Doug Kass didn’t mince any words, and well he shouldn’t have. Yesterday’s chorus of dovish cooing by Fed heads was just plain beyond the pale.
These craven cowards are a disgrace to even the misbegotten enterprise of Keynesian central banking and its purported Humphrey-Hawkins targets for inflation and employment.
That’s because the stock market supposedly has nothing to do with Economy focussed central banking, yet we get a tiny 7% market dip from the nosebleed section of history and the whole lot of them—-Powell, Clarida, Brainard, Bullard, Evans, Williams, etc. etc—are out there passing monetary cookies and candies to the Wall Street crybabies:
The Fed is the biggest bunch of empty suits I’ve ever seen and they won’t be happy until they blow up the world again. It’s a total disgrace.
That’s exactly right. After all, even in their own misguided frame of reference, the US economy is in the opposite place from where an Economy-minded Fed would have been rushing forward to bang the “stimulus” lever.
That is, inflation is at the 2% target and the U-3 unemployment rate is screaming that the nirvana of Full Employment has fully arrived. So if there ever were a time to leave well enough alone and permit interest rates to normalize and the Fed’s elephantine balance sheet to shrink, this would be it.
In the chart below we track the most stable measure of inflation we know of—the 16% trimmed mean CPI. It has the virtue of taking out the high and low outliers each month from the thousands of items in the CPI market basket (note: the 16% high and low discards are different items each month), thereby picking up the core rate of price change on a trend basis.
Now it just happens that since inflation targeting was officially adopted at the January 2012 Fed meeting, the 16% trimmed mean CPI has risen at a 1.98% compound annual rate.
And when it comes to economic statistics—that’s Mission Accomplished by any other name. As is evident in the chart below, on a year-over-year basis this index has hugged about as close as you please to the 2.00% target month after month for the entire period.
And, really, no one in their right mind would recommend that central banking policy respond to the monthly annualized rates of squiggles and zig-zags in the regular CPI or even the Fed’s favorite PCE deflator. For policy benchmark purposes, therefore, the 16% trimmed mean CPI is about as good as it gets.
So the truth is there has been no meaningful daylight between the 2.00% target line in the graph below and the path of the purple bars showing the actual Y/Y change. Every slight undershoot has been countermanded by a slight overshoot, including during April 2019 when the increase came in at 2.27% versus one year ago.
So what is there for the Keynesians not to like on the ostensible matter of Economy, with inflation running at or slightly above target and the U-3 unemployment rate (brown bars) at 3.6%?
If this were a map for a children’s treasure hunt, it would say: Your are here. Collect the prize and stop kvetching!
Fed’s Humphrey-Hawkins Goals: Mission Accomplished!
Beyond being dead on their targets, you have the blazing matter of normalization. To wit, you would think that after more than 10-years of money market interest rates below the inflation level that cutting rates again would be the last thing on their minds.
In fact, the chart below is about the smokiest gun you can find on the matter. During the last 11 years, there have been just two quarters in which the Federal funds rate was above the 16% trimmed mean CPI.
The first of these was way back in Q1 2008—before the Great Recession really got up a head of steam. In that quarter the trimmed mean CPI (blue bars) came in at 2.95% on a Y/Y basis, which was a hair below the effective Federal funds rate (red bars) at 3.20%. Call it 25 basis points of real yield.
Then during the next 42 quarters running the Fed slammed the money market interest rate (federal funds) so close to the zero bound that it never exceeded the inflation rate; and during some periods, such as Q4 2011, the funds rate was 0.10% compared to inflation at 2.57% on a Y/Y basis.
Needless to say, that was economically nuts. It meant that the real rate of interest on overnight money was negative 2.4%—effectively a deep subsidy to borrow money.
Yet who operates on overnight money, or even 30-, 60- or 90-day money?
Obviously, consumers can’t buy a car with overnight money—or even a toaster. If they were using a credit card, in fact, the interest rate was more than 15% for most of the period shown.
