Aug. 23, 2019
Permission to republish original opeds and cartoons granted.
Trump is not wrong about interest rates and the strong dollar, but does the Fed have any ammunition to do anything about it?
President
Donald Trump is not wrong. Relative to other countries, interest rates in the
U.S., as low as they currently are, are higher relative to our trading
partners. And the federal funds rate at 2 percent to 2.25 percent is well above
the 10-year treasury and have been inverted since May and so has the 10-year,
3-month treasuries spread. In the meantime, the U.S. dollar versus the Chinese
yuan and the euro remains quite strong, making exports to the U.S. much
cheaper. But even if it started aggressively cutting rates right now, can the
Fed really do much about it? We were at near-zero percent on the federal funds rate and did
trillions of dollars of quantitative easing during the Obama administration and
growth was still tepid as we lost market share to China.
Cartoon: The Three R’s
Russia, racist, recession: What will
Dems come up with next?
Video: Trump ends China's rare earth monopoly as Pentagon moves to build up processing in the U.S.
President
Trump is ordering the Pentagon to boost rare earth mining and processing
capabilities in the U.S. and it’s about time.
Fake news: Marketwatch and Drudge are wrong, 500,000 jobs not lost in 2018, the economy created 2.2 million jobs last year
You
might have noticed some alarmist reporting from Marketwatch and the Drudge
Report implying the economy lost 500,000 jobs last year. “JOB GROWTH
REDUCED BY 501,000,” reported Drudge, linking to a Marketwatch report that was
headlined, “U.S. created 500,000 fewer jobs since 2018 than previously
reported, new figures show.” Overall, the economy created 2.2 million jobs in
2018 if you look at the household survey, which matches the new estimate in the
establishment survey.
Oilprice.com: U.S. is now largest oil and gas producer in the world, EIA says
“Petroleum
and natural gas production in the United States jumped by 16 percent and 12
percent, respectively, in 2018, setting new production records and placing the
United States as the world’s single largest producer of oil and natural gas,
the Energy Information Administration (EIA) said on Tuesday. The U.S. had
already surpassed Russia as the world’s biggest natural gas producer back in
2011. Last year, the United States beat Saudi Arabia to become the single
largest petroleum producer, the EIA said, noting that ‘Last year’s increase in
the United States was one of the largest absolute petroleum and natural gas
production increases from a single country in history.’”
Trump is not wrong about interest rates and the strong dollar, but does the Fed have any ammunition to do anything about it?
By Robert Romano
Treasury yields flashed warning signs again with intraday inversions of the 10-year and 2-year treasuries as President Donald Trump blasted the Federal Reserve once again for acting too slowly to lower interest rates.
“Germany sells 30 year bonds offering negative yields. Germany competes with the USA. Our Federal Reserve does not allow us to do what we must do. They put us at a disadvantage against our competition. Strong Dollar, No Inflation! They move like quicksand. Fight or go home!” Trump tweeted on Aug. 22.
Here, Trump is referring to overseas government bonds, such as Germany and Japan, that are both trading in negative territory at the moment. He has previously called for the central bank to lower its key interest rate 1 percentage point to a range of 1 percent to 1.25 percent. Although not quite negative, it would be getting close.
Trump is not wrong. Relative to other countries, interest rates in the U.S., as low as they currently are, are higher than those of trading partners. And the federal funds rate at 2 percent to 2.25 percent is well above the 10-year treasury and have been inverted since May and so has the 10-year, 3-month treasuries spread. In the meantime, the U.S. dollar versus the Chinese yuan and the euro remains quite strong, making exports to the U.S. much cheaper.
But even if it started aggressively cutting rates right now, can the Fed really do much about it? We were at near-zero percent on the federal funds rate and did trillions of dollars of quantitative easing during the Obama administration and yet, growth was still tepid as we lost market share to China. The Fed supposedly runs monetary policy but exchange rates is not something it appears to focus on. It probably should.
As for Trump’s comparison to Germany and Japan, negative rates are not a positive economic indicator. Just as high interest rates signal inflationary environments, negative rates occur in deflationary environments, with slow or no growth. If rates are about to go negative, then Trump is absolutely right, the dollar is too strong relative to other currencies.
