Kaplan and Kashkari: Slowing Inflation Makes More Rate Hikes a Challenge
Just two days ago the FOMC decided once again to raise the target range for the Fed Funds rate, with Yellen expressing optimism about 2% inflation and therefore (in the Keynesian framework), the economy itself. While Dallas Fed President Robert Kaplan voted with everyone else (except Neel Kashkari) to hike rates, he today made it clear that the inflation trend is worrying him. If the inflation rate continues to move away from 2%, his opinion is that rate hikes should be suspended.
The June decision was therefore tougher for him to make. Reuters reports:
"In this job you make trade-off decisions; I think the fact that inflation of late has been more muted, for me, made me weigh those trade-offs much more carefully," Kaplan told reporters after a meeting of the Park Cities Rotary Club in Dallas. While he is comfortable with where rates are now, he said, "before I’d be comfortable taking the next step in raising the fed funds rate, I’m going to want to see more evidence that we are making more progress" toward the Fed's 2-percent inflation goal.
His concern about inflation is also the very reason that Neel Kashkari dissented on the rate decision. On his own blog, Kashkari referred to the alleged tradeoff between inflation and unemployment (known as the Phillips Curve) and noted that he believes the slowing inflation is sending a warning to the labor market. That is, since inflation was slowing, the employment numbers may soon reveal a scenario that is less rosy than their current trend. He writes:
On the other hand, unfortunately, the data aren’t supporting this story [that falling unemployment numbers are congruent with rising inflation--CJE], with the FOMC coming up short on its inflation target for many years in a row, and now with core inflation actually falling even as the labor market is tightening. If we base our outlook for inflation on these actual data, we shouldn’t have raised rates this week. Instead, we should have waited to see if the recent drop in inflation is transitory to ensure that we are fulfilling our inflation mandate.
Both Kashkari and Kaplan are worried that inflation trends are slowing and therefore don't want any rate hikes to impede the glorious path toward 2%. Of course, Kashkari is already talking about inflation beyond 2%, stating that an "overshoot of 2 percent... shouldn’t be concerning since we say we have a symmetric target and not a ceiling." When it comes down to it, don't think that a 2% devaluation of our purchasing power will stop the Fed's reckless ways.
Kashkari: Education, not infrastructure, is key to growth
Minneapolis Fed President Neil Kashkari spoke on Monday and came out against the idea that infrastructure spending was going to lead to economic growth. No, this doesn't mean he has been keeping up to date with David Stockman, or cracked open Mises's Theory of Money and Credit. Rather, the Central Planner from Minnesota figures that it is "investment" in the education system rather than infrastructure spending, that is going to grow the economy. As if he could possibly know.
Of course, this is just a surface level skirmish between central planners about what centrally planned projects should be focused on. There is nary a hint of conviction that only market actors, guided by the market's wondrous price mechanism, can properly allocate resources in the most productive manner. If the economy (which is in fact just a metaphor that doesn't have an existence of its own) is to be grown at all, such growth must be driven by the market, not the academics at the Eccles Building.
Kaplan Endorses the Balance Sheet Plan
Echoing the thoughts of Yellen and other Fed members, the Dallas Fed's Robert Kaplan indicated that the $4.5 trillion balance sheet should begin the scale-back process this year. "Gradually and patiently" was the phrase used, as they are ever wary of a tantrum on Wall Street. Reuters reports:
"My view is we could start that process as soon as later this year," Kaplan said in Fort Worth at the Cornerstone Credit Union League Annual Meeting, adding that he would prefer the Fed phase in the reductions to its portfolio so as to manage the impact on markets.
The last time the Fed signaled a change of course on the balance sheet, in 2013 under Fed Chair Ben Bernanke, yields shot up quickly, delaying the central bank's plans for returning monetary policy to a more normal setting.
Consider this a reminder that Wall Street's overreaction to slowing of easy money heavily weighs on the Fed's "objective and scientific" monetary management style. If Wall Street doesn't like it, then the Fed will give in. At any rate, right now the balance sheet normalization narrative is going full steam ahead.
Klaas Knot on ECB Tapering: "We'll See."
With the Fed continuing to portray a "hawkish" message, focused on three or four 2017 rate hikes, the ECB is too having to decide whether their easing policy should be cut back. The Fed began its tapering of (official) QE years ago and is therefore now onto rate hikes and balance sheet efforts. The ECB, however, is still heavily in asset-purchasing mode.
In a recent interview with the the Wall Street Journal, Dutch central bank governor Klaas Knot, made it clear: Euro area interest rate hikes are not going to take place until the asset purchase program has been brought to a close.
The question you raise is about rates. Our forward guidance is pretty clear on this front. It states that we will first end the net purchase phase of the asset purchases, and only then begin to lift off interest rates. That forward guidance reflects also the experience that other central banks like the Federal Reserve and the Bank of England have gained in this context. There is a certain logic, I would say, in that sequence, a logic that also applies to the eurozone. So for the moment I don’t see a need to revisit that logic.
In other words, the ECB is much further behind the Fed on the path toward interest rate "normalization." Normalization, of course, being a misleading code word for slightly tinkering with an interest rate target that is basically economically meaningless.
Knot continues with the classic central banker position of [my paraphrase] "everything is great, but we need more inflation." It's the balance of making sure everyone knows the swell job the bankers are doing, but at the same time that their heroic efforts are still needed.
When asked how close they were to completely halting the purchase of assets, Knot merely replied: "we'll simply have to see where the situation is." That is, they really don't know. At the same time, Knot claims that "what we have to do is be as predictable as possible." If this seems to be confused sentiment, Knot also says: "I don't want to express myself in absolute terms." Obviously.
What has been dubbed "FedSpeak" is simply "Central Bank speak." Central bankers all over the world don't know what's going on, they don't know how to steer an economy. No one does, of course, as only the market actions of individuals can reveal the price of money and the proper allocation of capital. But instead of letting go, they try to appear knowledgeable and perfectly in control.
The problem is, few actually believe them anymore, despite the tremendous efforts of financial media.