growth just as Americans are reaping the benefits a buoyant economy. The job market is humming, with unemployment at its lowest rate in nearly half a century. Wages, which barely rose during the post-recession "recovery," are finally giving workers a meaningful pay bump. Inflation remains tame. So why mess with success?”, reported cbsnews.com.

"Inflation has continued to surprise to the downside, not by a lot, though, claimed  Powell.

When a central bank succumbs to political pressure, the journey ahead is fraught with pitfalls, and maybe even some pratfalls.

Then there are others that are saying that they would not because of market volatility - the specter of the Dow Jones plummeting, and that higher rates are crimping growth, for example in the housing market, and that the nation is climbing out of the Great Recession.

So for good measure, let’s hear from CNBC’s resident economic curmudgeon, Jim Cramer who said without a hint of regret:  "If I were running Trump's re-election campaign, Jay Powell would be my worst nightmare," said Cramer, who, like the president, has been calling on Powell to stop. Powell apologists, "they must have no sense or empathy for what's about to happen to the working person in this country."

“But the messaging in the Fed’s dot plot of interest-rate projections, policy statement and Fed Chairman Jerome Powell’s press conference are all more important than the move, and most economists think they will uniformly lean dovish, analysts said. At some point, perhaps as soon as March, the Fed will skip a quarterly rate hike. At the moment, most economists think that will be a pause and not the end of the tightening cycle,” reported Market Watch in a predictive spirit the day before the expected increase.

Dovish, if we remember, was the byword of Powell's predecessor, Janet Yellen, and she, too, was assaulted for that position, yet it also seems that the martyr’s crown is not for him, as he struggled for a self-described pause.

Ms. Yellen

Some have said that 2019 is the year for cutting, but let’s hold that thought for a moment.

Continuing in that vein, we see, “Michelle Meyer, head of U.S. economics at Bank of America Merrill Lynch, [who] said Powell must sound reassuring without sounding hawkish.

“The key words will be caution, patience, risks and data dependence,” Meyer said.

The reduction in the dots will be seen as a “market-friendly capitulation” and the market is already anticipating the move with current market pricing suggesting less than one hike in 2019, Meyer said.

“Powell blinked,” said Steven Ricchiuto, chief economist at Mizuho Securities USA.

Are we to assume that this is truly the position of the market?

At the risk of sounding “wonky”, a positive in my book, at least, “It is positive because it sends a tone that they are not overtightening and the yield curve is not going to invert,” Ricchiuto added.

A brief refresh for those that avoided macroeconomics like the plague, in favor or a beer at the campus pub: “When short-term yields on government debt pop above their longer-dated peers, it is often a prelude to a recession. The flattening yield curve is a key market concern,” he explained.

Yet, the market did erupt preceding the announcement of another rate hike, and “Erasing a 380-point gain prior to the Fed decision, the Dow Jones Industrial Average sank 351 points, closing at a 13-month low. The S&P 500 finished at a 15-month low, with 60 percent of the index now in a bear market, marked by declines of 20 percent or more from recent highs. The Dow opened nearly 100 points lower on Thursday.”

These could have been that unseen hand that we all learned about, decades ago, guiding the economy, but humor aside, selling is always an option for the market.

As promised earlier, another route, hovering in the background is the opposite -- the R word writ large - recession, and that some are saying is close on our heels, even with a rise in employment, and a strong dollar --- and that in 2020 we will see rates cut. So, take that!

Hold on say others, Powell "is raising the possibility of moving the landing zone by saying that we're not too far from the neutral rate and don't need to raise rates as much as previously thought," said Gregory Daco of Oxford Economics,” and also added, in his interview with CBS, that “he thinks Mr. Trump's claims that the Fed is denting the economy don't hold up to scrutiny, noting the strong pace of growth in recent months even as policymakers were in hiking mode. The far bigger impediment to growth next year will be the fading of any stimulus from the massive tax cuts Mr. Trump enacted in late 2017, he predicted.”

Ouch!

