Friday, 20 July 2018

On Fed shifts, Greek perps and Carney's intervention

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Anthony Peters sifts through today’s top issues.

What is it that gives me the feeling that Wednesday, despite all that is going on, FOMC meeting included, didn’t really serve to help us to know more about the state of the world than we did on Tuesday?

That is not to say the FOMC’s post meeting statement did not reflect a shift in language from event to process. That is: “economic activity is expanding” to “economic activity has been expanding”… or… “…labor market indicators moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced…” to… “…labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced.”

This shows the FOMC treating the recovery no longer as nascent but established which is, without a shadow of a doubt, pretty hawkish.

At the same time, however, the plunging energy costs have not been overlooked and their impact on inflation, the control of which is the Fed’s central remit, will prompt it to maintain a clean and loaded gun but with the safety catch still very much in the locked position. Thus they rewrite the lines from the December statement which originally read: “The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate…” to… “Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.”

The medium term is, as we know in central bank speak, exactly the same length as a piece of string.

It reiterated that it can remain patient in the process of normalising monetary policy but removed all references to the appropriateness of maintaining its 0-¼% target range for Federal Funds. Finally, the hawks have had their day albeit that they are still very much chained to their perch.

The decline in oil prices began in serious in June when WTI printed at US$107.26. In the interceding 128 trading days, it has declined to US$44.47 which represents a fall of some 58%. The basis effect on CPI will last for a long time to come and thus I can see the Fed struggling to find the 2% required to let it take the safety off and to pull the trigger.

It might sound fatuous but I will not have to reserve judgement until the next FOMC meeting on March 18th. I have a friend who once quite innocently said, “You might not but I know what I’m thinking….”. I’d be happy to apply this to the FOMC if I were of the opinion that it did. I’m not entirely sure it does.

Greek perps

Meanwhile, the Greek situation continues to tax the smartest brains in Europe. Short of converting the entire national debt into zero coupon perps, I can’t see a way out. Prime Minister Tsipras hasn’t said it yet, but the body language is still: “You can either help us not to default and get half your money back or you can let us default and get none of it. Pay’s yer money, takes yer choice.”

Popular opinion across Europe seems to be to trending toward helping the Greeks out but I’m not sure popular opinion is aware who’s money it is that might not be repaid.

I must commend Holger Schmieding and Christian Schulz of Berenberg Bank for their stunning piece on Greece. Holger and I have crossed swords many a time over the years when it comes to whether the single currency project will be seen by history as an act of either visionary genius or of misguided, idealistic folly – no prizes for guessing which of us was on which side of the argument – but please permit me to doff my cap to him and his team for this piece and recommend it to be read.

Dubious contribution

Back here, Mark “The Magician” Carney has just earned himself an A-star-plus for stating the bleedin’ obvious with respect to the ECB’s recent action plan. Quite what the Governor of the Bank of England has to do opining on the action of the ECB escapes me. I’m not too sure he would appreciate if Saint Mario felt he had to pass comment on the MPC’s monetary policy decisions or whether he would have the courage to tell the world what he thought of Madame Yellen and the Fed. But he has done and you can’t put the poo back in the horse.

We didn’t need Governor Carney to tell us that currency union without fiscal union isn’t going to work. We don’t need him to tell us that incomplete risk sharing is as good as no risk sharing at all. Did he really have to say “European monetary union will not be complete until it builds mechanisms to share fiscal sovereignty”? It’s a bit like suggesting that if we reduce the speed limit on our roads to zero, nobody will ever again be hurt or that if we all became vegetarians, the life expectancy of cattle and poultry would rise sharply. Sir, it ain’t going to happen.

The rise of some of the more odious nationalist movements across Europe should tell us what is happening. It’s not the voters who got it wrong, it’s the politicians. Have the latter forgotten who their employers are? We all know what happens to us if we go into the boss’s office and tell him or her that he’s a fool and that he’s taken rubbish decisions. Why do politicians think they have the right to do the same to those who gave them their jobs, just with impunity?

Time to wheel out Bertold Brecht and his 1953 poem “Die Lösung” which he wrote in the aftermath of the popular uprising against the SED government which translates as “The Solution” and goes: 

“After the uprising of the 17th June, The Secretary of the Writer’s Union, Had leaflets distributed in the Stalinallee, Stating that the people, Had forfeited the confidence of the government, And could win it back only, By redoubled efforts. Would it not be easier In that case for the government To dissolve the people And elect another?”

I rest my case.

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