Wednesday, Dec 16, 2015

It's happened

BBC: Fed raises interest rates

Everyone knew this was a done deal but we are awaiting the accompanying language

Posted by judgandury @ 07:16 PM (9935 views)
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1. hpwatcher said...

I'm not sure they had any choice, although the data in the bigger picture is looking pretty dreadful.

Any thoughts Libby? You are our ZIRP / NIRP bull

Wednesday, December 16, 2015 07:29PM Report Comment

2. judgandury said...

OK, so we now know that it was unanimous. Their language along with their just increased growth forecast suggests that they expect another two or three rate rises next year.

Wednesday, December 16, 2015 07:59PM Report Comment

3. khards said...

Whoo hoo, so what happens next? I guess they are simply showing the markets that they still have some credibility.
On the other hand there is a massive unsecured consumer credit boom underway in the car industry. Can't see that it's spreading yet, perhaps the rate hike is to help cool that.

Wednesday, December 16, 2015 08:34PM Report Comment

4. mountain goat said...

Historic. Even though this had been widely anticipated (if you look at the recent jump in 1yr US Treasuries for example), personally I am surprised it went ahead in the face of commodity price falls and China slow-down.

So when does the UK start? Summer 2016 maybe?

Wednesday, December 16, 2015 08:34PM Report Comment

5. judgandury said...

mountain goat, the BOE are looking at something called NAIRU - the non-accelerating inflation rate of employment. In simple terms it is when we have effective full employment. It is currently calculated at 5% in the UK and we are approaching that now at 5.2%. When we reach NAIRU there is usually a notable upward pressure on wages which in turn causes inflation. Interest rate rises have a lagged effect, so they always prefer to slightly front run NAIRU. At the moment we have very low inflation which mitigates their concern about NAIRU but just like the Americans, the BOE has a careful eye on what will happen when the initial oil price drops fall off the chart. The Americans have reached NAIRU and their core CPI increased 2% last month, so they were the first to hike their rate. When our unemployment rate falls another 0.2%, even a hint of inflation picking up will trigger a rate rise here.

Wednesday, December 16, 2015 09:36PM Report Comment

6. hpwatcher said...

It's lovely seeing the Fed raising IR's going into a recession.

I look forward to seeing the Treasury yields rising inline with interest rates......hahahahahahahahahahahahahahahahah

Thursday, December 17, 2015 08:09AM Report Comment

7. libertas said...

Interesting. The last bank to tighten, the ECB, had to slash afterwards. Yellen has said she was surprised at oil price falls, so it will be interesting if oil prices collapse to $20. Indeed, the dollar squeeze, I.e. The additional cost of borrowing dollars to buy oil caused by the proposed four further tightening so this year could precipitate further oil price falls that could in turn result in deflation in America and negative rates in the u.s.

Yellen is raising rates for America, but could the global situation make that a bad decision?

Bigger question for us is whether it will provide the Bank of England confidence to boost rates here? Fixed rate or variable?

Thursday, December 17, 2015 08:16AM Report Comment

8. hpwatcher said...

Yellen is raising rates for America, but could the global situation make that a bad decision?

We don't yet know how the increase will be reflected in the real world. Perhaps this rise will be largely ignored. We will have to see.

There are still massive movements in Bonds, seemingly inexplicable..

Thursday, December 17, 2015 08:26AM Report Comment

9. mountain goat said...

Well as judgandury explained it seems the crystal ball is now NAIRU not oil or bonds. Time to study what this NAIRU is, although at a first glance the devil seems to be how they come up with 5% unemployment as "effective full employment"

Thursday, December 17, 2015 09:09AM Report Comment

10. hpwatcher said...

The Americans have reached NAIRU and their core CPI increased 2% last month, so they were the first to hike their rate. When our unemployment rate falls another 0.2%, even a hint of inflation picking up will trigger a rate rise here.

I wonder how the 94 millions US citizens out-of-the-work-force, are represented in that cosy little formula?

Thursday, December 17, 2015 09:45AM Report Comment

11. nickb said...

