Connect with us


The Fed’s review of its monetary policy strategy—and what Brookings’ scholars have to say about it

The Fed’s review of its monetary policy strategy—and what Brookings’ scholars have to say about it



By Dave Skidmore

The Federal Reserve is wrapping up a comprehensive review of its monetary policy framework that explored fundamental questions raised during the global financial crisis and its aftermath. Was the Fed’s strategy for pursuing its legal mandate of maximum employment and price stability the best one in a world where inflation—and consequently interest rates—remained stubbornly low even as the U.S. unemployment rate approached half-century lows? Were the tools deployed during the Great Recession the right ones to fight the next downturn? Could the Fed’s communications practices be improved? Brookings Institution scholars and conference participants have been thinking about these questions as well. See the compilation of selected research papers and articles below.

At his press conference in late July, Powell said that, as a result of the review, the Fed “in the near future” will revise its Statement on Longer-Run Goals and Monetary Policy Strategy. Board Vice Chair Richard C. Clarida, who is leading the review, said in an early August interview that the Fed is looking at “some important evolutions.”

The Fed’s policy committee, the Federal Open Market Committee, first adopted the strategy statement in January 2012 when Brookings Distinguished Fellow in Residence Ben S. Bernanke was Fed chair. Janet L. Yellen, who would succeed Bernanke as Fed chair and who also is a Brookings Distinguished Fellow in Residence, led the FOMC subcommittee that produced it. Though the Fed had informally judged two percent inflation as consistent with price stability since mid-1996, the 2012 statement formalized the target as two percent inflation as measured by the Commerce Department’s personal consumption expenditures price index. A 2016 amendment emphasized that two percent was a symmetric goal, meaning that policymakers “would be concerned if inflation were running persistently above or below this objective.”

Motivation for the Review

Except briefly during 2018, inflation has not sustainably reached two percent since the target was announced. An economic relationship known as the Phillips Curve suggests that low unemployment should lead to higher inflation. But historically low U.S. unemployment rates before the COVID-19 recession did not produce higher inflation. Economists aren’t entirely sure why.

Graph of inflation and the Fed's 2% inflation target

Many consumers welcome very low inflation, but the problem is that very low inflation means interest rates, on average, remain very low. That, in turn, diminishes the Fed’s ability to fight recessions using its traditional tool—cutting its target for the interest rate on overnight loans between banks (the federal funds rate). The distance between the federal funds rate and its effective lower bound (roughly zero or a little less) has been shrinking. Fed policymakers’ median estimate of the neutral level of the federal funds rate—the rate at which monetary policy is neither expansionary nor contractionary—has fallen from 4.2 percent in January 2012 to 2.5 percent in June 2020.


The Fed’s strategy for achieving its inflation objective has been what economists call a “bygones” strategy, meaning it does not try to make up for past misses. It simply seeks to move inflation back toward two percent—balancing its pursuit of price stability with achieving the other leg of its dual mandate, maximum employment. Economists at Brookings events have suggested that the Fed replace its bygones strategy with various “makeup” strategies. When inflation ran below target, for instance, the Fed could shoot for inflation temporarily a bit above two percent to make up for the undershoot while still aiming for two percent, on average, over a specified period.


When the federal funds rate is above the effective lower bound, the Fed can reduce it to support the economy during downturns. But, when the funds rate neared its effective lower bound during the 2007-2009 recession, the Fed began using two new tools—large-scale purchases of longer-maturity Treasury and government-backed mortgage securities (quantitative easing) and statements about its plans for short-term interest rates (forward guidance). Both tools were aimed at putting downward pressure on longer-term interest rates, such as mortgage rates and corporate bond rates. Other central banks have deployed tools that the Fed has not—such as pushing their short-term policy rates below zero (negative rates) or targeting rates on longer-maturity securities by committing to buy them at a predetermined price (yield-curve control).

The current review, conducted largely during a U.S. economic expansion of nearly 11 years, was focused on monetary policy during future downturns, which seemed comfortably distant. But the future arrived sooner than anticipated with the onset in February of the COVID-19 recession, and the Fed has resumed both large-scale securities purchases and forward guidance. The question is how these and other monetary policy tools might evolve as the economy struggles to recover from the current recession. At the start of the review, the Fed ruled out only two possibilities: changing its statutory maximum employment and price stability mandate and raising or lowering the two percent inflation objective. FOMC minutes subsequently have suggested that securities purchases and forward guidance would remain key parts of the Fed’s toolkit but that participants were skeptical about the usefulness of negative rates in the United States and weren’t ready to adopt yield curve control.


