The Federal Open Market Committee was expected to announce nothing of substance today and it did not disappoint. Its Fed funds target rate remains 5.25%%-5.50%. The balance sheet rolloff continues apace.
Yawwwwn. To call today’s event a “decision” would be misleading … the decision was already made. It’s even a stretch to call it an “announcement” given the FOMC has already pretty much told us what it was going to announce.
The whole thing has descended into farce. The FOMC tells markets what it’s going to do, then announces it as if it were news. Financial media oblige, lapping up the soporific pablum as if it were stone tablet caliber revelation.
If it were nothing but an otherwise consequence-free matter of form, it would be laughable. But it isn’t consequence free. In order to tell markets what it’s going to do well before it does it, it has to decide what it’s going to do well before it does it. That adds a delay between decision and the action.
It’s insult to injury. It’s adding to delays already built into its policy paradigm. As we’ve discussed ad nauseum, its favorite data are lagging indicators. CPI tracks inflation through multiple delays extending from seconds to years, the bulk of them lying in the years range. Ahhh, you might say, but the FOMC prefers PCE as a measure of inflation. No matter … it’s also based in consumption prices. Worse yet, it prefers so-called “core” and more recently even “supercore” versions, which by virtue of eliminating the most rapidly responding of consumer price data, lag even more.
So it’s hardly consequence free. These delays mean the policy function is out of phase with the policy target … enough to often be pro-cyclical. That is, policy is inflationary when conditions are already inflationary and disinflationary when conditions are already disinflationary.
Much more of the former then the latter, of course.
The result is the system careens from boom to bust and back again. And the more transparent (read predictable) the Fed has become, the more extreme the booms and busts. The nineties stock bubble, the ensuing bust, the mortgage bubble, the following financial crisis, and the “everything bubble” inflated since are all cases in point.
It doesn’t have to be this way. All the Fed need do is discard an assumption it’s never bothered to justify to begin with … that asset prices are irrelevant to inflation. The Fed a priori discards them in its reckoning of inflation. The tacit notion that they live an independent existence in a parallel universe while interest rates and the real economy interact is absurd on its face. At risk of being laughed out of the room, the Fed would never say it, yet it behaves as if they do.
The only concession to the reality that asset prices are the canary in the inflation mine resides in its “financial conditions” construct, wherein said “financial conditions” are viewed as a sort of transmission channel from policy to the real economy. Yet even this vague and fuzzy indicator is only occasionally hauled off the shelf when it seems convenient. And considering how much its powerful constituency, Wall Street, loves inflation, that isn’t very often.
Its other powerful constituency, Washington, loves inflation just as much … and contributes delays of its own. Politicians are getting blamed for running up federal debt at a breakneck pace, posing an existential threat to the American economy. I’m not about to make excuses for politicians, but the Fed was the prime mover. Easy money policy “works” to “expand credit” by inducing borrowing. Politicians are hardly immune. It’s no accident that federal debt started going off the charts in the midst of a fourteen year easy money orgy of ultralow rate policy and serial printing expeditions. Monetary tightening does the opposite, but fiscal policy has built up a huge head of steam and is still behaving as if borrowing were nearly free. This is another lag between policy and response, and explains why inflation is taking so long to be brought to heel. Already resurgent asset prices indicate another inflationary impulse has entered the system.
Over the course of innumerable post-meeting press conferences, I have yet to hear the Chairman explain why the FOMC excludes asset prices from its reckoning of inflation. I can’t recall the question having even been asked. That, alas, is unlikely to change today.
I will follow up in the comments with any reaction to the much less important issues that are much more likely to come up.