2007 All Over Again: "We Are Outsourcing Our Monetary Policy"

Tyler Durden's picture

Last night we noted the odd "messaging" that was apparent in The PBOC's Yuan fix shifts into and after The Fed and Janet Yellen spoke...

 

 

Almost as if The Fed had "outsourced its monetary policy" to China once again. But as DollarCollapse.com's John Rubino notes, it appears Janet Yellen has instead outsoured US monetary policy to the financial markets...

In that deservedly-famous 2006 CNBC debate between Peter Schiff and economist Arthur Laffer (in which the latter manages to be both arrogant and wrong about literally everything), Laffer celebrates the fact that “we are outsourcing our monetary policy to China” (minute 5:17).

Alert listeners probably wondered what he meant by that, and also probably found the idea vaguely disturbing. But whatever it was we were doing, it turned out to be bad because within a year the global economy was in free-fall.

And now that strange, ominous concept has returned — but this time we’ve put our monetary fate in even less-stable hands:

Yellen Outsources U.S. Monetary Policy to the Financial Markets

 

(Bloomberg) – Fed Chair Janet Yellen told the Economic Club of New York on Tuesday that policy makers had scaled back the number of interest rate increases they expect to carry out this year after investors did the same.

 

She argued that the downgrading of rate expectations in the market had led to lower bond yields, providing the economy with needed support in the face of weaker growth overseas. The Fed then followed suit this month by reducing its anticipated rate hikes in 2016 to two from four quarter-percentage point moves projected in December.

 

“That’s a good thing,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, commenting on the sequence of actions. "Monetary medicine gets into the blood stream faster if the public can anticipate what the Fed’s response to an economic shock will be.”

 

There are pitfalls. Investors may become so impressed with their ability to influence Fed policy that they’ll press for more stimulus than the central bank is willing to supply.

 

Forcing Fed

 

“The risk is that markets’ perception of such continued accommodation will embolden them even more to try to force the policy hand of the Fed,” Mohamed El-Erian, chief economic adviser at Allianz SE and a Bloomberg View columnist, said in an e-mail.

 

Indeed, investors in the federal funds market are betting that the central bank will raise rates just once this year, not the two times policy makers envisage.

 

The Fed’s experience over the last six months also shows how difficult it can be for the central bank to align investors’ view of optimal monetary policy with that of its own.

 

“It’s a constant learning process by both the Fed and the markets,” said Joachim Fels, global economic adviser for Pacific Investment Management Co., which oversees $1.43 trillion in assets.

 

Automatic Stabilizer’

 

Yellen used her spoken remarks though to extol the symbiotic relationship between the central bank and the financial markets. “This mechanism serves as an important ‘automatic stabilizer’ for the economy,” she said.

 

Her comments come against the backdrop of continued criticism from Republican lawmakers and economists that the Fed is following a discretionary monetary policy that investors don’t understand and is hurting the economy as a result. They want the Fed to follow a monetary policy rule, such as the one espoused by Stanford University professor John Taylor. It uses a simple equation to link changes in interest rates to movements in inflation and the economy.

 

With her remarks on Tuesday, Yellen was “implicitly defending the Fed’s approach in the rules versus discretion debate as being one that’s systematic” and understood by the markets, Crandall said.

I’m not going to try to explain (or even understand) any of this, except to say that putting oneself at the mercy of financial market sentiment seems a bit risky, given that Mr. Market is a well-known manic depressive.

It’s also an inversion of the proper relationship between “money,” or more accurately the monetary environment, and the players who act on that stage. Placing monetary policy in the hands of stock, bond, and derivatives traders is like putting the definition of meters and seconds into the hands of Olympic athletes: Within a few years the self-interest of the participants will make past records meaningless.

Some other fun analogies: putting criminals in charge of the legal system, putting kids in charge of the dinner menu, putting car makers in charge of auto safety testing, putting food companies in charge of nutritional reporting. All are recipes for incoherence if not disaster.

Apply the same process to interest rates and currency creation, and the price signaling mechanism of the capital markets will go haywire. And without accurate price signals, modern market-based capitalism descends into chaos.

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Seasmoke's picture

Mr. Market is a criminal. Have you no idea what the fuck you are doing Janet ???

Looney's picture

When Yellen retires, Jeff Dunham should hire her as one of his dummies.

She is well trained and is used to somebody else’s arm deep up her ass controlling what she says or does. ;-)

Looney

max2205's picture

this is just dems and hillary financial policy...don't be fooled

VWAndy's picture

 Cuz the Rs would never sell out? Oh wait they did and will continue to sell you out at every opertunity.

Squid-puppets a-go-go's picture

i largely agree with the angle of this article. But isnt it odd how we like to intellectualise things til we cant see the woods for the trees?

