The Fed Reopens Wonderland

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by: Mark J. Grant

First, it was Quantitative Easing. Then, it was Quantitative Tightening. Now, we are in Quantitative Hibernation.

The hurrier I go, the behinder I get.

- The White Rabbit

The recent minutes of the FOMC may be summarized by the following:

  • Fed removes reference to further gradual rate increases.
  • Fed says it plans to continue with current floor approach.
  • Fed says it's prepared to adjust balance-sheet normalization.
  • Fed reiterates federal funds target is primary policy tool.
  • Fed says economic activity rising at solid rate, and jobs strong.
  • Fed says labor market strengthened, and unemployment remained low.
  • Fed says spending grew strongly, and investment moderated.
  • Fed says core and headline inflation remained near 2%.

If you took Chairman Powell at his word, and inference, in October, November and December, you would come to one conclusion. If you listened to what he said in January, you would reach a different conclusion all together. It is absolutely reminiscent of Alice.

It's no use going back to yesterday, because I was a different person then.

- Alice

It is hard to know exactly what happened. With his "Make America Great Again" baseball cap, did they listen to the Hatter? If they were following their statements, and being "data dependent," then what data changed their viewpoint?

It can't be any public economic data because nothing particularly changed between October and January. Maybe they stare harder at the markets than we realize. Certainly, equities backed up during this time period and the credit markets widened to Treasuries, and Liquidity languished - that can be accurately reported.

When I used to read fairy tales, I fancied that kind of thing never happened, and now here I am in the middle of one!

- Alice in Wonderland

Over more than three decades, and four Fed chiefs, there have been a half-dozen sharp market downturns that forced central bankers to pause tightening programs or even change their policy entirely, which is what it looks like Chairman Powell has done. In the wake of these downturns the S&P 500 gained more than 20% on each occasion one year out, unless a recession ensued. The current rally is now up about 15% in less than six weeks. I point out that short of war, there is nothing that influences the markets more than the Federal Reserve Bank.

Chairman Powell recently said,

A complex business cycle process is underway, whose outcome is yet to be determined. For the Federal Reserve it is a time... to gauge whether policy is still appropriately positioned to foster sustained economic expansion... It is clear, especially in the last month or two, that inflationary pressures are easing.

Federal Reserve Chairman Jerome Powell, and Vice-Chairman Richard Clarida, had dinner Tuesday night with President Donald Trump and Treasury Secretary Steven Mnuchin at the White House. Chairman Powell's comments in this setting were consistent with his remarks at his press conference last week, the Fed said in a statement. He did not discuss his expectations for monetary policy, except to stress that the path of policy will depend entirely on incoming economic information and what that means for the outlook.

Finally, Chairman Powell said that he, and his colleagues on the FOMC, will set monetary policy in order to support maximum employment and stable prices and will make those decisions based solely on careful, objective and non-political analysis.

And the moral of that is - Be what you would seem to be - or, if you'd like it put more simply - Never imagine yourself not to be otherwise than what it might appear to others that what you were or might have been was not otherwise than what you had been would have appeared to them to be otherwise.

- The Mock Turtle

All of this brings into focus just what "data dependent" really means. First, the issue is just what data they are looking at? While they will never, in a million years, admit it, it is rather obvious that one of the pieces of data that they pay attention to is the markets. Deep in their castle they must have a "Markets Room" with green eye shaded people that only storm out, and create a ruckus, when the markets are not behaving properly, or as expected.

Second, "data dependent" has always raised the question of just who is evaluating the data and in what manner. Data, you know, does not make the decisions. They just tell us that they look at the stuff and then make decisions about what to do with it. Even at the Fed, I would bet, data does not get up and tell you what to do with it, unless perhaps it is around 6:00 PM, and time for dinner.

You know what the issue is with this world? Everyone wants some magical solution to their problem and everyone refuses to believe in magic.

- The Hatter