How do we know that Janet Yellen isn't holding down interest rates, as Donald Trump claims?

Factual Questions
1

Donald Trump is on record saying that Janet Yellen, chairwoman of the Federal Reserve, is keeping interest rates artificially low to boost the U.S. economy (and Hillary Clinton’s chances) in the run-up to the 2016 election.

The NY Times article I linked to above, asks a bunch of financial experts whether they believe that’s what Yellen is doing. But the NYT’s “argument from authority” approach isn’t as convincing as it could be.

What I’d like to know is this: Suppose the Fed is actually holding down interest rates. How would financial speculators detect that, and what market positions would they take to profit from the inevitable, post-election interest rate hike?

I think that the absence of that widespread speculation - the fact that Goldman Sachs and other banks worldwide aren’t stampeding to take those market positions - is a more convincing argument that the Fed is simply doing its job. I’d like to see it explained that way.

2

Clearly the rates are at historic lows. And have been for years. So in that sense they’re being held down versus historical practice.

The specific charge is they’re being held down these last few months for specifically political, not economic reasons.
Investors (large or small) who believe a significant rate rise is imminent would like to be selling or shorting current low interest rate bonds whose value will tank when rates are suddenly significantly higher.

Beyond that you get into more second and third order effects such as the effect of interest rates on oil prices, the Dow, etc.

The hard part of detecting the effect is you have to decide what date to consider your starting point and then to decide how the bond selling you’ve seen since then differs in your assumed scenario versus how it’d look in a different scenario where smaller rises occurred spread over a couple years per natural Fed actions vs. the economic cycle.

Bottom line: You (any you) are trying to see the difference between two sets of assumptions you pull out of your analysis or your anal[sub]ysis[/sub] as the case may be. It’d be real easy for somebody’s assumptions to cloud their analysis.

And what do you do if you discover e.g. Goldman is behaving like they believe your scenario #1 and Citigroup is behaving like they believe your scenario #2?
The data and calcs are far beyond me. But that’s how I see the issues surrounding the calcs.

3

If I have understood you correctly, Trump is complaining that Yellen is helping to boost the economy. Yes, she is and there is nothing secret about it. Most economists would agree that raising interest rates would hurt the economy. Why is what she is doing wrong?

A separate question is whether the recession that Trump is proposing would hurt her chances. It probably would, but so what? The main effect of the policy (which is not Yellen’s alone, although she doubtless has a lot of influence over the other governors) is to boost the economy.

4

The Fed doesn’t raise the discount rate until, in the view of a majority of Fed governors, the risk of inflation from delaying a hike outweighs the risk of killing the momentum of a recovery.

Since it’s a vote, it’s not technically true that she alone is holding down rates, although as the head, her own opinion certainly carries weight and it would be fair to say that she can persuade the outcome in either direction if it’s a close call.

The Fed would prefer to do nothing during an election year until after the election, that is pretty standard practice.

Trump isn’t offering any reason why a higher interest rate would be beneficial to anyone, he’s just adding Janet Yellen to the list of people who are against him as part of his general basket of bullshit and the Fed itself is part of the general right wing basket of bullshit.

5

Here’s the Consumer Price Index from the Bureau of Labor Statistics. If we use these numbers as our inflation numbers, and I’m not say they are, but if we did, then there’s no reason to suspect Janet Yellen of holding down interest rates solely to promote Hillary’s campaign. As the posters above are implying, Janet Yellen and the rest of the FED are just doing their job.

6

It seems like Trump is saying that the Fed’s role should be to tank the economy in order to help him get elected. The Fed’s actual role is to support the economy and manage inflation. Trump’s complaint seems to be that the Fed won’t deliberately destroy the U.S. economy to satisfy his preferences. I would suggest that no one else in the country should share Trump’s single-minded sense of entitlement that he be president regardless of the cost to other people.

7

The discussions of the governors of the US central bank are made public on the delayed basis. It has been apparent for over a year from these discussions that they are watching the data closely and they feel it is the close call. The conspiracy promotion of this Trump is just silly ignorance.

by the objective economic data, and particularly the inflation rates, the US central bank position on the rates looks completely data driven and rational as compared to other central banks decisions.

8

As I understand it, there’s a roughly 6 month period between when the interest rate is changed and the effect starts to be seen across the economy.

