Commenter TravisV pointed me to a Zero Hedge post outlining the “dovish” discussion buried deep in the latest release of Fed minutes.
I am probably committing MM heresy with this post for two reasons. The first being the bit of surprise that the terrorist attacks smack in the middle of Paris had little impact on US markets and it appeared, at least to me, to express some doubt that the FOMC will start its liftoff from the ZLB next month given that they had been trending downward most of the last couple of weeks. And the second is that despite the notification I received on my iPhone this morning from CNBC stating that that Fed officials aren’t boxed in for December, I am looking at a huge credibility problem. The squawking about liftoff has been going on for quite some time, something the FOMC was never going to be able to rationally and confidently do, and further delays are going to require a lot of explaining which they don’t seem to be very good at. At least I haven’t noticed the word “mistake” publicly uttered in reference to themselves – ever – no matter how consequential.
By the way, Reuters reported over the weekend that the FOMC announced an expansion pf their reverse repo to $195B /mo. And so it really does not look to me like there are any concrete steps going on indicating a change of heart, with the act of actually raising the target funds rate being a formality that reflects an already manufactured reality.
If I had to guess, there just may be somewhat of a surprise that the Wicksellian rate is not moving in the expected direction. So much for playing with things they don’t understand. I’d prefer that if they wish to dabble, they do it with stuff that has the greater likelihood of erring on the side of loose next time, no harm no foul.
Additionally, I found the tone of the Zero Hedge post to be sort of strange, as if the discussion about the natural rate were some sort of hidden gem in a pile of steaming stinky stuff. And it just seems to me to be an indication of the FOMC’s communication problem. Janet Yellen says the FOMC decisions are data-dependent, but which data it happens to be is a complete mystery given that conditions have deteriorated since the summer and a December rate hike is still very much on the table. To me, nothing that comes out of the FOMC is useful or meaningful, just a mass of menacing incoherence; and I just don’t have a warm fuzzy that there are pleasant surprises instore.
I could be wrong, however. I was wrong in September when I thought the FOMC would just lay it on. But I would just say that I could be wrong about December specifically, but I don’t believe I am wrong in general that the wheels are already in motion and we’re going to feel the poor monetary policy fallout if it hasn’t started already.
I wonder though, how much of this is really going to end up being excusable after discussions about the equilibrium rate showed up in the minutes. One can expect someone like me to not know or care what that means. But I truly expect far more from an institution that is supposedly full to the brim with much smarter people than me.
PS: This David Beckworth post shows the movement of the equilibrium rate in the wrong direction for most of the year. Though I think I have to disagree with the statement that the Fed was too loose during the “boom” period because it matters what happened in the period prior. If money was tight in the early 00’s, then it’s reasonable to to assume makeup, and I am unsure how logically consistent it would be to advocate level targeting and come to the determination that money was too loose during that period. And I think this is why we need to break out of the talking about interest rates prison cell that has been our complete undoing.
PPS: I would also disagree that this data proves the Fed did not and is not “artificially” suppressing interest rates when it does have influence over this rate as well… just not in the way most people think… And yes, the Fed does need to stop “artificially” suppressing the equilibrium rate – can the reverse repo and pour on the QE ’till she blows.