I'm calling BS on the NAIRU. Nordic economies sustained near full employment without rampant inflation for decades with active labour market policies (job sharing) right through the period neoliberal governments pretended they could do nothing to interfere with the holy market for fear of unemployment. Hiding behind their obscurantist facade of the NAIRU. It's politics not science.

Thursday, December 17, 2015 10:45AM Report Comment

12. nickb said...

for fear of inflation that is...

Thursday, December 17, 2015 10:46AM Report Comment

13. mombers said...

The 5% minimum unemployment thing has always really bothered me. If policy is to deliberately keep people out of work, why don't we have a much more generous welfare system to compensate them? Even if you have 6% unemployment, how do you differentiate between the 5% who have to take one for the team and sit on the bench and the 1% who shouldn't?

Thursday, December 17, 2015 10:59AM Report Comment

14. judgandury said...

mountain goat, by now you will probably have learned a few things about NAIRU. As a side issue, one interesting thing about it is that the blogshere is largely ignorant of its existence. It certainly seems that very few people here had heard of it and yet it is well known to any and all economists and analysts. In the UK it is worked out by the Office of Budget Responsibility. Knowledge of its existence and currently calculated level (it shifts) is perhaps why market participants were certain of the Fed rate rise and the blogshere was not. Be aware though that it is not the only metric used for these purposes and I am willing to bet that most of these metrics (and particularly their calculated levels) are also not well known to the blogshere. For clues on the timing of our rate rise, keep your eye on UK unemployment reaching 5% and on the core inflation rate reaching 1.8%

Thursday, December 17, 2015 11:16AM Report Comment

15. judgandury said...

mombers, don't shoot the messenger but effective full employment (in economic terms) means that almost everyone who wants a job can get a job. What it doesn't mean is that people can always get precisely the job they want. Think about it this way - have you ever heard of an immigrant not finding some kind of work here? They more or less all do which is why we are a preferred destination. You are wrong to infer a policy from it, let alone one where people are deliberately kept out of work.

Thursday, December 17, 2015 11:26AM Report Comment

16. latterdaysinner said...

The debate on the NAIRU or the natural rate of unemployment was largely settled by the 1980s. I think everyone in the economic profession bar the most die hard Keynesians agree that it exists but the problem is that it's bloody hard to estimate and it can go up and down over time, making it a near-useless tool for targeting monetary policy. If structural change in the economy makes a profession redundant (say coal mining), the NAIRU increases because marginal increases in wages for the second best profession for redundant coal miners (say warehouse general staff) will not persuade them back into the workforce.

It's useful to know when policymakers are targeting a certain rate of unemployment as a guide to their actions. I just wouldn't expect them to get it right, it's a big ask.

Thursday, December 17, 2015 12:43PM Report Comment

17. mountain goat said...

I am usually the first to rant about Central Banks but pleased in this case with NAIRU being used as part of the equation to predict inflation and determine interest rates. It makes sense to use the slack in the labour market for the state of the economy. The price of bonds, shares and commodities, reflect global, not local, supply and demand (and are subject to market manipulation). In our economy costs are largely driven by wages. Just think about how much a cup of coffee costs made in your own home versus Starbucks. Even our coffee at home costs what it does because someone has to grow, harvest, transport and sell it. It's mainly about labour costs, although sometimes there are natural shortages due to drought etc.

Now if they would only include housing costs in their inflation measures I would be even happier.

Thursday, December 17, 2015 12:51PM Report Comment

18. mombers said...

@15 My understanding is that if unemployment gets too low, people start asking for higher wages and a wage - price spiral comes into force. So how do you stop this unless you put brakes on the economy to bump some people out of work so that wages are competed down? All I'm saying is that there are victims of this policy. Luckily we do have a reasonable welfare system so people don't exactly starve but this is being eroded and of course it introduces the perverse situation where the low skilled who want to work face marginal tax rates of close to 100%, which don't leave enough left over to pay for transport costs, childcare, etc.

Thursday, December 17, 2015 01:39PM Report Comment

19. judgandury said...