"Fed tightening won't be the main source of the slowdown in 2019," said Daco, "it'll be coming from Trump's policies."

Please, sir, may I have another?

Circling back we can also see a myriad of statements that makes many nervous that Powell is trying to serve two masters.

"Where we are right now is the lower end of neutral," he said during a news conference at the conclusion of the two-day Federal Open Market Committee meeting. "There are implications for that."

Thanks to the good office of CNBC we also see that “Statements Powell made over the past several months about the neutral rate have caused sharp market fluctuations.

In early October, the chairman said the Fed was "a long way" from neutral. The statement coincided with the beginning of a rough wave of volatility that has sent major stock market averages into correction territory.

Then in November, he addressed the issue again, saying the current funds rate was "just below" the range of projections that individual FOMC members had for the neutral level.”

Whose world is this anyway, asked pundits, with only the slightest tongue in cheek; we also heard the chairman say this, in reaction to reporter’s questions on what he was really trying to say:  "Monetary policymaking is a forward-looking exercise, and I'm just going to stick with that," he said.

"There's real uncertainty about the pace and the destination of further rate increases, and we're going to be letting incoming data inform our thinking about the appropriate path," Powell later added.

With the hike, announced Wednesday, the funds rate is now targeted between 2.25 percent and 2.5 percent. The range of neutral estimates from committee members is around 2.5 percent and 3.5 percent.

“The Federal Reserve is "listening" to a plunging stock market but still views the economy as strong enough to stick to an increasingly data-dependent, yet higher, course for interest rates, New York Fed President John Williams said on CNBC Friday. The Fed raised rates by a quarter point this week, the fourth hike of the year, sending stocks SPX, -2.06% sharply lower,” reported MarketWatch.

Then again, all things considered, Powell might be in self-protective mode, knowing that if the economy does run off the rails, next year, he will be Trump’s scapegoat.

Texas Judge on ACA creates a hornet's nest

Judge O'Connor

It could have been called a stealth attack: a Texas judge ruling that the Affordable Care Act, colloquially  known as “Obamacare”, was unconstitutional, just as the deadline approached for the 2019 sign up, or renewal; the move prompted a hue and cry, not only from Democrats, but also from Republican lawmakers, fearing another huge effort, on their part, to replace it, and an even larger blow back from their constituents.

In a move that was obviously deliberate --- a psychological weapon against the much maligned, and much misunderstood 2013 law, the legacy of America’s first black president, Barack Obama, and the fear is that the United States health market will be thrown into chaos, should it be supported.

Former U.S. House majority leader, and currently minority House leader, Nancy Pelosi, who was a pivotal figure in the ACA’s passage, said, in part, from a statement, released by her office:

  

“Tonight’s district court ruling exposes the monstrous endgame of Republicans’ all-out assault on people with pre-existing conditions and Americans’ access to affordable health care. The GOP Congress tried and failed to destroy the Affordable Care Act and protections for pre-existing conditions. Then, in the midterm election, the American people delivered a record-breaking margin of almost 10 million votes against House Republicans’ vile assault on health care.  Now, the district court ruling in Republicans’ lawsuit seeks to subvert the will of the American people and sow chaos in the final day of HealthCare.gov open enrollment.”

  

Many have questioned the reasoning of U.S. District Judge Reed O'Connor’s which is based on the removal of the individual mandate, which he sees as a total invalidation of the law, and its constitutionality, and one that many believe he is in serious judicial error.

Alison Kodjak of NPR reported that "The lawsuit had to do with whether when Congress last year repealed or eliminated the penalty for not having insurance — it was a tax penalty for people who didn't have insurance — whether that meant the rest of the law didn't apply anymore. The court case argued that all of the pieces of the law were dependent upon each other, so by eliminating the penalty the rest of the law fell apart. The judge agreed with that opinion."

