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Economics

Cuando los funcionarios de los bancos centrales quedan en la mira

Jun 27, 2022 Howard Davies

LONDRES – ¿Quién querría ser responsable de la política monetaria en 2022? A juzgar por los feroces debates económicos y políticos que vemos en todo el mundo, parece que se declaró abierta la temporada de caza de funcionarios de bancos centrales: les están disparando desde todos lados.

Se culpa a Jerome Powell —presidente de la Reserva Federal de EE. UU.— y sus colegas por no haber detectado las señales iniciales de una amenaza inflacionaria el año pasado. Incluso en el otoño pasado seguían todavía sosteniendo que los aumentos de precios eran «transitorios». Con la inflación actual en EE. UU. cerca de los dos dígitos, parece haber sido un error de juicio. Pero ahora que la Fed reconoció su equivocación y está subiendo las tasas de interés, muchos la acusan de asfixiar la recuperación pospandemia, llevar tanto a los mercados de acciones como de bonos al colapso, y precipitar una recesión.

El Banco Central Europeo todavía no comenzó a aumentar las tasas, aunque se espera que lo haga en julio. Se acusa al BCE tanto de indecisión como de plantar las semillas de una nueva crisis en la zona del euro por haber sugerido la posible reversión de la flexibilización cuantitativa (FC). El diferencial en el rendimiento de los bonos gubernamentales italianos y alemanes aumentó considerablemente y amenaza la estabilidad fiscal del sur de Europa. Prometieron un arma para combatir la fragmentación, pero de momento sigue en etapa de diseño.

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vic lai Jun 28, 2022

The Fed's previous view that inflation should have been temporary, a judgment that has been widely seen by the market as being wrong, was actually not far from the truth !
This is because the recent monthly US CPI inflation prints have unexpectedly been disturbed by the sudden breaking out of the Ukraine War, bidding up the oil, gas, and food prices that in turn have been propping up the recent months' waning inflationary pressure that could clearly be witnessed at the early beginning of this year.
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According to Eric Basmajian, the current inflationary pressure in the US is becoming increasingly narrow, and it basically is coming down to just oil. Let's take a look at all the factors that had been contributing to high CPI inflation before the start of the Ukraine War :
(i) extraordinary stimulative monetary cum fiscal policies 18 months ago that were pushing a lot of liquidity into the system,
(ii) industrial commodities (like copper, oil was late to the game) rising at
100% annualized rate in February of 2021,
(iii) the disturbed supply chains and the impact on durable goods 12 to 18 months ago (with durable good inflation of about 20%),
(iv) the declining US dollar in early 2021, importing inflationary pressure from abroad.
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Today, we have
(i) extraordinarily contractionary monetary policies,
(ii) negative price growth for broad industrials over the last 6 months. The commodity complex is getting increasingly narrow, and industrial commodities are going down, with copper switching from increasing at a 100% annualized rate 18 months ago to declining now at 12% annualized rate,
(iii) durable goods inflation falling from 20% to 6%, with excess inventories seen at major retailers,
(iv) a US dollar that's hitting multi-decade highs, depending on what index you're looking at.
Also, there will not a repeat of the 1970s-style wage-price inflation spiral, but only a money price wage spiral, and so wages lag. With the Fed raising the interest rates and slowing the employment growth, overall employment growth will cool and wage growth will always follow.
---
Today, most of the inflation drivers have flipped from pro-inflation to pro-deflation or pro-disinflation, and the one that's holding up the entire complex is oil prices and to a lesser extent the food prices, which are tied to the ongoing unpredictable Ukraine War.
So, inflation had already started to subside and cool before the unexpected start of the Ukraine War, which caused a secondary spike in commodities, mainly food and fuel, and which gave a 3, 4 or 5 months extra life to what was already a diminishing inflation story.
Not to mention the observations that the consumers are fast running out of their boomed savings, are incurring more and more debts, and are also adversely affected by the negative wealth effect from the deflating everything asset bubbles.
---
Going back to late February this year, just a few months ago, inflation expectations 5 year-5 year forwards were 1.9%, below the long term average, with a Federal Funds Rate that was 1.5%, meaning that the market believed then that the Fed was going to be successful in taming inflation expectations.
Then we had the Ukraine War, and all of a sudden inflation expectations jumped, and now we're at a 3.5% terminal rate to tame inflation.
This second leg of inflation tied to the Ukraine-War shock may induce the Fed to once again over-react, at a time when
(i) the cyclical dynamics of inflation were already starting to come down and will continue to do so, and
(ii) many advanced countries are actively searching for alternative energies like coal to partly replace imported oil and gas.
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- vic lai Jun 28, 2022
  