The third leg of the three-part review—communication—has received less public attention than the first two. But the Fed has long struggled with financial markets’ tendency to over-interpret the Summary of Economic Projections, which presents FOMC participants’ forecasts for inflation, unemployment, economic growth, and the path of the federal funds rate. Officials have stressed that the funds rate paths of participants are projections, not promises, and are subject to change in response to economic development.

As part of the review, the Fed conducted unprecedented public outreach that included a research conference in Chicago, 12 regional Fed Listens events (one at each Reserve Bank), and two events in Washington, D.C. The events included representatives of business and industry, small business owners and entrepreneurs, labor leaders, community and economic development officials, academics, representatives of retirees, nonprofit organization executives, community bankers, local government officials, and congressional aides.

Brookings Contributions to the Discussion

Brookings Institution scholars and conference participants in recent years have examined a wide range of issues relevant to the Fed’s review. Below is a sampling of articles and papers published as Brookings Papers on Economic Activity (BPEA) and by Brookings’ Hutchins Center on Fiscal and Monetary Policy:

The Fed should review its framework

Should the Fed regularly evaluate its monetary policy framework?
By Jeffrey Fuhrer, Giovanni Olivei, Eric Rosengren, and Geoffrey Tootell (Federal Reserve Bank of Boston)
Federal Reserve Bank of Boston President Eric Rosengren, in a Fall 2018 BPEA paper with three Bank economists, writes that U.S. monetary policy would benefit if the Fed at regular intervals conducted a formal and open review of its policy framework, with the aid of outside contributors.

Monetary policy with low interest rates and low inflation

The new tools of monetary policy
By Ben S. Bernanke (Brookings Institution)
In his January 2020 address to the American Economic Association, former Fed Chair Ben S. Bernanke warns that too-low inflation can threaten central banks’ ability to fight recessions. Too-low inflation is a problem because it contributes to low interest rates, which (because of the effective lower bound) reduce the scope for interest rate cuts. The new tools adopted by the Fed during the financial crisis—quantitative easing and forward guidance—were effective and should become permanent parts of central banks’ toolbox, he argues. To preserve the tools’ effectiveness, it is critically important for central banks to keep inflation and inflation expectations close to target, he concludes.

Monetary policy at the effective lower bound
By Kristin J. Forbes (MIT-Sloan School), James Hamilton (University of California, San Diego), Eric T. Swanson (University of California, Irvine), and Janet L. Yellen (Brookings Institution)
Former Fed Chair Janet L. Yellen, in a symposium with the authors of three papers presented at the Fall 2018 BPEA conference, discusses what monetary policymakers should do when interest rates approach the effective lower bound and what the lower bound could mean for their ability to set monetary policy. The papers examined whether monetary policy at the effective lower bound is less potent and generates increased international spillovers, and the extent to which large-scale securities purchases and forward guidance can substitute for traditional monetary policy.

Monetary policy in a low interest rate world
By Michael T. Kiley and John M. Roberts (Federal Reserve Board)
In a Spring 2017 BPEA paper, two Fed Board economists, using standard economic models, find that interest rates could hit zero as much as 40 percent of the time—twice as often as predicted in work by others. The constraint on monetary policy this would cause would make it harder for the Fed to achieve two percent inflation and maximum employment. The authors suggest that a monetary policy that tolerates inflation in good times near three percent may be necessary to bring inflation to two percent on average.

Rethinking the Fed’s 2 percent inflation target
By Lawrence H. Summers (Harvard University), David Wessel (Brookings Institution), and John David Murray (formerly deputy governor, Bank of Canada)
A Hutchins Center report in June 2018 explores alternatives to the Fed’s two percent inflation target. Summers recounts the origins of the two percent target and argues that targeting, instead, a rate of increase in nominal gross domestic product (GDP) would be better. Wessel analyzes three alternatives—raising the inflation target, targeting the level of prices rather than the inflation rate, and targeting nominal GDP. Murray explains why the Bank of Canada, one of the first central banks to adopt an inflation target, sticks with its two percent target.

What is “average inflation targeting”?
By David Wessel (Brookings Institution)
Wessel explains in a May 2019 blog post, the motivations for the Fed’s review of monetary policy strategy, tools, and communications practices. He explores the advantages and disadvantages of average inflation targeting, an often-mentioned alternative to the Fed’s current framework. Under average inflation targeting, the Fed would aim to offset periods when inflation was below two percent with periods when it was above two percent, and vice versa.