Whether the Fed could weaken the dollar sufficiently with interest rates cuts and open market operations to cure overseas competitive devaluations is a really great question. But I don’t think so. I think that when it comes to the dollar being too strong, the Fed is basically out of ammunition. That’s something we need to work out via diplomacy and some sort of international monetary accord, perhaps as part of a trade agreement such as the one currently being negotiated with Beijing. I have suggested barring currency manipulators like China from treasuries markets as a potential penalty, but such a drastic move carries a lot of risk in terms of disrupting financial markets and would carry further repercussions in terms of U.S.-Chinese relations.
The conundrum is this: How do you weaken the dollar when it's the world's reserve currency and everyone piles it up like it's gold, and what's more, everyone has an incentive to do so because it makes their exports cheaper?
That said, I understand and appreciate the President’s frustration with the Fed. When it comes to economic conditions, arguably, because the Fed waited so long to hike rates from its near-zero percent levels after the financial crisis and Great Recession — the first hike did not come until Dec. 2015 and the full normalization not until after the 2020 elections beginning in Dec. 2016 — it has very little room to maneuver for the next recession.
If the Fed had hiked rates sooner, say starting in 2014 and 2015, it seems likely the recession would have already occurred. Were the rate hikes forestalled until after the 2016 election? Was it politically timed to help the incumbent party at the time? I think those are fair questions.
Either way, with so little room left to maneuver, we’re in zero-bound territory and we could be about to test negative interest rates in the next recession when it does come, and all of the perverse incentives they might create as borrowers including governments get paid interest to borrow at negative rates.
And in terms of rate cutting, the Fed waited until after its own rate had inverted with the 10-year treasury, finally moving rates down on July 31, but not by enough to cure the inversion. Now, whether those inversions could have been avoided is an interesting proposition. Hypothetically, it could have eased earlier this year.
In fact, Trump has been pointing to the relatively higher interest rates since Oct. 2018, when he told the Wall Street Journal, “I’m very unhappy with the Fed, because Obama had zero interest rates and I have almost normalized—and maybe normalized, depending on who you’re talking to—interest rates. You give me zero interest rates and you show me my numbers with zero interest rates.” Was the President ahead of the curve?
Leaving that aside, in theory, the Fed could cure its own interest rate inversion now by dropping its rate toward zero, but it’s worth noting that the Fed tends to ease as we get closer to recessions and that it cures its inversion as we enter the recession. It might want to see the 10-year, 2-year fully invert before it fully moves in that direction. Meaning, once the Fed cures its inversion, that may not be a really good signal.
So maybe the President should be careful what he wishes for. On the other hand, could doing the Fed ending its own inversion now by cutting rates help avert a recession? It’s easy to see why the President would be concerned.
Now, there is some talk that, somehow, interest rate inversions, which occur like clockwork prior to recessions, were themselves the cause and not merely a prediction of a recession, that they become some sort of self-fulfilling prophecy. I don’t buy into that since every recession in recent history you can look at included some inversions as a flight to safety occurred, and business cycles being what they are, nothing lasts forever.
Either way, it is clear that we are nearing the end of the business cycle. Right now, the economy is strong, coming off its strongest growth since 2005 and a record low 3.7 percent unemployment rate. Once the 10-year, 2-year fully inverts, you might expect a recession about 16 months later on average, which might put it in Dec. 2020 if it were to happen right now, after the election, if that’s what you’re wondering about.
But it could be sooner. If so, a good question might be whether the central bank timed its own rate hiking after the 2016 election so that a recession would occur just as voters were headed to the polls in Nov. 2020. Were they out to get Trump? We’ll find out soon enough. Stay tuned.
Robert Romano is the Vice President of Public Policy at Americans for Limited Government.
Cartoon: The Three R’s
Click here for a higher level resolution version.
Video: Trump ends China's rare earth monopoly as Pentagon moves to build up processing in the U.S.
To view online: https://www.youtube.com/watch?v=yr6XfLo5ZgY
Fake news: Marketwatch and Drudge are wrong, 500,000 jobs not lost in 2018, the economy created 2.2 million jobs last year
By Rick Manning
You might have noticed some alarmist reporting from Marketwatch and the Drudge Report implying the economy lost 500,000 jobs last year.
