MONEY

Higher Gas Prices Keep Inflation Just Above 2%

Gas nozzle and hose line graph
TS Photography—Getty Images

Inflation steady as pain at pump is offset by slower growth in food costs.

The Consumer Price Index increased 2.1% for the twelve months that ended in June, reports the Bureau of Labor Statistics. This is the second month in a row that the CPI broke 2%.

The index, which estimates overall inflation by measuring price changes in a “basket” of consumer goods, also showed .3% month-over-month growth from May to June of this year. That number is slightly down from May, which saw a .4% month-over-month increase.

Because food and energy prices tend to be volatile, many analysts and economists also look at the “core” consumer price index, which excludes those items, to get a sense of underlying inflation trends. The core CPI rose 1.9% since last June, says the BLS. This increase is roughly on par with last month’s year-over-year core CPI increase, suggesting inflation remains relatively steady.

According to the BLS, the CPI’s increase this month was primary driven by higher gasoline prices. The cost of gasoline rose 3.3% during the month of June and accounted for two-thirds of the entire index’s increase. The price of food, which had jumped in May, rose more slowly in June, increasing by only 0.1%

Investors watch inflation numbers closely because they may offer a clue about when the Federal Reserve may begin to raise key short-term interest rates, which the Fed has held near zero since the 2008 financial crisis. Chair Janet Yellen has said the central bank intends to hold rates down at least until inflation runs at 2%.

But though the closely watched CPI has notched above 2% for the second month in a row, it’s not the inflation number the Fed uses for its 2% target. Instead, it uses a number from the Bureau of Economic Analysis called the personal consumption expenditure, or PCE, deflator. This index covers a broader selection of goods and is also calculated somewhat differently. It also has been running lower than CPI recently—the latest reading was 1.8% for the twelve months ending in May, or 1.5% for the core number excluding food and energy. The BEA will release updated PCE numbers on August 1st.

The CPI typically runs 0.30 to 0.40 percentage points higher than the PCE index, says Mark Zandi, chief economist at Moody’s Analytics, speaking to Money.com on Monday evening before the release.

“The target CPI is 2.3% or 2.4%, somewhere in that range,” said Zandi. If so, today’s numbers suggest the Fed is getting closer to it’s target, but isn’t there yet.

Update: Due to an editing error, the story originally misstated the amount CPI typically runs above the PCE index. It has been corrected.

MONEY First-Time Dad

What Millennials Want That Their Boomer Parents Hate

Luke Tepper
Luke looks around for the inflation that has yet to come Taylor Tepper

It is nine letters long, (not legal weed), and causes investors' blood to boil.

Inflation. We really want some inflation. Now, if possible.

Macroeconomic forces are not top of my mind all the time. A couple of weekends ago, for instance, my wife and I played poker and drank beer on our friend’s rooftop patio. Our son Luke, clad in his new miniature gondolier outfit, crawled between our legs as one person after another told us how cute he was. That night Luke held onto one of my fingers while I gave him his midnight feeding. Later my wife and I slipped into his room for a few moments to watch him sleep.

I can tell you that at no point during our perfect summer day did the word inflation pop into our heads. We went to sleep thinking just how lucky we were to have such a beautiful son, rather than dwelling on the fact that we face an inflationary climate that is hostile to the economics of our new family.

We aren’t strangers to what economists call “headwinds.” Mrs. Tepper and I graduated from the same really expensive private college in 2008, just as the nation was mired in the worst recession in 80 years. We attended college (and later graduate school) as state governments across the country drastically cut higher education spending, which meant higher costs, which meant that we incurred a combined six-figures student loan marker. And entering the job market in the teeth of negative economic growth means we’ll be playing catch-up for years and years.

Given all that we (and Americans, generally) have endured since 2008, it might seem strange that I would ask for higher inflation. When the prices of goods rise quickly, the Federal Reserve is apt to raise interest rates. Higher interest rates make it more expensive to purchase a house, or borrow for anything. Don’t I want to own a house? What’s wrong with me?

For a little bit of context, let’s back up and look at where inflation has been over the past six years. If you look at the core price index for personal consumption expenditures (or core PCE), inflation is rising at an annual rate of 1.5%. In fact ever since Lehman Brothers declared bankruptcy it has barely budged over 2%.

inflation...

Even if you look at a broader inflation metric, like the consumer price index, prices have risen at 2.1% or lower for almost two years.

What does this mean?

