One year ago, when the Fed released its 2009 transcript, we learned that after a terrible 2008 [7], the Fed's sense of humor gradually returned and instances of the word "laughter" in declassified Fed transcripts rebounded in 2009.
As a reminder, the Fed's sense of humor as determined by recorded incidences of "laughter" at FOMC meetings hit their highest level on record in July 2007, which coincides exactly with the moment when the housing bubble finally burst (remember: they weren’t laughing at you, they were laughing with you). The laughter died down quickly after that.
[8]
Today, with the usual 5 year delay, the Fed released the transcripts from its 2010 meetings and telephonic conference calls. As the chart below shows, while laughter did pick up on several occasions, most notably in January and November, it was again a relatively subdued year as would be expected at a time when the Fed had to admit its first policy error, when a year after launching QE1, it proceeded with QE2 in late 2010.
[9]
Still, it's good to see that as the Fed was busy transferring wealth from unborn future generations and the middle class to the uber wealthy, it kept at least some sense of humor when doing so.
That said, it would not be fair to say that the Fed was only focusing on its erroneous models and undue optimism about a recovery that would never come for anyone except shareholders: according to the August 2010 transcript, here is what according to Janet Yellen was the biggest " a Japan-style deflation remains a relevant worst-case scenario for us going forward." Full quote:
I, too, hope that the long disinflationary trend of the past two years will end, and I think a further disinflation seems unlikely. However, the evidence suggests that prices and wages react with a considerable lag to shifts in output and employment, and Japan provides a useful cautionary example. Japan’s deflation didn’t begin until the mid-1990s, a half-decade after the collapse of Japanese real estate and equity prices. Furthermore, during the early years of deflation, Japanese long-run inflation expectations remained well anchored, averaging about 1½ percent as measured by consensus forecasts. So, unfortunately, a Japan-style deflation remains a relevant worst-case scenario for us going forward.
The irony, of course, is that while admitting this, Yellen never actually learned from the Japanese lesson. As we showed last August [10], Japan also tried to "escape" its deflation by hiking rates in August of 2000. The "success" of the rate hike lasted all of 7 months before Japan had to cut to zero.
[11]
One wonder after what is already the worst start to any year in US stock market history, whether the Fed's attempt to renormalize will be able to last even 7 months.
And here is where it gets even scarier, because if Ms. Yellen loses control of the stock market, then a "Japan-style deflation" will seem like a walk in the park compared to what is coming in the US...
