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.

8 thoughts

    1. The virus itself raised the 6th flag, (Supply Shock due to a lack of demand of Americans staying at home) You don’t need any over-investment thesis, standard production levels are not acceptable when people are staying at home. You might see one more decent retail sales print due to pent up virus buying.

      LEI, which is working from an all-time high, is going to head down fast in the next four months. You should see 2-3 months of decline in one report going out in the future.

      Those two flags I have accounted for already.

      The tricky part is housing starts, we have cycle highs in demand, and we might not have a long enough negative duration period to where housing starts fall noticeably. I believe builders might stop production short term from protecting their workers from the virus.

      Now that we are in lockdown mode, I am looking at GDP this way
      Q1 will be softer than the current trend because the data is going to lag a few weeks. We are looking at the 2nd half of March, hitting it hard. We might not get a negative print on Q1.

      Q2 is going to be one of the worst quarter to quarter negative prints ever recorded in history because the data will have full domestic and global lockdown policies. Not to mention the oil price war

      Q3 Will see a rebound in GDP but only due from a low bar of Q2.

      Q4, if my September 1st thesis holds, Q4 should be ok.

      This is why I wrote this jobless claims article a few days ago; jobless claims were still heading down the last two weeks. The 3-month job gain average of 243,000 was good at this stage of the cycle, and the previous print was at 273,000.

      This is all going to change dramatically in the next few months; then, after we handle the virus and get people off lockdown protocols, we slowly get people to do normal things again. I am looking for September 1st as the timeline to where we have a better grip on the virus, and then we should see where we are on domestic and global shutdown protocols.

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

    1. We are adjusting to the economic damage of the virus, which is important and different from previous cycles.

      I am getting ahead of the 5th recession red flag. Leading economic indicators went positive last month. It can’t account for the virus damage fast enough due to the monthly reporting of the data. However, I am raising the Flag now because the components are going to get weak due to the lockdown protocols here and around the world.

      I am questioning the 4th from happening due to duration. Housing starts falling into a recession because housing demand is at cycle highs. I don’t believe this virus will be here with us is this negative convexity. Sept 1st date I added to the article, is the main thesis for the recovery curve to be quicker than other cycles.

      The flag, which is usually the most important, has been risen due to the virus scale and duration. The 6th recession red flag. Demand gets hit this bad this quickly due to government protocols; it’s a unique situation that you have to adapt do.

      Usually, you wouldn’t see a cycle where the majority of the population has been told to stay and home and not travel—so accounting for that factor and the duration of the negative output I have to give Q2 a full-fledge recessionary curve. My recessionary bond yields were breached last week as well.

      The difference now than another recession is that the negative shock is quick; the positive come back will be faster than average recovery times.

      So even though Q2 is a recessionary curve, Unless Q1 is negative, we might not see back to back negative GDP prints. Just one real awful print. A very soft Q1 and Q3 and a traditional Q4. That is the unique aspect of 2020. I am adjusting to the scale and duration of the virus daily now.

      This is why tracking the virus case curve is essential now and something that a traditional cycle doesn’t usually have.

    1. The discussion above is reflecting an outlook that can’t be attributed to visual data that will come out. Next month I am assuming that Q2 is going to be recessionary due to the protocols and the future data will show that. Because we know of the government protocols now, we get ahead of the actual report. That is the major difference now. Usually, I don’t raise the flags ahead of the data getting bad but its not a question anymore with a lot of countries in shutdown protocols.

      That is the correct way to adjust to negative shocks such as a virus or a natural disaster of scale.

      This is much different than traditional economic cycles where data wouldn’t move so fast. The negative downturn will have a faster upturn because of the virus.

    2. A better way to answer your question.

      2nd quarter of the U.S. is going to be recessionary with a lot of the data lines.

      The question is about Q3 and Q1. For Q3 it’s still up in the air due to the virus, I know Goldman Sachs gave it a high recovery rate, I am not convinced about that yet. I need to see where we are with the virus and when protocols of containment will be taken off. Q1 might not have enough harmful virus data yet to show a negative GDP report. If it did, yes, we are in a technical recession now. Nothing we do now can stop Q2 from being harmful.

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