Central Banks: still kidding themselves

As expected by nearly everyone except the futures market, the Fed did not cut rates last week and predicted only one in the future and not until next year. This contrasts with the futures market expecting at least two this year and two more next year. However, the redoubtable Megan Greene en route to Harvard and writing in the Financial Times is surely right in saying the question for the Fed is not whether it should cut rates but why. Pension Partners’ Charlie Bilello provokes the same question in Figure 1, which shows each of 6 Exchange Traded Funds investing in different asset classes at record highs. The FOMC’s own answer is that it would cut rates in order to sustain expansion but last week, with one dissenting voice, the Committee saw no need to do so yet as the collective quarterly forecasts on growth and unemployment turned out (marginally) better than last time.

The dissenter was St Louis Fed President James Bullard who is worried about inflation’s falling further away from the 2% per annum official target but Ms Greene argues that rate cuts are useless in combatting structural inflation driven by technology and globalisation (demography too?). She also doubts whether current interest rates are inhibiting either consumers (who are spending as cheerfully as ever) or businesses (who are not investing because they are so worried about trade wars and deglobalisation).

The ECB has an even bigger inflation challenge and this week will see the provisional CPI estimates for June struggling to reach 1.5% in most countries. One can argue how overstated GDP data is in China, India and even the US but there is little doubt that the Euro Area is barely growing at all. This prompted Mario Draghi last week to reaffirm his famous ‘whatever it takes’ approach to save the euro, which apparently rather startled some of his more cautious colleagues, as they had not been consulted. One colleague who seemed unfazed was Bundesbank President Jens Weidmann, who has become something of a convert to monetary easing as the time for choosing Mr Draghi’s successor gets closer. In contrast, the Bank of England seems determined to raise interest rates as soon as the opportunity arises: this would include a disruptive Brexit hitting the pound or a smooth Brexit (no Brexit?) sparking a wages and prices surge. This seems something like ‘tails you lose, heads you lose’!
I am aware that I keep returning to the subject of central bank impotence.

Markets are playing games with them but still they keep kidding themselves that they can tame powerful economic forces if only they could fit them into an equilibrium model!