Zero Interest Rate Policy: ACT II

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From The Federal Reserve:

https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The effects of the Coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective.”

Ohio governor declared that all restaurants and bars to be closed down by 9:00PM. As healthy normal everyday life soon is taken away from us by the agent of the Devil. The more our country needs to do to weather the storm while we defeat this demon.

I am sticking to my timeline that by September 1, 2020, we will be in a better place then than today regarding this Virus. We just need to ride out the storm.

-3.5 months of testing and getting that new case curve down. We might be able to get this down quicker than 3.5 months.

-The Heat of July and August to try to get us back to such sense of normalcy and not these days of crazy headlines of things getting worse

We can start to get back to standard data mining without the Virus being such a complex issue on September 1, 2020. 

This is why I said in this article, we needed to declare WWIII on this Virus. We are starting to do that on both the fiscal and monetary side. This isn’t going to be a quick fix, so we need to be ready for War.

https://loganmohtashami.com/2020/03/06/america-its-time-to-declare-an-economic-war-against-cov-19/

We have a lot of short term pain to be felt as we fight this Virus. The Chaos theory and the Butterfly effect I talked about February 3 has grown in size and velocity.

“In chaos theory, the butterfly effect refers to the idea that due to the interconnectedness of all things, a small event can result in large effects on a nonlinear, dynamic system.” 

“The butterfly effect gets its name from the metaphor that even small swirls of air caused by the flapping of a butterfly’s wings can change the path of a tornado, even though the system is far removed in space and time from the initial event.” 

“In many ways, we see this theory manifest in the U.S. bond and stock market – a dynamic system that is prone to the influences of distant perturbations.”

From Boeing to Brexit: 7 major storylines that could send mortgage rates even lower

Also, I talked about how we have handle times of adverse shocks to the economy to grow again. 3 times we have had negative GDP in this record-breaking expansion; 4 times, we have been below 1%. One time we had back to back quarters of .5% GDP in this cycle. However, we have always come back to have growth again. This global pandemic, which has closed down countries, is a new kind of beast. The velocity of economic damage due to people simply not being able to live a normal life is terrible. Just tonight, the CDC has recommended people gathering of 50 or more to be canceled.

Q4 2nd GDP revisions

Recent economic data has indeed been decent. Jobless claims are still low. Leading economic indicators are at an all-time high, housing permits are at cycle highs, the last jobs number was 273,000 jobs gained with a 3 month average of 243,000. Purchase application data is at cycle highs with double-digit growth year over year for 7 straight weeks. Even the recent regional manufacturing data got better.

Feb regional MANU

However, this is all going to change.

March data, the tail end of Q1, is going to get walloped due to the Virus.  Q2 will have the full brunt of the virus effect, and Q3 shouldn’t be high but better than Q2. That is the best estimate I can give with the up to date virus headlines. Even though some people didn’t see hits to the jobless claims data just last Thursday, its coming people.

Jobless Claims Vs. The Coronavirus 

https://loganmohtashami.com/2020/03/12/jobless-claims-vs-the-coronavirus/

Don’t think about what the Fed is doing tonight is a quick fix; all this does is try to minimize the pain, and suffering Americans are going to be dealing with while we fight this Virus. The same with the fiscal side of the government response, which is more important right now.

Social distancing does come at a price. The bond market has breached into my recessionary yield range of  (-0.21% -0.62%). Once we get past this storm, we will be growing again. The B.C. Before Coronavirus, economic expansion was the longest ever recorded in history with the longest job expansion as well. Without the agent of the Devil, Americans would have had a typical weekend right now.

Now, its time to show the Virus the real power of King Dollar, The Federal Reserve, but most important of all, the power of the American people! It might not be pretty or sweet how we act sometimes. However, when we need to, when death and destruction are staring us in the eye, we do come together to fight back.

Finally, let’s Get WWIII on against this Virus!

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Now onto something else!

August 16, 2015. We were still at ZIRP, and I wrote this article with some specifics on questioning the Fed Rate Hike

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Article here:  Fed And The First Rate Hike 

https://loganmohtashami.com/2015/08/16/fed-and-the-first-rate-hike/

In this article, my take was this, and I had wished I gotten into more details. Maybe the Fed raising rates now is not the best idea.

  In an interview with Bloomberg. I said they need to change their metric because unemployment is dropping too fast due to the Labor participation rate.

“Another view I’ve held for years is that they should raise their inflation metric to 2.25%-2.50% on PCE.”

To make it more straightforward since we are back at zero again.

Raise your inflation targets to 2.25% or 2.5%, yes, the same as above. Don’t raise rates unless we can sustain 2.25% – 2.5% PCE rate of growth.

Feb PCE
I have talked about how the Fed should be running with a 10-year moving average of PCE core as a good baseline model to be neutral. If Core PCE is running at a 10 year moving average of 1.75%, that is where the Fed should be at to be non-accommodative. However, this is after we, in effect, have been able to sustain 2.25%- 2.5% core PCE growth. Without that happening, we should be at zero.

The Federal Reserve has done its duty regarding its dual mandate. It’s not the Fed’s fault we have a global pandemic virus right now. However, it can do a better job in the future.

Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data daily on his Facebook page https://www.facebook.com/Logan.Mohtashami and is a contributor for HousingWire.