Kashkari should have joined the Treasury, not the Fed!

The title of his speech is revealing: Nomonetary Problems: Diagnosing and Treating the Slow Recovery, where he says:

I must acknowledge up front that most of the policy prescriptions I will identify are outside the scope of monetary policy. Monetary policy is largely doing what it can to support a robust recovery, and what remains are fiscal and regulatory policies. If we are able to apply our research expertise to identify potential solutions, I believe it is appropriate to do so and then leave it to other branches of government to decide whether or not to pursue them

If, as he says “I joined the Federal Reserve because I want to help tackle the most important economic policy challenges we face as a country”, he´s wasting his time at the Fed!

The view of central bankers that the problems they face are “nonmonetary” is prevalent. Just to give one example (among many):

Throughout the “Great Inflation” Arthur Burns argued that inflation was a nonmonetary phenomenon (Unions, Oligopolies, Oil Producers, etc.).

Now, the view remains the same “throughout the “Great Stagnation”!

Must be lively in the FOMC these days

A James Alexander post

As expected the FOMC made no change to its target rate. But we still think that the discussions at the FOMC are much more lively than they have been. Somehow, the “normalization” program pressed by the Fedborg and championed by the anti-prosperity inflation hawks has been delayed. Hooray!

We reckon that some of the newbies on the FOMC, particularly Neel Kashkari are shaking things up a bit. In an internal interview released the other day he made the refreshingly honest statement:

“Clearly what happens in global financial markets, as an example, will affect the U.S. economy. We can’t be blind to the fact that actions we take could affect global economic developments, which in turn will have an effect on our economy. We need to think about those feedback loops, and I believe that we do. It is one of the many inputs that we look at as we decide the optimum course of monetary policy.”

It is such a change from the stance of the Fed until recently that believes it operates somehow independently of the real world rather than a participant. Sure in the long run money is neutral, but in the short run, in fact for the last eight years, it has not been neutral. Monetary policy was way too tight in 2008 and thus caused the recession. And policy has continued way too tight so that the US has had a very prolonged recovery from that recession. And may now be so tight again as to cause a new recession.

Obsession with keeping projected inflation below 2% means a sword of damocles of potential monetary tightening has consistently hung over the market and made economic growth like pushing water uphill. And since mid-2014 the US has had passive tightening, and after December 2015 actual tightening.

The Fedborg is not responding well to the uppity newbies on the FOMC. It is spitting out bizarre statements like today’s “Labor market conditions have improved further …” when it’s own Changes in Labour Market Conditions Index clearly shows them worsening.

It tries to highlight  that although nominal wage growth has cooled, real wages are much better.

“Growth in household spending has moderated, although households’ real income has risen at a solid rate”

Hasn’t it heard of the sticky wages problem? We had always thought that this key insight, perhaps the only insight, macroeconomics has had is rather a problem. Naively pointing to real wage growth in a deflation has long been regarded as a basic error – one which would lose a lot of marks if spotted in any undergraduate economics essay.

The Fedborg wants rates up because it believes rates are the tool for the implementation of monetary policy. Market Monetarists, like the market itself, believe expectations about future policy are the tool. The Fedborg doesn’t like expectations as it thinks they are harder to control, based on market consensus rather than a hard price like the Fed Funds Target Rate. Consensus is dangerously democratic or even anarchistic in that it may be different from the Fedborg’s own, autocratic, view of the world.

At least today the Fedborg has been shut up. We fear it won’t remain quiet forever and that any sustained market momentum will put it back on top. Hopefully, Kashkari and others might realise that this is also a feedback loop:

[market-strengthening -> Fed tightening talk -> market weakening -> Fed backing off -> market strengthening -> Fed tightening talk -> … ]

And a loop that needs breaking in order to achieve sustainable and stable growth – by a shift away from inflation targeting and towards nominal income growth targeting.

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.