Markets threw a hissy-fit in the wake of the Fed’s widely ridiculed “None and Done” decision to hold rates at near zero where they’ve been through thick and thin since December 2008. So it was time for St. Louis Fed President James Bullard to distance himself from this debacle.
And he did on Saturday, at the annual meeting of the Community Bankers Association of Illinois, by shooting an expertly targeted broadside at the Federal Open Market Committee, of which he is a non-voting member this year. But the broadside was directed at a lot more than just the failure of the FOMC to raise rates at the last meeting. And shrapnel perforated his own foot.
The meeting was “pressure packed,” he said, and the decision was “a close call,” with “a large majority of the FOMC” expecting to kick off “policy normalization” – raising rates – “this year.”
“I would have dissented,” he said. But he couldn’t dissent because he’s a non-voting member.
Supported by a 33-slide presentation, he pointed at “the market reaction” – the fact that stock markets around the world swooned after the decision. Everything the Fed does and says is with one eye on the stock markets and with the other eye on the bond markets. Instead of pumping up the markets, as the Fed had perhaps hoped to do, the decision seems to have “created rather than reduced global macroeconomic uncertainty.”
“I argued against the decision,” he said.
He lamented the misconception out there that a measly 25-basis-point rate increase is being interpreted as being “restrictive monetary policy,” when in fact it’s still an “exceptionally accommodative monetary policy,” and just the first baby step toward “normalization.”
But “the case for normalization is simple,” he said. “The Committee’s goals have essentially been met”:
The Committee wants unemployment at its long-run level and inflation of 2%. The Committee is about as close to meeting these objectives as it has ever been in the past 50 years.
Most of the weakness in inflation was due to the plunge in oil prices, a “temporary” phenomenon, he said. “Oil prices will stabilize so that when you look at year-over-year inflation, it’s going to start coming back to 2% over the forecast horizon.”
And yet, “the Committee’s policy settings remain stuck in emergency mode,” with the Fed’s balance sheet having “ballooned to about $4.5 trillion,” from about $800 billion in 2006. And the policy rate has been stuck at about 13 basis points for “nearly seven years,” though “the Committee thinks the long-run level of the policy rate should be about 350 basis points.”
That’s 3.5%! That median of the long-run appropriate policy rate of FOMC participants is a world away from the current 0.13%. It would mean a revolutionary concept: capital would have a real, if still small cost! Good luck trying to get there, in these horrendously distorted markets, without crashing everything in sight.
So Bullard finally asked the totally obvious question: “Why do the Committee’s policy settings remain so far from normal when the objectives have essentially been met?”
And the answer? Um, well…
“The Committee has not, in my view, provided a satisfactory answer to this question.”
But Bullard has conveniently forgotten that Ben Bernanke already provided an answer back in 2010 when he was still Chairman: in an editorial, he called it the “wealth effect.” QE and ZIRP – “strong and creative measures,” as he called them – would lead to higher stock prices, which would boost wealth, spur spending, and crank up the economy, he wrote. He was right about the first part: asset prices soared. But he was wrong about the second part: it did not crank up the economy for the 80% or so of Americans who didn’t participate in his extraordinary monetary gifts. And hence, overall, the economy has been growing at a disconcertingly slow rate.
This monetary policy never targeted inflation and unemployment. From get-go, it focused on asset prices and on bailing out and enriching those entities and individuals that held most of these assets, per Bernanke himself. Consumer price inflation and unemployment have become more recent pretexts for continuing the original intent.
Bullard also shot at the inclusion of a reference to financial market conditions in the statement issued after the meeting, with more shrapnel hitting his foot:
“Traditionally, the Fed has not referred to financial market conditions when making policy for good reason: Financial markets tend to wax and wane, sometimes suddenly and monetary policy has to be more stable than that.”
The dripping irony! Last October, as QE Infinity was being tapered out of existence, stocks were plunging. The S&P 500 was down a breath-taking, unheard-of, incredibly whopping … 7.4% from its crazy high at the time, and folks were fretting about a free-fall into a mild correction or something. But he came out of the woodwork, got on Bloomberg TV, and mused about “delaying” the end of QE. Markets turned around on the spot. And he became an instant hero, a one-man market manipulation machine.
And now that Wall Street is clamoring for a repeat performance, it’s inexplicably getting something else? No, it got a repeat performance: no rate increase. But the whole scheme is starting to be threadbare, and investors around the world are getting nervous that central banks cannot keep it upright much longer.
Bank shares got crushed in the US since the FOMC decision. Because not all is well in banking land. Read… Bankers Threaten Fed with Layoffs if it Doesn’t Raise Rates
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