In a rather astounding round of testimony, Janet Yellen explained to members of the US Senate that the G20 has determined that utilizing monetary policy for domestic reasons, such as when unemployment is high or inflation too low, is not considered currency manipulation. Thereafter, she also explained that she hasn’t seen any indication that a change of course from planned tightening is needed.
To her credit, she did explain that monetary policy is not on a preset course and that the Committee would consider a range of incoming data in order to set monetary policy to achieve its goals. However, I find the disconnect in logic between here and now vs. her hypothetical of using QE to meet inflation goals simply breathtaking.
The Committee raised the FF rate in an atmosphere of sub 1% PCE with the very vague justification of saving us from future inflation and abrupt tightening (a claim Yellen reiterated in her congressional testimony this morning) despite the warnings from some economists from both inside and outside the Fed that the natural rate was still too low and that the Fed lacked the tools to manage a crisis should the worst happen as a result of the increase.
Markets have tanked every day since and the situation only gets worse whenever an FOMC member comes out to stick to his or her guns.
This situation has lots of similarities to 2008: the Fed having tightened too much in the previous tightening cycle and not relenting soon enough, with its members still fretting about inflation, suggesting more hikes where coming amid market turmoil, indicating they were more interested in inflation than they were in preventing panic.
Two important differences are that they now no longer have housing or any rational fear of inflation to blame for outsized hawkishness. The price of oil crashed over a year ago and the rate hike is recent.
This is what it looks like when the FF rate is too far above the neutral rate. It just doesn’t take a rocket scientist to figure it out. Although, I am positive a rocket scientist couldn’t figure out why the supposedly smart people can’t figure it out.
Nevertheless, there is only one way to fix this before it gets out of hand. Yellen and the hawks MUST back down – NOW. If they do not, they need to be handed their pink slips and be escorted out to the parking lot before their monetary mismanagement leads to the pink slips being handed out to innocent people en masse.
As I’ve said often, hawks are obsolete. Bring on the doves.