Fed: Action Jackson - Rabobank

Michael Every, Head of Financial Markets Research at Rabobank, notes that in this year's Jackson Hole meeting, Janet Yellen's keynote address basically read "We were doing a great job pre-2008; then out of the blue there was a crisis; but we overcame that because we are so clever; and now we are slowly getting back to normal."

Key Quotes

“Indeed, her near-term message appears to be that the chances of a September rate hike may be higher than previously thought, especially if we get another strong payrolls report: that has seen USD soar. Yet the Fed isn't even convincing itself, let alone the public. As Yellen stated, the FOMC's forecast range "shows a 70% probability that the federal funds rate will be between 0 and 3-1/4 percent at the end of next year and between 0 and 4-1/2 percent at the end of 2018"(!) Anywhere between zero and 4.50% surely implies the Fed has no idea where things are heading.

In terms of her nod to the future, Yellen ruled out negative rates or raising the inflation target, or shifting to target nominal GDP for now. But there were two important elements thrown into the mix: i) an argument in favour of fiscal stimulus, a marked difference from a Fed that was always a deficit hawk; and ii) Yellen noted that "future policymakers may wish to explore the possibility of purchasing a broader range of assets," opening the door to the Fed buying equities or corporate bonds.

So is the Fed prepared to raise rates solely because it is convinced that more QE would allow it to undo any damage that might be done if this were to prove a mistake? Is it so convinced of its own safety net that it won't mind trying the most death-defying of stunts, much like a muscle-bound all- American action hero, who the audience knows can't die in a movie he stars in?

Other central banks were just as upbeat about what they can achieve despite their record of failure to date. For example, the BoJ's Kuroda –who surely can't have concluded his policy review yet?– made it clear that he won't hesitate to ease as much as needed, and that "there is no doubt that there is ample space for additional easing in each of the three dimensions." This despite the fact that the BoJ owns a third of the JGB market and is a key shareholder in a rising number of firms, and yet is still stuck in deflation.

Moreover, the ECB's Coeure added that "...if other actors do not take the necessary measures in their policy domains, we may need to dive deeper into our operational framework and strategy to do so," although he admitted that eventually such unorthodox actions may see the costs outweigh the benefits: of course, there have been loud public calls in Europe that this is already the case!

In other words, we can expect the Fed to keep trying to raise rates; and yet a further escalation of distorting central-bank liquidity, and more so if the Fed is wrong; and fiscal stimulus ahead too to support central banks!”