The Federal Reserve and the Working Class

It was only last week that we noted how Janet Yellen, Chairman of the Federal Reserve System’s Board of Governors, was talking about the possibility of ‘negative’ interest rates due to several weeks of turbulence in the financial markets:

“A lot has happened since” the December Fed meeting, Ms. Yellen acknowledged. Weeks of financial market turbulence have Fed officials reassessing whether their projections for steady growth and job gains and gradually rising inflation will hold up in the months ahead. The Fed’s next policy meeting is March 15-16.

“We will meet in March, and our committee will carefully deliberate about what impact these developments have had,” Ms. Yellen said.

For now, officials are sticking to their view that the expansion will continue and interest rates will rise, but Ms. Yellen emphasized on Thursday that she wants to keep her options open. “It’s premature to make a judgment,” she said, adding repeatedly that policy isn’t on a pre-determined course.

“We are… looking very carefully at global financial market and economic developments that create risk to the economy,” she said. “We are evaluating them, recognizing that these factors may well influence the balance of risks or the trajectory of the economy, and thereby might affect the appropriate stance of monetary policy.”

Stock prices sank as Ms. Yellen spoke. In what looks like a perverse feedback loop, she worries that market conditions could pinch the economy, and her lack of confidence sends markets lower still.

Negative rates are getting increased attention following moves in that direction by the Bank of Japan, European Central Bank and other central banks in Europe trying to stimulate stronger economic growth and higher inflation.

Our position was that the Fed should just leave things alone, and let the market work things out, and that the government simply cannot control the economy, no matter what Dr Yellen believes. The Wall Street Journal is also beating the drums concerning the recent losses in the stock market:

Risk Grows of Markets Sparking Recession

While many economic indicators aren’t flashing concern, the global financial turmoil could cause a slowdown

By Greg Ip | Updated Feb. 11, 2016 8:41 p.m. ET

From The Wall Street Journal. Click to enlarge.

Is the U.S. headed for recession? The markets suggest so.

With Thursday’s selloff, the Dow Jones Industrial Average is now down 14.5% from its all-time high last May. Yields on risky bonds continue to climb, while investors have sought safety in U.S. Treasurys, sending those yields lower. And oil has hit a nearly 12½-year low.

Yet the economic data show no recession. Job growth in January was healthy, and employers are having trouble filling vacancies.

This dichotomy is neatly captured by two indexes compiled by Cornerstone Macro. One, using financial indicators such as the stock market and corporate bond yields, puts the probability the U.S. is now in recession at 50%. The other, which adds in macroeconomic data such as loan delinquencies and inflation-adjusted income, puts the probability at just 28%.

Of course markets often wrongly predict recessions. But in some circumstances they can help bring them about. Economic turning points are unpredictable because they are caused by changes in psychology, not just mechanical factors such as interest rates and wages and salaries. Markets influence that psychology by signaling to businesses whether they should invest or hire. Fear of recession can thus be self-fulfilling.

There’s more at the link, along with another article from the Journal entitled Economists, CEOs: Recession Risk Rising. Yet, the very first graph in that article notes that “the latest report on initial jobless claims, a leading indicator of labor-market distress, suggests a diminishing chance.”

Dow Jones Industrial Average, January 2, 2016 - February 12, 2016. Click to enlarge.
Dow Jones Industrial Average, January 2, 2016 – February 12, 2016. Click to enlarge.

What we are seeing here is a real divergence between what the economic elites think will happen, and what people are actually doing. The stock market, as measured by the Dow Jones Industrial Average, has fallen 1,451.19 points, or 8.33%, so far this year, and the decline is only that small because of a very good day on Friday; using the close on Thursday, the index had fallen 1,764.85, or 10.13% year to date. No wonder the economic elites are panicked!¹

But I’m not one of the elites: I am a solidly working class American, in a working class family. Yes, my 401(k) has lost — on paper, of course: it’s only a real loss if I sell — $2,288.42 this year. However, the losses this year are, at least according to the conventional wisdom, driven primarily by the collapse in oil prices; if I have lost money in the stock market, what have I gained due to the fall in the price of oil?

Oil Price IndexRather a lot, it turns out. I live in northeastern Pennsylvania, and I use home heating oil to run the boiler which heats my humble abode. During the winter of 2013-2014, I spent $3,068.26 for 866.2 gallons of heating oil, at an average cost of $3.550 per gallon. The price was slightly over a dollar lower last winter, when I spent $2,248.03 for 893.7 gallons of heating oil, at an average price of $2.515 per gallon; last winter was exceptionally cold in the northeast, leading to higher oil consumption. This year, I added a wood stove to defray heating oil costs, which makes my expenditures somewhat lemons and oranges — closer than apples and oranges, both being citrus fruits! — and have spent $525.36 on 330.5 gallons of heating oil, an average of $1.590 per gallon (my last purchase was at $1.440 per gallon) plus $245 on firewood; I have enough heating oil and firewood on hand to last the rest of the winter heating season.

Thus, heating my home this winter will cost me $770.36, which is $1,477.67 less than last winter, and a whopping $2297.90 less than two winters ago, which just happens to be $9.48 more than I’ve lost in my 401(k) so far this year.

Alas! I have not kept records of how much I’ve spent on gasoline, but the drop in the price of gasoline has been dramatic; I know that we’ve saved a lot on gasoline, as have the vast majority of working class families. While the drop in oil prices, leading to the dramatic decrease in the stock market, is a major concern to the economic elites, things haven’t been nearly as bad for working class families, and that’s a fact we need to remember. There is going to be pressure among political elite from the upper class to ‘do something’ about the fall in stock market values, but ‘doing something’ will more probably have a greater negative effect on working Americans.

We have said previously, during the 2009 ‘stimulus plan’ debates, that the best thing that the government can do in times of economic difficulties is nothing at all, and that’s the case again. If the well-to-do have lost money in the stock market, well that’s just too bad, but investing money in stocks is an inherently risky activity. The government should not take actions to try to save the investments of the investor class that will simply make things more difficult for the working class.
¹ – We noted last week how Ford stock has dropped for reasons based on investors’ perceptions rather than any problems with the company itself.
Cross-posted on The First Street Journal.