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August 30, 2016

Our Future: RIP at Jackson Hole

At 10:00 am Eastern yesterday, Federal Reserve chair Janet Yellen gives her greatly anticipated opening speech at the Federal Reserve Bank of Kansas City’s annual economic symposium held in beautiful Jackson Hole, Wyoming.
Today, I’m going to tell you what she says before she says it. If you’re reading this after the speech, you can gauge whether or not I was right.
This exercise, “guessing” what Yellen is going to say, before she speaks, is important.
It’s important because if I’m right, you’ll know I wasn’t guessing and you’ll know exactly how the actors in Jackson Hole are burying us alive.
And you’ll know what’s going to happen with financial markets.
Here’s what she’s going to say…

You Can’t Fight the Fed’s Future

The title of the meeting this year in Jackson Hole, which is usually attended by the Federal Reserve chair, the world’s central bankers and economists, is “Designing Resilient Monetary Policy Frameworks for the Future.”
The title of Janet Yellen’s speech, according to the symposium’s agenda, is “The Federal Reserve’s Monetary Policy Toolkit.”
So, first of all, I’ll tell you the symposium is about covering central bankers failed tracks and offering up a witch’s brew of monetary concoctions that, if necessary, will be implemented in the future, just so the world knows these gods of monetary manipulation have our backs and will make everything alright, no matter what fears we have.
Excuse me while I laugh my head off.
Yellen’s speech, and she’s wearing the tallest, most pointed black hat at the barn-raising event, will be about how the Fed hasn’t failed, how unemployment is better because of the Fed’s policies, how the U.S. is leading the world out of global recession, and how, not matter how it looks, there are other tools the Fed can drill and thrill us with, just in case we’re worried that what’s not really been working, stops working, or implodes us.
All this is necessary because the Fed’s credibility is in a ditch somewhere in Detroit.
Yesterday, the Wall Street Journal’s Jon Hilsenrath penned a fantastic piece titled “The Great Unraveling: Years of Fed Missteps Fueled Disillusion With Economy and Washington.” The subtitle was, “Once-revered central bank failed to foresee the crisis and has struggled in its aftermath, fostering the rise of populism and distrust of institutions.”
Hilsenrath cites how steeply confidence in the Fed has fallen, saying,
An April Gallup poll found 38% of Americans had a great deal or fair amount of confidence in Ms. Yellen, while 35% had little or none. In the early 2000s, confidence in Chairman Alan Greenspan often exceeded 70%.
Back when the cryptic Alan Greenspan spoke in tongues when he spoke at all, most Americans, and a good part of the world, thought he was some kind of monetary god. The economy was humming along and his mostly low interest rate policies seemed to be doing the trick. Of course, in hindsight, we know the original modern central bank cranks set us up for the financial crisis and Great Recession.
So much for black magic.
One reason the Fed gets it so wrong, so often, is their economic “models” are like trash trucks – garbage in, garbage out. They’re consistently wrong in their predictions and prognostications. Still, people believe they have some black box that predicts economic futures. They don’t and they’ve proved that for decades.
According to Hilsenrath’s article (which is impossible to argue with) the Fed:
…missed signs that a more complex financial system had become vulnerable to financial bubbles, and bubbles had become a growing threat in a low-interest-rate world; were blinded to a long-running slowdown in the growth of worker productivity, or output per hour of labor, which has limited how fast the economy could grow since 2004; and had no idea inflation wouldn’t respond “to the ups and downs of the job market in the way the Fed expected.

What’s Actually Being Said in Jackson Hole

So with all that in mind, and knowing the symposium is about “Monetary Policy Frameworks for the Future,” and that Chair Yellen is going to talk up her toolkit, here’s what she’s going to say:
  1. What the Fed’s done has worked, look at unemployment at 4.9%
  2. Look at the U.S. economy, it’s not good, but the Fed expects it to get better
  3. Global markets still need help, but other central banks are doing God’s work
  4. If there’s any slippage in the U.S. the Fed’s got the fixes
  5. They can always do more QE since they have an unlimited balance sheet
  6. They can buy other assets
  7. They can take rates negative if they absolutely had to
  8. They have other tricks in their bag that they don’t want to trot out unless they’re needed
Here’s what she really means, and what she’s not saying:
  1. The only thing the Fed has to point to is lower unemployment, and if you’ll notice, financial assets are enjoying bubblicious highs, but let’s not talk about the bubble-making aspect of that.
  2. The economy is crawling along at a 1.2% growth rate and that has to change because our models, that show inventories are depleted and will get restocked, say a better growth’s coming. Only, it may not happen, on account of the fact that our models are almost always wrong.
  3. Global markets are in a death spiral and central banks are doing everything they can to save the world. Negative rates aren’t helping, and God help us all if any of these big economies slip back into recession or some black swan sinks some big financial market somewhere.
  4. The Fed’s done all this before, it knows where its tools are and how to use them. More is always better if something’s not working.
  5. The Fed’s done a couple rounds of QE, so it’s ready and willing to go the full 15 rounds if it has to. QE has never been an effective trickle-down policy, but it helps the banks stay profitable.
  6. The Fed’s willing to buy more assets like more Mortgage-backed securities and other government-backed assets, not just Treasuries. Hell, we’ll buy corporate bonds, and stocks if we have to, because you know we can.
  7. Negative rates are on the table. If the goes negative, they’ve lost all control.
  8. There’s nothing the Fed can be stopped from doing. If it comes down to black magic they’ll try it because it’s about saving the Fed and its constituent big bank shareholders more than the economy.
Sure, the markets are flat, waiting with baited breath to whatever the witchy woman says.
They’ll be some reaction.
If Yellen is perceived to be dovish, meaning she’s leaning towards more easing, more stimulus, if necessary, markets will rally for a while. Maybe a few hours, days, or weeks.
If Yellen is hawkish, meaning she indicates things are so rosy a rate hike isn’t off the table (she won’t give a timeframe), markets will drop. Maybe a lot.
In the end, Janet Yellen’s job now is to not spook markets. It’s not about the economy, stupid. It’s about the markets holding up long enough for the economy to prove they’re not in bubble territory and that their lofty levels are justified.
Folks, there isn’t enough time on any economic clock for that to happen.
Janet Yellen and the Fed, like all the world’s central banks, believe they’re gods and can corral the free market and manipulate the world spinning on its axis to their beat.
Words will never be enough to control markets when they decide they’ve heard enough.
That’s what we have to look forward to, no matter what Janet Yellen says today.
Courtesy Shah Gilani at Wall Street Insights & Indictments (More by Shah here
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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