Fed Signalling: From Smoke Signals To Blowing Smoke
via Mark St. Cyr
“For me, deciding whether to raise rates or hold steady came down to a tension between faith and data. On one hand, intuitively, I am inclined to believe in the logic of the Phillips curve: A tight labor market should lead to competition for workers, which should lead to higher wages. Eventually, firms will have to pass some of those costs on to their customers, which should lead to higher inflation. That makes intuitive sense. That’s the faith part.” – Minneapolis Fed President Neel Kashkari explaining his reasoning for dissent at the June 2017 FOMC conclave.
There are times when moments of clarity are expressed unwittingly by those who try mightily to not only obscure their expressed meanings but also make them so indistinct of their true meaning they become indecipherable, hieroglyphic and, what may be more important, appear to mean anything to anyone. Which actually means it’s meaningless inasmuch that usually listening to Fed members explain their reasoning has more in common with a teenager defending their actions with the well-worn excuse of “Because!” Only with a better vocabulary.
Now, with that said, in my opinion, here’s why Mr. Kashkari’s assessment and explanation stands out as a moment of honest clarity: It demonstrates that the whole idea that the Fed was ever “data dependent” at any time was also an act in faith.
Why make such a claim? Well, it’s for this reason:
It is near impossible to any person holding the ability for critical thought, living in the current real world economy, against a backdrop of ever deteriorating macro data to reconcile that today, again, today is not only the best time for raising rates but also raise them at a pace not seen since before the financial crisis. And last but certainly not least, stating, not trial ballooning, but declaring actual dates and amounts for the most feared process concerning Wall Street e.g., a reduction of the balance sheet, beginning in earnest ∼90 days hence (e.g. September).
If one believes there will be no fallout from this decision going forward? I would suggest you’re not caught up in any act of “faith”, but rather, you’re suffering from delusion.
To make my point I ask this question in the same light as was asked many times of recently departed Adam West: “Riddle me this, Batman!”
“How is an economy stronger when all the data shows it to be weaker?”
Answer: “When the Federal Reserve says it is. Data be damned.”
To back up my argument, lest I remind one of what the Chair of the Fed herself, Ms. Yellen, was stating only a few months ago back in the ancient economic history of October 14, 2016, AQE. To wit:
The Federal Reserve may need to run a “high-pressure economy” to reverse damage from the 2008-2009 crisis that depressed output, sidelined workers, and risks becoming a permanent scar, Fed Chair Janet Yellen said on Friday in a broad review of where the recovery may still fall short.
Here’s another from the same article, again, to wit:
Yellen, in a lunch address to a conference of policymakers and top academics in Boston, said the question was whether that damage can be undone “by temporarily running a ‘high-pressure economy,’ with robust aggregate demand and a tight labor market.”
“One can certainly identify plausible ways in which this might occur,” she said.
And what was the response and interpretations to such statements by others far more qualified to understand their implications and tone rather than take mine alone for it? Fair question, and again from the same article:
“This is a clear rebuttal of the hawkish arguments,” to raise rates soon, a line of argument pitched by some of the Fed’s regional bank presidents, said Christopher Low, chief economist at FTN Financial.
“Inflation can go to 3 percent, if the Fed thinks this is temporary,” said Gundlach, who agreed Yellen was striking a chord similar to Summer’s “secular stagnation” thesis. “Yellen is thinking independently and willing to act on what she thinks.”
Her remarks jarred the U.S. bond market on Friday afternoon, where they were interpreted as perhaps a willingness to allow inflation to run beyond the Fed’s 2.0 percent target. Prices on longer dated U.S. Treasuries, which are most sensitive to inflation expectations, fell sharply and their yields shot higher.
With the above for context: Explain what was the catalyst that would implore the Fed ∼60 days after the above idea of running a “high pressure” policy, along with the ever increasing dovish tones that would make actual doves envious to embark on a policy tightening schedule, along with the near overnight manifestation of morphing the most ardent uber-doves of the committee (e.g., Ms. Yellen, Mr. Fischer, Ms. Brainard et al) into a single-minded flock of hawks? Because as per the last voting record, all agreed to the hike, and schedule for balance sheet reduction except Mr. Kashkari.
Was it “the data” that’s improved? Hardly. Even Mr. Kashkari pointed out the obvious. And, as a matter of fact, it’s deteriorated ever further since the beginning of the year.
I have argued there’s only been one change which could have the resulting effect, and it’s not of the economic variety (Hint: begins with “T”). But I implore readers to try to come up with their own based on their own sourced empirical data. All I’ll say before you start is good luck.
