The 5 most impactful comments.
1. The US has the easiest financial conditions ever and is far behind the rest of the world in starting to reverse policy.
In fact the Fed increased asset prices over the summer even while it started talking about tapering. It’s still just talk. The Jackson Hole Fed Chairman Powell statement was that there is still no rush to do anything.
It appears that maintaining the S&P 500 rally has become the overwhelming priority.
“No, nothing has mattered. Not the divergences, not the slowing of growth or economic disappointments, not an equity bear market in the 2nd largest economy of the world, not vast pressures in inflation of costs, on the consumer, not valuations. Nothing. Like clockwork markets make new highs every month tracking the Fed’s balance sheet and for show are now making a bottom on the same day each month following ever shallower pullbacks.”
“Failure is not an option, but failure is inevitable for this trend is so steep it is unsustainable.”
2. All around the world central banks have been reversing policy through tapering and raising interest rates.
On Friday South Korea raised rates too. The BOK has a different perspective.
“Despite the rate hike, financial conditions “remain accommodative,” the BoK governor said, with the policy rate being well below the rate of inflation. “We are seeing some side effects from the unusually loose conditions of the past year-and-a-half, so we will normalize interest rates in accordance with the economic recovery,” he said.
3. What drives Chairman Powell’s decisions?
“It’s difficult to see where Jerome Powell’s incentive is to – paraphrasing William McChesney Martin Jr – remove the punchbowl as the party is getting started. It’s very easy, in contrast, to see his incentive to add an extra kick to it.
What other factors could be involved? Don’t miss this debate which got off to a strong start as you can see below.
4. It’s clear that inflation is still trending. There are good reasons for this to continue.
Direct transfers are now permanent crisis instruments and will likely be put into use every time there is an economic setback.
This is an inflationary game changer compared to the decade of stand-alone QE policies. The asset swap QE that has been in place as a perma-instrument since the great financial crisis is NOT inflationary on a stand-alone basis, but if it is used to ensure that funding costs remain low, while governments (the true currency issuer) increase the money stock flowing around in the real economy via large unfunded deficits, then we have an inflationary cocktail in place.
5. Growth may be less sustainable. Without one time spending from transfer payments real personal income has fallen far behind.
Stimulus growth effects seem to have already peaked.
The Fed already has a poor forecasting record and Powell has not had a good experience so far with tightening policy as he overdid it in 2018 and had to dramatically and quickly reverse back to stimulation. The Fed has done so much for so long, the problem now is that the Fed may tighten into a slowdown.
Why risk all that again? Powell must know, or fear, that the soft landing option has passed long ago. Is his real policy simply stimulus forever until it breaks? Then scapegoat something or someone else when it does?