“Do Your Job”

This Friday (August 26^th) will be my next Bloomberg radio appearance. It will be on the second of the 3-day Kansas City Fed’s annual Jackson Hole conference and a perfect time to share with you a recent email discussion that I had with a former Fed president and former voting member of the FOMC. The main topic was whether the Fed’s willingness to continue to engage in monetary activism has put them in the position of being an enabler of bad behavior by those charged with that other lever of governmental action: the fiscal lever.  

Here is the email exchange:

Me:

“Dear Mr. xxxxx,

It is widely acknowledged that monetary policy can only do so much. Yet, far beyond the help economies needed to avoid a depression outcome, central bankers have embraced extraordinary and unprecedented monetary activism. 

All the reasons stated to meet its dual mandate are well known and, by all accounts, have been achieved. And reliance on the wealth effect remains questionable, at best. 

Therefore, my question to you is: By engaging in such actions, to what extent do you believe central bankers have given those responsible for fiscal policy a pass?

Thank you.”

Him:

“Thanks for the Q.  

Short answer: no.  The lack of fiscal support for the economy is due, in my view, to the philosophical bent of many in the Republican Party.   They would oppose fiscal stimulus, even if macro outcomes were much worse.

The Fed has not achieved its price stability objective - inflation is below 2% and is expected to remain so for a couple years at least.

I would be willing to say too that the Fed has not achieved its employment objective, but that perspective is somewhat more idiosyncratic.

Thanks again.”

Me:

“Thank you for the prompt reply, Mr. xxxxx. Much appreciated. 

At the risk of overstaying my welcome, allow me the following thoughts. 

Your comments suggest an ability of central bankers to produce results that, according to all credible accounts, require the fiscal part of the economic equation to be engaged in order to achieve the desired results, including a sustainable, organic rate of growth. Moreover, your comments (on the philosophical bent of many in the Republican Party) suggest to me a political dynamic to the decision-making of the central bank, which implies a whole range of thoughts too numerous to explore here. 

In sum, if it is true that monetary policy alone can only do so much:

1 - Is it not better for the central bank to force the issue with fiscal policy makers rather than set itself up as the be all and end all of public policy? 

2 - By taking the growth and stability of the US economy virtually entirely unto its shoulders, does not the central bank set itself up as the potential scapegoat should an unforeseen economic downturn ensue before organic, sustainable (escape velocity) growth take place? (This point would be, no doubt, preferable by some politicians.)

3 - When the central bank “does it all”, are not the public policy options compromised should an unforeseen/black swan/exogenous event (geo political, economic, financial, etc.) trigger an economic downturn with interest rates at near zero and the central bank’s balance sheet at unprecedented levels? 

Unless the business cycle has been repealed and economic downturn is inevitable. 

(Note: I have had such discussions on the above with various Wall Street and other economists for several years running. Most stimulating but I am always left with lingering questions and thoughts that I find hard to square the circle.)

Should you feel inclined (as in have the time) to respond, your thoughts would be most welcome. 

Many thanks.”

Him:

“Sir,

The central bank is a bunch of unelected officials.   They've been charged to use certain tools to achieve certain goals - and they should do that: no more, no less.

There is a plausible argument that CB leadership should be more outspoken in their concerns about fiscal policy.   (For example, perhaps Janet Yellen should tell fiscal policymakers now that they will need to be much more supportive in the event of an adverse shock.).   I think that a case could be made along these lines. 

But it seems inappropriate (and probably unwise) for the unelected officials of the central bank to deliberately make choices that leave people out of work to try and get Congress to behave better. 

Thanks for your thoughtful comments.”

Note: At this point I sent a few kind words of thanks and discontinued the dialogue as I knew this would lead to nothing productive. His views were clearly articulated and set in philosophical stone.

It is his last comment, “…it seems inappropriate (and probably unwise) for the unelected officials of the central bank to deliberately make choices that leave people out of work to try and get Congress to behave better…” that reveals to my ear, a mindset that is, frankly, mind numbing.  

If monetary policy alone can not get the job done – as in a sustainable, organic economic expansion, then what good on long term is at this point with years into monetary activism and trillions of dollars for the economy? Yes, it is noteworthy that fewer people are unemployed but if by doing so the US economy does not produce the sustainable, organic (not heavily reliant on governmental action) economic outcome needed to avoid what many believe (present company included) will be near certain economic disaster, what good do we have on a long term from monetary policy?

You can do the seemingly right thing so that you provide the appearance of doing your job but in reality you are adhering to rules that while correct (and certainly acceptable to not getting fired), leads to consequences that ensure that the next fiasco will unfold. And “I told you so” just isn’t helpful. 

Investment Strategy Implications

This coming weekend the Fed meets and the focus will be on how the Fed sees the US economy and when they plan to – blah, blah, blah – raise rates. This is good to know but completely ignores the 800-pound gorilla in the room that some (but only some) seem to think is a far more consequential matter: Is the Fed acting as an enabler of bad public policy behavior by allowing those elected officials who have been charged with being the custodians of the US economy and the long term and sustainable well-being of its citizens to not do their job? Clearly my dialogue with the former Fed president says that’s not their job. Well, then whose job is it?

Note: My BBR appearance this Friday should be a good one. You can catch it using this link.