Powell Promises Patience: So What? It Doesn't Matter

At a speech in Atlanta, Fed chairman Jerome Powell promises patience and walked back his autopilot statement. So what?

No Preset Path

“As always, there is no preset path for policy,” Powell said. “And particularly with muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves.”

Balance Sheet Reduction

The above statement is amusing given that Powell discussed a balance sheet autopilot following the December 19 FOMC meeting.

We thought carefully about how to normalize policy and came to the view that we would effectively have the balance sheet run off an automatic pilot and use monetary policy, rate policy to adjust to incoming data. I think that has been a good decision. I think that the runoff of the balance sheet has been smooth and has served its purpose and I don't see us changing that. And I do think that we will continue to use monetary policy, which is to say rate policy as the active tool of monetary policy.

Autopilot Off

Apparently, the autopilot is now off.

So What? It Doesn't Matter

None of this matters in the least. One additional rate hike will not tip the economy into recession. One rate hike less, or even a rate cut will not prevent a recession.

Economic imbalances are staggering following decades of Fed officials blowing repetitive economic bubbles of increasing amplitude.

Dot Thought Thickens

That's what the dot plot of expected rate hikes looked like in December. It will not look that way following the next FOMC meeting.

Over time, the dot plot always thickens.

The December meeting will show unanimous or near-unanimous opinion that the Fed is doing a brilliant job for the current year.

What Does Matter

The BIS warns of $3.15 trillion in BBB corporate debt hovering just above junk that "if and when the economy weakened, it is bound to put substantial pressure on a market that is already quite illiquid and, in the process, to generate broader waves."

Economy Isn't a Truck

No matter how hard the Fed tries, the economy can't be steered like a truck by a group of economic wizards. The economy isn't a truck.

Attempts to steer the economy coupled with inane fear of routine price deflation are a key reason we have these bubbles.

CPI Deflation Not a Problem

The BIS did a historical study and found routine deflation was not any problem at all.

"Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.

For further discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Tinder Stacked a Mile High

Real World

In the real world, bubbles eventually matter.

My assessment stands: A Fed-Sponsored Economic Bust is Coming no matter what the Fed says or does now.

Mike "Mish" Shedlock

Comments
No. 1-11
shred1
shred1

QE4, coming up!

ReadyKilowatt
ReadyKilowatt

BBB grade debt? What's in your 401(k)?

RonJ
RonJ

"In the real world, bubbles eventually matter."

QE aside, the fear was that the FED would raise rates too soon, causing a 1937 scenario. Well, they delayed and delayed and delayed raising rates and there are now pundits talking of 1932 moments and monetary resets. Kind of a damned if you do, damned if you don't, scenario.

DFWRealEstate
DFWRealEstate

Interesting that Powell now says he "wouldn't hesitate" to tweak the balance sheet normalization plan. I suspected it was only a matter of time before his private equity/Wall Street roots started showing. What a difference a month makes!

gregggg
gregggg

Just wait til Moody's reclassifies those bonds as this mess sorts out.