The New York Times commented, in their coverage, that, “The Justice Department’s response to the case was highly unusual: though it disagreed with the plaintiffs that the entire law should be struck down, it declined this year to defend not just the individual mandate, but the law’s provisions that protect people with pre-existing conditions. That prompted a coalition of 16 states and the District of Columbia, led by California, to intervene and defend the law.”

Speaking for the Trump Administration, White House spokesperson, Sarah Sanders, was exultant in her praise, noting that "Obamacare has been struck down by a highly respected judge. The judge's decision vindicates President Trump's position that Obamacare is unconstitutional. Once again, the President calls on Congress to replace Obamacare and act to protect people with preexisting conditions and provide Americans with quality affordable healthcare. We expect this ruling will be appealed to the Supreme Court. Pending the appeal process, the law remains in place.”

Not to be outdone, President Donald Trump tweeted, in an almost alleluia-like manner: "As I predicted all along, Obamacare has been struck down as an UNCONSTITUTIONAL disaster! Now Congress must pass a STRONG law that provides GREAT healthcare and protects pre-existing conditions."

"Congress amended one provision of a 2,000 page law and did not touch the rest of the law so it is implausible to believe that Congress intended the rest of the law not to exist," Abbe Gluck, a health-law expert at Yale Law School, said following the ruling.

Going even further, “In a Washington Post op-ed, Nicholas Bagley, a law professor with a focus on health policy at the University of Michigan, failed to make sense of O'Connor's legal case. He determined that the "logic of the ruling is as difficult to follow as it is to defend."

"This case is different; it's an exercise of raw judicial activism," Bagley said. "Don't for a moment mistake it for the rule of law."

Observers have noted that the tables have turned now that the GOP is in power, even now with only the Senate, and the White House; and that decades of accusations of “liberal activist judges”, and “ruling from the bench, and not the law” are okay, as long as they do it.

Lest anyone think that the endgame belongs only to Democratic defenders, even those that on the opposite side of the aisle are calling, it, pun intended, a misjudgment.

“And even many Obamacare critics have spoken out against the ruling. Conservative lawyers that previously criticized the law took issue with the breadth of the ruling. Philip Klein, the executive editor of the conservative-leaning Washington Examiner and author of a book on "overcoming" Obamacare, called it an "assault on the rule of law” in an interview with Business Insider.

Based on a model from Mitt Romney as governor of Massachusetts, Obama, in a neat legislative trick of using a conservative hero to craft national law, the legacy piece faced several challenges in its crafting, but received no help from the Republicans who, in the words of Mitch McConnell, wanted him to be a one-term president.

Several attempts were made to replace the ACA and all failed; and, now O’Connor’s ruling is the latest effort to chip away at a law that helped over 12 million Americans get health care, and especially preventive care from the hills of West Virginia, to America’s urban core cities.

This happened despite talks of death councils, imprisonment and other ill-informed rumors, but it also “expanded Medicaid, which has allowed more than 10 million people to get coverage in states that chose to expand the program. The law also protects people with pre-existing conditions and allows people up to age 26 to be covered under their parents' insurance . . . The ACA also secured more money for Native American health care and made significant changes to allow for generic drugs and to provide funding for Medicare.”

In 2017 Consumer Reports also said that, “As legislators and the executive branch renew their efforts to repeal and replace the Affordable Care Act this week, they might want to keep in mind a little-known financial consequence of the ACA: Since its adoption, far fewer Americans have taken the extreme step of filing for personal bankruptcy.

Filings have dropped about 50 percent, from 1,536,799 in 2010 to 770,846 in 2016 (see chart, below). Those years also represent the time frame when the ACA took effect. Although courts never ask people to declare why they’re filing, many bankruptcy and legal experts agree that medical bills had been a leading cause of personal bankruptcy before public healthcare coverage expanded under the ACA. Unlike other causes of debt, medical bills are often unexpected, involuntary, and large.”

“It’s absolutely remarkable,” says Jim Molleur, a Maine-based bankruptcy attorney with 20 years of experience. “We’re not getting people with big medical bills, chronically sick people who would hit those lifetime caps or be denied because of pre-existing conditions. They seemed to disappear almost overnight once ACA kicked in.”

