Federal Reserve Unchanged But Policy Mocking Begins

January 30, 2015

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The FOMC statement this week suggests that the Federal Reserve is choosing to ignore an avalanche of problematic information. Why?

As the mismatch between the data and the so called “data dependent” Federal Reserve narrative grows, the credibility of policy makers continues to be questioned. For example:

1. The Federal Reserve is missing its inflation target massively on the downside, and breakeven inflation rates are even further away, and at record lows.

2. 2015 Bloomberg Macro Economic Surprise Index has had the worst start to any year for a decade.

3. Earnings growth estimates are currently falling at the fastest rate since 2008:


4. The Baltic Dry Index hit a new 29 year low this week, and GCC (a widely traded commodity index) continues to make new lows.

5. Europe is now officially in deflation.

I could go on with the data examples. They are overwhelming. However, the Federal Reserve refuses to change its narrative of the likelihood of rate rises in a few months because they believe the economy is doing well.

There have been many comments about policy this week that are trying to reconcile the Federal Reserve with reality. Here are just a few examples:

Like lemmings at the cliff’s edge, central banks seem steeped in denial of the risks they face.” Stephen Roach


If QE actually worked then why did this happen in France?


What is the real purpose of QE? It should be obvious by now:

Central bankers must clearly know that policy is now in crisis. Even the BIS publications more or less admit to this, and policy makers that have retired are perhaps better able to speak more plainly. Here are this week’s comments from former Bank Of England Governor Mervyn King:


So how does denying the obvious serve any purpose? If policy is clearly too tight while growth and inflation continue to fall at a rapid rate, then couldn’t failing to address the problem and providing some remedial action compound the problem?

The only explanation I can come up with is that the central banks themselves know they are in a jam. The problem with admitting it though is that there is very little that the Federal Reserve can actually do about it with rates near zero for the seventh year running, and the last QE program just recently completed. For now that program needs to be perceived as a success and so some delay is necessary before the next program.

Meanwhile, the markets are no longer waiting. Debt is continuing to rise and so bond yields have to continue to fall to make this affordable in a chronically weak world economy. This process means bond yields have to trend to zero everywhere to keep the structure going.

Money printing can overpower credit concerns and massive bond issuance for a time, but now there is a new problem in Europe. What happens when inflation goes negative? Real bond yields then have to start rising. Then the cycle turns and becomes far more problematic.

The cracks in policy are widening and require answers that are not being provided. This is why it is now open season on mocking central bank policy, including the Federal Reserve:



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