To show further just how far off the rails the economy, “markets”, and the Fed’s relationship to them in both understanding, along with believing it has any semblance of control of it other than adulterating it, along with perverting once understood economic fundamentals. The Chair herself made a comment in regards to a question that not only knocked me back in my chair but also made me realize just how far down the rabbit-hole we truly are. It seems to have passed-by the media totally unnoticed. That comment?
It was her response to a question proposed via a New York Times™ reporter (question begins at 26:00) to elicit her interpretation as to how what was once seen as a tightening event has had the same effect as loosening. And if she believed the market no longer cared about Fed policy. Or said differently: Has the Fed lost control? Below is her response. To wit:
“We have certainly noticed the stock market is up considerably over the last year, that usually shows up in financial condition indexes and is an important reason why some of them show easier financial conditions, there’s been a modest decrease recently in the value of the $Dollar, although it’s up substantially since mid 2014. So we take those factors into account in deriving our forecasts and deciding the appropriate stance of policy. We’ve done that. But other things also effect the stance of policy, so there really can’t be any simple relationship. We’re not targeting financial conditions. We’re trying to set a path of the federal funds rate taking into account of those factors and others that don’t show up in the financial conditions index, we’re trying to generate paths for employment and inflation that meet our mandated objectives.”
Got that? As I iterated earlier: appears to mean anything to anyone. Which actually means, it’s meaningless.
But there’s far more to the above than what shows up in text, and it’s this: If you watch the exchange, it’s clear when she makes the statement, “we’re not targeting financial conditions.” She makes that statement emphatically as to make clear the “market” is not an overriding factor for policy decisions.
Fair enough; then I ask once again “Riddle me this, Batman?”
Why was the balance sheet relentlessly expanded to a tune of some $4,500,000,000,000.00 (e.g., $4.5 Trillion) along with continuing a reinvestment rollover policy that’s currently still in effect if “the market” is something that doesn’t have a bull’s eye for outright central bank intervention (along with every other major central bank globally) on its back for the sole means of propping it up as to instate or perpetuate some effect of “the wealth effect?”
Answer: Because they’ve been blowing smoke that’s why. Period. And for those who’ve believed the contrary? Sorry, but there’s no real Santa Claus either.
Think I’m off base? Fair enough. So let’s look at the following for some further clues and ask a simple question, shall we?
Question: So, today, against the likes of the charts shown below is the time to turn so hawkish real hawks are envious? To wit:
The point being made here is not just some random use of putting up a few charts which might not mean anything to many at first glance. What needs to be accentuated and understood is the above charts represent what the data is showing today, how it has rolled over, and what anyone with a modicum of business or economic acumen would believe should be the basis for consideration of anybody, let alone a monitory policy making one to use as a baseline for their “data dependent” reasoning.
But today? It’s meaningless. Why?
Well, I’ll just point to the current decision by the FOMC and let that stand as its own proof. For the Fed in a near unanimous vote of consent and confidence believes raising rates and reducing its balance sheet straight into the teeth of the above is precisely the right thing to do.
Again, why is this such an important point to understand today? It’s for this reason:
Because when the data above were at these same levels (and remember, we’ve deteriorated back to them, not came up to them, an important distinction), it was the underlying basis or “data” used by former chair Ben Bernanke to unleash another iteration of QE known as “Operation Twist.”
Are you beginning to see how all that “data dependent” gibberish along with all the sycophantic Ph.D. talking heads, analysts, economic wizards et al who use the self-generating word cloud after any meeting as to pick and choose what narrative and wording they’ll use to spin some yarn about how they interpret the Fed to mean this or that? Again, they too have been doing nothing more than blowing smoke because you can’t have it both ways. And yes, even if you are on television.
I’m sorry for repeating myself (and I’ve been saying it for years), it’s all been nothing more than an exercise in blowing smoke. And the above shows the proof of that assertion.
The only “twist” that has happened since October is a twist in outcome of that other act of faith that everyone believed was inevitable. Hint: It began with an “H” but ended with a “T” instead. And with that the “market” is now at the mercy of an unflinching phalanx of faith observant “Hawks Are Us” that’s – data be damned – they’re gonna raise then blaze the balance sheet. All while continually blowing smoke so thick they hope it obscures any finger-pointing should the day arrive.
I thank Mr. Kashkari for at least being honest and openly state what many of us have been saying into deaf ears for years. Whether he did it intentionally or not.