Are the Fed and ECB Different?

This may surprise you, but the Fed and ECB are no different. Pause now, top see if you can come up with an explanation of how and why that is so.

Meanwhile, you can add the Bank of China, Bank of Japan, Bank of Canada, and Reserve Bank of Australia to the statement and the answer does not change.

The Key Framework

Every central bank in the world has one thing in common: They all do what they want and make excuses for it.

At the moment, the ECB wants to hike, so it will. Right now the Fed wants to pause so it will.

None of this has a damn thing to do with following the data. A look at QE evidence alone proves as much.

Fed’s QE

On March 9th, 2022 the Fed completed its final open market purchase effectively ending the Covid QE 4 program that started in March 2020.

If the Fed was data dependent, it would not have kept QE going with inflation roaring.

At the time the Fed ended QE, year-over-year inflation was up a massive 8.3 percent. The Fed kept making excuse after excuse for it.

Three Unshakable Fed Beliefs

• It’s transitory, stupid!
• We need to make up for lack of prior inflation.
• Inflation expectations are well anchored.

Illusion of Data Dependence

The Fed is not data dependent. It had its mind firmly entrenched in the idea that it needed to make up for the lack of prior inflation. To do so, it purposely let inflation run hot until that blew up in the Fed’s face.

If Fed policy matches the data, it’s happenstance. If the framework seems to makes sense, that’s happenstance as well.

At any given time, perhaps even most of the time, the Fed may appear to be following the data. But any framework to follow the data typically only happens after the has made a huge policy error somewhere along the line.

That is precisely how the Great Recession happened and it fully explains where we are right now.

No Understanding of Inflation

A big problem for all the central bankers is not a single one of them has any idea what inflation is. They all ignore asset bubbles as if they don’t matter.

Ironically, asset bubbles are the one thing that matters the most. Deflationary crashes inevitably happen from asset bubbles.

How the Fed Destroyed the Housing Market and Created Inflation in Pictures

Despite the Fed attempting to get inflation under control. It’s still roaring if one looks at asset bubbles and housing prices.

For Discussion, please see How the Fed Destroyed the Housing Market and Created Inflation in Pictures

The Problem is Not Deflation, It’s Attempts to Prevent It

On May 5, 2020, I wrote The Problem is Not Deflation, It’s Attempts to Prevent It

The Fed sure prevented deflation, at least for now. But we may easily see another bout of crippling asset deflation yet.

BIS Deflation Study

The BIS did a historical study and found routine price deflation was not any problem at all.

“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations

Asset Bubble Deflation

It’s asset bubble deflation, not routine CPI deflation that is damaging.

Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive build up of unproductive debt and asset bubbles that eventually collapse.

“What the Moment Demands”

Finally, my hoot of the day on November 18, 2023, was San Francisco Fed President Sings Praises of Ben Bernanke “What the Moment Demands”

Please give that a look. I go over the Fed Uncertainty Principle and numerous flashbacks to the idiotic policies of former Fed Chair Ben Bernanke that led to the Great Recession.

The Fed is clueless about “What the moment demands”. If they are actually doing what’s needed, it’s nothing more than dumb luck.

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