Temporary price-level targeting: An alternative framework for monetary policy
By Ben S. Bernanke (Brookings Institution)
In a blog post, Bernanke explains his 2017 proposal for a new monetary policy framework for the Fed—temporary price-level targeting. Because the effective lower bound constrains monetary policy from being as supportive as it should be during and after recessions, the Fed would make up for periods of too-low inflation by committing to push inflation above target until it averaged two percent. An implication is that, to achieve the inflation overshoot, the Fed would keep interest rates lower for longer during periods of high unemployment and low inflation.

Monetary policy strategies for a low-rate environment
By Ben S. Bernanke (Brookings Institution), and Michael T. Kiley and John M. Roberts (Federal Reserve Board)
Bernanke, in a 2019 blog post, explains a paper co-written with Fed Board economists. It uses economic modeling to evaluate the effectiveness of Bernanke’s temporary price-level targeting framework along with other “lower-for-longer” strategies (promises by central banks during downturns to keep interest rates low even after the economy recovers). The paper finds that most of the lower-for-longer policies deliver better outcomes than traditional policy approaches in low-interest-rate environments.

The optimal inflation target and the natural rate of interest
By Philippe Andrade (Federal Reserve Bank of Boston), Jordi Galí (Center for Research in International Economics), and Hervé Le Bihan, and Julien Matheron (Banque de France)
In a Fall 2019 BPEA article, the authors study how changes in the natural (neutral) interest rate affect the optimal inflation target. They find that starting from values before the financial crisis, a one percentage point decline in the natural rate should be accommodated by an increase in the optimal inflation target of about 0.9 to one percentage point.

Why are interest rates low?

The neutral rate of interest
By Michael Ng and David Wessel (Brookings Institution)
The authors explain the concept of the neutral rate of interest and why it matters in Hutchins Center blog post in October 2018. The neutral rate is the short-term interest rate that would prevail when the economy is at full employment and stable inflation. Estimates of the neutral rate, both in the United States and in other economies, has been declining since the early 1970s, leaving the Federal Reserve and other central banks with less room to cut interest rates when necessary. They explore possible reasons for the decline in the neutral rate, including former Fed Chair Ben S. Bernanke’s global saving glut hypothesis and former Treasury Secretary Lawrence H. Summer’s secular stagnation hypothesis.

On falling neutral real rates, fiscal policy, and the risk of secular stagnation
By Lukasz Rachel (Bank of England) and Lawrence H. Summers (Harvard University)
In a Spring 2019 BPEA paper, the authors show, by using econometric procedures and looking at market indicators, that neutral real (inflation-adjusted) interest rates have declined by at least three percentage points over the past generation. Neutral rates would have declined by more than twice that if not for offsetting fiscal measures, they find. They argue that changes in savings and investment propensities explain the decline. They write that their findings support the idea that mature industrial economies are prone to secular stagnation. They conclude that, to achieve full employment and keep inflation from falling below target, fiscal policymakers will need to tolerate larger budget deficits and monetary policymakers will need to adopt unconventional monetary policies.

Safety, liquidity, and the natural rate of interest
By Marco Del Negro, Domenico Giannone, Marc P. Giannoni, and Andrea Tambalotti (Federal Reserve Bank of New York)
Four New York Fed economists write in a Spring 2017 BPEA paper that the decline of the natural (or, neutral) rate of interest is primarily due to strong demand for safe and liquid assets, especially U.S. Treasury securities, provoked in part by foreign and domestic crises over the past 20 years. They find that returns on securities that are less liquid and less safe than Treasuries, such as corporate bonds, have declined much less.

Why is inflation low?

What’s (not) up with inflation?
By Sage Belz. David Wessel, and Janet L. Yellen (Brookings Institution)
The authors in January 2020 Hutchins Center report explore reasons why the Phillips Curve has flattened (why inflation has become so unresponsive to job market pressures)—and why it matters. A flatter Phillips Curve means the Federal Reserve can err on the side of pushing unemployment lower without risking an unwelcome increase in inflation. On the other hand, lower inflation means interest rates are lower, leaving the Fed with less space to cut rates in response to a weak economy. And, a flatter Phillips Curve means the Fed might have to raise rates more than in the past if it became necessary to reduce inflation.

What’s up with the Phillips Curve?
By Marco Del Negro and Andrea Tambalotti (Federal Reserve Bank of New York), Michele Lenza (European Central Bank), and Giorgio E. Primiceri (Northwestern University)
In a Spring 2020 BPEA paper, the authors examine the origins of the disconnect between inflation and the ups and downs of the business cycle over the past 30 years. They conclude that, in response, central banks should adopt systematic monetary policy strategies, such as average inflation targeting, that react more forcefully to off-target inflation.

