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Jake Van Der Kamp

Investors should circle July 15 on their calendars. That is the day United States Federal Reserve chairman Janet Yellen will give her semi-annual testimony to the House of Representatives financial services committee.
SCMP, July 6
 
Back in monetary pre-history when Janet Yellen’s predecessor, Ben Bernanke, first pushed US interest rates down to zero, he suggested that mid-2015 would be a target date for bringing them back up to a normalised level.
It is now seven days past the middle of 2015 and in another eight days we are to hear from the Fed chief whether this target, or anything even close to it, is likely to be met.
Don’t bother circling dates on your calendar. Nothing substantial will change, not on July 15, nor any time yet visible on the horizon. The Fed is caught in a trap of its own making and has already proved that it cannot unmake this trap and does not have the courage to do so in any case.
Thanks to our peg to the US dollar, this will mean no relief for younger prospective homebuyers
In Hong Kong, thanks to our peg to the US dollar, this will mean no relief for younger prospective homebuyers. They will continue to be priced out of the property market well into the future.
The essentials of the Fed trap can be made out from the chart showing a 60-year record of US federal funds rate, the Fed’s money tap for bankers that want money and don’t want to bid their customers for it.
From under 2 per cent in the mid-1950s it rose to over 19 per cent at one point in mid-1981 under tight discipline imposed by the last truly responsible Fed chief, Paul Volcker. From then on the trend was down and for the past seven years the fed funds rate has averaged less than an eighth of 1 per cent.
And now let us consider some other averages. Over those 60 years it has averaged 5.1 per cent, over the past 50 years, 5.6 per cent, and, if we measure that 50-year average as 25 years either side of the July 1981 peak, we get 5.8 per cent.
Let’s call it 5 per cent and say that this would be a normalised interest rate for the US economy. This is the short red line on the right side of the chart and it is obviously much higher than the market expects from the Fed, which is at most a 25 basis point increase from present levels, the green line.
If the Fed now imposes those 25 basis points you will hear plenty of commentary to the effect that quantitative easing (QE) is over at last, right on target and normal conditions have returned.
But no, normal conditions, meaning interest rates determined by the market with only an occasional directional nudge from the Fed, would be at least 400 basis points higher.
And if the Fed were to push rates even halfway there it would immediately send the entire US into a severe recession. A debt addicted Wall Street, which is back to the merger, buy-out and share buyback mania that led to its 2008 crash, would certainly crash.
The rest of the economy would then slow down, which would further depress financial markets, and Janet Yellen would be confronted with hordes of screaming speculators.
She would give in immediately. The Fed has done so on every occasion of even the slightest protest. The market even has a name for this pattern of Fed surrender to Wall Street – the Greenspan Put.
I doubt that she could even raise short term rates by 50 basis points, which is nothing. QE will continue with barely a tremor. The trap will stay shut. The Fed hasn’t the courage.
 


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US Federal Reserve

Forget normalised US rates, the Greenspan Put is here to stay

 Janet Yellen would be confronted with hordes of screaming speculators if rates were normalised. Photo: EPA

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.css-1m2rp1p{color:#34b8b5;}Jake's View | Forget normalised US rates, the Greenspan Put is here to stay

Jake's View | Forget normalised US rates, the Greenspan Put is here to stay