Here’s Something That Will Never Happen, But Probably Should…

The ECB and the BoJ are out of the way and generally speaking, most observers think risk assets probably have the all-clear from now until September barring some kind of meltdown at 1600 Pennsylvania Avenue which, honestly, seems just as likely as not – especially after what we learned this morning.

One thing that would cause an immediate rebellion from traders the world over would be a surprise from the Fed next week, something exactly no one thinks will happen and something that, to be sure, has exactly 0% chance of occurring.

But that’s not going to stop former FX trader Richard Breslow from speculating about it because apparently, he’s run out of fresh ideas for the week.

Despite being completely unrealistic, what you’ll read below does reinforce a couple of important points and also raises what is perhaps the most important question of all for central banks. Namely this: if it’s clear that what you’re doing isn’t working in terms of creating the type of “real economy” inflation you’re ostensibly aiming to create, then hasn’t this entire endeavor become one giant example of Einsteinian insanity?…

Via Bloomberg

It feels strange but, curiously, not entirely pointless, to suggest the Fed do something that there’s zero chance they will even contemplate. I’m talking about next week’s FOMC meeting and using it as an opportunity to be bold. This is mostly a meeting they hold in mid-summer to justify the fact that no one has any desire to be in Washington DC in August, and September is a long way off. But taking an extended holiday is precisely what they oughtn’t do. The only thing it will accomplish is forcing, as well as encouraging, investors to carry on with the types of trades every right-minded observer thinks has a large element of recklessness. Which is just a somewhat less nice word for “financial conditions remain benign.”
  • As you can tell, I’m not in the camp that thinks the way to get inflation is to continue on with policies that are no longer efficacious in producing that desired effect. At this point, ultra-low rates are exacerbating problems that weren’t particularly of concern when the post-crisis response was initiated and are no longer needed for the ones that were
  • If you want to see higher wages, fast-tracked investment decisions and raised inflation expectations, then rates can’t be this low. And this isn’t as counter-intuitive or economically unorthodox as it sounds. It’s human nature. They can’t figure out what the new normal is for R* or why. It’s this low because the Fed is actively suppressing it. That’s what you call an uncomfortable truth
  • Markets have veritably ignored the previous hikes because these have been the right thing to do yet are expected to be doled out in such a miserly fashion as to have little impact any time soon. And they certainly haven’t slowed the economy. To believe they have, you would have to assume the lag in the monetary policy transmission effect is off the charts — literally
  • Futures are pricing no chance of a move. The markets aren’t set up for it. You’ll cause mayhem in the pits.
  • Well when you have news to get out and don’t want to cause a ripple, what do you do? Make sure it’s released in the Saturday edition or opposite the Super Bowl. Next Wednesday, coinciding with the meeting, will be the testimony by Trump Jr. before the Senate Judiciary Committee. Sure to have more gawkers than Comey’s day. The Fed can slip in the hike and by the time anyone pays attention it will be old news. Presto chango

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Of course all of that assumes that the Fed is actually concerned with real economy inflation.

If, on the other hand, they were trying to simply reflate financial assets on the off chance that might eventually “trickle down” to the peasant class, well then they’ve done a bang- up job…

InflationRelative

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