Inflation dynamics: Dead, dormant, or determined abroad?
By Kristin J. Forbes (MIT-Sloan School)
In a Fall 2019 BPEA paper, the author finds that, since the financial crisis, growing globalization has played an increased role in many countries in determining consumer price inflation. She argues that a better treatment of globalization in inflation models will help improve forecasts and could help explain the growing wedge between profits and the labor share of national income. Overall, however, she finds that while consumer price inflation is increasingly “determined abroad,” core inflation (inflation excluding food and energy) and wage inflation are still largely a domestic process.

The author did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. He is not currently an officer, director, or board member of any organization with a financial or political interest in this article. Prior to his consulting work for Brookings, he was employed by the Board of Governors of the Federal Reserve System.

Read More

Continue Reading


‘The Official Truth’: The End Of Free Speech That Will End America

‘The Official Truth’: The End Of Free Speech That Will End America

Authored by J.B.Shurk via The Gatestone Institute,

If legacy news corporations…



'The Official Truth': The End Of Free Speech That Will End America

Authored by J.B.Shurk via The Gatestone Institute,

If legacy news corporations fail to report that large majorities of the American public now view their journalistic product as straight-up propaganda, does that make it any less true?

According to a survey by Rasmussen Reports, 59% of likely voters in the United States view the corporate news media as "truly the enemy of the people." This is a majority view, held regardless of race: "58% of whites, 51% of black voters, and 68% of other minorities" — all agree that the mainstream media has become their "enemy."

This scorching indictment of the Fourth Estate piggybacks similar polling from Harvard-Harris showing that Americans hold almost diametrically opposing viewpoints from those that news corporations predominantly broadcast as the official "truth."

Drawing attention to the divergence between the public's perceived reality and the news media's prevailing "narratives," independent journalist Glenn Greenwald dissected the Harvard-Harris poll to highlight just how differently some of the most important issues of the last few years have been understood. While corporate news fixated on purported Trump-Russia collusion since 2016, majorities of Americans now see this story "as a hoax and a fraud."

While the news media hid behind the Intelligence Community's claims that Hunter Biden's potentially incriminating laptop (allegedly containing evidence of his family's influence-peddling) was a product of "Russian disinformation" and consequently enforced an information blackout on the explosive story during the final weeks of the 2020 presidential election, strong majorities of Americans currently believe the laptop's contents are "real." In other words, Americans have correctly concluded that journalists and spies advanced a "fraud" on voters as part of an effort to censor a damaging story and "help Biden win." Nevertheless, The New York Times and The Washington Post have yet to return the Pulitzer Prizes they received for reporting totally discredited "fake news."

Similarly, majorities of Americans suspect that President Joe Biden has used the powers of his various offices to profit from influence-peddling schemes and that the FBI has intentionally refrained from investigating any possible Biden crimes. Huge majorities of Americans, in fact, seem not at all surprised to learn that the FBI has been caught abusing its own powers to influence elections, and are strongly convinced that "sweeping reform" is needed. Likewise, large majorities of Americans have "serious doubts about Biden's mental fitness to be president" and suspect that others behind the scenes are "puppeteers" running the nation.

Few, if any, of these poll results have been widely reported. In a seemingly-authoritarian disconnect with the American people, corporate news media continue to ignore the public's majority opinion and instead "relentlessly advocate" those viewpoints that Americans "reject." When journalists fail to investigate facts and deliberately distort stories so that they fit snugly within preconceived worldviews, reporters act as propagandists.

Constitutional law scholar Jonathan Turley recently asked, "Do we have a de facto state media?" In answering his own question, he notes that the news blackout surrounding congressional investigations into Biden family members who have allegedly received more than ten million dollars in suspicious payments from foreign entities "fits the past standards used to denounce Russian propaganda patterns and practices." After Republican members of Congress traced funds to nine Biden family members "from corrupt figures in Romania, China, and other countries," Turley writes, "The New Republic quickly ran a story headlined 'Republicans Finally Admit They Have No Incriminating Evidence on Joe Biden.'"

Excoriating the news media's penchant for mindlessly embracing stories that hurt former President Donald Trump while simultaneously ignoring stories that might damage President Biden, Turley concludes:

"Under the current approach to journalism, it is the New York Times that receives a Pulitzer for a now debunked Russian collusion story rather than the New York Post for a now proven Hunter Biden laptop story."