I am a bit surprised by the emotions being stirred up by NAIRU. It is just a metric, nothing more.

It exists because bald unemployment numbers do not predict wage inflation as well as nuanced unemployment numbers. For example, if previouly disinterested people are motivated to join the workforce it might produce an unemployment number that is identical to an economic scenario where, for whatever reason, people prefer to sit on their hands. The unemployment numbers might be the same for both situations but the implications for fiscal policy are quite different. There is no political or emotional significance to it. It is just sensible to look under the hood of unemployment numbers to get a bit more out of them than bald numbers.

Thursday, December 17, 2015 01:40PM Report Comment

20. judgandury said...

mombers@18. The idea of 'bumping people out of work to control inflation' does not exist in the economic lexicon. The idea behind putting interest rates up is to make borrowing more expensive and thus to reduce demand getting out of hand. That does not put anyone out of work. The idea is to curtail an accelerating need for more recruitment (caused by excessive demand) where there is no longer a sufficient supply of labour. Exchange rates and their effect on prices is also a (secondary) consideration in the rate setting process. Interest rates have a lagged effect so yesterdays rise does not infer than they are trying to control today's demand/recruitment. The new rate is still very accommodative

Thursday, December 17, 2015 02:18PM Report Comment

21. Alan Lubin said...


I looked into the costs of opening a coffee shop. The rent was the killer in London as i would have needed to sell 20,000 cups of coffee just to pay the landlord.

Thursday, December 17, 2015 10:32PM Report Comment

22. stillthinking said...

"Rising unemployment and the recession have been the price that we have had to pay to get inflation down. That price is well worth paying.""
- Norman Lamont, Chancellor of the Exchequer. 16th May, 1991

Friday, December 18, 2015 03:00AM Report Comment

23. judgandury said...

Nice historical sound bite but no real relevance.

Lamont's/the Tory response to the previous administrations IMF bailout, 24% inflation, the winter of discontent and rolling blackouts was to destroy the unions and shut down swathes of our industry. It was this fundamentalist purge that caused 'Lamont's' rising unemployment. The base rate was 17% in the year Lamont's crew came to power and never got that high again, so we can't really claim any role for interest rates in 'curing' the inflation Lamont was referring to in that quote. There is no real commonality between Lamont and co's fundamentalist purge and the Fed's and BOEs current use of monitoring metrics.

Friday, December 18, 2015 07:29AM Report Comment

24. judgandury said...

I've been thinking about the "pitchfork" response to NAIRU, from some posters and I think that maybe it needs a more digestible explanation.

So, I'm going to try to distil it down to it's essence: -

Nairu makes the assumption that the number of people out of work should be small. If the number is not small then it tells the BOE/FED that their macroeconomic policy is not working and they adjust it accordingly. That's it really. On most charts, NAIRU spends most of the time below the actual unemployment rate so there are not many times when it could reasonably be accused of curtailing job creation.

It also has to be stressed that it's just one of several major tools. For example the BOE won't hike rates when we reach NAIRU if inflation projections do not give cause for concern. Every major central bank in the world uses NAIRU and the Japanese are a good example of how it is almost never used to curtail job creation. Japanese unemployment has often been below NAIRU but rates remain accommodative because NAIRU is not the only tool used (it never is). Another example is this FED rate hike we are discussing. If NAIRU was used exclusively and literally then rates would have returned to 'normal' in one big lump. The fact is that even though they have reached NAIRU before us AND their CORE inflation is higher than ours, they still wont return rates to normal until 2017 ish. In other words, more employment will be encouraged by accomadative policy for a considerable lengthg of time after NAIRU has been reached.

I hope that puts it into context.

Friday, December 18, 2015 09:21AM Report Comment

25. mombers said...

@23 out of interest, since Japan has struggled with deflation for decades, shouldn't NAIRU have been lower than actual unemployment, i.e. unemployment still too high to cause wage-price inflation? I might be misinterpreting of course, not taking a pitchfork by any means...

