Pulse: Monetary Policy
The biggest economic conference of the season, the World Economic Forum, has just wrapped up in Davos. Most of the sessions are now available as they happen, and with the snow piled high here in Chicago, watching them online almost seemed like being there. I’ve included links to some of the best discussions and interviews you might enjoy on this even colder weekend.
This morning, the Wall Street Journal issued a "bombshell" report about changes to the Fed's plans to "normalize" its balance sheet. The story, FMI contends, delivered far less than it promised.
The WSJ reported, in an overwrought and very run-on opening sentence, that “Federal Reserve officials are close to deciding they will maintain a larger portfolio of Treasury securities than they’d expected when they began shrinking those holdings two years ago, putting an end to the central bank’s portfolio wind-down closer into sight.”
Predicting the future is notoriously difficult, but that doesn’t stop the flurry of prognostications every January. We’ve gathered a selection of 2019 forecasts, including some predicting low probability events, because just imagining the unlikely can reveal horizons sometimes obstructed by conventional wisdom.
I normally feel after reading, reviewing, and discussing the events of the previous week that I’m able to discern a direction or constructive theme. Today however, every corner of the world seems mired in some degree of turmoil, and markets are reacting. There is so much noise that it is difficult to decide what is causing this new volatility. Is it China, the Fed, the Mueller investigation, Yellow Jackets, or technology run amuck?
As everyone knows, October has been a terrible month for equity markets. Some market participants feel that this did not just coincide with higher interest rates, but was caused by flawed Fed monetary policy and comments on overshooting. Like the humming chorus in Madama Butterfly, there has been a steady rise in the number of voices supporting a Fed pause in December. These include members of the Federal Reserve Open Market Committee itself, such as Neel Kashkari, and leading economists such as Jason Furman.
Gradually, inch by painful inch, the central bankers are losing their clothes – the comforting ideology that has enveloped them like a warm garment for more than a generation. This is the ideology, or “regime”, of central bank independence and inflation targeting (CBI+IT). Oh, how shy they are! Look how they hold onto any scraps!
A leading economist has predicted that central banks will not remain independent much longer. His forecast was made at a Bank of England conference called to celebrate – yes – 20 years of independence. Guests included Mrs Theresa May, the Prime Minster. It was opened by the Governor, Mark Carney, who drew a different, but equally startling, lesson from the crisis.
Willem Buiter, chief economist of Citi, put up two slides where he declared that: