Smoke-Filled Rooms And Perma-Easing

“We’re informed by past experience,” Christine Lagarde said Thursday, following the unveil of new forward guidance that appeared to give the ECB wide latitude to keep monetary accommodation in place in virtual perpetuity.

She was obviously referring to Jean-Claude Trichet’s infamous policy mistake.

“The new strategy indeed marks a shift towards more dovishness, potentially leading to a delayed and very soft tapering as well as a further delay of any rate hike,” ING said, in a follow-up note. “Not a real surprise but a confirmation that the hawks at the ECB are currently having a hard time.”

Honestly, I think ING (and others) might not fully appreciate the implication from the new guidance, which was castigated as “pouring old wine from a barely new bottle.”

The ECB has effectively given itself carte blanche to persist in various iterations of easing for as long as policymakers please. Unless of course you really believe inflation in Europe is likely to accelerate beyond 2% and stay there for an extended period of time, a contention starkly at odds with recent history (figure below).

“[The new] policy communications may have disappointed those looking for a complete revamp of the ECB’s forward guidance, but it does signal a more persistently loose policy stance,” TD’s James Rossiter and Pooja Kumra said, in a note. “The shifting of the necessary conditions around rate hikes and inflation (with no change in actual policy) implies a later hike in the ECB’s key interest rates.”

Again, I think it’s important to look at the bigger picture. A week ago, in “Maximum Crisis Level,” I pushed back a bit on the notion that the Fed is “behind” when it comes to normalizing policy. “With apologies to my Canadian readers, nobody cares what the BoC does,” I half-joked, adding that,

The RBA “counts” at the margins, RNBZ less so and the BOK hardly at all. Now think about who’s still with Jerome Powell in the steadfast contention that current policy (i.e., maximum accommodation) is still appropriate (at least for another few months): The ECB and the BOJ. Contrary to the increasingly popular narrative that says the Fed is “behind,” the fact is that everybody who counts is still pedal-to-the-metal. That’s not necessarily a “good” thing. It just is what it is.

The ECB on Thursday underscored the thrust of that excerpted passage. As Bloomberg wrote, “the ECB’s guidance change means that even if inflation is at the target at the end of its forecast horizon — as much as three years out — it won’t be forced to respond with tighter policy.”

More broadly, the new guidance speaks to my general contention (reiterated this week, by the way) that the “Big Three” will never be able to normalize. That was the takeaway from the July ECB meeting, and this is one case where I’m confident in using the following phrase, which I generally despise: “I don’t care what anyone else tells you.”

Meanwhile, back at the ranch, the ubiquitous “bipartisan group of senators” was close to re-agreeing to the infrastructure deal they struck weeks ago. “We had an agreement on 99% when we walked out yesterday afternoon,” Joe Manchin said.

Manchin’s legacy is now defined by a commitment to bipartisanship so quixotic that the set of possible explanations has been winnowed down to just three: Joe is hopelessly naive, mortified at the prospect of being identified by his constituents as a member of the party he represents or else just a simpleton living out the plot of a Beltway sitcom in which a member of Farmington, West Virginia’s social elite (and yes, that’s just as oxymoronic as it sounds) accidentally found himself at the center of the political universe. It’s probably a combination of all three.

“The pay-fors are pretty much lined up,” Manchin went on to declare, in remarks cited by Bloomberg for an article that also featured the following color:

Senator Tom Carper of Delaware, a typically reliable Democratic vote and ally of President Joe Biden, signaled Thursday that he would object if negotiators didn’t include more funding for water and sanitation. “It’s not every day you get 89 senators to vote in favor of water infrastructure legislation,” Carper told reporters.

As ever, I’m left to ponder two possibilities. Either I’ve lived alone, in isolation for so long that I’ve taken to chuckling deliriously at things that normal people don’t find funny, or else other people are similarly incredulous at how flagrantly ridiculous US politics has become. Read that excerpted passage again. Then ask yourself this: What does it say to the electorate when, among senators, it apparently goes without saying that convincing an overwhelming majority of lawmakers to “vote in favor of water infrastructure” would normally be impossible?

In fact, it is possible, though. Carper’s point was that the bill in question previously passed the Senate 89-2. Now, Carper wants to ensure it’s funded. “I want to make sure that they are fully funded,” he went on to say. “I’m going to withhold my support until they are fully funded.”

Tammy Duckworth, who authored the drinking water bill, expressed similar sentiments. “I can’t commit to supporting a final bill if it does not include full funding for my Drinking Water and Wastewater Infrastructure Act at $35.9 billion over the next five years,” she remarked.

Assuming the relevant senators do agree on a final bill, it’ll have to be scored because after all, we have to assess the budget impact. Never mind that the very concept of a “budget” ceases to have meaning when you’re the sole legal issuer of the currency in which the numbers on the ledger are denominated.

An even “better” soundbite came from Jon Tester who, apparently without a shred of irony, said: “If it’s not ready for Monday vote, we’re going to lose a couple of weeks on our August recess. So it’s got to be ready.”

Yes, “it’s got to be ready.” But not because bridges need fixing and Americans need clean water. Rather, because the prospect that US senators would lose a few vacation days is a total non-starter. (Admittedly, I’m taking Tester’s comments a bit out of context, but not totally.)

Chuck Schumer is at least a semblance of aware when it comes to how mind-bogglingly out of touch that probably seems to everyday people, who, as it turns out, mostly don’t take vacations, let alone scheduled “recesses.” Unless by “vacation” you mean the extended one nearly seven million Americans are still on (figure below).

“As majority leader, I have every intention of passing both major infrastructure packages – the bipartisan infrastructure framework and a budget resolution with reconciliation instructions – before we leave for the August recess,” Schumer said Thursday, in floor comments.

That’s all fine and good, but it still kinda misses the point, doesn’t it? It’s not about whether you wholeheartedly intend to ram two pieces of legislation through before leaving town. The right thing to say if you want to reverse the ongoing decline in public confidence vis-à-vis Congress is that “recess” is irrelevant.

If pressed about timelines and vacations, any lawmaker who cares at all about the public, should simply say, “Maybe we’ll go on vacation when our job is done. Next question.” And getting the job done shouldn’t mean huddling together in conference rooms for all-nighters over pizza and wine (which happened recently, during the infrastructure talks) like a bunch of college kids sharing a bottle of Jim Beam and bong hits while cramming for finals in a dorm room.

I’m fine with the proverbial “smoke-filled rooms.” There’s something nostalgic and oddly comforting about the Beltway elite hashing things out through wafts of cigar smoke — a consensus born of scotch and fine leather upholstery can’t be all bad.

What’s not so comforting, though, is the image of two-dozen professed “centrists” gathered around a table strewn with pizza boxes, salads in plastic containers, disposable cutlery and nine bottles of $20 Syrah, trying to decide whether pipes count as “infrastructure.”