Is the FOMC about to split? Sooner the better

A James Alexander post

If it’s possible for the Supreme Court to become supremely politicized, why not the FOMC too? No area of US government is free of it.

In an election year it seems odd that the FOMC should be taking such huge risks with the economy by actively tightening monetary policy. NGDP growth is slowing horribly, and expectations have fallen too – judging by equity markets, bond yields, TIPs yields and the US dollar. The Non-Manufacturing ISM, 80% of the economy was weak, joining the already weak industrial sector.

Of course it’s even odder that the Chair is an avowed Democrat, but Yellen has long since gone native, just like Bernanke, forgetting all their pro-growth dovish bias in favor of the instinctive anti-inflation hawkishness of the Fedborg.

However, there is hope for an optimist like me. The recent minutes of the FOMC’s January meeting contained this snippet:

a few participants noted that direct evidence that inflation was rising toward 2 percent would be an important element of their assessment of the outlook and of the appropriate path for policy.

Apparently these were voting members putting down a strong market. This looks like a growing revolt of the doves.

The doves will have had their numbers and morale swelled by the arrival of Neel Kashkari. He seems a very lively  and worthy successor to Kocherlakota. He’s also young but battle hardened in actual, real, electoral politics. He doesn’t sound at all like his ultimate ambition is to be absorbed by the Fedborg into grey’dom and inflation doom-mongering. He seems in a hurry to make his mark. Officially, he’s a Republican, but doesn’t sound like the usual right wing inflation nutcase.

Doves will also have been boosted by the exit of the always-wrong Richard Fisher as his replacement seems much more balanced, and Texas needs a boost now, anyway.

The rest of the minutes was the usual dreary on the one hand this, on the other that. The epitome of the Fedborg, it’s “Policy Normalization” program only gets two mentions, thankfully.

It would all be funny,if it weren’t so tragic.The fact that the Fed can’t look in the mirror and see that its constant reiteration of being “data dependent”, is  just a constant feedback loop. They just can’t see that they cause the data to move, thinking it somehow has nothing to do with them (i.e. exogenous).

Not even someone as smart as Tim Duy can see the irony of what he correctly identifies as what is going on:

The Fed will take a pause on rate hikes. An indefinite pause. The sooner they admit this, the better off we will all be. Indeed, the sooner they admit this, the sooner financial markets will calm and the the sooner they would be able to resume hiking rates. 

What? Resume hiking rates? How stupid does he think the market is? Well, maybe it was duped once, but surely not twice.

That is why it is so hard to predict a recession, because it is so hard to predict when the madmen who are in a constant feedback loop will realize they are in it and change their behavior.

6 thoughts on “Is the FOMC about to split? Sooner the better

  1. Kashkari called for the big banks to be broken up. I guess he’s not aware that smaller banks are more prone to failure in an aggregate demand shock. He also called for banks to be holding greater amounts of capital so that they can weather any problem and that makes me think he doesn’t understand the effect this would have on monetary velocity.

  2. Gordon
    If you adjust for the size of small banks it’s not obvious they fail more. The biggest banks can’t really ever be allowed to “fail” because they are, well, too big.

    They use their TBTF’ness to enter into huge leverage, via derivatives, that no standalone entity could possibly be taken seriously as a counterparty. If you can’t have a niche wholesale derivatives player it tells you something about that market.

    Velocity in financial markets is not the same thing as velocity of money. Although, if you are right, the solution is simple, more money, not TBTF banks.

  3. I agree that more money (or NGDP level targeting) is the answer. Then it does not matter if banks are large or small if demand shocks are avoided. But I have no confidence at this time that the Fed would offset a drop in velocity with an increase in the money supply.

  4. Gordon. If you have no cofidence that the Fed would offset a drop in velocity with more money then you can have no confidence in the Fed. Technically speaking, that is exactly their primary responsibility.

  5. Pingback: FOMC splits, and it is a good thing! – NGDP Advisers

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