For one thing, wage growth has stagnated at around 2% since we left school, and job growth, while picking up lately, has been relatively slow. Weak job creation and small pay increases means that people have less money to spend, which means fewer jobs and the cycle goes round and round.

So more economic growth (spurred on by more borrowing and spending) would help alleviate low wage growth, and help us ramp up our weekly paychecks. But it would also do something else. It would help us pay down our student loan debts.

Super low inflation is bad for people who have debt. Right now Americans owe more than $1.1 trillion in student loan debt. That means people our age are receiving raises that aren’t that high and have to confront a record level of debt before their careers really get going. With so much of our take-home pay earmarked for debt service, no wonder housing isn’t a priority, or affordable, for millennials (or the Teppers).

Of course, this kind of talk scares our parents (and rich people), who own bonds and other assets designed to preserve wealth instead of create it. Having already endured years of low interest rates, they really don’t want their bond portfolio to be hit by an inflation jump.

To which I say, tough. Many boomers entered the job market as the economy was expanding and college was affordable. Their children did not.

Luke has this one toy that he loves. It’s a sort-of picture book for infants consisting of a crinkly material, and he loves nothing more than smashing the thing between his hands and feet. In 17 years, he’ll want a car—and then four years of college.

I realize that the costs of these things will rise—prices always rise. It would just be nice if our salaries rose enough to pay for them.

Taylor Tepper is a reporter at Money. His column on being a new dad, a millennial, and (pretty) broke appears weekly. More First-Time Dad:

 

MONEY The Economy

Think the Fed Should Raise Rates Quickly? Ask Sweden How That Worked Out

Raising interest rates brought the Swedish economy toward deflation Ewa Ahlin—Corbis

Some investors are impatient for the Fed to raise interest rates. They may want to be a little more patient after hearing what happened to Sweden.

If you’re a saver, or if bonds make up a sizable portion of your portfolio, chances are you’re not the biggest fan of the Federal Reserve these days.

That’s because ever since the financial crisis, the nation’s central bank has kept short-term interest rates at practically zero, meaning your savings accounts and bonds are yielding next to nothing. The Fed has also added trillions of dollars to its balance sheet by buying up longer-term bonds and other assets in an effort to lower long-term interest rates.

Thanks to some positive economic news — like the recent jobs report — lots of people (investors, not workers) think the Fed has done enough to get the economy on its feet and worry inflation could spike if monetary policy stays “loose,” as Dallas Fed President Richard Fisher recently put it.

If you want to know why the argument Fisher and other inflation hawks are pushing hasn’t carried the day, you may want to look to Sweden.

Like most developed nations, Sweden fell into a recession in the global financial crisis. But unlike its counterparts, it rebounded rather quickly. Or at least, that’s how it looked.

As Neil Irwin wrote in the Washington Post back in 2011, “unlike other countries, (Sweden) is bouncing back. Its 5.5 percent growth rate last year trounces the 2.8 percent expansion in the United States and was stronger than any other developed nation in Europe.”

Even though the Swedish economy showed few signs of inflation and still suffered from relatively high unemployment, central bankers in Stockholm worried that low interest rates over time would lead to a real estate bubble. So board members of the Riksbank, Sweden’s central bank, decided to raise interest rates (from 0.25% to eventually 2%) believing that the threat posed by asset bubbles (housing) inflated by easy money outweighed the negative side effects caused by tightening the spigot in a depressed economy.

What happened? Well…

Per Nobel Prize-winning economist Paul Krugman in the New York Times:

“Swedish unemployment stopped falling soon after the rate hikes began. Deflation took a little longer, but it eventually arrived. The rock star of the recovery has turned itself into Japan.”

And deflation is a particularly nasty sort of business. When deflation hits, the real amount of money that you owe increases since the value of that debt is now larger than it was when you incurred it.

It also takes time to wring deflation out of the economy. Indeed, Swedish prices have floated around 0% for a while now, despite the Riksbank’s inflation goal of 2%. Plus, as former Riksbank board member Lars E. O. Svensson notes, “Lower inflation than anticipated in wage negotiations leads to higher real wages than anticipated. This in turns leads to many people without safe jobs losing their jobs and becoming unemployed.” Svensson, it should be noted, opposed the rate hike.

image (8)
Sweden

Moreover, economic growth has stagnated. After growing so strongly in 2010, Sweden’s gross domestic product began expanding more slowly in recent years and contracted in the first quarter of 2014 by 0.1% thanks in large part to falling exports.

As a result, Sweden reversed policy at the end of 2011 and started to pare its interest rate. The central bank recently cut the so-called “repo” rate by half a percentage point to 0.25%, more than analysts estimated. The hope is that out-and-out deflation will be avoided.

