More Back-Pedaling – This Time by a “Hawk”

We already pointed out on Tuesday and again on Wednesday that numerous signs of back-pedaling by Fed officials recently emerged – no doubt in reaction to the sudden wobble in “risk” assets (what else could have been the motivation?). On Wednesday we asked rhetorically whether San Francisco Fed president John Williams was actually serious.

Enter St. Louis Fed president James Bullard on Thursday, who only a few weeks ago was talking about wanting to alter the FOMC statement toward indicating a more hawkish tone. Nothing but a less than 10% dip in the spoos to completely change a monetary bureaucrat’s views these days. According to the FT:

“From the transcript of St Louis Fed president James Bullard’s interview with Bloomberg Television:

“I also think that inflation expectations are dropping in the U.S. And that is something that a central bank cannot abide. We have to make sure that inflation and inflation expectations remain near our target. And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December. So… continue with QE at a very low level as we have it right now. And then assess our options going forward. …

My forecast is for rising inflation. That’s why I’m concerned about declining inflation expectations, the five-year TIPS in particular has declined below one and a half percent. The five-year forward is down from its previous levels. And the central bank has to guard against any expectations in the market that would suggest that the central bank is not going to hit its inflation target. So you have to be credible on your inflation target. So a simple – what I’m saying is that a simple step that we may be able to take or maybe the committee might consider at its October meeting would be to just take a pause on the taper, let more data accumulate and see how the U.S. is going to evolve over the rest of the year and into next year. …

I think you should quit numbering the QEs. I’ve been an advocate of having an open-ended program. I do think QE is our most powerful tool when the policy rate is at zero.And I think it’s far more powerful than forward guidance for instance. And I think we saw that during the taper tantrum of 2013. And therefore I think I’ve been for having an open-ended program that reacts to economic data. And so far we’ve been able to taper the program down on the face of really dramatically improving labor markets this year, but maybe this is a juncture where we’d want to invoke that clause about it being data dependent.”

The remarks follow the comments earlier this week by John Williams of the San Francisco Fed, who signaled his willingness to consider a new round of asset purchases if “a sustained, disinflationary forecast” emerges.”

So the new line is that we have “not enough inflation” (of course, monetary inflation, though it has slowed from its peak, is still going gangbusters). In other words, the dollar is not being debased fast enough according to Bullard and Williams. Now, these are only regional Fed presidents with a very limited influence on how the FOMC votes, but the fact that they are wheeled out now to talk about inflation expectations being “too low” (this is so utterly absurd we have difficulties to wrap out head around it), is simply designed to find a new justification for continuing the Fed’s monetary pumping now that virtually all previously formulated labor-market related goals have been met several times over (anyone remember the 6.5% unemployment rate threshold?).

The stock market apparently liked to hear it:

Bullard saves the day: right after his remarks became known, the market recovered from another sharp early sell-off, via StockCharts, click to enlarge.

We should add here, we don’t really believe that it made as much difference as people seem to believe. Had Bullard not said anything, the market would likely have found some other reason to bounce a little, given its short term oversold condition and the fact that options expiration is dead ahead.

Bullard is however seen as a relative “hawkish” FOMC member, so in that sense his volte face may have raised a few eyebrows (and stocks were raised with them, so to speak). Surely the notion that “they wheeled him out for a reason at this juncture” is not too far-fetched.

Seems not to know what he wants: James Bullard.

(Photo via Bloomberg)

Conclusion:

The attempt to centrally plan changes in money’s future purchasing power, which has been popular with the Fed since Irving Fisher came up with his price indexes, is one of the greatest sources of economic instability currently in train. Yes, the result is the exact opposite of what the bureaucracy and its advisors and courtiers maintain. It is precisely when prices would normally decline when attempts to preserve “stable money” tend to bring about the biggest distortions in the economy – not to mention that a 2% loss in purchasing power per year is anythingbut stable anyway.

The problems are many, but just to name a few of the most important: the “general price level” is a mathematical fiction that has no existence in real life – even though money has a purchasing power, it cannot possibly be measured, as both goods and money itself are subject to the laws of supply and demand.

Moreover, prices do not change in a uniform manner when the money supply is pumped up. Even though “CPI” may remain tame, when there is monetary pumping, a price revolution takes place underneath the seemingly calm surface of placid consumer goods prices. Relative prices in the economy will shift, and thereby falsify economic calculation and incite capital malinvestment. Lastly, monetary pumping leads to a reverse redistribution of wealth, as early receivers of newly created money will gain to the detriment of later receivers.

All of this has been known for a long time. And yet, monetary central planning continues along the lines mentioned above as if the planners had never heard about these things. Central economic planning is a literal impossibility in any case, but the impression one gets is that the very planners tasked with interfering with money itself have apparently no inkling of sound monetary theory.