We warned here [17] (and here most recently [18]), the most insidious way in which the Fed's ZIRP policy is now bleeding not only the middle class dry, but is forcing companies to reallocate cash in ways that benefit corporate shareholders at the present, at the expense of investing prudently for growth 2 or 3 years down the road. It seems the message is being heard loud and very clear among 'some' of the FOMC members; most notably Richard Fisher:
"Without fiscal policy that incentivizes rather than discourages U.S. capex (capital expenditure), this accommodative monetary policy aimed at reducing unemployment (especially structural unemployment) or improving the quality of jobs is rendered flaccid and less than optimally effective... I would feel more comfortable were we to remove ourselves as soon as possible from interfering with the normal price-setting functioning of financial markets."
Perhaps Yellen (and others) will listen this time?
Excerpted from Richard Fisher's speech on Monetary Policy [19]:
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In my view, the Federal Reserve has supplied more than sufficient liquidity to fuel economic recovery above and beyond a reduction of unemployment from its current level of 7 percent. As I just said, money is cheap and liquidity is abundant. Indeed, it is coursing over the gunwales of the ship of our economy, placing us at risk of becoming submerged in financial shenanigans rather than in conducting business based on fundamentals.
Monetary Policy Rendered Flaccid
To be sure, the job creators in our economy—private companies—have used this period of accommodative monetary policy to clean up the liability side of their balance sheets and fine-tune their bottom lines by buying shares and increasing dividends. They have also continued achieving productivity enhancement and relentless reduction in SG&A (selling, general and administrative expenses). Running tight ships, they are now poised to hire as they become more confident about nonmonetary matters that remain unresolved.
I used to say that the United States was the best-looking horse in the global glue factory. Now, I firmly believe we are the most fit stallion or filly on the global racetrack: Our companies are the most financially prepared and most productively operated they have been at any time during the nearly four decades since I graduated from business school. What is holding them back is not the cost or the availability of credit and finance. What is holding them back is fiscal and regulatory policy that is, at best, uncertain, and at worst, counterproductive.
Against that background, I believe that the current program of purchasing $85 billion per month in U.S. Treasuries and mortgage-backed securities comes at a cost that far exceeds its purported benefits. Presently, there is no private or public company that I know of, including many CCC-rated credits, that does not now have access to sufficient, cheap capital. There is no private or public company I know of that considers monetary policy to be deficient. Instead, to a company, every CEO I talk to feels that uncertainty derived from fiscal policy and regulatory interference is the key government-induced deterrent to more robust economic growth and profitability.
The FOMC has helped enable a sharp turn in the housing market and roaring stock and bond markets. I would argue that the former benefited the middle-income quartiles, while the latter has primarily benefited the rich and the quick. Though the recent numbers are encouraging, easy money has failed to encourage the robust payroll expansion that is the basis for the sustained consumer demand on which our economy depends. It cannot do so in and of itself. Without fiscal policy that incentivizes rather than discourages U.S. capex (capital expenditure), this accommodative monetary policy aimed at reducing unemployment (especially structural unemployment) or improving the quality of jobs is rendered flaccid and less than optimally effective. And as to the housing markets, prices are now appreciating to levels that may be hampering affordability in many markets.
What About Inflation?
As to the issue of inflation, the run rate for personal consumption expenditure (PCE) prices in the third quarter was 2 percent, according to recently revised data. The Dallas Fed computes a Trimmed Mean analysis of the PCE, which we feel provides a more accurate view of inflationary developments. The 12-month run rate for the Trimmed Mean PCE has been steady at 1.3 percent for the past seven months.
As measured by surveys and financial market indicators, expected inflation five or more years out is anchored firmly at levels consistent with the 2 percent rate that modern central bankers now cotton to as appropriate. These surveys and indicators also show expected price increases over 2014 only modestly below 2 percent.
Against this background, I am not of the school of thought that monetary policy need continue to be hyperaccommodative or be made even more so in order to bring medium-term inflation expectations closer to target. I certainly don’t see any justification for seeking to raise medium-term expectations above 2 percent as an inducement for businesses to pour on capex and expand payrolls or for policy to act as an incentive for consumers to go out and spend more money now rather than later. To me, this would just undermine the slowly improving confidence we have begun to see.
Especially given that we have a surfeit of excess liquidity sloshing about in the system, the idea of ramping up inflation expectations from their current tame levels strikes me as short-sighted and even reckless. We already have enough kindling for potential long-term inflation, which will sorely test our capacity to manage policy going forward. I do not wish to add further wood to that pile.
It Is Time to Taper
In my view, we at the Fed should begin tapering back our bond purchases at the earliest opportunity. To enable the markets to digest this change of course with minimal disruption, we should do so within the context of a clearly articulated, well-defined calendar for reducing purchases on a steady path to zero. We should make clear that, barring some serious economic crisis, we will stay the course of reduction rather than give an imprecise nod as we did after the May and June meetings that led markets to believe the program might end as unemployment reached 7 percent.
Only then can we at the Fed return to focusing on management of the overnight rate that anchors the yield curve. To be sure, we may wish to keep overnight rates low for a prolonged period, depending on economic developments. But we need to return to conducting monetary policy that is more in keeping with the normal role of a central bank. We need to break away from trying to manipulate term premia and stop prolonging the distortions that accrue from our massive long-term bond purchases and the risks we incur in building an ever-expanding balance sheet that is now approaching $4 trillion.
Becoming Dentists Once Again
I consider this strategy desirable on its own merit: I would feel more comfortable were we to remove ourselves as soon as possible from interfering with the normal price-setting functioning of financial markets. And I consider it desirable from the standpoint of protecting our limited franchise. As Chairman (Ben) Bernanke has pointed out politely, and I have argued less diplomatically, good monetary policy is necessary—but certainly not sufficient—to return the nation to full employment. Acting as though we can go it alone only builds expectations that far exceed our capacity. And it could lead us to believe that we have a greater capacity to control economic outcomes than we actually have.
If I may paraphrase a sainted figure for many of my colleagues, John Maynard Keynes: If the members of the FOMC could manage to get themselves to once again be thought of as humble, competent people on the level of dentists, that would be splendid. I would argue that the time to reassume a more humble central banker persona is upon us.
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