So the next time you’re inclined to ask the heavens why rates in America are still so low, remember Sweden and the scourge of deflation. Ask yourself if you want to take the risk that your debts (think mortgage) will become even more onerous.

MONEY The Economy

A Key Fed Official Says the Job Market is Just Fine. But is He Right?

Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas
Richard Fisher, president of the Federal Reserve Bank of Dallas. Jose Luis Magana—Reuters/Corbis

With a little help from Jonathan Swift, Shakespeare, and World War II, Dallas Fed President Richard Fisher makes the case for why interest rates need to rise soon.

In between references to Shakespeare, beer goggles and Wild Turkey, Dallas Federal Reserve Bank President Richard Fisher— a member of the Federal Open Market Committee that sets the nation’s interest-rate policy— expressed concern Wednesday about the risks caused by the Fed’s ongoing stimulative policies.

Thanks to a dramatically improving jobs picture, according to Fisher, the Fed should not only cut off its bond-purchasing program (known as “QE3″) by October, but the central bank should also shrink its portfolio of assets and begin raising interest rates early next year or sooner.

Whether or not the economy can withstand monetary tightening — fewer jobs means fewer people able to buy stuff — is open for debate. The real question, though, is if the jobs picture is really that strong?

First some context.

In his colorful speech, Fisher, one of the Fed’s leading “inflation hawks,” reiterated his belief that the Fed’s rapidly escalating balance sheet (now at approximately $4.4 trillion) in combination with a near-zero federal funds rate has led to investors having “beer goggles.” (As Fisher explains it, “this phenomenon occurs when alcohol renders alluring what might otherwise appear less clever or attractive.”) This is what he says is happening with stocks and bonds, which are both relatively expensive.

To make his point Fischer quoted Shakespeare’s Portia in Merchant of Venice: “O love be moderate, allay thy ecstasy. In measure rain thy joy. Scant this excess. I feel too much thy blessing. Make it less. For fear I surfeit.”

Portia’s adjectives (joy, ecstasy and excess) describe “the current status of the credit, equity and other trading markets that have felt the blessing of near-zero cost of funds and the abundant rain of money made possible by the Fed and other central banks that have followed in our footsteps,” Fisher said.

Of course, the Federal Reserve hasn’t bought trillions of dollars of debt, and cut the main interest rate to nothing, for no reason. There was something called, you know, the Great Recession — the once-in-a-lifetime cataclysmic economic event from which the country is still recovering.

But, said Fisher, things are improving, especially in the labor market. Not only did businesses add almost 300,000 employees last month, but there are more job openings, workers are quitting more often and wages are rising. Is he right?

Let’s check out some graphs:

Job openings:

ycharts_chart-1

Fisher is right that job openings “are trending sharply higher.” This time last year, there were a little less than 3.9 million job openings. Right now there are more than 4.6 million – an 18% increase.

“Quits”:

quits

The healthier an economy, the higher the number of employees who quit their job to either find another or start a new business. Therefore a higher so-called quits rate, means a healthier labor market.

Like job openings, the number of quits has been rising since bottoming out during the recession. The major difference though is that the number of job openings has almost reached pre-recession levels, while quits has not.

Wages:

wage growth
BLS

Fisher admits that wages aren’t growing “dramatically.” Nevertheless, he cites the Current Population Survey and the most recent National Federation of Independent Business survey to show that wages are on the rise.

However, wage data from the Bureau of Labor Statistics shows that Americans in the private sector are earning $24.45 an hour, only up 1.9% from last year.

But these three metrics aren’t the only metrics to gauge the health of the labor market.

Long-Term Unemployed:

l-t unemployment
BLS

Before the recession, about 1.3 million workers were without a job for longer than 27 weeks. Today, that number is slightly more than 3 million. While that’s significantly better than the post-recession high of 6.8 million in August 2010, there are still a lot of workers who’ve been without a job for a long time.

“Long-term unemployment is still a significant source of slack in the economy and is accounting for a historically large share of the total unemployment rate,” says Wells Fargo Securities economist Sarah House.

Broader unemployment:

l-t2
BLS

And while the unemployment rate may signify the economy is moving closer to full employment, the picture is less sanguine if you look at a broader unemployment rate that takes into account the underemployed (part-time workers who want to work full-time) and discouraged workers. Before the recession that number hovered a little over 8%. It’s now 12.1%. And while it’s trending down, it’s not coming down fast enough. At least according to recent testimony by Federal Reserve Chair Janet Yellen.