The word DEBT doesnt appear once here in , what, 1000 word essay trying to diagnose the feds motivations.

Its really fukn simple. theres too much debt for rates to be raised without sending half the world into insolvency. thats all that needs to be mentioned. but no, we must bang on about 'rules driven vs discretionary approach'  and 'outsourced policy'

global jubilee now, plzkthx

Wait What's picture

discretionary = ad hoc, shoot-from-the-hip

in whose eyes is unplanned, 'we'll figure it out as we go' the best way to run anything, let alone the largest economy in the world?

the Fed is like a Silicon Valley startup, long on cash and short on organization... and we all know how most of those start ups end.

the Fed is no different. it will fall apart when its lack of order, planning, and rules catch up with it.

seeing how many lemmings in the media are now call it out for its credibility issues, the Fed and its 'methods' are not long of this earth.

KnuckleDragger-X's picture

The markets aren't criminal, the weasals running them however......

Beam Me Up Scotty's picture

Markets, he said Markets!!!  BWAAHAHAHAHHHAHAHAHAHAHAHAHAHAHAHHAHAHA!!!  We don't have "markets".  Not in the classical sense anyway.

HardlyZero's picture

"That's a good thing"

Like when John Law kept stepping up his game until the entire economy of France was "Law" 'backed'.

Strong echoes of The Mississippi Bubble.

https://www.youtube.com/watch?v=bnC7TdkRnP4


JRobby's picture

Mr Market is insane because of all the stimulants and depressants he takes simultaneously. AND the dosage keeps on building up steadily......

Janet will end up penniless, jacketed, on Thorazine with burn marks on the side of her head before this is over.

HardlyZero's picture

"Monetary medicine gets into the blood stream faster if the public can anticipate what the Fed’s response to an economic shock will be.”

Mainline hyper-leveraged fiat.

looks very de-stabilizing and will just cause daily crashes...somewhere.

Nobody For President's picture

How  come we always call it Mister Market? Seems like it is more a Ms Market - a bitch and a whore that rolls over for anyone with enough money.

lester1's picture

How does Art Laffler still have a job ????????????????

knukles's picture

queue "laugher track"

VWAndy's picture

Guess what the thieves are going to do?

CPL's picture

Outsource that shit to Israel of course.   In this case it's called passing the buck to avoid a beatin. 

Infield_Fly's picture
Infield_Fly (not verified) Mar 31, 2016 2:21 PM

wonder how much the zionists pay these monkeys to bicker on air to bamboozle the sheeple???

 

like watching those old pro wrestling rants done a week before match to sell tickets.

Fogey's picture

QE4.

 

Purchase financial and corporate bonds.

Theonewhoknows's picture
Theonewhoknows (not verified) Mar 31, 2016 2:43 PM

Fed is not failing to deliver their Bubblenomics. They still believe they are montary gods that can change course of action through their speeches and assessments of policy. Problem is that everyone is hurt when they do that and to save ourselves it would be good idea to have some central bank - proof portfolio and this may be the entry point to actually not sinking with the stock exchange http://independenttrader.org/permanent-portfolio-models-and-their-long-term-roi.html

Arnold's picture

Well as a unit, they can.

Whether the spearhead can benefit you..........

 

The Magic Eight Ball says no, as well as the Vegas odds.

Snitchey's picture

Thinking they'll have to allow a pretty major crash to occur before they can plausibly implement QE4.

Loving TVIX right now setting new 52 weeks lows and ready for the April Crash.  Then roll over to financial and corp bonds before QE4 is announced. 

Think it will work?

khakuda's picture

"Investors may become so impressed with their ability to influence Fed policy that they’ll press for more stimulus than the central bank is willing to supply."

 

Oh no, they'll supply it and then some.  What do they think ZIRP, QE and negative rate threats are all about at a time when the CPI is north of 2%, unemployment is below 5% and the bond, real estate and stock markets have gone vertical.

What the markets and politicians want, the Fed delivers.  It takes hardly any protest from the markets to get MOAR.

moneybots's picture

 

Yellen used her spoken remarks though to extol the symbiotic relationship between the central bank and the financial markets. “This mechanism serves as an important ‘automatic stabilizer’ for the economy,” she said.

 

The economy doesn't look stable.

 

conraddobler's picture

You mean 1913 when we officially outsourced it in blatant violation of the constitution?

Coins come from the treasury so screw bills and screw notes and by the way put the freaking silver and gold back in the coins you cheap ass bastards.

You're the United States of America freakin act like it.

buzzsaw99's picture

 yes "we" are outsourcing monetary policy but not in the way he thinks. the boj & snb are bidding up fang stocks so the fed doesn't have to. brilliant actually because it recycles trade deficit usd back into bubblicious stocks.

Old_European's picture

Did Laffer pay Schiff his penny?