Here Is One Of The Most Important Pieces Of 2016
On the heels of yesterday’s Fed decision, here is one of the most important pieces of 2016.
(King World News) Paul Brodsky, Macro Allocation Inc. — After yesterday’s policy statements by the Fed and Bank of Japan, a harsh light is being shined on the incredible nature of their communications. It would be wise in the current environment to structure investment portfolios with a pro-volatility bias…
Central banks in G7 economies have been carrying a heavy load for a very long time, especially noticeable to all since 2009. Zero and negative sovereign interest rates, asset purchase programs and whack-a-mole currency devaluations have avoided a counterfactual that would have included credit exhaustion, debt deflation and economic contraction.
Balance Sheet Time Bombs
Their now conventional unconventional monetary policies have been overlaid by communications policies that have fostered a narrative of economic normality and cyclicality. It all seems rather disingenuous given their successful coup de marché, and maybe a bit delusional too given their serious demeanors discussing Philips curve stuff in the face of balance sheet time bombs.
And now…central banks seem exhausted too, not only in terms of being able to stimulate consumption and levitate asset prices, but also in terms of their communications policies that suggest they can.
The BOJ may have jumped the shark yesterday when it embarked on a new program called “QQE with yield curve control” whereby it will pin 10 year JGB yields at 0%. The BOJ also signed on to a new program called “inflation overshooting commitment” whereby it will keep creating sufficient base money until CPI inflation exceeds 2%. Let there be no mistake: this is formalized QE Infinity.
It was a tacit admission that lowering funding rates further would have no stimulative impact on the Japanese economy, and that all it can do at this point is expand the size of its balance sheet. BOJ watchers do not understand why more attention wasn’t paid to the short end of the curve, which would be easier to manage. Pinning ten year yields without any pretense of economic stimulation can only be a policy meant to prop up the banking system. The primary objective of any central bank – the reason they were initially founded – is to protect the banking system in times of serious economic distress. That time seems to be now, at least according to the BOJ.
Meanwhile, the Fed passed on hiking rates yesterday despite its seemingly desperate interest in doing so. This bolstered the idea that its ability to execute policy by building market consensus – and even consensus around the table at the Eccles Building – has vanished. Fleeting Fed credibility is the talk of the town (all towns but Washington), and the Fed is perilously close to approaching outright market rejection. It may still be the monetary authority over the world’s most prominent reserve currency, but it has lost its power of suasion over dollar denominated capital markets.