It is rare to see such few changes from one FOMC statement to the next. Market participants and linguistics-parsing trading algos alike must have been slightly mystified. We have often commented half in jest in recent years that the FOMC members could just as well skip the meeting and make copies of the previous statement and distribute those, but it has never been more true than this time around.
As always, it all sounds very reasonable and 'scientific' on the surface, but we will continue to confidently maintain that they are as clueless as ever and have no idea what their policies will produce. This is not a comment on the intentions, intelligence, education levels or otherwise general competence of the committee members. Many of them may well have our best interests at heart, even though we obviously disagree with the economic theories they base their decisions on. It is merely a comment on the literal impossibility of central economic planning.
Even the most astute economist would be lost. Central banking represents so to speak a special case of the socialist calculation problem, as it pertains to price fixing in the monetary realm. Unfortunately, Anglo-Saxon central banking socialism remains as popular as ever. For instance, as the Daily Bell points out here, not even mainstream critics dare to come to the only sensible conclusion, namely that money must be left to the market, not a 'committee' – and that therefore, the committee is surplus to the economy's requirements. Not even if the critic in this case asserts early on in his article that what central banks are doing borders on insanity.
So what was different in the May 1 FOMC statement from the last one? Just two things really; the alleged effect of lower deficit spending by the government was rephrased in a more forceful manner and a single sentence with regard to the Fed's handling of the asset purchase (or more precisely: money printing) program was added to the statement. There was one more alteration of the sentence describing economic conditions, but that didn't really represent much of a noteworthy change in terms of content. The WSJ's highly practical FOMC statement tracker – a fine tool for both trained and aspiring Kremlinologists - allows one to see the details at a glance.
This was said about the fiscal situation:
….fiscal policy is restraining economic growth.
Well, that is an uncharacteristically blunt assertion. We would grade it as a mixture between a 'CYA' (cover your behind) statement that is basically preemptively informing everyone that should the economy tank, it can't possibly be the Fed's fault, and another potential excuse for maintaining and eventually even expanding the pace of monetary pumping.
Is it actually true? The government has no resources of its own. Whatever it spends, it must in some shape or form take from the private sector (whether by taxation, borrowing or inflation). The logic behind deficit spending is pretty much non-existent, but due to the manner in which GDP is calculated, any fall-off in government spending will at least initially be recorded as a 'negative' for economic growth. Admittedly, government spending amounts to 'economic activity', but surely no-one is so naïve as to believe that it can actually create wealth and hence 'growth'. The usual suspects excepted of course.
Here is the additional sentence dealing with the currently underway 'let's print money till the cows come home' exercise:
The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.
It seems to us that the word 'reduce' in the sentence above could be dropped without running too great a risk of an undue failure to properly describe reality, but the 'exit' myth lives on of course (the possibility of an eventual 'exit' was taken over verbatim from the previous statement).
This is based on the idea that eventually, enough new bubble activities will be inaugurated on the back of heavy monetary pumping to create a convincing illusion of recovery. It may of course happen, but the economy's behavior to date suggests actually that so much scarce capital was wasted in the last major iteration of the eternal bubble that it will prove inordinately difficult to achieve that goal.
Market participants have spent all of Q1 fretting about this 'exit'- curiously, this began not even one month after the Fed decided to add 'QE4' to the already up-and-running 'QE3', with no time limits attached. Obviously said fretting was an exercise in futility if ever there was one. 2013 is the third year in a row that has seen a temporary strengthening in economic data early in the year due to one-off effects. This time around, a temporary spike in incomes due to expected changes in tax policies was evidently the culprit.
The focus should actually be shifted to door number two, namely to the “may increase the pace of the purchases” possibility. There is a simple rule of thumb one can apply here: the classical Keynesian one-track-mind reaction to a failure of massive deficit spending and money printing to bring about an (however fleeting) improvement in the economy's fortunes is to keep doing the same, only more of it.
So if even $85 billion per month don't do anything except goosing stock prices, the committee can be expected to duly conclude that it is not doing enough. In fact, that is what the sentence from the statement highlighted above actually informs us of. Moreover, including James Bullard, altogether three different Fed members have recently moaned publicly about inflation being 'too low'. Indeed, U.S. inflation expectations (this is to say, expectations about the future rate of change of CPI) have lately begun to follow euro-land inflation expectations lower. This is mirrored by Treasury note yields, which have just fallen to their lowest level this year. At 1.64%, they are among the lowest yields in all of history (the record low was put in last year):
The 10-year Treasury note currently only yields 1.64%
(click to enlarge)
Of course none of this has anything to do with the pace of actual monetary inflation, which remains as brisk as ever. As we have recently pointed out, an acceleration in money supply growth could be observed in April, after a slight slowdown earlier in the year likely due to technical reasons (this is to say, reasons that are not connected with the Fed's pumping efforts).
Many people are probably wondering why there has been so little effect on the CPI. To this is should be noted that a number of prices are in fact rising, but an effect on final goods prices on a broad front may only become noticeable with a very big lag. Historically these lags have been highly variable and have often involved many years during which the prices backdrop appeared to remain benign on the surface. This is by the way also why Paul Krugman's constant crowing about how right he was or is about 'inflation' (i.e., rising consumer prices) is way premature. Anyway, Fed members are complaining about inflation being 'too low,' which means that they are preparing us for more money printing.
As an aside to this, we keep wondering what 'too low' inflation is actually supposed to mean. Is it bad when people's real incomes don't shrink faster? How can this make any sense to anyone in his right mind?
The broad U.S. money supply TMS-2, via Michael Pollaro. How this can lead anyone to conclude that there is 'not enough inflation' is slightly mysterious
(click to enlarge)
Charts by: StockCharts, Michael Pollaro