On Saturday, the 2016 edition of the Fed’s Jackson Hole two-day symposium came to an end, and as many expected, following long bouts of rhetoric, circular statements and hollow bluster, much of it contradictory, both the participants and markets remain as confused as ever.
In addition to Friday’s Yellen-Fischer one-two knock out punch, below are some of the key quotes, courtesy of Dow Jones
“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal-funds rate has strengthened in recent months.”
– Federal Reserve Chairwoman Janet Yellen, Friday, in a keynote speech at the conference:
When asked whether the Fed could raise rates at its meeting next month and again before the end of the year, he said Ms. Yellen’s speech “was consistent with answering yes to both of your questions, but these are not things we know until we see the data.”
– Fed Vice Chairman Stanley Fischer, Friday, in a CNBC interview:
“We should be on a program of gradual rate increases,” though he added, “We can afford to be patient” when it comes to acting.
-Fed governor Jerome Powell, in a Bloomberg television interview Friday:
“If the economy in the next few weeks performs consistent with my sense of the economy, then I think we ought to have a serious discussion at the September meeting” about raising rates.
– Atlanta Fed President Dennis Lockhart, Saturday, in a WSJ interview:
“If we had a lot of good news and we got into the September meeting and other people wanted to go, I could support that–but again I’m talking about one increase and no planned increases after that.”
– St. Louis Fed President James Bullard, Saturday, in a WSJ interview:
“The case for raising rates in the near term “has been strengthened.”
– Dallas Fed President Robert Kaplan, in a Bloomberg television interview Friday:
“I see a gradual…upward pace in interest rates as being appropriate.” As to when the Fed might raise rates next, she said, “I go into every meeting with an open mind.”
– Cleveland Fed President Loretta Mester, in an interview with CNBC Friday:
“We will act decisively as we move on… The bank will carefully consider how to make the best use of the policy scheme in order to achieve the price stability target. The “zero lower bound is no longer insurmountable” as a policy constraint “in practice”; “It is natural to assume another lower bound exists,” and the current rate is “still far from such a lower bound”
– Bank of Japan Gov. Haruhiko Kuroda said at the conference Saturday:
“Negative rates work and are nothing extraordinary or immoral or absurd.”
– European Central Bank executive board member Benoit Coeure, at the conference Friday:
A Fed rate increase “might trigger some reactions from our side, but we will also respond to other determinants of inflation.”
– Bank of Mexico Gov. Agustin Carstens, in a WSJ interview Friday:
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And while Wall Street has been busy trying to decipher what all these statements mean for the probability of a future rate hike, and whether one would take place in September, or December, or both, the real underlying message that emerged was one noted previously: a common plea to their colleagues in the rest of government: please help.
In other words, the push for a transition from monetary to fiscal policy was the true agenda behind this year’s Jackson Hole.
To be sure, while fiscal policy was not on the formal agenda for the conference, it was a steady part of the dialogue as policymakers thought through policies for a post-crisis world. One of the central worries is that households and businesses have become so cautious and set in their outlooks – expecting little growth and little inflation – that they do not respond in expected ways to the efforts central banks have made.
Or, as the WSJ tacitly put it a day before Jackson Hole, central banks are now failing, and as even Hilsenrath blasted, “years Of Fed missteps” have led to populism, and disillusion with the system. The result has been a historic collapse in popular confidence that the Fed “will do the right thing for the economy”
As Reuters’ Howard Schneider summarized the Jackson Hole post-mortem, “mired in a world of low growth, low inflation and low interest rates, officials from the Federal Reserve, Bank of Japan and the European Central Bank said their efforts to bolster the economy through monetary policy may falter unless elected leaders stepped forward with bold measures. These would range from immigration reform in Japan to structural changes to boost productivity and growth in the U.S. and Europe.”
Without that, they said, it would be hard to convince markets and households that things will get better, and encourage the shift in mood many economists feel are needed to improve economic performance worldwide. During a Saturday session at the symposium, such a slump in expectations about inflation and about other aspects of the economy was cited as a central problem complicating central banks’ efforts to reach inflation targets and dimming prospects in Japan and Europe.
The ECB was perhaps the most vocal, after its executive board member Benoit Coeure said the bank was working hard to prevent public expectations about inflation from becoming entrenched “on either side” – neither too high nor too low. But the slow pace of economic reform among European governments, he said, was damaging the effort. “What we have seen since 2007 is half-baked and half-hearted structural reforms. That does not help supporting inflation expectations. That has helped entertain disinflationary expectations,” Coeure said.
What Coeure did not acknowledge is that it is the ECB’s role in keeping rates at record low levels as a result of its government (and now corporate) debt monetization that has allowed Europe’s government to completely ignore structural reforms. After all, if the market no longer signals a reaction to governmen policies, either favorable or otherwise, what is the point of putting one’s political career at risk if interest rates won’t budge.
Bank of Japan governor Haruhiko Kuroda followed a similar path and said he is in regular talks with Japanese Prime Minister Shinzo Abe about opening Japan to more immigration and other politically sensitive changes needed to improve potential growth, currently estimated at only around one percent annually. As noted before, Fed Chair Janet Yellen devoted the final page of her keynote talk on possible monetary policy reforms to a list of fiscal and structural policies she feels would help the economy.
Kuroda came very close to also admitting defeat, acknowledging that household expectations have not moved, and said the BOJ was prepared to continue its battle to figure out how to shift them. Essentially, the BOJ will double down on what is now no longer working, but is effectively hurting both the Japanese banks and the economy.
“Japanese inflation dynamics remain vulnerable,” Kuroda said. “It could be that long-term inflation expectations are yet to be anchored in Japan” at the bank’s 2 percent target.
This, despite, “flooding the financial system with cash, and voicing a steady commitment to their inflation targets” in an effort to make people believe they will be met. The conclusion one can draw is that while central banks retain some credibility among markets, at least inasmuch as rising asset prices are concerned, the general public now openly ignores any central bank forecasts, and why not: with Fed interest rate “forecasts” such as this one, it is clear that not even the Fed has any idea what is coming.
Where does all this confusion leave us? According to one economist, what happens next may put the past 7 years of simple “financial repression” and central bank failure to shame: in a lunch address by Princeton University economist Christopher Sims, “policymakers were told that it may take a massive program, large enough even to shock taxpayers into a different, inflationary view of the future.”
“Fiscal expansion can replace ineffective monetary policy at the zero lower bound,” Sims said. “It requires deficits aimed at, and conditioned on, generating inflation. The deficits must be seen as financed by future inflation, not future taxes or spending cuts.”
In other words, openly monetizing the debt with the intent of generating runaway inflation: think helicopter money on steroids, a strategy that ultimately risks the dollar’s status as a global reserve currency.
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Is a “shock” fiscal stimulus on the table? As Reuters concludes, “it was not clear whether such ideas will catch on. But there was a broad sense here that the other side of government may need to up its game.”
And as central bank policies continue failing, it will. As Deutsche Bank’s Dominic Konstam said over the weekend, “we are inclined to expect persistent financial repression with low real rates at least until as and when the US economy slows enough to provoke a reactionary fiscal response.”
So there it is: all it will take for central banks to get their wish – world governments shocking “taxpayers into an inflationary view of the future – is for the economy to collapse. Because if the Lehman bankruptcy launched the greatest wealth transfer in history from the middle class to the world’s wealthiest, so the next US recession
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