'I am again reminded of the late Dr. Richebacher’s key insight that asset inflation is the most dangerous type of inflation, certainly riskier than consumer price inflation. There is (or, at least, was) general agreement that more than a modest increase in consumer prices is undesirable and would provoke tightening measures from responsible central bankers. But with rising asset prices almost universally viewed as constructive (while confirming the soundness of policies), there is no constituency motivated to rise up and demand measures to contain inflating asset prices and Bubbles.
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A central bank beholden to securities market Bubbles has already forsaken independence. After accommodating the mortgage finance Bubble with years of loose monetary policy, the Fed has been completely hamstrung for that past decade. Our central bank waited too long to commence the process of normalizing policy. In the end, it found itself unwilling to impose any semblance of a tightening of financial conditions, despite securities markets signaling dangerous monetary excess. Still, the Fed is now condemned for excessive tightening that has put U.S. markets and economic prospects at significant risk. This is the narrative the President is using as he fashions a scapegoat while hammering the Fed into submission.
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The Fed’s political problem will not end with Donald Trump or Chinese trade negotiations. Going forward, our central bank will be under unrelenting pressure to support the markets and boost the economy - and will be a target for the party on the losing side of election outcomes.
As the Fed policy regime evolved, it failed to articulate a sound framework for explaining the factors driving monetary policy decisions. A view took hold that there is little risk of aggressive stimulus so long as consumer price inflation stays within its 2% target. As things turn dicey, the Fed will struggle to push back against calls for aggressive rate cuts and restarting QE. For years now, loose monetary policy has accommodated egregious financial excess, including fiscal deficits approaching 5% of GDP during peacetime economic expansion. Deficits don’t matter; speculative excess and asset Bubbles don’t matter.
I expect Trump attacks are the first salvo in what will be only more intense political pressure directed at the Fed to employ aggressive stimulus measures.
August 30 – Wall Street Journal (David Harrison and Maureen Linke): “The decadelong economic expansion has showered the U.S. with staggering new wealth driven by a booming stock market and rising house prices. But that windfall has passed by many Americans. The bottom half of all U.S. households, as measured by wealth, have only recently regained the wealth lost in the 2007-2009 recession and still have 32% less wealth, adjusted for inflation, than in 2003… The top 1% of households have more than twice as much as they did in 2003. This points to a potentially worrisome side of the expansion, now the longest on record. If another recession comes, it could be devastating for people who have only just recovered from the last one.”
The rise of populism is in its initial stage. The situation turns much more serious when the current Bubble deflates. There are major costs associated with the Fed’s loss of independence – independence from politics as well as from market pressure. For now, however, markets are trading on the prospect of aggressive global monetary stimulus (rate cuts and QE).'
- Doug Noland,
Dudley Sticks His Neck Out, August 31, 2019
Context'..The efficacy of global monetary stimulus is at a critical juncture, as are the world’s financial, economic and geopolitical backdrops..''..the “middle class” suffering disproportionately from inflation and Bubbles..''..When it comes to understanding the nature and destructive capacities of inflation, the “Austrians” put the “Keynesians” to shame.'How GDP Measures Help Create the Illusion that Money Pumping Grows the Economy, September 2, 2019