I was driving into work earlier this week listening to Bloomberg Radio, and there was a guest on from one of Wall Street’s big banks. She was an investment strategist and she was being quizzed about what the Fed would announce later that day. Her opinion wasn’t much different than you would hear from any other strategist on the Street, but as I was listening, I was struck by how distorted global financial markets have become over recent years.
This strategist proceeded to explain how the Fed was stuck between a rock and a hard place because if it didn’t hike rates, inflation would rise above its target, and if it did hike rates, the dollar would appreciate too fast.
Sounds like a tough job to be the Fed. Not only does the Fed have to ensure that everybody gets work, that inflation doesn’t rise too high, that the stock market doesn’t fall too fast or rise too high, that expectations of inflation aren’t too hot or too cold, that banks don’t drive the economy off of a cliff again, but also that the dollar doesn’t get too strong.
Mrs. Yellen must be exhausted.
Makes one wonder how the United States ever functioned, let alone became a super-power, without the actions, reactions, and overreactions of a committee of professors setting the price of money.
Today’s central bankers seem to hold their policies in such high regard and they seem to have such a phobia of the business cycle that monetary policy has become the dominant force in global financial markets. The focus of investors in stocks, bonds, currencies, and commodities is much less on which companies and securities offer the highest and best returns, and much more on which assets will benefit most from monetary largesse.
Is it any wonder then that instead of investing cheap capital in plant and equipment to power economic growth, companies have been much more interested in using cheap money to speculate in their own shares?
The U.S. is supposed to be the home of free-market capitalism. But how different is it, really, to have an economy that allocates capital based on the whims of a monetary politburo than to have the politburo allocate that capital directly? The Fed—under the leadership of Bernanke and Yellen—has acted like a committee of central planners trying to finesse every economic indicator imaginable in the direction that they would like to see it move.
The Fed should be abolished as Ron Paul so eloquently outlined in End the Fed. If that’s not possible, let’s at least get back to focusing on inflation—the only variable the Fed can guide over the long-run. Enough with encouraging asset bubbles to create an ephemeral wealth effect.
It doesn’t work.
The good news in all of this, as I commented to a colleague yesterday, is that the hubris of global central bankers seems so great today that there is nothing preventing them from making a massive policy error and finally awakening the public to the distortion and lasting damage that activist monetary policy inflicts on the economy. “Good news?” he said.
Stay vigilant in your investment affairs as the central banks once again try to create something out of nothing.
Jeremy Jones, CFA
Latest posts by Jeremy Jones, CFA (see all)
- Yellen Still Can’t Understand What the BIS has Known for Years About Inflation - September 22, 2017
- Is This the Beginning of the End for Fossil Fuel Energy? - September 22, 2017
- Is Intense Investor Optimism a Sign of the End? - September 20, 2017