“JOB GROWTH REDUCED BY 501,000,” reported Drudge, linking to a Marketwatch report that was headlined, “U.S. created 500,000 fewer jobs since 2018 than previously reported, new figures show.”
But these headlines are quite misleading. It’s fake news.
Overall, the economy created 2.2 million jobs in 2018 if you look at the household survey, which matches any new estimate in the establishment survey that might be derived from routine benchmark adjustments by the Bureau of Labor Statistics to population estimates.
The unemployment data we get every month is based on two surveys, one of households and the other of businesses, to determine who is working and where they are working. As part of those surveys, the Bureau of Labor Statistics annually revises their datasets based on more complete information that comes in later.
This is a part of the normal comings and goings of the agency, and it is irresponsible for Marketwatch and Drudge to ring alarm bells when they should know better. These survey revisions do not change whether people have jobs or where they have jobs in the aggregate, it changes the assumptions that are made in the survey, and they certainly do not show job losses.
It is normal for the Bureau of Labor Statistics' to revise the benchmarks for the non-seasonally adjusted establishment employment survey, modifying the assumed population levels from the initial survey, which then gets finalized the following year and the data smoothed out across the dataset into its reported seasonally adjusted form.
For example, for the March 2018 revision, the preliminary estimate showed the establishment survey had 43,000 more jobs than initially reported, but by the time the survey was finalized, it ended up showing 16,000 fewer jobs than initially reported.
The worst scenario from these standard revisions, assuming the preliminary estimate holds, would be to simply bring the establishment survey more in line with the household survey, both which are really, really good, showing the Trump economy has produced about 5.2 million jobs since Jan. 2017 instead of the 5.7 million initially reported in the establishment survey. Instead of producing 223,000 jobs a month in 2018, it might have instead produced 185,000, but we’ll find out for sure in February when the final number is posted.
Overall, the economy created 2.2 million jobs in 2018 if you look at the household survey, which matches the new estimate in the establishment survey.
That doesn't mean we lost any jobs and Marketwatch and Drudge's click-bait headlines to the contrary do their readers' a disservice.
In fact, 2018 produced the strongest economic growth reported since 2005, and unemployment seen during the Trump administration is the lowest it has been in the past 50 years, and pending a reversal, those are the numbers the American people will be considering as the 2020 presidential cycle nears.
Rick Manning is the President of Americans for Limited Government.
ALG Editor’s Note: In the following featured report from Oilprice.com, the U.S. is now the largest producer of oil and natural gas in the world according the U.S. Energy Information Agency:
U.S. is now largest oil and gas producer in the world, EIA says
By Tsvetana Paraskova
Petroleum and natural gas production in the United States jumped by 16 percent and 12 percent, respectively, in 2018, setting new production records and placing the United States as the world’s single largest producer of oil and natural gas, the Energy Information Administration (EIA) said on Tuesday.
The U.S. had already surpassed Russia as the world’s biggest natural gas producer back in 2011.
Last year, the United States beat Saudi Arabia to become the single largest petroleum producer, the EIA said, noting that “Last year’s increase in the United States was one of the largest absolute petroleum and natural gas production increases from a single country in history.”
While Saudi Arabia is bound by the OPEC+ production cut pact and has been curbing its oil production, eager to prop up prices, U.S. shale production has surged over the past two years, also supported by the higher oil prices that the OPEC deal has brought.
Crude oil production in the U.S. jumped by 17 percent in 2018, setting a new production record of almost 11.0 million bpd, with the Permian contributing to most of the production growth, the EIA said.
This year, however, the U.S. shale production has been growing at a slower pace amid lower oil prices as companies scale back drilling plans and budgets as investors clamor for more returns.
U.S. shale producers need to slow down this production growth and focus more on capital discipline in what is an oversupplied market, Continental Resources’ Harold Hamm said last week.
In its latest Short-Term Energy Outlook (STEO) earlier this month, the EIA sees U.S. shale’s monthly production growth slowing at least until 2020, averaging 50,000 bpd a month from the fourth quarter of 2019 through the end of 2020, down from average growth of 110,000 bpd a month from August 2018 through July 2019. Despite the growth slowdown, the EIA still expects U.S. crude oil production to set record production levels in 2019 and 2020, at 12.3 million bpd and 13.3 million bpd, respectively.