Americans now evidently view the major sources for their news and information as part of a larger political machine pushing particular points of view, unconstrained by any ethical obligation to report facts objectively or dispassionately seek truth. That Americans now see the news media in their country as serving a similar role as Pravda did for the Soviet Union's Communist Party is a significant departure from the country's historic embrace of free speech and traditional fondness for a skeptical, adversarial press.

Rather than taking a step back to consider the implications such a shift in public perception will have for America's future stability, some officials appear even more committed to expanding government control over what can be said and debated online. After the Department of Homeland Security (DHS), in the wake of public backlash over First Amendment concerns, halted its efforts to construct an official "disinformation governance board" last year, the question remained whether other government attempts to silence or shape online information would rear their head. The wait for that answer did not take long.

The government apparently took the public's censorship concerns so seriously that it quietly moved on from the collapse of its plans for a "disinformation governance board" within the DHS and proceeded within the space of a month to create a new "disinformation" office known as the Foreign Malign Influence Center, which now operates from within the Office of the Director of National Intelligence. Although ostensibly geared toward countering information warfare arising from "foreign" threats, one of its principal objectives is to monitor and control "public opinion and behaviors."

As independent journalist Matt Taibbi concludes of the government's resurrected Ministry of Truth:

"It's the basic rhetorical trick of the censorship age: raise a fuss about a foreign threat, using it as a battering ram to get everyone from Congress to the tech companies to submit to increased regulation and surveillance. Then, slowly, adjust your aim to domestic targets."

If it were not jarring enough to learn that the Office of the Director of National Intelligence has picked up the government's speech police baton right where the DHS set it down, there is ample evidence to suggest that officials are eager to go much further in the near future. Democrat Senator Michael Bennet has already proposed a bill that would create a Federal Digital Platform Commission with "the authority to promulgate rules, impose civil penalties, hold hearings, conduct investigations, and support research."

Filled with "disinformation" specialists empowered to create "enforceable behavioral codes" for online communication — and generously paid for by the Biden Administration with taxpayers' money — the special commission would also "designate 'systemically important digital platforms' subject to extra oversight, reporting, and regulation" requirements. Effectively, a small number of unelected commissioners would have de facto power to monitor and police online communication.

Should any particular website or platform run afoul of the government's First Amendment Star Chamber, it would immediately place itself within the commission's crosshairs for greater oversight, regulation, and punishment.

Will this new creation become an American KGB, Stasi or CCP — empowered to target half the population for disagreeing with current government policies, promoting "wrongthink," or merely going to church? Will a small secretive body decide which Americans are actually "domestic terrorists" in the making? US Attorney General Merrick Garland has gone after traditional Catholics who attend Latin mass, but why would government suspicions end with the Latin language? When small commissions exist to decide which Americans are the "enemy," there is no telling who will be designated as a "threat" and punished next.

It is not difficult to see the dangers that lie ahead. Now that the government has fully inserted itself into the news and information industry, the criminalization of free speech is a very real threat. This has always been a chief complaint against international institutions such as the World Economic Forum that spend a great deal of time, power, and money promoting the thoughts and opinions of an insular cabal of global leaders, while showing negligible respect for the personal rights and liberties of the billions of ordinary citizens they claim to represent.

WEF Chairman Klaus Schwab has gone so far as to hire hundreds of thousands of "information warriors" whose mission is to "control the Internet" by "policing social media," eliminating dissent, disrupting the public square, and "covertly seed[ing] support" for the WEF's "Great Reset." If Schwab's online army were not execrable enough, advocates for free speech must also gird themselves for the repercussions of Elon Musk's appointment of Linda Yaccarino, reportedly a "neo-liberal wokeist" with strong WEF affiliations, as the new CEO of Twitter.

Throughout much of the West, unfortunately, free speech has been only weakly protected when those with power find its defense inconvenient or messages a nuisance. It is therefore of little surprise to learn that French authorities are now prosecuting government protesters for "flipping-off" President Emmanuel Macron. It does not seem particularly astonishing that a German man has been sentenced to three years in prison for engaging in "pro-Russian" political speech regarding the war in Ukraine. It also no longer appears shocking to read that UK Technology and Science Secretary Michelle Donelan reportedly seeks to imprison social media executives who fail to censor online speech that the government might subjectively adjudge "harmful." Sadly, as Ireland continues to find new ways to punish citizens for expressing certain points of view, its movement toward criminalizing not just speech but also "hateful" thoughts should have been predictable.