For those that are worried, take note: “The judge issued what is known as a declaratory judgment — which, unlike an injunction, allows the law to continue unabated until the case is taken up by another court. Democratic states have pledged to appeal the ruling, so O'Connor's decision will likely not be the last word. Meanwhile, people who get access to healthcare through Obamacare's marketplaces or Medicaid expansion will continue to have coverage.”

There is always the law of unintended consequences, and the old adage to be careful of what you wish for still holds, and for those, in the GOP, ready to pop the champagne corks as they damn Obama, that celebration might be only possible if they “think that plenty of unnecessary deaths, suffering, and financial ruin are OK. And Republicans, who suffered huge losses in the 2018 midterms in part because of their extremely unpopular attempts to repeal the ACA, would own this outcome. Plus, it’s essentially impossible to imagine a significant fix that would be acceptable to both a Republican-controlled Senate and a Democratic-controlled House.”

Many legal experts expect that the law will be preserved by the Supreme Court, certain that that is the eventual path, but also note that many of those supportive justices present in 2013, are still on the bench, but stress that “if Judge O’Connor’s decision ultimately stands, about 17 million Americans will lose their health insurance, according to the Urban Institute, a left-leaning think tank, but also the millions more who gained subsidized private insurance through the law’s online marketplaces, and no cap on out-of-pocket costs.”

November Jobs report disappointing, but optimism reigns

Despite optimism on the part of many economists, bankers and media, the U.S. economy was below expectations in the November Job Report, released by the Labor Department on Friday, when it showed that non-farm payrolls were down by 155,000, rather than the expected 198,000.

Many are seeing this as a paradigm, if not a disaster, and most are optimistic, and cite the banner headline of unemployment of 3.79 to cover any perceived cracks in the paint of a report that was hoped to be joyful.

“Adding 155,000 jobs this month is not a disappointment,” said Martha Gimbel, director of economic research at Indeed Hiring Lab. She said the U.S. is still adding “twice the jobs that the economy needs to add each month to keep the unemployment rate steady,” in her remarks to Marketwatch.

Taking the opposite tack from our early assessment, is this: “None of the information released today represents a paradigm change for the economy—the labor market is strong and continues to get stronger,” said “senior U.S. economist Eric Winograd of AllianceBernstein, and he stressed: “This, more than anything else, is the reason that the [Fed] remains likely to raise rates over the course of the next year.”

Wages, still are low, at a gain of only 0.2 for the average, and not the 0.3 that was hoped for; consumer confidence has waned, despite some expenditures that seem to reflect more need, than desire.

In previous months we have examined the myriad of reasons why wages will only increase, including those employers who will only reward those who are accepting new jobs, or those who bring much needed skills to a job; and, many employers are still finding it difficult to attract those jobseekers with the skill that they need.

“Employees who say they are willing to go above and beyond at work has declined,” said Brian Kropp, vice president for human resources at Gartner. One out of four employees used to say they were giving their work an extra oomph — something Gartner calls “discretionary effort.” Now, it’s closer to one in six.

The reason, Mr. Kropp said, is simple: Workers are not being rewarded for their efforts. “One of the things we’ve seen is that it’s harder for employees to get promoted nowadays,” he said. In 2006, for example, it took an average of about two and a half years to get a promotion, compared with four and a half years today,” reported The New York Times.

Labor Force Participation remains the same as in prior months at 62.9 percent, or 133,000, reflecting in part, the growing rise of baby boomers that are retiring; but, as we have cited there are those that do not have a specific reason, yet to most observers, the lack of real wages is a significant factor.

Last month we showed that gender played a role and that more women were entering the workforce at record rates, and that many men are still staying on the sidelines. And, some have said that men want the higher pay, while women,even with the gender gap in pay; and, many are entering, even if only to support the men, who are holding out, but that is more conjecture than fact.