Likewise, no businessman would buy machinery with a 10-year productive life on ultra-short term money. Nor would they fund inventories that way because failure to rollover the loan would result in the fire sale of their goods and the ruination of their business.
Nope. The only thing negative money market rates in real terms are good for is to finance the Wall Street carry trades. Speculators and gamblers can afford to fund their working inventories with overnight money because their assets–stocks, bonds and options—are highly liquid and tradeable. If that can’t roll some or even all of their cheap funding, they can quickly liquidate both sides of the balance sheet.
Of course, during a roaring 10-year bull market underwritten by the massive bond buying campaigns of the central bankers, there was no need to worry about rolling-over short-term funds. It was just like shooting fish in a barrel or having a legal printing press.
After all, when your cost of goods (i.e. carry cost of overnight money) is negative in real terms, any asset with a semblance of yield or prospect of even modest appreciation is highly profitable. And it is even more so if you are playing this spread with derivatives because the carry cost of an option is essentially all the speculator has to pay.
So now we get to the last bar in the chart for Q1 2019 and the 16% trimmed mean CPI comes in at 2.22%, while the Federal funds rate finally inches above the inflation line to 2.40%.
What that means, of course, is that after 11 years of negative real interest rates, the money market rate is finally positive, albeit at just 18 basis points.
That’s right. The pivoting cowards in the Eccles Building are now so panicked by the prospect of another hissy fit on Wall Street that they have essentially embraced the proposition that the US economy cannot stand even 18 basis points of real interest rate.
Empty Suits indeed!
We will put in policies that need to be in place to keep the economy, which is in a very good place right now, and it’s our job to keep it there,” he told CNBC’s Steve Liesman in a live interview from a Fed conference in Chicago.
Stated differently, the Fed heads are basically saying their job is to monetize whatever folly the elective and fiscal authorities stumble into:
“We do not know how or when these trade issues will be resolved,” Fed Chairman Jerome Powell said Tuesday. “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion.”
So when a future President Elizabeth Warren puts on a drastic wealth tax causing investment and growth to stagnate even further—why just have the Fed compensate with easier money.
When a future Democratic Congress raises the minimum wage to $20 per hour and puts 20 million people out of work—-just ask the Fed to crank up the printing presses.
Of course, the underlying issue is never addressed. Namely, what are the natural versus artificial reasons for under performance of the US economy, and does one mandate fit all?
We will address that question further tomorrow, but suffice it here to reference our thoughts on the matter, which we unloaded during an extended interview with Neil Cavuto on Fox Business this afternoon.
https://www.youtube.com/watch?v=b1vohs4kRPY&feature=youtu.be
https://www.youtube.com/watch?v=b1vohs4kRPY&feature=youtu.be
Let us also quote Bill Blain’s morning missive about the enormous damage that our monetary politburo has already levied on the financial system—and the far greater train wreck that is sure to follow from the Fed’s current delusion that its continuous capitulation to Wall Street has anything at all to do with Economy:
In 35 years of markets, this is perhaps the stupidest moment I’ve ever seen.
On Friday we’re likely to see another decent US employment number – which should give lie to the illusion the US needs zero rates. But a strong US jobs report will cause the spoilt brat of a stock market to wail, in fear it might not get another lollipop of easing…
If I had any hair left to tear out, would.
Since 2009 “lower for longer” rates have not caused a regeneration of manufacturing, infrastructure or other productive assets. Instead, low rates have encouraged corporates to buy back their own stock, pay their owners larger bonuses and dividends, and fooled investors to buy these same stocks as the most attractive relative asset – which is distortion.
A second unintended consequence is burdening the economy with unproductive assets and obsolete capital assets. Corporate borrowing to convert equity into debt raises systemic weakness across the economy. The Darwinian Selection process which drives growth and causes firms rise and fall according to their ability to manage themselves becomes distorted and lose momentum, leading to too many weak zombie indebted going-nowhere companies to block market niches more nimble new firms could more profitably fill. The long-term consequences are long-term rentier behaviour by owners, and declining real wages (and rising income inequality) as productivity across the nation slides as capital assets are not replaced and upgraded.