From an American's perspective, these overseas encroachments against free speech — especially within the borders of closely-allied lands — have seemed sinister yet entirely foreign. Now, however, what was once observed from some distance has made its way home; it feels as if a faraway communist enemy has finally stormed America's beaches and come ashore in force.

Not a day seems to go by without some new battlefront opening up in the war on free speech and free thought. The Richard Stengel of the Council on Foreign Relations has been increasingly vocal about the importance of journalists and think tanks to act as "primary provocateurs" and "propagandists" who "have to" manipulate the American population and shape the public's perception of world events. Senator Rand Paul has alleged that the DHS uses at least 12 separate programs to "track what Americans say online," as well as to engage in social media censorship.

As part of its efforts to silence dissenting arguments, the Biden administration is pursuing a policy that would make it unlawful to use data and datasets that reflect accurate information yet lead to "discriminatory outcomes" for "protected classes." In other words, if the data is perceived to be "racist," it must be expunged. At the same time, the Department of Justice has indicted four radical black leftists for having somehow "weaponized" their free speech rights in support of Russian "disinformation." So, objective datasets can be deemed "discriminatory" against minorities, while actual discrimination against minorities' free speech is excused when that speech contradicts official government policy.

Meanwhile, the DHS has been exposed for paying tens of millions of dollars to third-party "anti-terrorism" programs that have not so coincidentally equated Christians, Republicans, and philosophical conservatives to Germany's Nazi Party. Similarly, California Governor Gavin Newsom has set up a Soviet-style "snitch line" that encourages neighbors to report on each other's public or private displays of "hate."

Finally, ABC News proudly admits that it has censored parts of Robert F. Kennedy Jr.'s interviews because some of his answers include "false claims about the COVID-19 vaccines." Essentially, the corporate news media have deemed Kennedy's viewpoints unworthy of being transmitted and heard, even though the 2024 presidential candidate is running a strong second behind Joe Biden in the Democrat primary, with around 20% support from the electorate.

Taken all together, it is clear that not only has the war on free speech come to America, but also that it is clobbering Americans in a relentless campaign of "shock and awe." And why not? In a litigation battle presently being waged over the federal government's extensive censorship programs, the Biden administration has defended its inherent authority to control Americans' thoughts as an instrumental component of "government infrastructure." What Americans think and believe is openly referred to as part of the nation's "cognitive infrastructure" — as if the Matrix movies were simply reflecting real life.

Today, America's mainstream news corporations are already viewed as processing plants that manufacture political propaganda. That is an unbelievably searing indictment of a once-vibrant free press in the United States. It is also, unfortunately, only the first heavy shoe to drop in the war against free speech. Many Chinese-Americans who survived the Cultural Revolution look around the country today and see similarities everywhere. During that totalitarian "reign of terror," everything a person did was monitored, including what was said while asleep.

In an America now plagued with the stench of official "snitch lines," censorship of certain presidential candidates, widespread online surveillance, a resurrected "disinformation governance board," and increasingly frequent criminal prosecutions targeting Americans who exercise their free speech, the question is not whether what we inaudibly think or say in our sleep will someday be used against us, but rather how soon that day will come unless we stop it. After all, with smartphones, smart TVs, "smart" appliances, video-recording doorbells, and the rise of artificial intelligence, somebody, somewhere is always listening.

Tyler Durden Sun, 05/28/2023 - 23:00

Read More

Continue Reading


Never Short a Dull Market; AI is Sexy, But Everyone Hates Oil

There’s an old adage of Wall Street, which says: "never short a dull market." And while AI is getting all the press these days, the oil market is about…



There's an old adage of Wall Street, which says: "never short a dull market." And while AI is getting all the press these days, the oil market is about as dull as it gets. This, of course, brings the energy sector to the top of my contrarian alert list.

This is not to say that I'm buying oil-related assets with both hands. It just means that, at this point, it makes more sense to look at energy as a value asset, as it is oversold and ripe for a move up whenever the right set of variables required to deliver such a move line up just right.

In the current world, the variables could line up just right as early as today.

There are No Oil Bulls Left

Nobody loves oil.

The level of bearishness expressed by futures traders is at least equal to where it was during the pandemic, and after the Silicon Valley Bank (SIVB) collapse. The International Energy Agency (IEA), forecasts that, of the expected $2.8 trillion in energy investments for 2023, roughly $1.7 trillion will be allocated to low carbon energy sources, including nuclear, solar, and other potential sources. Only $1.1 trillion will be invested in fossil fuels.

And according to the Financial Times, auctioneers in Texas are trying to unload two brand new fracking rigs, which together cost $70 million, for a starting combined bid of just below $17 million.

