The 3 R’s – Rewind, Replay, Repeat


The message from the Fed is much like having your 1980’s Sony Walkman jam and spew the magnetic tape requiring a pencil to repair it. Fed policy is the same. Every month the tape spews out, ruining quality along the way. Instead of admitting the machine is faulty they keep jamming to the beat on Extra Bass, oblivious to their surroundings and skirt being run over by the approaching bus. Yet they hit that part of the tape again and wonder what is going on failing to accept reality.  Rewind, replay, repeat!

Before I delve into the treasure trove prose of the September FOMC minutes, economist Stephen Roach hit the nail on the head with regards to the US Fed something I’ve said repeatedly about their cluelessness:

Moreover, frothy asset markets in an era of extreme monetary accommodation take the pressure off fiscal authorities to act. Failing to heed one of the most powerful (yes, Keynesian) lessons of the 1930s – that fiscal policy is the only way out of a liquidity trap – could be the greatest tragedy of all. Central bankers desperately want the public to believe that they know what they are doing. Nothing could be further from the truth.”

To the FOMC Minutes.

Once again the comments repeated the previous document which described,

“The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff’s assessment that both monetary and fiscal policy appeared to be better positioned to offset large positive shocks than adverse ones. In addition, the staff continued to see the risks to the forecast from developments abroad as skewed to the downside.”

Then the FOMC spoke of its increasingly hard to justify credibility suggesting a rate rise was needed to cover its behind rather than admit policy has been ineffective,

“Members generally agreed that the case for an increase in the policy rate had strengthened. But, with some slack likely remaining in the labor market and inflation continuing to run below the Committee’s objective, a majority of members judged that the Committee should, for the time being, await further evidence of pro- gress toward its objectives of maximum employment and 2 percent inflation before increasing the target range for the federal funds rate…Three members preferred to raise the target range for the federal funds rate by 25 basis points at this meeting. They cautioned that postponing policy firming for too long could push the unemployment rate markedly below its longer-run normal rate over the next few years. If so, the Committee might then need to tighten policy more rapidly, thereby posing risks to continued economic expansion. A couple of these members expressed concern about the potential adverse effects on the credibility of the Committee’s policy com- munications if the next step in the gradual removal of accommodation was further postponed.”

As I wrote last month

“In the press conference Yellen said “Why didn’t we raise”? It does not reflect a lack of confidence in the economy…let me try to set out again…we are generally pleased with how the US economy is doing… evidence is that the economy is expanding more strongly…we don’t see the economy as overheating now…we continue to progress toward our objectives”.

If things are so peachy why has the Fed lowered its 2016 and long term GDP growth target to 1.8%? One reporter sensibly asked “if you’re cutting growth predictions, where is the inflation coming from?” 

I thought the use of the word “overheat” by Yellen several times was mind boggling. If the US economy is at risk of overheating on 0.37% rates and you’ve just cut forecasts to 1.8% long term growth, what does that suggest for a normal operating GDP level? There is no way anyone can take central bankers seriously. The language she used in the press conference was a total fiction.

Time to get out the pencil folks. Preferably with the eraser on the top to wipe out the mistakes.


  1. Bemusing that the market (1) interpreted positively (2) is “relieved” that supposed hikes will be gradual. Does anyone really think the Fed will surprise markets with a successive series of sharp hikes (and into such a benign growth environment)!?



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