Savvy Participants Adjusting Tactics To Fed’s Emergency Policies
US Fed officials differ in public and in private, and will likely do so for the foreseeable future about interest-rate strategy.
Richmond Fed President Jeffrey Lacker, the only dissenter among last week’s FOMC 10 voting members, commented: “Such exceptionally low real interest rates are unlikely to be appropriate for an economy with persistently strong consumption growth and tightening labor markets.”
Mr. Lacker noted keeping interest rates at their current Zero+ mark deviates from the way the Fed has responded to the economy in the past, which is dangerous because public understanding of the Fed’s behavior has been “an essential foundation for the monetary stability we currently enjoy.”. .
St. Louis Fed President James Bullard, a FOMC voting member in Y 2016, said his case for normalization is simple: The Committee’s goals have essentially been met, but the committee’s policy settings remain stuck in emergency mode.
He also did not like some of the Fed’s Chairwoman’s comments: “… I think developments that we saw in financial markets in August, in part reflected concerns that uh, Chinese — there was downside risk to Chinese economic performance and perhaps concerns about the deafness with which policymakers were addressing those concerns … a lot of our focus has been on risks around China but not just China, emerging markets, more generally in how they may spill over to the United States.”
Mr. Bullard concluded financial markets tend to wax and wane, sometimes suddenly. “Monetary policy needs to be more stable.”
Besides all that, please remember: The FOMC’s policy settings remain “at emergency levels;”
The Fed’s balance sheet has blown up to about $4.5-T from the $800-B where it was in Y 2006;
The policy rate remains at about 13 bpts, where it now has been for nearly 7 years while the Committee thinks the long-run level of the policy rate should be about 350 bpts.
You do not have to be a banker to see the Fed has an abnormal situation that cannot go on forever. The FOMC needs to decide to start their long way back to “normalization” sooner rather than later, because in an “abnormal” interest rate world trade continues to face strong headwinds.
The Fed cannot resolve slowing global growth because the relationship between world trade and world income has undergone structural changes that has resulted in the current global slow growth environment.
That being the case participants now have to learn to live with it and adapt investment strategies to this new “normal.”
Stay tuned…
HeffX-LTN
Paul Ebeling
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