I've no problem with NAIRU if unemployment is increased by maybe drawing economically inactive people into the figures, i.e. not suppressing recruitment or manipulating the labour market into employing fewer people. My personal opinion is that inflation targeting has a mixed record - massive asset bubbles stoked with artificially cheap money repeatedly over the last few decades. Contemporary economics is really having a hard time explaining recent events and proposed remedies have had mixed results.

Friday, December 18, 2015 11:30AM Report Comment

26. judgandury said...

People often say things like "contemporary economics is really having a hard time explaining recent events". To some extent this is the fault of egomaniac economists who like to paint themselves as having way more power to influence events than is actually possible. On the other hand how do people feel qualified to say something like the above, if they are not an economics expert with a deep understanding of its concepts, scope and reach? Absolutely no disrespect intended to mombers because he is only saying what thousands of other people have said but how would a normal person know whether or not economics can explain something, if they don't know that much about economics?

In a vacuum economics could prevent or remedy almost any economic situation but it cannot and does not exist in a vacuum. Economics cannot cure or prevent human greed, wars, disease, sexual desire, geographical constraints, natural resource paucity or wealth, earthquakes, racism, fear, self destructive tendencies, the rise and fall of charismatic leaders and hypnotic despots, cultural characteristics, changing weather patterns and so on.

Japan is often painted as some sort of paradox that defies economic convention but that is not true. Japan's economic predicament is in fact readily explainable (although it should be acknowledged that they are one of the richest nations on earth).Their predicament has not persisted because of a failure of economics. Rather it has persisted because of a demographic and cultural characteristics and intransigence (amongst several other things). They can not do what it takes because what it takes is mostly unacceptable or alien to them.

Regarding the Japanese NAIRU contradiction that you perceived. There is actually no contradiction because broadly speaking there are three distinct types of NAIRU used. There is unadulterated NAIRU, the short-term NAIRU and the long-term NAIRU (which largely relates to the equilibrium rate of unemployment). The all have different time frames and very different implications for macroeconomic policy.

This is a big, big subject so I will have to over simplify to some extent. The concept and use of NAIRU has evolved such that recent estimates of it still focus on an unemployment rate consistent with a private consumption deflator but now there is a distinction made between the long term NAIRU and the short term NAIRU (which is bucked around by factors such as our recent oil price falls). So in relation to your question about Japan, economists no longer think that there is a long-term trade off between inflation and unemployment. They instead think that long run unemployment depends on structural variables (hence the contradiction you wrongly perceived) whereas inflation is a monetary concern. There is now also a consensus that NAIRU derived macroeconomic stimulus cannot on its own permanently reduce unemployment but that in the short term if unemployment falls below NAIRU, inflation will rise until unemployment returns to the NAIRU. At that point inflation will stabilise at a permanently higher level. In other words short-term improvements in unemployment relative to NAIRU that derive from stimulative policy will be reflected in progressively higher rates of inflation. Temporary supply shocks (eg oil) are typically those which are expected to revert to zero over the horizon of two years. Such temporary shocks may change the rate of inflation, at any given rate of unemployment, but the NAIRU will be unaltered once they have passed. On the other hand, a long-lasting supply shock (for example demographics,etc.) may permanently alter the NAIRU, so that inflation will rise or fall until such time as unemployment alters. With evolved NAIRU, under certain circumstances the level of unemployment can sometimes exert no influence on inflation, although inflation is affected by the rate of change in unemployment.

I've only scratched the surface above but hopefully you can see why I'm bemused by some of the attitudes to the use of NAIRU. Surely something has to be understood before it can be criticised? The fact that the worlds main central banks and their armies of top analysts use it should make people realise that it is taken seriously by the best and brightest. Sure you'll find an article or three going on about how bad it is but quite frankly you could also find a book or three claiming that Elvis is still alive. More importantly, knowing of its existence and its currently calculated levels helps us to understand what the BOE/FED will do next

Friday, December 18, 2015 03:16PM Report Comment

27. judgandury said...

Good example of what I said last week about how some so called respected people are actually perceived at the sharp end.

Just a few seconds on from 17:03:15

Friday, December 18, 2015 06:12PM Report Comment

28. libertas said...


