In recent weeks we have seen a surprising spike in criticism of central banks by establishment figures, in some cases central bankers themselves, most notably Mark Carney who last Friday remarkably admitted that very low interest rates tend "to coincide with high risk events such as wars, financial crises, and breaks in the monetary regime." This continued yesterday when 7 months after it praised negative rates, the San Francisco Fed pulled a U-turn and warned that the "Japanese experience", where negative rates dragged down inflation expectations even more, is ground for NIRP caution.
Then, in an even more bizarre interview with the FT, St Louis Fed president James Bullard made an even more stunning admission - that the Fed no longer has any idea what is going on. To wit:
"Something is going on, and that’s causing I think a total rethink of central banking and all our cherished notions about what we think we’re doing... We just have to stop thinking that next year things are going to be normal."
There was more. In a series of questions aimed at the Fed in this post-Jackson Hole powerless reality, we brought you some rhetorical fireworks from the head of FX at Deutsche Bank, Alan Ruskin, who lashed out at the central bank with 20 questions, technically statements, that 10 years ago would have branded him a tinfoil-wearing conspiracy theorist (we know, because we asked just these questions back in 2009), among which:
- "Will the Fed/ECB buy equities/ETFs? How far are central banks willing to distort underlying value, or is distorting value intrinsic to Central Banking as per the Austrian critique?"
- "How much are Central Banks going to be complicit in a collapse in fiscal standards, by buying public sector assets? Will a passive Central bank simply accommodate and facilitate fiscal actions related to MMT?"
- "Are we reaching a natural end to the secular decline in inflation and rates that has propelled the asset cycle in the last 40 years. Has asset inflation hidden an even more meaningful deceleration in the natural rate of growth that will evident in the next decade?"
- "Is it the Central Banks job to do away with business cycle? And at what price? Are we witnessing the great moderation interspersed with a great collapse in confidence and wilder big credit cycle, and greater long-term misallocation of resources?"
- "The Fed did a particularly good job hitting its inflation target in the years before the Great Financial collapse in 2008 - what does that say about inflation targeting creating stability?"
Tying it all together was Bank of America, which in anreport meant to recommend buying gold, lashed out at the Fed, warning that "ultra-easy monetary policies have led to distortions across various asset classes"; worse - and these are not our words, but of Bank of America - "it also stopped normal economic adjustment/ renewal mechanisms by for instance sustaining economic participants that would normally have gone out of business", i.e. a record number of zombie corporations. In addition, as everyone knows, debt levels have continued to increase, making it more difficult for central banks to normalize monetary policy as 2018 showed so vividly (and for Powell, painfully).
Which brought us to BofA's conclusion:
"We fear that this dynamic could ultimately lead to "quantitative failure", under which markets refocus on those elevated liabilities and the lack of global growth, which would in all likelihood lead to a material increase in volatility."
How does gold fall into this? "At the same time, and perhaps perversely, such a sell-off may prompt central banks to ease more aggressively, making gold an even more attractive asset to hold."
These unprecedented attacks on the US central bank - the holiest of holies of the modern broken financial system, prompted us to observe that there has been an unprecedented increase in the level of criticism and outright skepticism that central banks still have control:
There has never been so much hostility against central banks - even among other central bankers - in the past decade as over the past month. Something is about to snap— zerohedge (@zerohedge) August 26, 2019
Which brings us to Tuesday morning, when not even 24 hours after this unprecedented barrage of anger aimed at the Fed, Bank of America has doubled down, with the bank's rates and FX strategist Athanasios Vamvakidis unleashed even more unexpected truth, and in a note justifying why further monetary easing is not the proper response to what ails the world now, writes that "the risks that monetary policy is trying to address are primarily the result of policy failures in other areas, which more central bank easing is unlikely to offset" and concludes that "we see increasing evidence that monetary policy easing in this environment supports asset prices more than the real economy. This increases risks for asset prices bubbles, with the eventual adjustment leading to a worse economy-the Greenspan mistake."
Welcome to the tinfoil club, Athanasios, just please get in line behind Carney, Ruskin and others. Oh, and maybe just tell us why you - as well as Mark Carney - waited 10 years to point out what was so obvious to anyone else who used their head over the past decade?
For those who care, here is BofA's full note:
One of the most controversial market themes this year has been the dovish pivot of major central banks, particularly its justifications and implications. Although global growth has weakened and inflation is below the target in most G10 economies, monetary policies are already loose, unemployment at a historically low level and wages are increasing in most cases.
The Fed is leading the easing cycle and the market is pricing the most easing for the Fed, up to an extent forcing other central banks to follow. This is despite the data in the US being the strongest in G10, the slowing of the US economy being broadly what the consensus has been expecting as last year's fiscal stimulus fades, US unemployment being at a 50-year low, and US inflation being above the target according to some measures-or only slightly below based on the Fed's preferred measures.
Global risks have increased, but monetary policy may not be the best way to address them in some cases. The risks that monetary policy is trying to address are primarily the result of policy failures in other areas, which more central bank easing is unlikely to offset, in our view. Such risks include trade tensions between the US and a number of other countries, the limitations of Germany's export-driven growth model and the failure of the country to implement fiscal stimulus, political risks and unsustainable fiscal policies in Italy, and risks of a no-deal Brexit. Moreover, we have expressed concerns that central bank easing may actually allow such policy mistakes to continue or even worsen.
We also note that monetary policy has diminishing returns, with increasingly limited impact on inflation and inflation expectations. Most central banks have very limited policy room to begin with and may be wasting valuable ammunition. If inflation is low for (good or bad) reasons that have nothing to do with monetary policy, more central bank action will not necessarily lead to higher inflation, which in turn could reduce central bank credibility and their effectiveness in meeting their inflation target in the future.
Last but certainly not least, we see increasing evidence that monetary policy easing in this environment supports asset prices more than the real economy. This increases risks for asset prices bubbles, with the eventual adjustment leading to a worse economy-the Greenspan mistake.