Supply is the Primary Influence on Oil Prices

Meanwhile, oil companies are quietly merging with competitors, and exploration outside the United States is continuing aggressively, with new discoveries being frequently announced. 

Simultaneously, the U.S. active rig count is slowly falling, led by natural gas. The price of gasoline is steadily rising, as the market begins to price in future supply reductions. Just in my neck of the woods, regular unleaded is up some $0.32 in the last week alone.

That doesn't sound like an industry that's planning on fading away. It sounds like an industry that's hunkering down and waiting for better times and preparing to squeeze supply in order to boost prices.

Charting the Oil Sector

The price chart for West Texas Intermediate Crude, the U.S. benchmark (WTIC), shows the depressed price picture which has led investors to walk away. And, until proven otherwise, there are plenty of sellers at the $75-$80 price area, where a sizeable Volume by Price bar highlights the point of resistance.

At first glance, there little difference in the general price behavior for Brent Crude, the European benchmark. (BRENT) where there is a resistance band defined by VBP bars between $80 and $90. A closer look reveals an uptick in Accumulation Distribution (ADI) and the semblance of some nibbling in On Balance Volume (OBV). It's subtle, but it's there.

The oil stocks are far from a bull trend. The Energy Select Sector SPDR ETF (XLE) is trading below its 200-day moving average, facing resistance put from $78 to $90 (VBP bars).

So why bother? Simply stated, OPEC has an upcoming meeting on June 3-4. The cartel is not happy about the prices and the way things are evolving. The Saudi oil minister recently warned bearish speculators to "watch out." And my gut is doing flips when I think about oil, as I see gasoline prices creep up when I drive to work.

But mostly, it's because there are no oil bulls left. This is what we saw in the technology sector a few months ago before its current rally. In early 2023, the tech sector was pronounced dead. The stories were all about the technology sector shuddering as the economy slowed. How about this one, from March 2023, which breathlessly announced a 5.2% decrease in semiconductor sales on a month to month basis and an 18.5% year to year drop?

Yet, as validated by the recent AI-fueled rally, the bad news first marked a bottom, while preceding a significant move up in tech shares.

Never short a dull market.

I've recently recommended several energy sector picks. You can have a look at them with a free trial to my service. In addition, I've posted a Special Report on the oil market which you can gain access to here.

Bond and Mortgage Roller Coaster Reverses Course

Expect negative news about the effect of rising mortgage rates on the homebuilder industry. That's because, as the chart below illustrates, there is a tight and very close correlation between rising bond yields, mortgage rates, and the homebuilder stocks (SPHB).

Moreover, the rise above 3.75% on the U.S. Ten Year Note yield (TNX) has triggered headlines about mortgage rates climbing above 7%. What the news isn't reporting is that, once bond yields roll over, which they are likely to do at some point in the future when the economy shows more signs of slowing and the Fed finally admits that they must pause, is that mortgage rates will drop and demand for new homes will once again pick up. Thus, we will see the homebuilders pick up where they left off.

As things stood last week, SPHB seems to have made a short term bottom.

For now, expect a continuation of the backing and filling in the homebuilder stocks. But, if I'm right and bond yields reverse course, the homebuilders are likely to rally again.

For an in-depth comprehensive outlook on the homebuilder sector click here.

NYAD Holds Above 200-Day Moving Average. SPX Joins NDX in Breaking Out. Liquidity is Shrinking.

The New York Stock Exchange Advance Decline line (NYAD) tested its 200-day moving average on an intra-week basis but did not break below the key technical level. On the other hand, NYAD remained below its 50-day moving average, which is still an intermediate-term negative.

Moreover, with the major indexes (see below) breaking out to new highs, we remain in a technical divergence as the market's breadth is lagging the action in the indexes. This is of some concern, given the fade in the market's liquidity, as I point out below.

The Nasdaq 100 Index (NDX) extended its recent breakout, closing the week well above 14,200. The current move is unsustainable, so some sort of pullback and consolidation are likely over the next few days to weeks. Both ADI and OBV remain encouraging.

What's more bullish is that the S&P 500 (SPX) finally broke out above the 4100–4200 trading range on 5/24/23. On Balance Volume (OBV) is perking up while the Accumulation Distribution (ADI) indicator is very encouraging.

We may be seeing a shift from a short-covering rally to a fear-of-missing-out buyer's rally.

VIX Holds Steady

The CBOE Volatility Index (VIX) remained below 20, as it has since March 2023. This remains a positive for the markets, as it shows short sellers are staying away at the moment.

