Authored by Eric Peters, CIO of One River Asset Management
“Thank you. I’m happy to take your questions,” said Jay Powell, an inner panic rising, more flight than fight. He’d lowered rates 25bps to 2.00% and knew as well as every reporter in the room that the Federal Reserve has never had so little ammo at an easing cycle’s outset.
When Bernanke first cut in September 2007, he slashed 50bps. That left 475bps until he hit 0%, which happened 15 months later. But back then, all central bankers had ample arsenals. European overnight rates were +3.00% in September 2007. Chinese one-year deposit rates were +3.60% as their GDP expanded at a stunning +11.9% pace. Even Japan’s central bank had lifted rates to +0.50% while still printing yen, buying bonds.
And back in 2007, every developed nation retained ample room to expand debt/GDP ratios to heights previously reserved for wartime.
“But that was then, this is now,” thought Powell, pointing to the first reporter. And something strange happened. America’s Fed Chairman felt himself slip onto autopilot, as he floated outside of his body, rising above to observe the room, in quiet contemplation.
Below stood a naked man at a podium, accomplished, well spoken, a touch flustered, fielding questions, pretending to hold great power. The room was filled with polite reporters, making their usual inquiries.
“The Fed has historically cut rates by an average of 550bps to recover from recession. Yet this poor fellow at the podium has only 200bps left,” thought Powell, floating in the corner.
China’s economy is slowing, drowning in debt. European rates are already -0.40%. Japanese rates -0.10%.
“Negative rates obviously don’t work,” he thought, “And QE hasn’t spurred an investment cycle, just inequality.”
Powell felt pity for the poor fellow below, living a lie. And he quietly wondered,
“When will a reporter finally ask: Now that central banks are becoming impotent, and the politicians are taking over, will you be America’s last independent Chairman?”