A Benjamin Cole post
The Fed entrapment of itself began with ex-Chairman Ben Bernanke, who slated the tapering down of quantitative easing before leaving office. Bernanke did not reduce QE to, say, “a low and variable level,” that would leave open the door for increasing QE as needed, as a mere policy adjustment.
By closing off QE as an option in 2014, Bernanke left his successor, Janet Yellen, without QE as tool. To use QE again, Yellen would have to engage in a “flip-flop” or policy reversal, considered a cardinal sin in Washington, D.C. talking-head circles. Worse, Yellen faces a vociferous gaggle of tight-money ideologues and extremists, eager to pounce on any Fed policy they can denounce as “activist,” “hyperinflationary” or ineffective.
Not content with having closed off one door, Yellen grabbed the paint brush herself and kept backstepping and improving the floor around her, reminding everyone everywhere that the Fed would likely raise rates in 2015.
So now we are bearing down on 2016, and the Fed still has not raised rates, leading to rising, acute and evidently hysterical discomfort among the prominent herds of “interest-rate crackheads.” For months, the only topic in the FOMC room, and tight-money circles, has been hiking interest rates.
Global trade H1 was down year-over-year. Singapore is in a deflationary recession, Hong Kong’s stock market off YOY. China is wobbly, and Europe in deflation. The Atlanta Fed says Q3 GDP in the U.S. is penciling out flat.
Wages in the United States are dead, and inflation below the Fed’s IT target—and the market expects inflation in the next five years to run at less than 1% on the PCE, or at about one-half of the Fed’s putative “average” target.
Worst of all, the U.S. RGDP is perhaps 10% below where it should or could be, had mediocre economic growth rates been obtained since 2008. I know of no industry straining to meet demand—indeed, most industry denizens still speak of weak demand, and certainly aggregate demand is weak.
But the Fed is trapped. Global central bankers and the other usual tight-money fanatics are now convening at the Fed’ annual Jackson Hole confab, to gird each other up for even tighter money ahead.
Jackson Hole is not a conclave of venture capitalists, real estate developers, business operators or even labor groups and truckdrivers or dockworkers.
People in the real economy are not invited to Jackson Hole.
At one time, the economics profession embraced “independent” central banks as a good idea. Is anyone so sure anymore?