Every time the idea is raised that the Federal Reserve seems to be acting, or basing policy decisions with some form of political bent, immediately the insinuation is either brushed off as ludicrous, or better yet, even conspiratorial. If the question is dared to be asked, or insinuated directly at any official during a public forum? More often than not the stuttering and stammering as to explain away any such notion becomes a real-time expression of just what was meant when applying the old adage, “doth protest too much.”
However, today, it appears no matter how curtly it’s deflected – the actions appear for more indisputable. Here’s a little history:
On December 14, 2016 the Federal Reserve raised interest rates for the first time since Dec. 2015. So as to save you the inquiry, yes, that was the only time during all of 2015 as well as 2016. These were the only two hikes since 2006. Yes, that’s nearly 11 years ago.
During the period of 2015-16, whenever a Fed. official was asked about conditions, or projections, getting a straight answer was just as futile as getting the same answer from one member to another. Again, it appeared this was just another real-time display of old examples such as, “good cop – bad cop” with some “I can no-longer recall precisely what I said I saw yesterday” eye-witnesses thrown in when asked about prior remarks. i.e., Think, Rorschach test.
This is when it become patently obvious one could no longer take wording, or implied messaging into account and must move to the more obvious using, once again, another maxim. e.g., Forget what they say – watch what they do.
Of course, that doesn’t mean to never take into account what is said. Using it properly simply means to put far more weight into past actions over any words-of-promise for tomorrow. Andrew Carnegie was a big believer of it and used it extensively, as do I.
This was the reasoning why before the December meeting of 2016 I opined that Nov. the Fed. may in fact not raise rates as many were concluding. Here’s what I stated. To wit:
“Everyone (and I do mean everyone) is flatly convinced the Fed. will raise rates this December. Personally, I’m not so convinced, while I’ll also add I’m more in the “will not” camp today than I was previous. i.e., I’m at about 80/20% plus today favoring they won’t. And here’s why….
At this last slated meeting and resolution the Fed., once again, chose inaction for action, keeping interest rates unchanged. Yet, we are told (by both the Fed. and their “watchers/pundits”) that the Fed. is “ready to move” and that “this December it’s really a go!” and more.
Fair enough, but if that is true: Then how does supposedly “encouraging” and “improving” data that swayed one of the more birds-of-a-feather doves (Boston Fed. president Eric Rosengren) to cast a dissenting vote in the previous meeting just 60 days later to change his stance? (e.g., back to should not raise from should)
Again, to make this point more clear: All when in less than 30 days – they are said – to really, really, really just going to “do it” this time?
It doesn’t make a lick of sense for any coherent communication based strategy, as well as projected policy stance. Period. Unless – that’s precisely (and I’ve argued exactly that) what you want. i.e., Never-ending obfuscation, and confusion. All wrapped in incoherent, nonsensical policy mumbo-jumbo”
To make clear: this was in November where both the “data” for a supposedly “data dependent” Fed. had not only rolled over, but so too had the “markets” and were, once again, threatening to break through prior support levels that were only negated when one Fed. official after another took any media available sending out soothing dovish tones to reassure the “markets” they had their finger poised above the “control-p” button should the need arise.
Couple the flip via Mr. Rosengren, along with Ms. Yellen’s “high pressure” speech in October, along with others such as Ms. Brainard’s consistent dovish stance and arguments, and last, but certainly not least; the believed inevitable surety that Ms. Clinton would emerge victorious in Nov. One could clearly see how The Fed. was setting itself up as to not “rock-the-boat”, regardless of any flip-flops or hawkish statements prior. i.e., The action for taking no action seemed to be the play at hand.
After all, as the Chair herself implied only 30 days prior (paraphrasing): “The harmful effects from the financial crisis were still within the economy, and the only way to possibly break their hold was to let inflation run hotter while keeping in place an accommodative monetary policy.” It had all the attributes for the setting up the reasoning for doing just that. If not, then why even make it? Especially by the Chair herself.
Then – Ms. Clinton lost. And suddenly all doves, dovish statements, dovish reasoning, and more were gone. Now, it’s an unflinching-flock of Hawks-Are-Us. All data prior? Hint:” What data?” The only data one needs to see is the vote tally for raising rates, and running off the balance sheet. i.e., A consensus of “Yes!” is an understatement.
And that brings us to today and the implied “normalization” path the Fed. is employing currently. For this is where the, “If you say you’re not one thing, then why are you doing things that demonstrate the exact opposite?” fits in.
As I stated back in December following the conference supplied by Ms. Yellen. I made the case that if one looked at the posturing, and listened to the rationale given as to explain away why the Fed. appeared to everyone watching to have morphed from dovish to hawkish (the Dot-Plot gave the first clues) her answers had more in common with grasping-at-straws than anything lucid. It was from that moment I made the case that the Fed., regardless of what they say going forward, were going to tighten and had indeed turned into hawks based on the election results.
No one agreed, and I was widely mocked by many in the main stream business/financial media for even implying it. After all, the “data” clearly showed not raising for another year was clearly applicable with past reasoning and actions. At the most was iterated, they may consider,( consider, not actually move) September as a possibility. Balance sheet talk? Forgetaboutit! was the reaction, even from the likes of Mr. Bernanke.
But now – here we are. And the biggest item I believe that’s both unrealized, and unaccounted for by most, and especially “the markets”, along with what I deem a “punctuation point” to the political, is this. To wit:
During all of Ms. Yellen’s chair-ship, along with most of her predecessors, one over arching theme was to not allow even the hint of any unforeseen or even foreseeable turbulence to enter the fray as budget talks or “resolution votes” transpired.
Always the case for “developments” was put foremost in front of any possible disruptive element that may occur during the process. i.e., Don’t make the “markets” more nervous than they already are about debt, debt-ceilings, shutdowns, and more. Let alone illuminating the Fed. in any possible unflattering role via casting a spotlight of “raising borrowing costs” in the middle of it.
And yet today?
The Federal Reserve has raised rates not once, not twice, but three times in under 6 months, and – and it’s the big one – has thrown the biggest of all bugaboos that the “market” fears (e.g., balance sheet reduction) directly into the teeth of one of the most important budget battles coming up this summer in years. Look for the term “shut-down” to re-enter the lexicon in increasing and ever vociferous manner from this point forward.
With the proposed wanting of setting new tax policies, Obamacare reform or repeal, infrastructure spending and more. Along with the ardent political bickering and who knows what more that will take place. The stakes could not be higher of exposing for everyone to see that the Fed. has made a blatant policy error decision with just the raising of rates via its current schedule. Especially should the “markets” begin faltering ever further going in.
This alone should be a real cause for concern for anyone questioning judgment or efficacy of current monetary policy based on current data. Again, that alone, and by itself, warrants the notion that the Fed. is taking a huge risk for backlash should it be proven out as such. i.e.,”Policy error” and “Lost credibility” will also enter the lexicon with the same furor and frequency as the political strife.
But, (and it’s a very big but) throwing balance sheet reduction certainty, with time schedules and amounts, into the that mix?
It turns the idea of “risk” on its head and wreaks of political skullduggery of the worst kind. And will not go unnoticed should the effects of such foolishness manifest.
As I implied at the opening: If the Fed. wants to keep stating it’s not politically motivated.
It should stop doing what can only be concluded as such.
© 2017 Mark St.Cyr