Don Rissmiller - The Biggest Fed Meeting Since 2008 in Terms of Expectations
FRA Co-Founder Gordon T. Long talks Financial Repression and current economic developments with Don Rissmiller, a founding partner and chief economist of Strategas Research Partners. Mr. Rissmiller has overseen Strategas macroeconomic research since 2006, as well as thematic research, and high frequency econometric forecasting.
"When we think about financial repression, we think about interest rates being below normal levels or below inflation. You would do that if you're in an environment with a lot of debt. The solution if you have too much debt is to try to make the burden of that debt to decrease."
Rissmiller highlights the 3 avenues in which the government receives funds through taxes. Taxing income, taxing transactions, and taxing wealth; however financial repression relates by,
"Keeping interest rates below inflation is a fancy way of taxing liquid wealth, taxing cash."
The Result of Low Interest Rates
"You're trying to stimulate the economy by implementing lower interest rates."
The financial repression process begins at the monetary policy level as a response to some shock In the economy. The goal is to get risk taking up in the economy, and that's complicated with monetary policy because it is not the best policy when it comes to risk taking,
"It may be the best you can do, it may be an appropriate policy response in a time of stress, but it still has consequences that may not all be desirable."
When you think about where we are going, what you can do is use whatever works.
"You have to force other investors to take more risk. You might bid up asset prices, and of course assets are not equally distributed so that has consequences for income inequality."
The September 17th FOMC Meeting
"It was the biggest fed meeting since 2008 in terms of expectations"
The Fed took the approach that they would like to wait a little more and see some more data. This is not uncommon, if we look back to 2013 to see an example of this, the Fed started talking about the quantitative easing taper in the middle of 2013, and by Sept 2013 the expectation was they were ready to go, but they held back for 3 more months because of the tightening of financial conditions.
"This is a reasonable way to look at what will happen in September of 2015, a tightening of financial conditions plus data that wasn't equate to have confidence in your forecasts leading the Fed to delay."
Forecasting The US Economy
Considering the global slowdown in world trade and commodity prices, Rissmiller shares some foresight into the potential future of the American economy.
"We are seeing weakness in manufacturing that means another sector will have to pick up the slack. The sectors I will focus on are housing, consumer, and the government."
"In housing we are seeing some improved signs on household formation. As unemployment is looking more normal we have had more household buying"
"Consumer spending has been growing, we think this can continue because the decrease in energy prices tends to effect consumer spending with a lag and so we are going to continue to see positives to lower energy prices."
"The government sector has been a drag, there is still one more budget fight coming in the next few weeks and that's going to be a challenge, but if we get through that we are into the part of the election cycle where government drag turns into a small boost, we are already seeing some rehiring at the state and local level and that is significant as well."