The Federal Reserve’s TRUE Dual Mandate! Taylor Rule Suggests Target Rate Of -8.58% As Federal Spending Rages Out Of Control

The Federal Reserve has a dual mandate: stable inflation and low unemployment. Well, core inflation is currently at 1.2% (core PCE growth is at only 0.95%) and unemployment (thanks to Covid-19) is at 11.1%. Not quite on target.

The Taylor Rule model using an aggressive specification suggests that The Fed lower their target rate to -8.58%.

Of course, Congressional spending is out of control with mandatory spending (entitlement programs, such as Social Security, Medicare, and required interest spending on the federal debt) since the days of George HW Bush and Bill Clinton. And especially post financial crisis.

Of course, mandatory spending on Medicare is soaring out of control.

Defense outlays are projected to grow with non-defense outlays declining,

Of course, the TRUE dual mandate of The Federal Reserve is propping up the S&P 500 index and NASDAQ.

Good luck to everyone trying to cope with out of control Congressional spending and Fed money printing.

The question is … will Congress and President Trump/Biden reign in their prodigious spending after Covid-19 passes?

Here is my answer. Where are the Budget Hawks when we need them??

Fed’s Muriburiland: Fed Keeps Pumping Air Into Asset Prices (S&P 500, Commercial Real Estate)

“In the field of monetary and credit policy, precautionary action to prevent inflationary excesses is bound to have some onerous effects— if it did not, it would be ineffective and futile. Those who have the task of making such policy don’t expect you to applaud. The Federal Reserve, as one writer put it after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

William McChesney Martin, Speech to Investment Bankers Association of New York, October 1955

Perhaps The Fed removes the punch bowl in Muriburi Land, but The Fed certainly didn’t remove the punch bowl in the USA. The S&P 500 index and commercial real estate have both exploded with the perpetual punch bowl.

“We’re not even thinking about thinking about the consequences of our actions.”

Jerome Powell, Chairman, Federal Reserve

Apparently, Chairman Powell lives in financial Muriburiland.

Thanks to Jesse at Jesse’s Cafe Americain for the quotes!

Corona’d! Atlanta Fed GDPNow At -45.5% For Q2, M2 Money At $18.15 Trillion (Velocity Crash)

The US economy has gotten pummeled by the economic shutdown. The Atlanta Fed’s GDPNow measure of Q2 GDP is now at -45.5% with two weeks to go until the end of Q2. Note that The Federal Reserve has been expanding the M2 Money supply with a vengeance since the end of February.

M2 Velocity (Nominal GDP / M2 Money Supply) was at an all-time low at the end of Q1. The economic destruction caused by the Covid-19 related economic shutdown is epic.

On the positive side, the Philadelphia Fed is showing a V-shaped recovery.

On the down side, the trillions of monetary stimulus generated by The Fed has helped the S&P 500 index detach from corporate earnings. Or out of sync.

I could also say “Fauci’d”, thanks to our own Grim Reaper of the economy.

Fed’s Limbo Rock: Powell Rejects Negative Rates As A Policy Tool As Taylor Rule Suggests A Negative Target Rate Of -13.52%

Fed Chair Powell rejects using negative rates as a policy tool.

Speaking of Powell’s proclamation that negative rates are not appropriate for the US, the Rudebusch (SF Fed) specification of the Taylor Rule says that the Fed Funds target rate should be -13.52%.

That represents a spread of 13.77% over the current Fed Funds Target rate of 0.25%, the largest disconnect since 2000.

Apparently, Powell has gone as low as he will go.

Economists at the University of Chicago estimate that more than two-thirds of the workers on unemployment insurance are making more in jobless benefits than they did at work.  Some are even hauling in two to three times as much.

Margin Call! Dirt-Cheap U.S. Mortgages Thwarted by $5 Billion in Margin Calls (ETFs Next!)

As Ronald Reagan once said, “The most terrifying words in the English language are: I’m from the government and I’m here to help.” The same applies to The Federal Reserve.

(Bloomberg) — The Federal Reserve’s emergency rescue of the U.S. mortgage market should have set off celebration among lenders trying to keep up with demand from borrowers. Instead, executives at Quicken Loans got a hefty margin call.

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That was just a fraction of the pain the Fed unintentionally inflicted on lenders in mid-March when it announced plans to buy a massive amount of mortgage securities. The move, meant to steady the market, caught many lenders by surprise and tipped their routine hedges deep into the red.

It’s added to strains throughout the industry that have left the gap between mortgage rates and benchmark Treasuries the widest since 2009. Back then, bank failures and concerns about the housing market kept home loans from becoming cheaper for borrowers. Now, it’s obscure parts of the financial world that are holding back efforts to shave thousands of dollars from many Americans’ biggest expenses — their mortgages.

“The Fed came in trying to help, but they overshot,” said Phil Rasori, chief operating officer of Mortgage Capital Trading Inc., which says it handles hedging for about 20% of the mortgage market. He estimates margin calls initially drained as much as $5 billion from lenders before the Fed eased off, posing “an existential threat” to some nonbanks that operate on thin cash cushions, selling off loans as soon as they’re made.

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Mortgage lenders promise to lock in interest rates for borrowers weeks before loans are finalized, then hedge that risk by shorting mortgage-related securities. But the Fed’s buying drove up prices for those assets, turning the safeguards into sudden demands for cash. Quicken, among the largest U.S. mortgage lenders, met its obligations during the period, spokesperson John Perich said.

Then there was this headline: “New York Fed Says It Will Begin Buying ETFs in ‘Early May’”

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Is Jerome Powell really Sid Vicious? At least for Quicken.

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A tip of the hat to Jesse from Jesse’s Cafe Americain!