Friday, September 18, 2015

"How The Fed Lost Its Cred"

I may have been reckless in my intro to the post immediately below.
In no way did I intend my infelicitous "Is it possible central banks are no longer fit-for-purpose and should just go away?" to be interpreted as "abolish the Fed".

Now please move the black helicopter.
Thank you.

From Forbes:
The Federal Reserve bottled out Thursday when it decided not to raise the short term cost of borrowing money. It’s unfortunate, because the lack of action now removes any semblance of a fig leaf it could hide behind and still claim credibility. 
“Clearly, the FED does not even think it knows what it is doing,” writes Woody Dorsey of Market Semiotics. That seems to sum it up in a nutshell. But let me breakdown some of the details of exactly  how the century old institution became a joke.

1. By deferring the decision to not raise interest rates until later the Fed is causing more uncertainty for the U.S. economy and as a consequence the global economy. More uncertainty means less growth. The economists on the policy committee should know this. A move from zero percent to a quarter of one percent isn’t much but if the move had been made the anxiety would be over.

2. The Fed points to recent financial market tumult as a reason not to raise rates. Financial markets are designed to be forums for price discovery that allow the buying and selling of things, in this case stocks. The tail does not wag the dog, so why is the Fed letting the markets rule the roost? This isn’t the first time the Fed seems to have been affected by market activity, just look back to the so-called taper tantrum in 2013, when bond investors reacted to Fed’s signaled policies.

3. The market reaction, such as it was, emanated from China in the summer. But the economic problems in that country were evident to those looking a long time before that. Last year for the first time since the early 1980s growth in Chinas steel output came to a near halt, and this year started a steady decline. I wasn’t even looking and I saw data on that. Steel has been the sine qua non of the Chinese economy for decades, so when production of it retreats you should know its in trouble. If the Fed didn’t notice that until this summer we are in real trouble.

4. The Fed continues to stick to its guns that it wants inflation to hit its two percent target. And yet it is clear to so many people that the inflation metrics the government issues just don’t reflect life in the supermarket for most people. While I don’t see 1970s style inflation, the effect of rising prices is obvious in most things I spend money on. Being a New Yorker, like millions of others, I don’t benefit from the drop in gasoline prices directly. To put it another way, if you had a watch that didn’t keep time you’d either fix it or ditch it. Not at the Fed though....MORE