Ahead of the FOMC statement and press conference today, I’m not going to repeat my usual critique of Fed policy but will instead quote an ex Fed Governor and let him do it himself. In a letter to the WSJ editor a few weeks ago commenting on an editorial on the Fed, Robert Heller, a Fed Governor from August 1986 to July 1989, said this:
“The congressional mandate as stated in the Federal Reserve Act of 1977 is for the Fed to provide for ‘stable prices’ – not 2% annual price increases. A 2% inflation will double the price level every 35 years. The late Paul Volcker said that, ‘stability at 2% is an oxymoron,’ and he was also fond of saying: ‘Once it’s (inflation) out of the bottle, there is no way to put it back in.’ He learned that from experience.”
He finished by saying, “The Fed should heed the wisdom of monetary policy giants like Paul Volcker and Milton Friedman and provide for stable prices in its policy decisions and not target an average inflation rate of 2%, which will result in an ever-increasing price level.”
Either way, we’ve seen over the past 10+ years that pinning rates at zero or below and buying up trillions of bonds doesn’t result in higher inflation nor faster economic growth. It’s certainly not clear now why the Fed thinks by doing more of this type of policy is going to get a different result. Low rates forever doesn’t stimulate behavior that wouldn’t have happened otherwise. That said, combining this monetary actions with trillions of fiscal deficit spending might have a different outcome and inflation might be the result to the detriment though of real wages and standards of living. Thus, we should then view current Fed policy as just financing US government deficit spending and of course doing their best to lift asset prices rather than being a direct stimulant to economic growth. I also think the Fed should be tying policy in the coming quarters more to the effectiveness of a vaccine since Covid is the only reason we’re in this situation to begin with.
Mortgage applications were down slightly on the week. Purchases fell .5% w/o/w and the y/o/y gain slowed to 6%. Refi’s fell by 3.7% w/o/w and the y/o/y gain moderated to 30%. Yes, Fed policy of lowering interest rates does lower mortgage rates and thus eases the monthly payment but the offset never discussed is the higher price paid for that home in response. One offsets the other.
The Japanese trade data for August remained weak but a bit less so from July. Exports fell 14.8% y/o/y, a touch better than the estimate of a 16.1% y/o/y decline. Auto exports fell by 19.4% but not as bad as the 30% plunge in July. Exports to the US and EU fell about 20% but rose by 5.1% to China. Imports were down by 20.8% y/o/y, more than the forecast of a 17.8% drop. The data is not market moving but does reflect a bottoming in the Japanese economy and for global trade but still evidence there is still a ways to go to get back the GDP that was lost. Japanese yields and stocks were little changed but the yen is higher as the US dollar is weak across the board.
CPI in the UK in August rose more than expected both headline and core but are still benign. Headline CPI was up .2% y/o/y vs the estimate of no change while the core rate was higher by .9% y/o/y, almost twice the consensus of up .5%. The modest reads were kept in check by the government’s subsidization of meals in the Eat Out to Help Out campaign. On the other hand, PPI fell more than estimated. The Bank of England also hasn’t learned anything from the monetary experiments over the past 10+ years as comments from some members imply that they might do more QE as if a 10 yr gilt yield of .21% is not low enough. The pound is rallying to almost $1.30.
Neither have lessons be learned at the ECB as the Bank of Spain head today said that they “can’t rule out more ECB stimulus in the future.” The Euro STOXX bank stock index is still down 40% from where it was in February.
Euro STOXX Bank Stock index