Conventional wisdom says inflation will come when wages really start to rise. Some, like Fisher, think we’re getting really close to that point. But if you take into account wage data from the BLS and look at the millions of Americans who aren’t working to their full capacity, it’s not hard to see how tightening monetary policy might make life harder on lots of workers.

MONEY

Janet Yellen’s Guide to Investing

U.S. Federal Reserve Chair Janet Yellen adjusts her glasses
Kevin Lamarque—Reuters

The Fed says stocks in general aren't overpriced, but watch out for bubbles in social media and biotech.

Janet Yellen, chair of the Federal Reserve, is testifying before the House of Representatives today. Yesterday, she spoke to the Senate. Her testimony is accompanied by a deeper-dive document called “The Monetary Policy Report.”

One snippet caused a stir yesterday, because the Fed lays out a fairly detailed view of valuations in the markets. The Reformed Broker blog quipped that it sounded like a report from a portfolio manager at “Yellen Capital Partners”. The big news was that the Fed thinks prices for some biotech, social media, and other small companies look “stretched.” That’s a polite way of telling investors: watch out.

But the Fed’s full take on the markets is worth a look. Here’s what the bank says — feel free to skip ahead if you prefer to read Fedspeak in translation — and what it means.

“Some broad equity price indexes have increased to all-time highs in nominal terms since the end of 2013. However, valuation measures for the overall market in early July were generally at levels not far above their historical averages, suggesting that, in aggregate, investors are not excessively optimistic regarding equities.”

A standard way to look at whether stocks are cheap or expensive is to compare prices on the S&P 500 index to companies’ earnings. If you use the profits Wall Street analyst’s estimate for the coming year, prices look high relative to the past decade, but a long way from the tippy-top prices of the late-1990s bubble.

image(30)
SOURCE: Factset

People with a more bearish take on the market prefer to look at stocks relative to the past 10 years of actual earnings. This smooths out times when earnings are unusually high, and cuts out Wall Street analysts’ optimism. It also allows you take a longer view. Again, stocks look expensive compared with recent years, less so compared with the peak… but quite high relative to a longer history.

image(31)
SOURCE: Rober Shiller

The Fed’s saying stocks are on the expensive side, but not crazily so.

“Valuation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries.”

There was much talk of a biotech bubble earlier this year, and those stocks have been volatile ever since. They’re still way ahead of the S&P’s big gains in recent years. As Business Insider noted back in March, new biotech IPOs are popping up all over. There were 24 in the first quarter of this year and 37 least year, compared with just 11 in 2012. That can be a sign that investors are throwing their money at anything in hopes of getting that one big lottery ticket stock.

ycharts_chart(1)

As for social media: This.

“Credit spreads in the corporate sector have also declined, on balance, in recent months… Credit spreads on high-yield corporate bonds are near the bottom of their range over the past decade.”

We’re talking about bonds here. High-yield is the nice way of saying junk bonds with poor credit quality and a higher risk of default. I bet if Janet Yellen is worried about anything, it’s bonds more than weird social media IPOs. Investors who take a plunge on small companies with a new app usually know going in that they could lose money fast.

That’s not always the case with bonds. As investors have searched for more ways to get yield, they’ve been pouring money into “unconstrained” and “nontraditional” bond funds, many of which hold lower grade debt. That may help investors if interest rates go up, but it also means taking on other kinds of risks. Some analysts, like Eric Jabcobson at Morningstar, worry that not all fund investors know the risk they are taking on. Unpleasantly surprised bond-fund investors can make a lot of trouble: In a worst-case scenario, if they all run for the exits at once, fund managers may end up having to fire-sale less-liquid bonds, or sell their higher quality bonds to meet redemptions. That would amplify a bond bear market, which in turn would mean tighter lending conditions all around.

But the Fed isn’t painting a worst-case scenario here. They’re just saying they are watching this data point.

The big question: What business is it of the Fed’s what people invest in?

Like it or not, communicating with markets is a big part of what central banks do. It used to be said that British banks were regulated merely by a raised eyebrow from the governor of the Bank of England. Janet Yellen is giving the markets a little bit of an eyebrow raise here. The Fed’s main jobs are getting unemployment down and keeping prices stable, but especially after 2008, it worries about asset bubbles too.

