2007 All Over Again: "We Are Outsourcing Our Monetary Policy"
By Tyler Durden
Almost as if The Fed had “outsourced its monetary policy” to China once again. But as DollarCollapse.com's John Rubino notes, it appears Janet Yellen has instead outsoured US monetary policy to the financial markets…
In that deservedly-famous 2006 CNBC debate between Peter Schiff and economist Arthur Laffer (in which the latter manages to be both arrogant and wrong about literally everything), Laffer celebrates the fact that “we are outsourcing our monetary policy to China” (minute 5:17).
Alert listeners probably wondered what he meant by that, and also probably found the idea vaguely disturbing. But whatever it was we were doing, it turned out to be bad because within a year the global economy was in free-fall.
And now that strange, ominous concept has returned — but this time we’ve put our monetary fate in even less-stable hands:
Yellen Outsources U.S. Monetary Policy to the Financial Markets
(Bloomberg) – Fed Chair Janet Yellen told the Economic Club of New York on Tuesday that policy makers had scaled back the number of interest rate increases they expect to carry out this year after investors did the same.
She argued that the downgrading of rate expectations in the market had led to lower bond yields, providing the economy with needed support in the face of weaker growth overseas. The Fed then followed suit this month by reducing its anticipated rate hikes in 2016 to two from four quarter-percentage point moves projected in December.
“That’s a good thing,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, commenting on the sequence of actions. “Monetary medicine gets into the blood stream faster if the public can anticipate what the Fed’s response to an economic shock will be.”
There are pitfalls. Investors may become so impressed with their ability to influence Fed policy that they’ll press for more stimulus than the central bank is willing to supply.
Forcing Fed
“The risk is that markets’ perception of such continued accommodation will embolden them even more to try to force the policy hand of the Fed,” Mohamed El-Erian, chief economic adviser at Allianz SE and a Bloomberg View columnist, said in an e-mail.
Indeed, investors in the federal funds market are betting that the central bank will raise rates just once this year, not the two times policy makers envisage.
The Fed’s experience over the last six months also shows how difficult it can be for the central bank to align investors’ view of optimal monetary policy with that of its own.
“It’s a constant learning process by both the Fed and the markets,” said Joachim Fels, global economic adviser for Pacific Investment Management Co., which oversees $1.43 trillion in assets.
Automatic Stabilizer’
Yellen used her spoken remarks though to extol the symbiotic relationship between the central bank and the financial markets. “This mechanism …read more
Source: 2007 All Over Again: "We Are Outsourcing Our Monetary Policy"
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