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Eurodollar Accounting

Summary:
One step forward, two steps back. Implicit in the Fed’s big strategy reviewed unveiled by Federal Reserve Chairman Jay Powell at the end of August was an admission that policymakers had screwed up. No minor detail, either, they have messed up big time on the big stuff. Though failing to be explicit about it is so infuriatingly cowardly, it’s at least a definite step in the right direction. Following from that, though, next in line would be to figure out what, exactly, got screwed up and why. Finally, the final big move forward, what can realistically be done about it. Unfortunately, neither of those are on the horizon; two steps back.Minneapolis Fed President Neel Kashkari dissented from this week’s FOMC policy vote. Kashkari has been a frequent dissenter which has made him a star

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One step forward, two steps back. Implicit in the Fed’s big strategy reviewed unveiled by Federal Reserve Chairman Jay Powell at the end of August was an admission that policymakers had screwed up. No minor detail, either, they have messed up big time on the big stuff. Though failing to be explicit about it is so infuriatingly cowardly, it’s at least a definite step in the right direction.

Following from that, though, next in line would be to figure out what, exactly, got screwed up and why. Finally, the final big move forward, what can realistically be done about it.

Unfortunately, neither of those are on the horizon; two steps back.

Minneapolis Fed President Neel Kashkari dissented from this week’s FOMC policy vote. Kashkari has been a frequent dissenter which has made him a star “dove.” In this case, however, he has personified the Fed’s net negative; admitting the central bank got it wrong, but then, frustratingly, coming back to the same old conclusions anyway.

Earlier today, Neel took to the branch’s blog to explain his negative vote:

However, I voted against the FOMC’s September 16, 2020, policy statement because, while I believe the statement is a positive step forward in putting those lessons into practice, I would have preferred the Committee make a stronger commitment to not raising rates until we were certain to have achieved our dual mandate objectives.

That’s the dove that everyone (on Wall Street and in the financial media) loves. His explanation, though, should be sending chills up everyone’s spine instead:

When I first became an FOMC voter, I dissented against all three of the Committee’s rate hikes in 2017 because, as I wrote then: “We are still coming up short on our inflation target, and the job market continues to strengthen, suggesting that slack remains.”…We misread the labor market and, as a result, the tightening cycle that we embarked upon was not optimal to achieving our dual mandate goals of maximum employment and stable prices. [emphasis added]

Yeah, you did. And “misread the labor market” is one of those All-Time understatements.

One reason is because it had been a blatant and unforced error, one made out of emotion (please, please let QE work!) rather than honest analysis. Warned over and over about the very real participation problem, the very obvious fault in the unemployment rate, and the macro reasons behind it, policymakers ignored all that in favor of…the soothing sounds and pleasing aroma of R*.

R*, or R-star, is nothing more than the fuzzy little Deus ex machina officials have deployed as a perverted sort of economic Get Out Of Jail Free card.

Kashkari has to be very careful here; since there was macro slack in the labor market, then R* would be a few big points off and confessing to this fuller explanation of reality risks angering the Fed’s influential John Williams types who can’t bring their minds around to all the evidence blatantly pointing to one failed monetary policy after another.

An entire dozen years and counting. They call it stimulus, but labor market slack calls into question whether anything had ever gotten properly stimulated.

Eurodollar AccountingEurodollar Accounting

Good step forward.

Unfortunately for the influence at the Minnesota branch, that’s where we lose Kashkari. Yes, they messed up on inflation because the labor market hadn’t actually reached full recovery (as we all know from the absurd overuse of the word “transitory”). His preferred solution, and why he dissented this week, the same as before this week, is to commit to holding rates at zero for…ever.

The Fed’s error in monetary policy, in this branch President’s judgment, was in beginning the rate hikes too soon. In other words, for Love Dove Neel, the US hadn’t been Japanese enough.

Two giant steps backward.

Remember, this was all before 2020; more than a decade of error piled upon error in monetary as well as economic judgement. The two actually, and obviously (interest rate fallacy), go hand in hand. That’s the part these people are having so much trouble with – they simply refuse to believe that the cause of so much (global) economic misery is their own distinct lack of monetary proficiency.

Why else did everything go bad when it did? What happened in 2007 and 2008, again? I recall vividly a monetary break that for everything central bankers tried it ran roughshod over the global system and economy anyway. Zero interest rates and abundant reserves, after all, and still worldwide liquidations and monetary panic.

And now there’s this year. It’s easy to admit macro labor slack with COVID in the bag permitting more official denial as to any lingering negative effects from what amounted to GFC2 back in March – when, yet again, an unnecessary monetary break that for all central bankers attempted ran roughshod over the world as if policymakers had learned absolutely nothing from GFC1.

That’s pretty much the point about inflation and labor market slack; nope, they had learned nothing. Nothing. NOTHING.

What does that mean for the post-GFC2 comeback? The Fed trying to make up for its huge prior error by making the same one! I mean, if seven years of QE’s and ZIRP didn’t solve the slack leftover from GFC1, then the right answer is, more years of doing the same things that hadn’t solved the slack left over? Do officials ever think these things through all the way, or even just say them out loud?

Kashkari is hardly alone in wanting America to more thoroughly resemble Japan, thus his popularity. ZIRP Through ‘30 isn’t their official slogan but it might as well be. Another: We’ve Lost One Full Decade, Why Not Two!

To begin with, we find the economy once more at a chillingly familiar crossroads. The unemployment rate is again dropping rapidly signaling one thing, while pretty much everything else, yet again, is aligned against that view. Especially this:

Eurodollar Accounting Eurodollar Accounting

The amount of ongoing, continuous labor market distress is simply frightful. Full stop. How can it be the middle of September, and jobless claims remain, even after a statistical adjustment a few weeks ago, significantly higher than we’d ever seen before March of this year?

And that’s just the reopening weeks; I’ve only included above those from the beginning of June forward.

While it’s a positive step that even Fed officials now are sounding reasonable caution about the unemployment rate, it just won’t be nearly enough. It’s not enough. To get out of what sure seems to be an even bigger mess, we need to do even more of the things that failed to clean up the last one?

Eurodollar Accounting

It’s an insanely stupid statement Neel and his fellow policymakers have forced me to write, to even contemplate, but at the same time it just so perfectly explains the seemingly unbreakable dollar “bullishness”, how there’s no answer to all real problems behind it. And I hate that term (bullish) more than anything because, in this situation, the combination of unsolved slack with a chronic global dollar shortage (two sides of the same coin; just as Keynes had warned a century ago) isn’t bullish in any meaningful way for any of the Earth’s inhabitants.

It’s the eurodollar’s world; we’re all just trying to live in it, survive it, as best we can until the Kashkari’s finally realize this and then yet convince all the Powell’s and Williams.

Crap. I think that’s three steps back. Eurodollar accounting (below).


Eurodollar Accounting Eurodollar Accounting

Jeffrey P. Snider
As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. His company is a global investment adviser, hence potential Swiss clients should not hesitate to contact AIP

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