Authored by Richard Breslow, via Bloomberg,
It has been a particularly hard year for economic forecasting.
Expectations have been range-bound in a manner that looks like assets prices bouncing back and forth between support and resistance when they are unsure where they are meant to go. When traders cotton on to this dynamic, they quickly learn to take all hype with a grain of salt and refuse to get carried away. They understand that breakouts aren’t sustainable until the time is right.
And there is no benefit from trying to force the issue.
This is a lesson central bankers would do well to take to heart as they contemplate yet another round of policy easing. And this week’s testimonies by Fed Chairman Jerome Powell would be an excellent place to start. At some point, falling back on the catch-all “global headwinds” line ceases to have any meaning other than as forward guidance that they will continue to have the markets’ backs.
Does anyone seriously think the U.S. needs a preemptive rate cut? Let alone possibly a 50 basis point one? Will Europe solve its problems by burying itself deeper into negative interest rate territory? The G-20 came and went. The Deutsche Bank restructuring has been announced. There are always going to be scary things looming on the horizon. At some point you have to let things try to play out by themselves. And, in truth, we have proven far more effective at dealing with problems than avoiding them.
The concept of “insurance cuts” is a bad one. On many levels. Most importantly as it continues to encourage bad behavior from politicians unwilling to use fiscal policy and infrastructure spending to complement monetary policy that is obviously tapped out. Despite strident assurances to the contrary.
The Europeans decry the notion of “transfer payments” as if more quantitative easing is free. If they can’t act like a unified body, they might want to reconsider just how “noble” is the experiment. Not to mention making the rest of the world continue to pay the price. And if the U.S. wants to spend its fortune on tax cuts, someone needs to make a better and less divisive case for that choice.
The Fed and its peers need to combat the notion that they have no choice but to continue on with business as usual.
The perception that we have dug such a toxic hole for ourselves that there is no escape is a real one.
The whole world is a “bad bank.”
And, ironically, it contributes to the fearlessness with which investors continue to pile into risky assets of all stripes.
You can’t understand market pricing without realizing that whenever a central banker uses the word “normalization,” it is taken as a punchline. And it makes it especially problematic to use the circular argument that the Fed needs to, or must, cut because it is priced in. Of course it is. But that doesn’t necessarily mean the real economy is crying out for action.
There is a time for bold action. And there is a time when you just have to be patient. Not an easy thing to do in a highly politicized and polarized environment. But at this point, it may in fact be true that only time will heal our wounds. And it could be a long slog. Just remember, this problem wasn’t caused by a natural disaster. Exhibiting patience, even that of a saint, and being less diplomatic about pushing back against clearly suboptimal policies, would be an important exhibit of what central bank independence really means.