When Britain offers unlimited access to its jobs from the entire European sub-continent and beyond, NAIRU would be an infinite number of jobs, curtailed only by the physical ability to house said people. Everybody is looking from the context of the last great recovery, post 1992, when we still had strong border controls. So the theory is right but the context has changed.

Today it came out that over 2 million NIS Numbers have been issued to Europeans, when they officially counted 700k. Numbers massaged on purpose to not make Cameron look bad, and so Cameron would have directly ordered this. Clearly, another 2 million will come the next 4 years if we can create as many jobs, and the situation on the continent is farcical, so this only goes into reverse when continental Europe accelerates beyond us, but with Sterling here and the currency being that much more valuable, the allure will be that London is paved with silver, yet it is Sterling.

Friday, December 18, 2015 11:02PM Report Comment

29. mister ed said...



Saturday, December 19, 2015 01:41AM Report Comment

30. tenyearstogetmymoneyback said...

23. Observation on Japan

Firstly let me say this is not intended as a criticism of the Japanese way of doing things and is based on only one visit to Japan ten years ago.

One of the most surprising differences between Japan and a Western economies was the number of workers we saw doing jobs that wouldn't exist over here. For example every hotel seemed to have a least one person out at the front, usually in a very elaborate uniform, to guide vehicles arriving to the designated parking places. Similarly with building sites there would always be a couple of older men outside to stop people on the pavement and guide in a lorry when one arrived.

I suppose the point I am tying to make is that there doesn't have to be much link between employment levels and productivity.

Saturday, December 19, 2015 08:22AM Report Comment

31. clockslinger said...

Libby at 7. Agreed. Couplle of months and Janet will bring on NIRP in US (unless the machines keeping buying on the basis everything- rate increases, Turkey shooting down Russian jet, falling PMI- the kind of things that would make humans think all might not be so awesome) as good news for equities.
Ten years @ 29, I seem to recall one attempt to raise rates back in the early 90's in Japan. Worked like a charm, of course!

Saturday, December 19, 2015 02:47PM Report Comment

32. pete green said...

For me one of the biggest issues in economics is de-linking the relationship between interest rates and money supply. In this way interest rates can vary for other reasons but do not influence overall money supply. Which seems as one of the fundamental problems in our economy. Money could be created through a central government function & loaned to banks and spent directly by government in lieu of taxation. Of course this would take away the ability of private banks to create that money supply (I am sure this is much more complicated in the finer points). Thus interest rates set by a central bank can be used for as a finer economic tool for controlling other economic issues.

Saturday, December 19, 2015 04:20PM Report Comment

33. libertas said...

Pete, interest rates refer not to money supply, but to the time preference of money in Austrian economics, i.e. with low rates there is a short time preference and it gets spent faster.

Sunday, December 20, 2015 10:45AM Report Comment

34. libertas said...

tenyearstogetmymoneyback said...

"One of the most surprising differences between Japan and a Western economies was the number of workers we saw doing jobs that wouldn't exist over here."

The West had that too, before it began taxing marginal low paid jobs out of existence with ironically, national insurance, that is supposed to help the poor.

Sunday, December 20, 2015 10:47AM Report Comment

35. quiet guy said...

I occasionally keep an eye on the 'Daneric' blog which Techieman used to refer to when he was a regular poster. Daneric recently asserted a causal effect between short term US Treasury yields and US interest rates:

Elliott Wave Update ~ 17 November 2015
"the Fed follows the market, they do not set them. The 3 month yield is the highest it has been in 5 years and that is significant. I estimate that the Fed will have to hike rates by at least an 1/8 point if the 3 month yield moves toward .25. They will be "muddled" if it hovers around .15 - .22 by the time of December's rate hike decision. In any case, the Fed may hold off one more rate hike decision based on where the 3 month yield is in a few weeks, but the market is going to force their hand sooner or later because the 6 month count is pointing up."

Elliott Wave Update 8 December 2015
"Yields on the move. 3 month is above .25 which should be the threshold trigger for raising rates."

