In response to an FT article by Sam Fleming on 29th January 2016, entitled 'Federal Reserve: Credibility on the line'
1. A look at leading economic indicators such as trade figures, ratio and trend of sales/inventories, retail sales, durable goods etc. indicates that the US economy is turning down
2. The Fed uses tools like the Phillips curve to guide its policy-making – in my view the Phillips curve is bunkum. However, even if it were not, it is being ‘fed’ (pun intended) with inflation and employment data that have had more ‘work done’ than Meg Ryan
3. Even if the data were good, employment is a lagging indicator – it doesn’t tell you you’re in a downturn until you’re already well into one
4. In short – the Fed are possibly the most clueless organisation in the world when it comes to forecasting economic downturns – they even manage to make the IMF look good
5. Much of the talk of a ‘mistake’ is a value call on whether or not it is the Fed’s job to bail out the stock market, or indeed any other group. However, the real ‘mistake’ is they haven’t got a clue what is going on in the economy because they use crappy models and tortured data. They are therefore likely to disappoint whether you believe in the virtue of central planning or not (I don’t – I believe that they are a group of high IQ, probably well meaning people, who despite all that, are not very good at understanding how the real economy works)
6. Irrespective of whether or not the downturn turns out to be a shallow correction or a hard landing (I think it will be hard), the Fed, if it were being true to its policy track record over the past thirty years, would now be easing
7. There is a view that the Fed should have started tightening much earlier. E.G. Mohamed El Erian recently remarked on CNBC that QE1 was good, but that they should have started tightening as soon as the initial crisis was averted. He added that this was not done because the politicians were not ‘there’ to hand off to. Irrespective of whether you are a fan of the Fed, there is truth in this. The Executive and the Congress have effectively outsourced the economy to a group of unelected academics.
8. Any talk of four rises this year is emanating from cloud cuckoo land. I personally think they may do one more. If they don’t go in March or June, they will not raise rates in September – I.E. they will make not make a second rate hike just before the presidential election - and risk being accused of affecting an election result
9. In summary, they have missed a complete cycle and the economy is turning down. There is no way that they have enough ammunition in the interest rate box to make a substantive difference when they wake up to the downturn. Their balance sheet looks like a badly run hedge fund (not a bad description of the Fed actually) but that will not stop them unleashing QE4
10. QE4 will not be enough. They will unleash more new 'experiments' that they haven’t thought through properly, and the cycle of debt at the root of all this will continue unabated. The new policies will include NIRP, helicopter money, and, if they can pull off 'the big con' without sufficient people waking up to what is happening – the war on cash.
11. None of that will work either – what is necessary is a complete review of the entire monetary and banking system, the global debt mountain, and how governments fund the promises they make to their electorates. I.E. a system reset. We will eventually get one of those, whether by design or after calamity. Whatever, this is way too big for the Fed.
How long this takes to play out, I do not know - my crystal ball is as cracked and murky as anyone else’s. Personally I am amazed they’ve been able to kick the can down the road as long as they have. But I do know that when something can’t last forever, it doesn’t.