Assuming that statement is correct, anything that Yellen is doing today is irrelevant to the election.

9

The problem with keeping the interest rates at near zero is if the economy gets used to it and still begins to tank, you’ve used your big gun to boost the economy and now its empty. I also think they’ve used the low interest rates to boost the stock market. You can’t put your savings in a bank at less than 1%, so if you want to make money you have to put it in some market.

10

The interest rate in the U.S. is 0.5%. Compare that to

0.0% in the Eurozone.

4.35% for China.

-0.1% (that’s right, a negative interest rate) in Japan.

0.0% in Germany.

0.25% in the U.K.

1.5% in Australia.

And on and on. Unless there’s a whole bunch of national elections around the world that I haven’t heard about, the U.S. doesn’t seem particularly out of line.

11

Maybe. If the Fed raised rates 1% on a random Thursday the hysterical overreaction from bond traders and the stock market would reverberate around the world in seconds. Which in turn would feed into sentiment across the economy in a couple days.

To be sure, over the next moth or so the markets would mostly recover from their attack of the vapors. And, as you say, the real lasting effect on the real economy would show up only over a period of months.

But for darn sure there’d be a big impact on something as news-driven as an election in the next few weeks.

Not for a moment do I believe Trump’s nonsense here. But the idea that nothing the Fed might do could influence an election coming up soon is not IMO correct.

12

Those who want to make significant bets in the U.S. government bond market generally bet on long-duration bonds, I think. Just today, the long bond plummeted as Ms. Yellen wondered out loud if “temporarily running a high-pressure economy” could boost employment.

Nevertheless, with the 30-year bond still yielding only 2.56%, traders do not appear to anticipate Weimar-style hyperinflation. :rolleyes:

If you think interest rates will rise in 2017, there are other ways to profit than just selling bonds.

It seems cynical to assume that the main purpose of low interest rates is to cause a stock market bubble. Nevertheless, those who think interest rate rises are coming just around the corner should get out before it’s too late. :eek:

The FRB is struggling to keep the American economy afloat, to help your sisters and brothers find jobs. The cynical notion that the FRB is just part of a conspiracy to prop up stock prices is the sort of thinking which leads to confused choices by voters.

13

The sheer stupidity of Trump’s claim on this is mind boggling. The fed is doing it’s job correctly and appropriately, which is basically to smooth out dips and peaks in economy and help prevent another great depression (plus control inflation and the money supply).

Is Trump really suggesting the fed should do nothing the last year before an election in case it influences the outcome? or what is he suggesting?

14

Trump claims the Fed is keeping interest rates low to influence the election. He also says that unemployment is too high right now. He also says the economy will collapse as soon as the Fed raises rates.

Given all of this, what does he think the Fed should do? Raising rates would make unemployment worse, not better. Does he want the economy to collapse ASAP? Are his statements even consistent with each other?

15

It is a challenge as it is the typical tool, but there are other tools the central banks can use - the asset purchases are an example. But it is the case that in the economic policy, the longer term economic rebalance it is preferred that the fiscal side, that is the direct government spending, of preference in investment in the assets or the human capitals, attack. The pro cycle austerity programs of the past decade since the crisis have not proven to be effective policy - the policy idea and framework that has worked when a crisis was essentially a single country crisis broke down when it became the global crisis effecting all the big economies.

A lesson that there can not be one rigid reaction to a problem in the economic policy, but there must be thinking about the scale.

It is also a lesson that probably the obsession in the big developed country central banks with having the 2 percent inflation was an inflation objective that was one that was too low.

There was too much obsession with a false idea of a hyper inflation risk (warned about since 2008 and never arriving - not there is no such risk, it was not the real risk for the developed economies, the deadly deflation was and even now almost one decade later still is).

The central banks do not closely track or care much about the stock markets, which are too narrow to reflect the overall real economy of a country. That is why all the central banks that are well developed engage in the business surveys and developed the business statistics trying to track the real economy, not the transparent financialized economy. It is a major source of data, the Federal Reserve research in fact, if I want to look at the US economy. Not your stock markets.

They are very mediatised in the Anglosaxon world - and most greatly in the American medias - the stock market indices, but they are not the good economic indicators for the macro economic policy planning. They represent too narrow and too sector biased segments of the overall economy.

The entire point of the low interest rate environments has been that there is on the macro level too much of the savings, not enough of the investment and the consumption.

