By now, it is clear that the first ten people or the last ten listed in the Yellow Pages would have a better clue on monetary policy than the current suits at the Federal Reserve. This means Aaron A. Aaronson or Zya Zion Zuriel could oversee interest rates and the money supply and control the most powerful institution in the world. It might not be ideal, but it may be a preferable alternative, especially if you can locate an Austrian, a gold bug, or a libertarian in the phone book.
Kash Me Ousside
Minneapolis Fed Bank President Neel Kashkari supported cutting interest rates as a pre-emptive strike to offset the brewing threats to the US economy. Addressing an audience at a Minnesota event, Kashkari had a clear message to markets: “We should be supporting the economy, not tapping the brakes.” He revealed that he is pleased the central bank is reducing rates in the boom phase of the business cycle.
But is there an end in sight? Will the Fed cut more, less, or stay the course? Kashkari has another message he wishes to convey to investors: Me no know. Because there is slowing global growth, low inflation, and declining business investment, he averred that rates need to be lower than the current level. By how much, he says, is unclear. Thanks for nothin’, Kashkari.
If the Fed were to ZIRP it up now, what tools would it possess to combat a recession? Kashkari stated that quantitative easing could be used again, like what happened after the economic collapse a decade ago. But if it is already quietly unleashing QE, what other unconventional policy tools could be instituted? Confidence, investors. Just confidence. “I feel like we have more confidence now that if we needed to use (other tools) we would be able to use them maybe even more powerfully than we did in the past,” Kashkari said. The Fed official also noted that he thinks inflation remains below the Eccles Building’s 2% target because there is still a large supply of workers that need to be encouraged to return to the workforce. This, he argues, would push up wage rates, which stagnated last month.
Later this month, the Federal Open Market Committee (FOMC) will convene its second-to-last policy meeting for the year. According to the CME Group FedWatch tool, the market widely anticipates a third quarter-point rate cut in 2019, lowering the target range to 1.50% to 1.75%.
No Plan at the Gosplan
It is transparent at this point that the Fed does not have a long-term plan, tapering the taper of its multi-trillion-dollar balance sheet and using the go-to excuse of waiting for data to drive its decisions. While being data-dependent does have its benefits, monetary policy directly impacts economic developments and trends because rates, money-printing, and other monetary mechanisms distort markets. So, the statistics can be influenced in part by central bank efforts, not by sound fundamentals.
Without a sunset on the horizon, the Fed will just continually resort to past policies until it reverses the current bearish news. The same thing is happening at the European Central Bank (ECB) as Mario Draghi has brought rates into subzero territory and tapped the well of QE again to try to jumpstart the eurozone economy. But if that hasn’t worked since the Great Recession, why would it work this time? Isn’t this the definition of insanity?
The motto the ECB has adopted is: Do whatever it takes, for however long it takes. The Fed has a slightly different mantra: We’ll see. This leaves markets breathlessly awaiting every word emanating from the mouths of officials like Kashkari, every word found in FOMC minutes, and every hint.
This is the problem with relying too much on the Fed and having blind faith in a century-old institution that has been the cause of the booms and the busts of the business cycle. We tend to believe that the Eccles Building is occupied by the smartest men in the room, but their central planning abilities are as reliable as the Gosplan and its five-year plans in the former Soviet Union. Let’s make markets independent again and less focused on what Jerome Powell ate for lunch as it might signal his next move.
In its quest to link President Donald Trump to every iniquitous act on the planet, from stealing pancakes in Scotland to having two scoops of ice cream, the mainstream media are now portraying the Fed as a damsel in distress, like the scream queens of the classic Universal or Hammer Horror pictures. It is pure nonsense. While the president is contradicting his own positions from a few years ago on Fed policy, the institution is still getting a taste of its own medicine, courtesy of Dr. Trump. Fed critics should be enjoying themselves, even if the policies will further distort markets and destroy economies. Remember, the long-term survivability rate for everyone is zero anyway.