“A serious writer may be a hawk or a buzzard or even a popinjay, but a solemn writer is always a bloody owl.”
– Ernest Hemingway
Welcome to the new, improved, faster-to-read, better yet still-free Thoughts from the Frontline. My team and I have been doing a lot of research on what my readers want. The reality is that my newsletter writing has experienced a sort of “mission creep” over the years. Bluntly, the letter is just a lot longer today than it was five or ten years ago. And when I’m out talking to readers and friends, especially those who give me their honest opinions, many tell me it’s just too much. There are some of you who love the length and wish it were even longer, but you are not the majority. Not even close. We all have time constraints, and I wish to honor those. So I am going to cut my letter back to its former size, which was about 50% of the length of more recent letters. (Note: this paragraph is going to open the letter for the next month or so, since not everybody clicks on every letter. Sigh. Surveys showed us it’s not because you don’t love me but because of demands on your time. I want you to understand that I get it.) Now to your letter…
Longtime readers know I am not the Federal Reserve’s #1 fan. I can’t recall ever resting easy, confident that the Fed was ably looking out for our economy and banking system. However, I have experienced varying degrees of skepticism and distrust. I must also acknowledge that we are all still here despite the Fed’s many mistakes.
Once or twice a year the Fed rekindles my frustration and concern with a particularly boneheaded statement or policy change. Last summer, the Fed’s annual Jackson Hole Economic Policy Symposium outraged and saddened me at the same time – which, given my emotional makeup, is quite an accomplishment. I shared my rage with readers in “Monetary Mountain Madness.” Feel free to read it again if you enjoy a good rant. I would have been even more depressed if I had known that one of the academic presenters there, Marvin Goodfriend of Carnegie Mellon University, an unabashed cheerleader for NIRP, would appear on the short list of candidates for Donald Trump’s first two appointments to the Fed.
Goodfriend is nominally a monetarist, but he doesn’t quack or waddle like any monetarist I know. The session that he presented was entitled “Negative Nominal Interest Rates.” In the first paragraph of the first section of his paper, he says that “[M]y current paper makes the case for unencumbering interest rate policy so that negative nominal interest rates can be made freely available and fully effective as a realistic policy option in a future crisis.”
So the first appointment to the Fed that Donald Trump will reportedly make is an unabashed advocate of negative interest rates as a policy option. It doesn’t sound like Trump wants a Fed that is modeled on the far more disciplined principles of a Richard Fisher or a Kevin Warsh.
While my rant last summer was about the Fed’s apparent willingness to embrace negative rates, we now face the opposite risk. Janet Yellen & Co. are asserting that inflation is such a serious threat that they must tighten policy with a two-pronged approach. They are already raising the federal funds rate and will soon begin reducing the massive bond portfolio accumulated in the QE years.
I don’t think these moves will create a crisis on their own. Rather, I think the mentality that they reveal may lead to much bigger mistakes when the next recession arrives. The mistakes may already be unfolding.
Here’s my key question: Is the Fed really as “data-dependent” as Yellen and others say, or do other factors influence them? I think the latter. You’ll see the other factors in a little bit.
Inflation Fail