Yellen on the Titanic: Ed’s Daily Notes for March 18th   Leave a comment


Bloomberg: Fed Seen Adopting Qualitative Rate Guidance as Job Market Gains

The FOMC meeting starts today. Here is what to expect:

The Federal Reserve will probably discard its 6.5 percent jobless rate threshold while adopting qualitative guidance for signaling when it will consider raising the benchmark interest rate, economists said in a survey.

The Federal Open Market Committee tomorrow will say that it will link policy to a range of economic indicators, according to 76 percent of 54 economists in a March 14-17 Bloomberg News survey. Twenty percent of the economists surveyed said the Fed will maintain the threshold it adopted in December 2012, while 6 percent said it will drop such guidance entirely.

The problem with the Fed linking “policy to a range of economic indicators” is that it would take the Fed outside of it’s mandate, which is specifically inflation and unemployment. While logical, it leaves them open to political accusations of not following their mandate.

There is another aspect the Fed needs to look at:

Wall Street Journal: The Hidden Rot in the Jobs Numbers

Most commentators viewed the February jobs report released on March 7 as good news, indicating that the labor market is on a favorable growth path. A more careful reading shows that employment actually fell—as it has in four out of the past six months and in more than one-third of the months during the past two years.

Although it is often overlooked, a key statistic for understanding the labor market is the length of the average workweek. Small changes in the average workweek imply large changes in total hours worked. The average workweek in the U.S. has fallen to 34.2 hours in February from 34.5 hours in September 2013, according to the Bureau of Labor Statistics. That decline, coupled with mediocre job creation, implies that the total hours of employment have decreased over the period.

Job creation rose from an initial 113,000 in January (later revised to 129,000) to 175,000 in February. The January number frightened many, while the February number was cheered—even though it was below the prior 12-month average of 189,000.

The labor market’s strength and economic activity are better measured by the number of total hours worked than by the number of people employed. An employer who replaces 100 40-hour-per-week workers with 120 20-hour-per-week workers is contracting, not expanding operations. The same is true at the national level.

The total hours worked per week is obtained by multiplying the reported average workweek hours by the number of workers employed. The decline in the average workweek for all employees on private nonfarm payrolls by 3/10ths of an hour—offset partially by the increase in the number of people working—means that real labor usage on net, taking into account hours worked, fell by the equivalent of 100,000 jobs since September.

If the Fed is aware of this, they haven’t given any indications of it. In my view, this could create a situation like 2008, where the Fed was unaware that anything was wrong, and maintained their policy course in the face of growing catastrophe. It reminds me of this:

Titanic-redo(hat tip to Forbes for the pic)

Breitbart: Weak White House Sanctions Rally Russian Market

Good summary by John Nolte at Breitbart:

As I write this, President Obama is announcing a list of limited sanctions against specific individuals in the Russian government meant to punish them for “violating Ukraine’s sovereignty.” The idea is to go after the personal finances of top Russian and Ukraine officials, including the former president of Ukraine and members of Putin’s inner-circle. Putin, though, is not on the list.

Greg White, the Moscow Bureau Chief for the Wall Street Journal reports that news of the White House sanctions did not have the intended effect. Relieved over how limited they are, the Russian market enjoyed a rally…

This is just my opinion, but I suspect the U.S. market rally yesterday was based on similar thinking. Unfortunately, that is VERY short-term thinking. As Nolte points out, Putin is playing a long game. By responding so weakly, the West has enabled Putin to plot out his next move. I suspect he will finish with the Ukraine, then let things quiet down once more before he makes his next move. As long as he takes slow, measured steps, outside of the 4-day news cycle, he knows the West won’t do anything serious.

National Review: The Appeasement of Paris

While the rest of Western Civilization is putting sanctions on Russia, what is France doing?

French president François Hollande has already announced that “there will be sanctions Monday on visas and assets of a certain number of [Russian] individuals if there is no de-escalation.”

That’s nice. What else?

Three years ago, France signed a military contract worth $1.7 billion to build two advanced-technology Mistral-class helicopter carriers for Russia, with an option to build two more. The first carrier, Vladivostok, conducted its sea trials earlier this month and is set to arrive in Moscow later this year. A Russian crew is already being trained on the ship, currently berthed in the French port of Saint-Nazaire. A sister ship, Sebastopol — ironically named after the chief port of Crimea — is set for delivery to the Russian navy late in 2015.

…When asked last Friday at a news conference about the carrier contract, President Hollande replied, “As far as other sanctions, notably military cooperation, that is the third level of sanctions.” But as recently as a March 7 news conference (more than a week after Russia’s invasion of Crimea), Hollande appeared unwilling to touch the issue. The Voice of Russia reported:

France continues to comply with the terms of the contract and will supply Moscow with two Mistral-class helicopter carriers, French president François Hollande announced: “We keep to the terms of the signed contracts. Right now we have no plans to cancel them and we hope to avoid this.”

Is it any wonder that Putin doesn’t take the West seriously?


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