Yellen may also be shaking the tree a little. The Fed doesn’t see a whole lot of bubbly behavior, but it also knows it can’t see everything that’s going on in every corner of the financial system. Blogging economist Tyler Cowen has a theory that Yellen’s talk about certain investors getting kinda complacent is really a way of finding out if that’s true. If the Fed says biotech stocks are a little high, and then investors take a closer look at their biotech stocks and decide to run away… well, maybe biotech stocks really were getting too high.

But let’s not forget the context in which Yellen is raising her eyebrow: Her Fed is still doing Quantitative Easing, though it’s likely to end this fall, and still holding short-term interest rates near zero. In other words, she’s still telling the financial markets that the Fed will keep stoking economic growth; the report just tempers that message a bit.

Yellen is saying, in effect, “We’ve still got your back — but don’t come crying to us if you go making crazy bets.”

MONEY

Here’s What Rick Santelli’s Latest CNBC Rant Is Really About

+ READ ARTICLE

Risk Santelli’s crazy-eyes routine on CNBC today, complete with theatrical camera walk-off as he shouted “Hasta la vista!”, is certainly something to see. But, um, what was Santelli actually arguing about? And what point was he trying to make?

If you don’t watch CNBC regularly, you may find even its normal trader banter difficult to decode. But Santelli gets worked up in a lather so quickly that some backstory needs filling in. Here’s the full 12-minute exchange and, below that, our best shot at translating the passion of Santelli:

(00:00) “I think we ought to get back to a more steak-and-potatoes, mundane, less-volatile form of central banking.”

There’s no doubt that what the U.S. central bank, the Federal Reserve, has been doing since the financial crisis is pretty exotic, i.e. the opposite of steak and potatoes. In addition to cutting short-term interest rates to roughly zero, the Fed has bought up trillions of dollars worth of bonds in an operation called quantitative easing. Economists debate exactly how and to what extent QE works, but the Fed is basically telling businesses and the market that it is going to keep its foot on the economy’s gas pedal at least until unemployment is running at 6% (we’re getting close) and inflation at 2%.

Santelli thinks this intervention is distorting the market. That’s not an especially unusual view among Wall Streeters. The other side of the argument, of course, is that without these inventions, the economy would be in even worse shape. And that inflation, the main thing we’re supposed to worry about when the Fed makes money too “easy,” is still very low.

(00:18) “Equity traders don’t seem to be bugged because they know in the end easy money will outlive any headwinds to the economy.”

He’s saying the Fed has pumped up the stock market artificially. This echoes the old idea that there was a “Greenspan put”—a common belief by bullish stock traders that past Fed chair Alan Greenspan would never let the stock market fall too far. Again, not an unusual thing to hear on the Street.

(2:29) “C’mon, Steve, be objective. You’re talking about feedback loops!… We’re in a managed setting. If a baseball league puts in his crummiest players, what’s the feedback loop for the talent?”

I don’t get the baseball thing, either. But he’s saying, I think, that it’s been so clear that the Fed would keep money easy that the market isn’t doing its job of pricing risk correctly.

And this is where the fight really starts. CNBC economics reporter Steve Liesman–possibly goaded by Santelli saying he’s not objective–pushes back by asking, essentially, if Rick Santelli is right and the Fed is obviously leading us toward disaster, why aren’t more investors fleeing the stock market? It’s a good question.

(3:55) “Do you want to hear social policy from the head of the largest central bank, who controls $4.5 trillion of American’s money?”

By social policy, he presumably means the Fed targeting low unemplyment. For the record, the Fed has a legal mandate to target both stable prices and high employment.

Remember, this is the same guy who rocketed to fame during the financial crisis with a rant about the government bailout subsidizing “losers’ mortgages.” In fact, the bailout mostly helped banks. Help for defaulted homeowners was comparatively small and slow to arrive.

(5:35)”Those young demographics don’t have money, don’t have jobs, they’re living in their parents basements, and less than half of Americans own stock portfolios. So who are we helping here?”

This is in response to a challenge from Josh Brown, who seemed to be saying that stocks are actually good investment if Santelli is right. After all, if the Fed’s wrong, and there’s inflation, you’d rather have stocks than low returning bonds.

Santelli’s response doesn’t really answer that. But hey, it’s live TV and it’s CNBC, so he’s got half a dozen people talking into his earpiece. Anyway, there’s a kernel of a solid point here: The Fed’s policy, if it’s propping up asset prices, doesn’t do much for people who don’t hold assets.

But if that’s true, that could help explain why inflation has been so low–the economy is a long way from overheating. So Brown asks how a different monetary policy–presumably, raising rates to slow growth–would possibly help this.

