“One day you are just going to have to do it,” said Mr Stevens, who argued before a House of Representatives committee on Friday that doing so would be in America’s best interests, and by extension the rest of the world.
Mr Stevens said “they need to [go up] for the US’s sake.”
…”It is a better thing, really, if the Fed can get the lift-off achieved,” Mr Stevens said, characterising the pending move as “easing off the gas a little bit” rather than “jumping to the brake.”
New lows for Australia’s commentary in recent days as a conga line of dumb bubblers pound Janet Yellen for holding rates on Friday. First up is Michael Pascoe-Domain:
Fed boss Janet Yellen achieved nothing by sitting pat. After all its positioning, warning, telegraphing and posturing, the Fed squibbed it, apparently because the world is an uncertain place right now.
Well, when is it not? Which gives rise to the other obvious question: If not now, when?
The market reaction to Yellen’s statement summed it up rather well – a knee-jerk rally that went nowhere and was quickly lost plus a little more. The market was left with a degree of confusion, not increased confidence. The decision to not lift rates just sows doubts about the strength of the US recovery and increases concern about China.
Does anyone feel more confident about China’s economy because the Fed delayed a small rate rise for a month or three?
Yes, actually. Anyone that has a clue knows that had the Fed hiked then the capital outflow threatening China and emerging markets (EM) would have hit the afterburners. It still will if and when the Fed ultimately hikes, but there doesn’t seem to be any rush to bring that on. Not least because if you’re an Aussie then an accelerated capital account shock in EMs will transmit Downunder as an historic economic reckoning.
The Yellen bashing moves from the ridiculous to the sublime when we turn to our own “everything is awesome” central bank chief, Glenn Stevens, from the AFR:
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“There will now be furious debate for the next eight or 10 weeks, until we get up to Christmas, on whether they will go in December.”
I’m afraid Captain Glenn is also eager to see the end-of-cycle shock in the global economy. And why not from his perspective? Yesterday’s delusional testimony in Parliament was clueless about the developing risks around him. I almost wish the Fed would get on with it so we can watch China enter crisis if only to illustrate how perilous it is for Australians to be egging it on.
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Better was available from Terry McCrann:
So as long as they remain at zero, you won’t get the robust and sustained recovery in the US economy, which Yellen demands as the precondition for starting to move them away from zero in the context of the risk (to her, certainty to others) of popping the financial bubble created by the zero rates.
That is to say, the longer she delays the rate rises, for fear of going down as the Fed head who gave us GFC Mark Two, the greater the certainty that it will happen and the bigger it will be when it does.
Almost every central banker in the world is signed on to the belief — and religious belief it is, every bit as theological as that of climate change true believers — that zero rates and QE will stimulate the real economy.
Arguably, the real message of the past six years — and the real lesson for future policymakers — is how the US economy managed to sustain 2 per cent growthdespite the negative drag of zero rates and QE.
Fortunately we were saved from experiencing that reality by Stevens’s gritty determination to resist the seductive siren calls both of Charybdisean QE and Scyllaian zero rates.
I do not believe that Australia can do either so that’s a little beside the point (and with rates at 2% and falling can we really hold Glenn Stevens up as some kind of Austrian titan?) but the larger discussion is worthy. QE has failed as an exercise in economic repair but that does not automatically lead to the conclusion that we should hike interest rates and crash the global economy.
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Joining the chorus was Westpac’s Bill Evans who wrongly predicted a rate hike. He should not be criticised for that. Bill is one of the few forecasters prepared to break with the pack and it is one of his greatest strengths. But his analysis is still wide:
The US Federal Reserve surprised us with its decision not to raise rates by 25 basis points at its September meeting. As we discussed last week the case around a range of measures of the US labour market for moving away from zero interest rates seemed convincing. One measure we did not cite captures a broader measure of unemployment which also includes those employed workers who would like more hours. Chair Yellen chose to highlight that measure as indicating ongoing slack. The facts are that this measure has fallen from a post global financial crisis peak of 17.1 per cent to 10.3 per cent. That compares with a 10-year pre GFC average of 8.5 per cent. Our point has consistently been that there is still some slack in the labour market but certainly not enough to justify a need for zero interest rates.
This discussion is self-evidently wrong. Were there not enough slack in the labour market then wages would be rising and they’re not. Before the GFC nearly 64% of Americans were employed. Today it’s 59%. He goes on:
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In assessing the subsequent profile for rates we have been expecting four hikes in 2016. That is partly based around a view of relative stability in the US dollar and stronger economic growth (2.8 per cent) in the US economy than the FOMC’s rather timid central forecast of 2.3 per cent. Even with the 2.3 per cent forecast growth the FOMC is expecting four hikes in 2016 – we would expect a flatter trajectory if growth could only reach 2.3 per cent, more in line with the market’s assessment of 2.4 moves.
Four hikes next year was always crazy talk and would have brought on GFC 2.0 after just two. The US is labouring through a period of secular stagnation owing to de-industrialisation, debt-saturation, wealth concentration and changing demographics. The world surrounding it is caught in a massive market share battle as US demand falters. Treating this like any other cycle is dangerously lazy.
What is missing from the Australian discussion is, as usual, context. Periods of debt saturation, poor demand and over-capacity such the one we are living through can be resolved through a number of channels. You can have a depression to clear out the debt and over-capacity and allow the brunt of the adjustment to fall upon labour. You can have a war to radically boost demand and productivity, as well as write off international debt at the point of a gun, but the brunt of the adjustment falls upon your dead children. You can boost productivity through structural reform, which is by far the best way, but the burden of adjustment falls upon politicians and rent seekers which is obviously difficult.
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The final choice is a different form of QE, one for Main Street that will stimulate demand, trigger private investment and deleverage households. It could come in the form of central bank funded infrastructure or tax cuts (though they are hard to take back) or simple cash drops in one form or another (or all three). It should also be combined with structural reforms aimed at productivity and various capital-boosting regulations to prevent financial markets from squandering it all over again on new bubbles. At some point in that process you will be able to raise interest rates without crashing everything.
It is a sad irony that it is left to “bears and doomsayers” to defend the monstrosity created by the dumb bubblers lest they destroy themselves and everyone else in their ignorance.
