Thursday, July 12, 2018

The Fed has a new solution for indicators showing recession.... just get rid of them and create new models

When it comes to the economy and state of the financial system, perception is far more important than reality for the global central banks.  And following the Fed's 'removal' of their balance sheet data from their website a couple of weeks ago, the U.S. central bank now is looking to jettison long-standing recession indicators in favor of ones that make their propaganda of a good and strong economy fit the paradigm.

The US Federal Reserve could abandon the so-called yield curve, a key macroeconomic indicator which has been used to predict recessions for many decades. This comes as this indicator is pointing to a rapidly approaching recession, while other data suggest that an economic downturn is nowhere in sight. 
Yields on longer-term and shorter-term bonds vary. During an economic boom, investors pile into higher-yielding and riskier 2-year Treasuries, boosting their face value and suppressing the yield, while longer-term yields rise. The wider the gap — the healthier the economy, Fed policymakers would say. 
As recession nears, investors scramble to safeguard their assets, and buy longer-term bonds, which are more stable. Longer-term yields drop, while short-term yields go up due to higher market volatility. The yield curve gap is narrowing — and might even start to invert. According to conventional wisdom among economists, that's a sure sign of a recession. 
This enigma has inspired Fed policymakers to start looking for a new methodology that could make recessions and other economic shocks more predictable.
"We are doing a lot of work to see what metrics are there to give us signals about weakness in the marketplace. I want to make sure we do all that we can not to miss something," Raphael Bostic, President of the Federal Reserve Bank of Atlanta, said. – Russia Today
This of course is not the first time central banks or governments have changed economic models to fit a political or financial agenda.  In fact the very same models that led Fed Chairman Paul Volker to raise interest rates to 21% in 1981 to stop Stagflation show that inflation levels now are up as high as they were back then.  But since these models have been modified and prostituted so much over the past 35 years, the Fed is acting as if inflation were only 2.5% versus the 10% or more it actually is.

The flattening yield curve that leads to an inverted yield curve is one of the most accurate indicators of an economic recession.  So perhaps it should not be surprising that the Fed wants to get rid of it in their own models, especially so Powell can be like Greenspan and Bernanke and say that he had no clue that the financial system was on the verge of collapse in 2008


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