Dancing Won't Get the Fed Out of Its Corner
After last week's Fed announcement that they wouldn't hike rates, we wrote:
The problem comes in when it's time to move. Even in a dry, wordy drama, actors do have to move about. Standing in place reciting lines won't do. Of course, they don't just move anywhere at any time. They know when and where it's time to scoot. And so they move on to their next mark. And at some point Yellen and her cohorts will have to move. Do they have a mark?
You'd think these Fed folks would start getting the message from the markets that raising rates over the next year isn't what markets want to hear. One suspects they're not so dense that they don't get that. But rather than reverse their "decisive" rate hike of December, which might show poor judgement on their part, they'll rely on comments about a growing economy, which allows them to keep the concept of ongoing rate hikes in play. They'll say the economy continues to grow, and so rate hikes are not only appropriate, but prudent. They'll keep saying that until the economy begins literally screaming at them such that they won't be able to ignore it. Maybe they don't understand that the economy is pretty much passive-aggressive. It won't just say what's on its mind; it won't admit things aren't going well; it will continue to keep the crowd waiting as it quietly (at least at first) sinks into the mud of malinvestment created over the past 20 years or so.
But wait, we're getting off track here. Malinvestment lies at the root of the pickle we're in now, but that's really a subject for another time. For now, we simply need to understand that the Fed has chosen to play a game, and that the game - they hope - will hold enough people's attention at bay until Yellen and Co. find an opportune time to claim there was no way they could have seen that the economy had turned south. Or maybe they'll get "lucky" and some "Black Swan" - or maybe an event they will claim to be a Black Swan - will pop up "out of nowhere" and force them to not only not raise rates, but to lower them - even into negative territory (another subject for another time).
Apparently admitting you were wrong isn't an option. And so the game goes on - for now.
Yesterday's announcement of 'no rate hike, but we're on track for future rate hikes' smacked of a central bank that feels it has to stick with it's program in order to retain a semblance of credibility. Such fanfare as accompanied their rate hike in December simply couldn't be ignored. To reverse itself right away would have been embarrassing. And so the Fed may have finally painted itself into a corner.So today (and tomorrow) Ms. Yellen answers questions from members of Congress, as she does twice a year; and it appears that dancing will be the preferred method of handling the painting-yourself-into-a corner problem. Of course if you think about it, you can dance until the callouses and bunions on your feet cause you to scream, but it's really not going to get you out of that corner. It will, however amuse and distract people so they don't realize you're stuck. Maybe they think you're supposed to be standing there - kind of like when actors need to hit their marks on stage and perform a certain set of business whilst remaining more or less in place. (That's, for example, how the guy running the spot lights knows where to aim and how long to keep the light on that spot.)
The problem comes in when it's time to move. Even in a dry, wordy drama, actors do have to move about. Standing in place reciting lines won't do. Of course, they don't just move anywhere at any time. They know when and where it's time to scoot. And so they move on to their next mark. And at some point Yellen and her cohorts will have to move. Do they have a mark?
You'd think these Fed folks would start getting the message from the markets that raising rates over the next year isn't what markets want to hear. One suspects they're not so dense that they don't get that. But rather than reverse their "decisive" rate hike of December, which might show poor judgement on their part, they'll rely on comments about a growing economy, which allows them to keep the concept of ongoing rate hikes in play. They'll say the economy continues to grow, and so rate hikes are not only appropriate, but prudent. They'll keep saying that until the economy begins literally screaming at them such that they won't be able to ignore it. Maybe they don't understand that the economy is pretty much passive-aggressive. It won't just say what's on its mind; it won't admit things aren't going well; it will continue to keep the crowd waiting as it quietly (at least at first) sinks into the mud of malinvestment created over the past 20 years or so.
But wait, we're getting off track here. Malinvestment lies at the root of the pickle we're in now, but that's really a subject for another time. For now, we simply need to understand that the Fed has chosen to play a game, and that the game - they hope - will hold enough people's attention at bay until Yellen and Co. find an opportune time to claim there was no way they could have seen that the economy had turned south. Or maybe they'll get "lucky" and some "Black Swan" - or maybe an event they will claim to be a Black Swan - will pop up "out of nowhere" and force them to not only not raise rates, but to lower them - even into negative territory (another subject for another time).
Apparently admitting you were wrong isn't an option. And so the game goes on - for now.
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