The central banks have a limited approach so the addressing of the stagnation on investment and the economic growth, which is a complex problem, only via the central bank will always have side effects not desired.

One of those is the hitting of the small saver on the savings account - although in most places the small saver bank accounts are not very important overall. It is the collateral damage.

I think it is just that most people globally have a very poor understanding of the workings of economies and they tend to grab a hold of some easy to follow symbolic number - the stock market is very popular for the Americans, like the Dow, although the Dow has so little to do with the actual macro economic health.

then since they do not understand better, they think that people in the Central Bank are following this same metric, and as it does not make sense to them, they invent stories to make it make sense…

In other places the story is different, but the mechanism of the story is similar.

16

Thanks kunilou - this is good.

So if I understand this correctly…suppose the Fed was somehow keeping the US interest rate artificially low. People looking for better returns could simply buy Australian or Chinese bonds. That would drive up the price of AUS/CHN bonds (thereby lowering their interest rates).

It should also lead to the US not being able to sell its own bonds, because better returns are available elsewhere. And that’s not happening, right?

17

To be clear the artificially low must mean ‘below the market equilibruim’ although a central bank can impact what that is on the margins.

Yes but you must understand the better returns to be the risk adjusted returns. The investors will be making the calculation of the trade off between the risk (which has the components of liquidity, market price, stability, etc.) and the nominal return.

If all things are equal, yes sort of (the US would have to accept lower prices of the bonds, it is unlikely to be ‘unable to sell’), although it is always possible that there is the secular increase in the demand for the government securities, so the US might not see a change. However the ratio of the price of the comparable sovereign bonds with the US would be observed to change, even if the US by the virtue of the demand did not see the direct price change.

In fact the reverse is seen with what happened with certain of the Eurozone sovereign bonds relative to the US dollar sovereign bonds.

So there is no market sign that the collective investment buyers think that the US Fed is making some substantial error at all.

18

You can directly see market risk neutral expectation of the Fed Funds rate in the future by looking at the Fed Funds futures traded on the CME, with contracts out into 2019, though most of the liquidity is in the first few.

The quotes work as for example Dec 2016 contract settled on Friday Oct 14 at 99.505, meaning a funds rate of (100-99.505)/100=.495%.

‘Risk neutral expectation’ is just the common jargon to distinguish the fact that we only know that buyers and sellers are evenly balanced (at a given moment) at a particular futures price. We don’t actually know that buyers and sellers objective expectation of the future Fed Funds rate is the same as rate implied by that futures price. In general the assumption is that actual market expectation of short term rates in the future is lower than what interest rate derivatives (like futures) prices imply, which is called a positive term premium. It’s not key to this discussion though.

The ‘strip’ of FF futures says the market generally expects an only gradual rise in the Fed Funds rate, and if compared to the Fed’s own estimate of the future FF rate the market doesn’t think the Fed will push rates as high or fast as the Fed says it expects to.

Re: Trump, it’s a fact that market prices give no indication of any expectation of sudden increase in the Funds rate after the election. OTOH the market doesn’t think Trump is going to win: it’s not clear from Trump’s accusation whether Yellen would supposedly keep trying to help President Clinton where she wouldn’t President Trump. Also just because the market doesn’t expect something from the Fed doesn’t prove the Fed doesn’t intend it. It’s also at least plausible the Fed could have political motives (ask yourself if you’d be so sure they couldn’t be true in case of Republicans on the committee or when one was a Chairman) but wouldn’t want to essentially admit them publicly by radically changing course on rates after an election. Finally, the two candidates could do different things in office (and Congress might cooperate with one but not the other to do anything much) which would give good reason for the Fed to raise rates more rapidly under that candidate than the other.

Like a lot of what Trump says it’s overwrought and lacking in evidence but it’s less clear it contains no kernel of truth whatsoever. Also as to the post above saying the Fed is doing exactly what it should, that’s definitely in the realm of opinion. Many highly knowledgeable people don’t agree, although many do agree, and many are ‘well on one hand…’ IOW it’s a matter of opinion.

19

Damn Obama and his Time Machine, keeping rates low since before he was elected in 2008 until present, just to help Hillary Clinton against Donald Trump!

Historic Rates Chart

20

How will these interest rate impact the opening of Avatarland? :stuck_out_tongue: