By Michael Every of Rabobank
As flagged yesterday, the Fed came, they saw,…and the Fed did even less than most had expected. After an exhaustive round of “The Fed listens” exercises, after teams of its economists and heavy thinkers got together to find a solution, the multi-year strategic policy framework review came up with…a shift to targeting inflation averaging 2% over the long term rather than the medium term and even greater tolerance for low unemployment.
That’s it. Not even yield curve control. Not even nominal GDP targeting. Nada.
This makes a mockery of those hoping for substantive change after such an exhaustive process. It makes a mockery of those expecting any substantive improvement in the future economic outlook. It makes a mockery of the army of Fed economists and their models and assumptions. As I said yesterday, it’s all political-economy…on which note please see here.
Yesterday was like a hunter-gatherer coming home to his starving tribe after yet another unsuccessful hunt for wild boar —because he uses a spear with no sharp flint on the end— and saying: “Don’t worry! After a policy review I am sticking with the spear, but will now catch more boar over the long run, so you will all get enough to eat.” This as winter approaches and it’s berries, berries, and berries on the menu again for those shivering round the fire.
Another way of looking at it, and one I’ve flagged before, is an awful echo of the end-days of the former Soviet Union. There were some planet-sized brains among the apparatchiks running that place. The problem was that the entire system didn’t work, and any tinkering with it could never achieve anything: the political-economy had to change, or nothing did. As a result, time after time, committee after committee of technocrat PhDs would meet, debate…offer up more agitprop jargon, and decide to build a new statue of Marx or Lenin.
Allow me to excerpt from the superb note on this latest Fed debacle from our Fed whisperer Philip Marey. First, he notes that the FOMC announced a 2% inflation target back in January 2012; the FOMC minutes of the October 2014 meeting then made clear this was symmetrical, and that over or under 2% was seen as problematic. The policy shift we saw yesterday has been in the pipeline since then. “During the Q&A at the Kansas City Fed event Powell said the Fed intends to do this kind of monetary policy review every 5 years. Does this mean that we have to wait 5 more years for the next negligible progress?”
Philip goes on to note: “The much deeper problem for the US economy is the asymmetric impact of Fed policies on households and businesses. The Fed’s monetary and regulatory policies have contributed to a form of capitalism where the rewards are going to the 1% and the risks are borne by the 99%. The current crisis response has made it painfully clear again that the Fed’s policies benefit high income individuals and large corporations, while small businesses and low income individuals bear the burden. While the Fed likes to see itself as part of the solution to America’s economic problems, it should ask itself whether it is also part of these problems.”
The market took a while to digest what it thinks this Fed move means. The end result was US 10-year yields jumping 12bp intra-day and sitting at 0.77% as I type, steepening the yield curve. Even the 5-year shot up from an intra-day low of 0.26% to a high of 0.31% and is at 0.32% at time of writing. In other words, it would appear that somebody seems to think that this will work and that there is now a moderately higher chance of higher inflation further down the line.
Really? By doing nothing for longer against a post-Covid-19 structural backdrop that is far, far worse than it was when the Fed’s policy review began, the odds of it meeting its future goals have improved? That’s an interestingly Panglossian view: perhaps we should all do more of nothing more often!
Meanwhile, even as the market is pushing US yields higher, the USD is on the back foot once again. Presumably, someone must be thinking that the Fed doing even less than was expected of the kind of policy that the more of which you do, the less success you get, is going to mean that the US government has to do more. Indeed, another new fiscal stimulus package, which is still not on the horizon in DC according to public statements, is being presented as the next trigger for USD selling. Movement in that direction might not have been accelerated by anything the Fed did, but it likely will be on the back of reports that a major US credit card firm is cutting consumer credit limits.
Well, let’s see how the rest of the world likes the same higher long yields the US is dragging them all towards: 10-year Aussies are now over 1% again, for example. Let’s see how their wobbly economies can cope with that, and how long before they too have to inject new monetary or fiscal or fiscal-monetary stimulus. Let’s see how much global demand there will be for those currencies when that inevitable happens.
For example, Tokyo CPI, which leads the national, was 0.3% y/y today vs. 0.6% expected, and -0.3% ex fresh food vs. 0.3% consensus, and -0.1% ex energy too, vs. 0.4% consensus. A whole lot more Japanese stimulus of the kind we know doesn’t work, and which the Fed is studiously copying, must surely be in the works?
Meanwhile, certainly putting the political in economy, Japanese PM Abe is stepping down for health reasons. This is a major development given under Abe Japan has seen political continuity, when the previous tradition was a rotating door of prime ministers. Will the new PM continue Abenomics? Will they actually implement the third arrow of structural reform (i.e., political-economy)? And how about the geopolitical implication given Abe has been pro-US and building up a regional alliance with Australia and India? The knee-jerk reaction has been a fall in the Nikkei and risk-off JPY buying.
More uncertainty. Indeed, the only certainty we have is the one that the Fed is providing – of the wrong kind.