When the VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures to hedge their put sales to the public. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying, which causes market makers to hedge by buying stock index futures. This raises the odds of higher stock prices.

Liquidity is Getting Squeezed

The market's liquidity is now in a downtrend. The Eurodollar Index (XED) is now below 94.5, and looks weak. A move above 95 will be a bullish development. Usually, a stable or rising XED is very bullish for stocks.

To get the latest up-to-date information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

#1 New Release on Options Trading!

Good news! I've made my NYAD-Complexity - Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe's exclusive stock, option and ETF recommendations, in your mailbox every week visit

Read More

Continue Reading


Costco Tells Americans the Truth About Inflation and Price Increases

The warehouse club has seen some troubling trends but it’s also trumpeting something positive that most retailers wouldn’t share.



Costco has been a refuge for customers during both the pandemic and during the period when supply chain and inflation issues have driven prices higher. In the worst days of the covid pandemic, the membership-based warehouse club not only had the key household items people needed, it also kept selling them at fair prices.

With inflation -- no matter what the reason for it -- Costco  (COST) - Get Free Report worked aggressively to keep prices down. During that period (and really always) CFO Richard Galanti talked about how his company leaned on vendors to provide better prices while sometimes also eating some of the increase rather than passing it onto customers.

DON'T MISS: Why You May Not Want to Fly Southwest Airlines

That wasn't an altruistic move. Costco plays the long game, and it focuses on doing whatever is needed to keep its members happy in order to keep them renewing their memberships.

It's a model that has worked spectacularly well, according to Galanti.

"In terms of renewal rates, at third quarter end, our US and Canada renewal rate was 92.6%, and our worldwide rate came in at 90.5%. These figures are the same all-time high renewal rates that were achieved in the second quarter, just 12 weeks ago here," he said during the company's third-quarter earnings call.

Galanti, however, did report some news that suggests that significant problems remain in the economy.

Costco has done an incredibly good job at holding onto members.

Image source: Xinhua/Ting Shen via Getty Images

Costco Does See Some Economic Weakness

When people worry about the economy, they sometimes trade down when it comes to retailers. Walmart executives (WMT) - Get Free Report, for example, have talked about seeing more customers that earn six figures shopping in their stores.

Costco has always had a diverse customer base, but one weakness in its business may be a warning sign for its rivals like Target (TGT) - Get Free Report, Best Buy (BBY) - Get Free Report, and Amazon (AMZN) - Get Free Report. Galanti broke down some of the numbers during the call.

"Traffic or shopping frequency remains pretty good, increasing 4.8% worldwide and 3.5% in the U.S. during the quarter," he shared.

People shopped more, but they were also spending less, according to the CFO.

"Our average daily transaction or ticket was down 4.2% worldwide and down 3.5% in the U.S., impacted, in large part, from weakness in bigger-ticket nonfood discretionary items," he shared.

Now, not buying a new TV, jewelry, or other big-ticket items could just be a sign that consumers are being cautious. But, if they're not buying those items at Costco (generally the lowest-cost option) that does not bode well for other retailers.

Galanti laid out the numbers as well as how they broke down between digital and warehouse.

"You saw in the release that e-commerce was a minus 10% sales decline on a comp basis," he said. "As I discussed on our second quarter call and in our monthly sales recordings, in Q3, big-ticket discretionary departments, notably majors, home furnishings, small electrics, jewelry, and hardware, were down about 20% in e-com and made up 55% of e-com sales. These same departments were down about 17% in warehouse, but they only make up 8% in warehouse sales."

Costco's CFO Also Had Good News For Shoppers

Galanti has been very open about sharing information about the prices Costco has seen from vendors. He has shared in the past, for example, that the chain does not pass on gas price increases as fast as they happen nor does it lower prices as quick as they sometimes fall.

In the most recent call, he shared some very good news on inflation (that also puts pressure on Target, Walmart, and Amazon to lower prices).

"A few comments on inflation. Inflation continues to abate somewhat. If you go back a year ago to the fourth quarter of '22 last summer, we had estimated that year-over-year inflation at the time was up 8%. And by Q1 and Q2, it was down to 6% and 7% and then 5% and 6%," he shared. "In this quarter, we're estimating the year-over-year inflation in the 3% to 4% range."

The CFO also explained that he sees prices dropping on some very key consumer staples.

"We continue to see improvements in many items, notably food items like nuts, eggs and meat, as well as items that include, as part of their components, commodities like steel and resins on the nonfood side," he added.


Read More

Continue Reading