Economist Lays Out The Next Step To Wonderland For The Fed

[edit] Also see this companion piece posted shortly after… Enter, the Vampire


 

Mr. Steven Ricchiuto, he of a Masters in Economics from Columbia, has laid out the proper plan for the Federal Reserve in this oh so noisy environment in which an unassuming and fairly quiet man is trying to tune out a personal bully on Twitter, tune out the stock market’s daily whipsaw and do what he perceives to be the right thing.

Today, the academic named above throws in with Trump and politely harangues Chairman Powell thusly in an open letter.

Stagflation this, Volcker that, deflation the other thing… blah blah blah. But then he gets to the interesting parts, the money parts. Of the post-Volcker era he states…

To rein in excess money supply growth, the Fed trimmed bank reserves — high-powered money — which resulted in dramatically higher short-term rates. This shift in policy served to dampen inflationary expectations, and thus inflation, while increasing central bank credibility. The dollar strengthened and elected officials became strong supporters of an independent Fed as a result.

Indeed, in microcosm, these periodic drives to the lower rungs of the Continuum are all about Fed credibility. Credibility rebuilt after events like last year’s break of the monthly EMA 100 limiter (red dashed line) on the 30 year Treasury yield.

In H2 2018 while the supposed bond experts were uniformly aligned in a BOND BEAR MARKET!!!posture and market participants were wondering why Jerome Powell was being so stern amid the stock market wipeout NFTRH noted that the Fed was not going to self-immolate in a blaze of inflationary expectations (featuring out of control long-term yields). Credibility would need to be rebuilt and here indeed it has been, and then some.

(Click on image to enlarge)

tyx

It should also be apparent from the unintended curve flattening that followed the Fed’s December rate hike, and the equity market selloff that followed the July rate cut, that the status quo is not working. Essentially, policy makers have lost control of the narrative.

We reiterate our call for the Fed to shift policy from targeting interest rates to targeting inflation of 2% or above. This should lead to a rapid decline in short-term rates and a curve steepening which should calm market concerns over the risk of a recession or a persistent deflationary environment.

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Gary Anderson 4 weeks ago Contributor's comment

I think the Fed is more comfortable with a little deflation than it is with soaring growth. They have to protect the collateral.