  As an aside, Jerome Powell is obviously a gentleman, not something for a person to sit on.
  The word chairman, like oarsman, has no sex or gender connotation, and is a neutral word that can be used to refer to either a male or a female.
  If you don't believe what I say, you can consult a genuine English language expert for clarification.
  The prevalent over-sensitivity shown by the free press in avoiding the use of potentially discriminatory words, perhaps to also avoid potential lawsuits, shows that, today, the women's mission of acquiring a general status more or less equal to that of men is still not yet accomplished.
  ---
  So many people in the market, and even the Fed chairman himself, still seem to think that the US Fed can manipulate the short term interest rate she controls up and down in any way she sees fit, so as to use expansionary or contractionary monetary policies to fine-tune the domestic macroeconomy.
  As a result, so many Fed watchers have recently criticized Powell for his being too late in ratcheting up the interest rate as a result of his lagging-behind in the forecasts of the latest quickly rising inflation rates.
  ---
  Well, what's actually been true is that, as has been pointed out by Richard Werner a very long time ago, the claim that the Fed sets (short-term) interest rates is one of the mythologies in macroeconomics ------ the Fed is actually a follower of market interest rates !
  What the Fed watchers should have been criticizing is therefore not that the Fed has guessed wrongly the future severity of the inflation rates, but that she has been a too-slow follower of the unfolding market situations in the latest quarters.
  ---
  According to economist Stephen Moore, whether the US macroeconomic plane will have a soft landing or a crash landing depends crucially on the policy decisions that the Fed and the Biden Administration make over the the second half of this year.
  Right now, the landing seems not to be very safe, because we only hear them talk about bigger rate hikes, higher taxes, more price controls, more regulations, and more spending, making the problem worse than before.
  ---
  Besides seeing the Fed's interest rate hikes, we'd also like to see the Fed selling off assets in their much expanded balance sheet, so as to more quickly and forcefully suck some of the excessive liquidity out of the macroeconomy, to help destruct some of the excessive demand still prevailing in the market, thereby weakening both aggregate demand and wage-push inflation, and so calming down overall inflation in the country.
  ---
  - vic lai Jun 28, 2022
    
    According to Stanley Druckenmiller, once inflation gets above 5%, it's never come down unless the FFR has gotten above the CPI inflation rate.
    According to Michael Kao, today the US CPI has already shot up to more than 8%, but the Fed can hardly raise the FFR to over 3.5% or 4% in the coming quarters without creating major funding stresses in the system.
    ---
    Remember the "interest rate conundrum" facing Alan Greenspan before the breakout of the GFC in 2008 ?
    Will the Fed's current rate-hiking cycle lead to the same conundrum, considering the fact that the persistent lack of global safety assets like US government long-duration treasuries is as prevalent today as then ?
    ---
    The health of the banking system is predicated upon net interest margins, and so if we have a treasury yield curve that essentially becomes flat or inverted, a big credit crisis like the GFC of 2008 may be generated as a result, that can take down the entire financial system with it.
    So the Fed needs to figure out how to engineer an aggregate demand slowdown, or a controlled demolition of the everything asset bubble, without creating a credit crisis.
    Just like QE was a creative solution to ZIRP, QT can also be used as another creative solution to widen the net interest margin for the banks.
    If the Fed doesn't have much super-long-dated-maturity treasuries currently in her balance sheet to sell, she can ask the Treasury to concentrate issuance of new treasuries at the long end of the yield curve, by creating say a 50-year or even a hundred-year treasury with interest rate high enough to lock in much more of the prevailing excess liquidity in the market.
    If the bid for this tenure by the market is not high, the yield will be further bid up and so further steepening the yield curve.
    ---
    Austria issued a 100-year government bond near the middle of 2020, paying an annual coupon of just 0.85 percent, which can partly be used to help pay for the country's spiraling coronavirus debt piles.
    Despite the low yield on offer, the issue was oversubscribed more than eight times over, an indicator of investors’ appetite for high-quality, income generating assets in a low rate environment.
    ---
    If the Treasury's doing so could help tame inflation to a large extent, then it allows the Fed's ongoing rate-hiking cycle to be less aggressive in bidding up the front end of the yield curve, thereby avoiding the interest rate conundrum and resulting in a smaller chance of popping the everything asset bubble and hence a bigger chance of achieving a softer landing.
    ---
    Powell shouldn't be Volcker the second, because the total amount of public and private debts as a proportion of GDP is much bigger now than in Volcker's time.
    The Fed's jacking up the FFR to 5 or 6 percent, or even more than 8%, to fight inflation, is just asking for trouble.
    ---
    - vic lai Jun 29, 2022
      
      Besides, "demand destruction," supply creation can also be used to cool off inflation, especially in the longer term.
      ---
      According to Erica York, "lawmakers can prevent the upcoming tax increase on investment in machinery and equipment by making full expensing a permanent part of the tax code, giving businesses the certainty they need that their expanded capacity will be financially viable in future years.
      Making full expensing of machinery and equipment permanent is one of the most cost-effective reforms lawmakers could enact.
      The provision is entirely aimed at lowering the cost of capital for new investments, and a higher level of capital investment leads to increased productivity, wage gains, and economic output ------ all well-suited to help with the recovery (and the inflation fighting)."
      ---
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Richard Allen Jun 27, 2022

Before the end of the real estate bubble in America, the Federal Reserve missed many signs of trouble. In hind sight, it appears that an accounts receivable manager at Lowes or Home Depot had a better understanding of the real estate market than did the Federal Reserve. It's CAMELS rating system failed. It's sources and uses of funds failed. Janet Yellen was President of the Federal Reserve Bank of San Francisco and she failed to properly exercise a Board delegated function to supervise the banks in her district.

There was a lot of turn over at the Board of Governors of the Federal Reserve System in the financial crisis. As it turns out, if the Federal Reserve doesn't understand the economy well enough that it continues to be surprised by events, then it's stated aim to fine tune the economy is a fools errand.

I would urge readers to consider two views.

Money and the Rule of Law: Generality and Predictability in Monetary Institutions

Fed Up: An Insider's Take on Why the Federal Reserve is Bad for America by Danielle DiMartino Booth
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