The market has shown strength, as previously reported for low wage earners and those with less education, and has expanded opportunities for African Americans, Latinx, and those with lesser skills.

There are winners in the report, despite the need, or more accurately, the seasonal holiday help, retail jobs increased to over 18,000; manufacturing rose by 27,000; and transportation and warehousing rose to 25,000 jobs, in no small part to the rise of online retail and the need for big box warehouses, plus workers needed to pick and pack the merchandise, as much as haul it long distance.

Bad news is still the case for those marooned in part-time jobs that would like full-time’ indeed full time jobs are still the ones most sought, especially in nursing and retail, and in fact, that rate rose in November from 7.6 percent, from a previous 7.4 in what economists call the real unemployment rate.

For most, the attention is now on the Federal Reserve and whether they will continue to raise interest rates, to prevent the economy from overheating, which is part of their mandate.

“Meanwhile, the recent drop in oil prices has made any near-term acceleration in inflation less likely. A measure of core inflation that excludes food and energy prices, at 1.8% in October, was below where the Fed projects it will be on average in the fourth quarter,” noted National Public Radio.

An added factor, they noted is that “Fiscal policy is another uncertainty. A key source of growth in the near-term, it is set to lose some impetus when a two-year package of federal spending increases expires next September. It is unclear whether lawmakers and the White House will come up with a new agreement for additional spending going into an election year or allow fiscal restraint to take hold.”

With the public drumming that President Trump has given Chair Jerome Powell, many are wondering if he will stay the course, or succumb to pressure, with the by-now standard belittling of administration officials, from the president.

He has said that a “pause “might be needed in the planned progress of rate hikes, but overall, the Fed has said that that there has been no broad shift in interest polcv, ”even if incoming data prompts them to drag out the pace of increases in the months ahead.”

"That's not a lottery jackpot, but it also doesn't set off inflation alarm bells for financial markets or central bankers," Mark Hamrick, Bankrate.com senior economic analyst, said of the wage growth number”, in his cautious remarks with NPR.

Powell has replied that he will not act in accordance with public shaming, but will instead continue the data driven path of his predecessor, Janet Yellen.

What has come out is a push for a neutral rate in 2019, after the mid-December rate increase; a move that has been promoted by Randy Quales, the Reserve’s vice president for bank supervision, between, 2.5 percent and 3.5 percent.

Taking a  look back under the leadership of Alan Greenspan, as chair, the Wall Street Journal cited, “Mr. Greenspan experimented with interest-rate guidance in 2003, when inflation was low and the job market soft. The Fed offered an assurance to investors that short-term rates—then 1%—would remain low for a “considerable period.

The Fed raised rates in quarter percentage point increments at 17 straight meetings between June 2004 and June 2006, and along the way assured investors it would proceed at a “measured” pace. In December 2005, as officials started considering stopping the rate increases, they modified their statement to say “some further measured policy firming” could be needed.”

But there was, later on, a widely held belief that the Fed’s “measured pace” guidance was a mistake because it locked them in to predictable rate changes and betrayed their own uncertainty about the outlook,” the Journal noted.

Taking an honest, and cautious, path was Federal Reserve Bank of New York President John Williams,” who spoke later on Thursday, after Powell expressed confidence in the economy, saying “the biggest challenge facing policy makers is achieving a soft economic landing.

“We have a pretty strong economy -- unemployment pretty low, inflation near our goal -- it’s just managing a soft landing, keeping this expansion going for the next few years,” he said in remarks with former Bank of England Governor Mervyn King at the LSE Foundation in New York.

“In practice we know things happen, unforeseen events can occur. We just need to be really prepared and be nimble about how we respond to changing circumstances,” he said to Bloomberg.com.

While not quite a major issue, yet, tariffs, and the ongoing tension with China, are giving some concerns, at least to the market and investors; yet despite that, and with a moderate global economy, at least pending the U.K.’s Brexit from the European Union, but with the good news from Spain, and their economic recovery, plus a strong U.S. dollar, restraint my indeed rule the day.