Boy, oh boy.
We’ve really had to recalibrate the way we think about things in the post-crisis world. On Saturday we noted, with more than a little amusement, that Wall Street has thrown in the towel on obscuring the fact that what we really need is for the incoming data to be just bad enough to give central banks an excuse to keep policy unconventional.
To wit, from Morgan Stanley:
In our view, for the cycle to last another several years, we want to see more of the same – a continued environment of ‘ok’ growth and low inflation, which allows central banks to keep the party going.
That’s right. “We want to see more of the same” lackluster growth and inflation, because if the outlook starts to brighten materially, well then, as BofAML hilariously put it last week, central banks will “no longer have the luxury of being credibly dovish [and] thus their capacity to adhere to [their] adopted ‘other mandate’ of targeting asset volatility” will be “constrained”.
Well on Saturday evening, Goldman was out with a similarly amusing riff on the same general idea. See if you can spot the punchline in the following excerpt:
Since it is clear that funds rate hikes will play a central role in the normalization process, Fed officials effectively have two options for tightening monetary policy. They can either rely exclusively on the funds rate—at least for the foreseeable future—or they can combine funds rate hikes with balance sheet runoff. The economic case for relying solely on the funds rate is twofold. First, as Chair Yellen noted again this week, policy is “much easier to communicate”, more familiar and easier to calibrate with the funds rate tool. Second, rate hikes move the funds rate further away from zero and thereby restore conventional easing capacity in the event of a renewed shock.
Ok, so we ruined the “spot the punchline” exercise by highlighting it.
What Goldman is saying there (as explicitly as possible), is that one advantage using FF hikes rather than SOMA rolloff when it comes to tightening is that rate hikes create room for rate cuts.
Or, put differently…