(6:00) “Here’s what a Fed chairman needs to stand up and do: ‘Congress, we’ve done the most we can do! … Now there’s a feedback loop—a big ruckus in November. Problem solved!”

You know who agrees that Congress should do more to stimulate the economy? Paul Krugman and every economist influenced by John Maynard Keynes ever. And the Fed, too–they point this out all the time. But something tells me that Santelli’s idea of what Congress should do is rather different.

(6:27) “If I’m a bank, why would I lend at sub risk-reward rate just because the government subsidizes it?”

He’s saying the Fed’s efforts to lower rates has made banks not want to bother lending. Huh? Nodody’s telling banks what rate they can lend at.

Then we get back to Santelli complaining about the Fed’s social engineering. Liesman asks: “Should the Fed make policy for you and the traders in Chicago.” (Santelli reports from a Chicago trading pit, where he is often cheered on by traders.) Translation: Who’s not objective here, Rick?

(7:27) “TRADERS IN CHICAGO NEVER CONTRIBUTED ONE PENNY TO THE CREDIT CRISIS!”

Sh– just got real.

(8:58) “I don’t care about the general consensus! I don’t care that Europe offers entitlements! We’re America!”

USA! USA!

The trader crowd cheers.

(10:00) “We’d be healing! Three years into a recovery. That’s what I say. Disprove it!”

This is what Santelli thinks would happen if rates were higher. It really is hard to imagine how higher rates and tighter money would make the economy stronger right now.

Stanford University economist John Taylor recently testified before Congress in favor of a law that would force the Fed to follow more predictable rules. His case is that markets need certainty to operate effectively.

But even if you accept that idea as matter of long-term policy, it’s kind of hard to see how the market would feel more certain and confident right now if the Fed were to suddenly swing to tight money.

Then, Brown says Santelli has been saying this stuff for five years.

(10:52) “AND I WAS RIGHT! End of conversation! Hasta la vista!” [Walks off camera.]

Or, as Kenny Powers says, “I’m not going to stop yelling! Because that would mean I lost the fight!”

But we’re not done. Now Liesman wants to tell viewers that listening to one his financial-news network’s stars would have lost of them money. Because if you thought the Fed was wrong, you would have bet against bonds, which have rallied, and on high inflation, which hasn’t materialized.

[Santelli returns.]

(11:10) “I wasn’t wrong on inflation. I didn’t know policy would be so bad that we’d get no velocity after five-a-half years.”

By velocity, he basically means that no one is spending money, even though the Fed’s QE program has, in a sense “printed” a lot of it. Santelli has claimed before that he didn’t actually predict high inflation. As Business Insider has pointed out, the record says otherwise.

MONEY

CNBC’s Rick Santelli Loses It Over Fed Policy

And his CNBC colleagues do not seem remotely amused.

+ READ ARTICLE

Whoa.

We’re used to seeing CNBC reporter Rick Santelli rant. He established it as part his brand at the start of the financial crisis, in a tirade against the bailout that called for a new “tea party” protest.

But today he cut loose on the Federal Reserve, and CNBC economics reporter Steve Liesman seems to have lost all patience with him:

“There is no single piece of advice you’ve given that’s worked, Rick. Not a single one.”

Watch it here. It gets heated about 2:30 in, boils over at around 6 minutes, and Santelli walks off camera at about 11 minutes.

 

MONEY

Does Anybody Need a Money-Market Fund Anymore?

New regulations are meant to protect money market mutual funds from another 2008-like panic.

On Thursday, the Wall Street Journal reported that the Securities and Exchange Commission is expected to approve new regulations for money-market mutual funds. Remember money-market funds? Before the financial crisis, these funds were very popular places to stash money because each share was expected to maintain $1 value. Your principal would remain the same, and the fund would pay substantially higher interest rates than a bank savings account.

But these days for retail investors, money-market mutual funds are something of an afterthought.

So why is the SEC intent on regulating them now? And will tighter rules push them further into irrelevance? Here’s what you need to know:

What going on?

A money-market fund is a mutual fund that’s required by law to invest only in low-risk securities. (Don’t confuse funds with money-market accounts at FDIC-insured banks. These rules don’t affect those.)

There are different kinds of money-market funds. Some are aimed at retail investors. So-called prime institutional funds, on the other hand, are higher-yielding products used by companies and large investors to stash their cash. The big news in the proposed rules affects just the prime institutional funds.

Prime institutional funds would have to let their share price float with the market, effectively removing the $1 share price expectation.