Elliott Wave Update ~ 16 December 2015
"The 3 month yield had been above .25% so the Fed was able to raise rates which is what I had predicted the 3 month yield needed to be at before they would raise rates."

Is the alleged causation a real thing? If so, do gilts short term yields give us any clues when the BoE will start inching up rates?

Sunday, December 20, 2015 01:20PM Report Comment

36. judgandury said...

No, it's not a real thing. The 3 month yield is a reflection of investor confidence. These investors look at the exact same metrics and survey data as the Fed, so it would be more accurate to say that they increased for the same reasons. When they made the above predictions on the 8th and 16th absolutely everyone remotely connected to the finance world knew that the Fed hike was a racing certainty. It's perfectly valid to look at 3 month yields for clues but there is no causal relationship. It's the data that causes the move.

Sunday, December 20, 2015 03:16PM Report Comment

37. mombers said...

The 3 month prices in the chances of a rate hike I think. If it didn't, when the announcement was made, yields would jump or fall on the day and there would be a killing to be made. The more certain the markets are that an increase is on the cards, the closer the 3 month will be to what the boffins in fixed income think it should be...

Monday, December 21, 2015 09:22AM Report Comment

38. libertas said...

Quiet Guy. Judge and jury is totally wrong. Central Banks ABSOLUTELY follow rather than lead the market. Just look at how the yield curve led interest rate cuts during the 2008 crash.

All of the press conferences, meetings and statements from central bankers are a CONFIDENCE GAME to provide the public the ILLUSION that the Central Bank is in control. In reality, their role is simply to deflect trends for the government and other vested interests. They essentially run a propaganda confidence game to maintain confidence but even the Fed has no control over global capital flows that vastly dwarf their influence and power.

The economy is a self regulating organism without a rudder. That is the true scary thing nobody will admit to.

Monday, December 21, 2015 10:19AM Report Comment

39. judgandury said...

The question was: is there a causal relationship. My answer was no. Impossible therefore to discern that I said that one follows the other.

There may be some oscillation and interplay (usually speculation induced) around the data projections but ultimately both respond to the projections and not to each other.

Monday, December 21, 2015 02:49PM Report Comment

40. mountain goat said...

US, European and Japaneses Central Bank balance sheets total about $10 trillion at the moment and they are all prepared to intervene in money/debt markets. Why would anyone look elsewhere for clues on market direction?

Anyway this is a chicken or egg discussion. In the UK IR will move up or stay down depending on the state of the labour market as well as inflation expectations from other causes. That is what I need to know. Thank you for the sensible contributions to this discussion.

Monday, December 21, 2015 03:00PM Report Comment

41. judgandury said...

"In the UK IR will move up or stay down depending on the state of the labour market as well as inflation expectations from other causes"


Monday, December 21, 2015 03:11PM Report Comment

42. quiet guy said...


Thanks for the response.

4,500+ views on this post - pretty good!

Tuesday, December 22, 2015 01:59AM Report Comment

43. hpwatcher said...

Central Banks ABSOLUTELY follow rather than lead the market

Not they they control the money supply and the very mechanism of money production. Look at all the market distortions that are occurring around the world, and particularly the US.

Ever heard the term central planning?

Tuesday, December 22, 2015 09:04AM Report Comment

44. hpwatcher said...


*Not when they control the money supply and the very mechanism of money production*

[Damn corrective text!]

Tuesday, December 22, 2015 09:05AM Report Comment

45. mountain goat said...

I found this point in Ambrose's article "The Fed typically needs 350 basis points of monetary ammunition to fight a downturn" of interest because it means the Fed (and presumably the BoE) have an incentive to raise IR if they can.

Tuesday, December 22, 2015 03:20PM Report Comment

46. hpwatcher said...

I found this point in Ambrose's article "The Fed typically needs 350 basis points of monetary ammunition to fight a downturn" of interest because it means the Fed (and presumably the BoE) have an incentive to raise IR if they can.

I guess it's a question of balance. The demands of all that against the massive debt and the related repayments.

Tuesday, December 22, 2015 07:43PM Report Comment

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