It’s tough to enjoy the final days of summer when the FED can’t just relax their wind pipes. The continued contradictions emanating from those who sit in the same meetings is jeopardizing the Fed’s credibility … AGAIN. Last Monday, San Francisco Fed President John Williams published an economic letter in which he posed the concept of either raising the inflation targets, or the Fed ought to target a NOMINAL GDP level. This was perceived to be an extremely DOVISH view as it would keep the FED on HOLD far longer than the market currently predicts. The problem was that Williams had voiced a HAWKISH view just two weeks earlier. The quick about-face makes me wonder if the Fed’s logo should be the Roman god Janus.
Following on the release of the Williams letter was a speech from New York Fed President Bill Dudley, who intimated a high probability of a rate increase at the FOMC meeting in September. The back and forth isn’t keeping the markets off-balance because the SPOOS continue to make new highs regardless of the jib-jab from FOMC members. The release of the July 26-27 FOMC minutes added to the confusion. The media headlines said the minutes reflected a SPLIT at the Fed. That’s NONSENSE. The vote was 9-1, which has been the status quo, except for the June meeting because of Brexit, Esther George returned to voting in favor of a rate hike.
If the Fed was SPLIT the vote would have been at least 7-3 so it is obvious that Chair Yellen is the most significant voice and the board will not break her desire for consensus. The FOMC minutes are filled with vacuous terms about members voicing concern — SOME PARTICIPANTS, SEVERAL, MANY, A COUPLE. With no names attached to any dissenters these terms do not connote a SPLIT AT THE BOARD. All dissension is nebulous until the vote is actually SPLIT.
Toward the end of the minutes it is clear that Yellen is in control, as it said: “Members again agreed that, in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. They noted that this assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”
This is a comprehensive list of the HEADWINDS that the Yellen Fed have invoked in abstaining from raising interest rates. Next week, Yellen will speak at the Jackson Hole conference, which her predecessor Ben Bernanke used as a platform for presenting dramatic views on central bank policy. If my views about Yellen’s dovishness are correct then look for her to be more forceful about raising the issue of global headwinds and continued slack in the U.S. labor market.
***In the Financial Times yesterday, noted economist Joseph Stiglitz presented the idea of a bifurcated EURO, “A Split Euro Is The Solution For The Single Currency.” Readers of NOTES FROM UNDERGROUND know that the issue of the euro is an easy target for criticism and now that Stiglitz has written a book about the severe distortions caused by a flawed economic and political union. He said: “It is important that there can be a smooth transition out of the euro, with an amicable divorce, possibly moving to a ‘flexible-euro’ system,with say a strong Northern Euro and softer Southern Euro. Of course none of this will be easy. The hardest problem will be dealing with the legacy of debt. The easiest way of doing that is to redenominate all euro debts as ‘Southern Euro’ debts.”
Professor Stiglitz is correct in theory but the politic of the present configuration of the EU makes this an Alice in Wonderland proposal. Even if Stiglitz can wave his magic wand, the ECB’s current QE program is making this outcome more difficult every day. The massive balance sheet Mario Draghi is building will mean that any redenomination of EU debt will need the guarantee of the Germans or the end result will be a massive capital hit to the banks holding Southern sovereign debt. The question still remains: WHO GUARANTEES THE ECB? As Draghi continues to build up the ECB‘s balance sheet the more systemic the problem becomes. Mario Draghi is the most dangerous man in the global financial system.
***In the July 29 FT there was an article titled, “The IMF Report Questions Its Role In Greece.” Over the last five years I have heavily criticized the IMF for its role in the TROIKA to bail out Greece’s creditors. An internal staff investigation coordinated by the Independent Evaluation Office (IEO) revealed that under Director Lagarde’s leadership the IMF violated many of its long-established guidelines. “It highlights the concerns of many both inside and outside the fund, that the fund’s treatment of developing and emerging market economies quite different from its treatment of advance economies.”
Bottom line, the IMF bailed out German and French banks and forced Greece into a depression policy of forced internal devaluation of its economy. I SAID IT THEN AND WILL SAY IT AGAIN: THE U.S. CONGRESS WAS CORRECT IN NOT VOTING THE IMF INCREASED FUNDS. It’s amazing that the media has not made more of this. Sometimes the dysfunctional Congress does get it right. Lagarde should immediately be removed from her post. The IMF remains an atavistic colonial remnant from a Bretton Woods world.