The SEC reportedly also wants to impose restrictions preventing investors from pulling their money out of these funds during times of instability, or discouraging them from doing so by charging a withdrawal fee. It’s unclear from the reporting so far which kinds of funds this would affect.

Why is the SEC doing this?

As MONEY’s Penelope Wang wrote in 2012 when rumors of new regulations were first circulating, the financial crisis revealed serious vulnerabilities to money-market funds. When shares in a $62 billion fund fell under $1 in 2008, it triggered a run on money markets.

In order to stabilize the funds, Washington was forced to step in and offer FDIC insurance (the same insurance that protects your bank account). That insurance ran out in 2009, and now the funds are once again unprotected against another run.

The majority of the SEC believes a primary way to prevent future panics is to remind investors that money-market funds are not the same as an FDIC-insured money-market account at a bank. Before the crisis, the funds seemed like a can’t-lose proposition. The safety of a savings account with double the return? Sign me up. But as investors learned, you actually can lose.

What does it mean for you?

Not much, at least not right away. The floating rate rules only apply to prime institutional funds, which the Wall Street Journal says make up about 37% of the industry.

The change also won’t be very important until money-market funds look more attractive than they do today. Historically low interest rates from the Federal Reserve have actually made conventional savings accounts a more lucrative place to deposit money than money-market funds. The average money-market fund returns 0.01% interest according to iMoney.net. That’s slightly less than a checking account.

Investors have already responded to money funds’ poor value proposition by pulling their money out. In August of 2008, iMoney shows there was $758.3 billion invested in prime money fund assets. In March of 2014, that number had gone down to $497.3 billion.

Finally, it appears unlikely that money-market funds will ever be as desirable as they were pre-crisis. As the WSJ’s Andrew Ackerman points out, money funds previously offered high returns, $1-to-$1 security, and liquidity. Interest rates have killed the returns, and the new regulations will limit liquidity and kill the dollar-for-dollar promise.

Don’t count the lobbyists out yet

Fund companies are really, really unhappy about the SEC’s proposed regulations. They’ve been fighting the rules for years, and until there’s an official announcement, you shouldn’t be sure anything is actually going to happen.

Others are worried the new regulations, specifically redemption restrictions, might actually cause runs on the market as investors fear they could be prevented from pulling money out if things get worse.

But the SEC may have picked a perfect time to do this. With rates so low, few retail savers care much about money-market funds. That wasn’t true back when yields were richer and any new regulation of money-market funds might have been met with a hue and cry from middle-class savers. Today? Crickets.

MONEY Economy

4 Takeaways from the Fed’s Big Meeting

Federal Reserve Chair Janet Yellen arrives for a news conference at the Federal Reserve in Washington
Federal Reserve chair Janet Yellen Susan Walsh—AP

This afternoon, the Federal Reserve released minutes from its mid-June meeting, providing a slightly more detailed picture of what chair Janet Yellen and her colleagues are thinking about the future of interest rates and monetary policy.

The June meeting itself had been a big shrug: The economy was getting better but not quickly enough to justify raising short-term interest rates; the Fed also said it would continue slowly tapering “quantitative easing,” the massive program of bond buying that’s meant to ease credit and stoke economic growth.

But here are three new things we’ve learned from the minutes.

1) Look for “quantitative easing” to end in October

We already kind of knew this, since the Fed has been reducing its purchases as a steady rate, but the minutes fill in a detail:

Some committee members had been asked by members of the public whether, if tapering in the pace of purchases continues as expected, the final reduction would come in a single $15 billion per month reduction or in a $10 billion reduction followed by a $5 billion reduction. Most participants viewed this as a technical issue with no substantive macroeconomic consequences…

But:

… participants generally agreed … it would be appropriate to complete asset purchases with a $15 billion reduction in the pace of purchases in order to avoid having the small, remaining level of purchases receive undue focus among investors. If the economy progresses about as the Committee expects, warranting reductions in the pace of purchases at each upcoming meeting, this final reduction would occur following the October meeting.

Bear in mind that this just means the Fed will stop buying bonds. It will still own over $4 trillion worth of them.

2) The Fed is divided about how to read inflation data

In a press conference after the meeting, Yellen said that although inflation seemed to be picking up a bit, the numbers were too “noisy” to conclude that inflation would go above the Fed’s 2% target for long.

The minutes of the meeting suggest that the other Fed governors and regional Fed presidents are divided on this. Some are worried that inflation is still far too low, indicating an economy that’s still too slack. And it looks like the recent strong jobs numbers, released after the meeting, which brought unemployment down to 6.1%, won’t change the minds of the inflation doves.

