Peak Stimulus Has Passed
Peak Stimulus Has Passed by Doug Noland – SafeHaven
Bloomberg Radio/Television’s Tom Keene, Wednesday June 14, 2017: “Professor, what is the question you want to ask chair Yellen at the press conference here in six minutes?”
Narayana Kocherlakota, former president of the Minneapolis Fed: “I think the question to ask is ‘Why are you continuing to hike rates in such a low inflation environment?’. There doesn’t seem to be any risk to keeping rates low and lots of benefits to it.”
Torsten Slok, chief international economist at Deutsche Bank: “What are their arguments why this move down in inflation is only temporary?”
Bloomberg’s Keene: “Krishna, what do you want to know? Please keep the stock markets up?”
Krishna Memani, chief investment officer of Oppenheimer Funds: “I want to know what would it take for you to get off the path of tightening? What would the data have to show you to get off the path you have set the Fed on?”
Bloomberg’s Keene: “Do you agree with vice chairman Fischer that we are still ultra-accommodative even with the low inflation…?”
Memani: “Yes we are, and there’s no downside because despite ultra-accommodative policies there’s no uptick in inflation. So we can press on the pedal as much as we want without it effecting the economy negatively.”
Bloomberg’s Keene: “Professor, do we have a good understanding of where we are in our technological economy – do you have a belief in the data that the good PhDs at the Fed are coming up with on productivity, on the measurement of price change, on GDP? Do you have faith in the numbers?”
Kocherlakota: “I have faith. It’s definitely a difficult job to be doing – to be measuring productivity in the kind of changing economy that we’re in. But I have faith in that. I look at the data, I try to keep track of not just what’s going on at the aggregate level but individual price changes and I think we’re living in a low inflation world and that gives the Fed a lot more room to stay accommodative.”
Bloomberg’s Scarlet Fu: “Is there any central bank that’s doing it right, Torsten? You’re an international economist. Is the ECB doing it better? Is the BOE doing better? Is the Bank of Canada doing it better?”
Slok: “There are important nuances, but I actually think that central banks have done extremely well. They have supported the economy as good as they can; they have invented new tools and instruments. We can debate if they were the right tools at the right time – the right dose. But I still will argue, at the end of the day, that what else should they have done, if we had been sitting in their chairs? I think we would have done the same thing. You can’t invent new tools and [do] Monday morning quarterbacking again without having another framework that’s better. This has proven again and again that this was the right way to look at. And you need to come up with some other reason or some other model, and there really is no convincing model other than what the Fed is saying.”
It’s not as if we don’t learn from history. It’s just that more recent history has such a predominant effect on our thinking and perspectives. Nowhere is this truer than in the financial markets.
It’s been going on nine years since the “worst financial crisis since the Great Depression.” We’re now only two months from the 10-year anniversary of the Fed’s August 17, 2007 extraordinary measures: “To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility. The Board approved a 50 bps reduction in the primary credit rate to 5-3/4%.”
This extraordinary inter-meeting response to a faltering market Bubble marked the beginning of unprecedented global central bank stimulus that continues to this day. It’s worth noting that the Fed’s August 2007 efforts did somewhat prolong the Bubble. The S&P500 traded to a then record 1,562 on October 12, 2007 (Nasdaq peaked in November). Extending “Terminal Phase” mortgage finance Bubble excess, 30-year mortgage rates dropped below 5.7% by early-2008, down about 100 bps from early-August 2007. And trading at about $72 a barrel in August, crude oil then went on a moonshot to surpass $140 by June 2008.