Some participants expressed concern about the persistence of below-trend inflation, and a couple of them suggested that the Committee may need to allow the unemployment rate to move below its longer-run normal level for a time in order keep inflation expectations anchored and return inflation to its 2 percent target, though one participant emphasized the risks of doing so.

But there’s still a vocal hawk team. Although price increases are very low, their main concern is that the Fed won’t be able to react fast enough when the economy turns.

… other participants expressed concern that economic growth over the medium run might be faster than currently expected or that the rate of growth of potential output might be lower than currently expected, calling for a more rapid move to begin raising the federal funds rate in order to avoid significantly overshooting the Committee’s unemployment and inflation objectives.

3) The Fed is worried that it’s being taken for granted.

…participants also discussed whether some recent trends in financial markets might suggest that investors were not appropriately taking account of risks in their investment decisions… [and] not factoring in sufficient uncertainty about the path of the economy and monetary policy.

What’s the problem with that? There’s always concern that easy policy will stoke an asset bubble. But Yellen has said that while she’s keeping this on her radar, it’s not a major concern yet. One good reason to think so: The housing market, the source of the really dangerous bubbles, is hardly frothy.

Despite attractive mortgage rates, housing demand was seen as being damped by such factors as restrictive credit conditions, particularly for households with low credit scores; high down payments; or low demand among younger homebuyers, due in part to the burden of student loan debt.

4) The labor market still looks weaker than it should be.

Although unemployment is down, some participants in the Fed meeting feel that many workers are still struggling to find work—they note that many workers have dropped out of the labor force altogether—and those with jobs still aren’t in a strong position to demand higher wages.

MONEY

One Reason Today’s Jobs News Isn’t Great for Your Money

Crowd of commuters walking in midtown New York
Mitchell Funk—Getty Images

Great jobs numbers have stock investors cheering. But what about bonds?

We’re heading into the 4th of July weekend with reasons to be cheerful. The jobs report from the Bureau of Labor Statistics came in surprisingly strong. Unemployment is down to 6.1%, the lowest level since before the financial crisis. And employers reported adding 288,000 new jobs, considerably more than the roughly 212,000 economists had forecasted, according to a Reuters survey.

At the same time, the stock market continued it’s rally. After the report the Dow climbed past 17,000 for the first time. So the story here — more jobs, stronger economy, good news for investors — is clear, right?

Well, actually, that’s if you care only about the stock market. The bond market had a different reaction this morning: Yields on Treasuries ticked up, which means that their prices fell. And while most of us consider bonds the ho-hum, steady part of our portfolios, they stand to take a big hit if employment continues to come back more quickly than expected.

The reason? In the upside-down world on bond investing, a really strong and sustained recovery means the Fed is more likely to raise interest rates — and rising interest rates cause bonds to fall in value. In this case, the potential slide could be worse because bonds gained in value this year as investors bet that the status quo of low interest rates would hold.

Of course, the jobs report wasn’t perfect. There are still plenty of signs of economic slack. Wage growth is still slow. And then there’s this:

fredgraph

Remember, the unemployment rate only captures people who say they are still looking for work. The graph above shows that the number people either working or trying to work is historically low. That partly reflects demographic changes, but also a large number of people so discouraged in their job searches they’ve stopped looking. Numbers like these are one reason Janet Yellen and the Fed may continue to hold rates low despite the better numbers.

Still, after a long period of low rates and strong returns for bonds, people who run mutual funds are worried that many investors are unprepared for rising interest rates. Speaking yesterday, before the jobs numbers came out, T. Rowe Price chief economist Alan Levenson noted that the risk of losses on long-maturity bonds is unusually high. “I don’t know that retail investors are aware, as they’ve ridden this bond market down to lower yields, that the duration of their assets and vulnerability to capital losses is extraordinary by historical standards,” he said.

How big a loss are we talking about? An exchange-traded fund owning long-maturity bonds has a “duration” of about 14 years, which roughly translates to a 14% capital loss should rates rise a full percentage point. A more typical fund used as a core bond holding, the Vanguard Total Bond Market Fund, has a duration of 5.6, so would face roughly a 5.6% decline in a one-point rate spike.

This doesn’t mean investors should be running away from bonds. Rates could stay low for a long time. And compared to stocks, bonds are still likely to be less volatile, especially in the lower-duration bonds you might have in a short- or intermediate-term bond fund. But today’s happy job news is reminder that the era of strong bond returns is likely coming to a close.

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser