St Louis Fed Suggests Foolproof Way to Prevent Yield Curve Inversion: Don't Hike

The St. Louis Fed president Jame Bullard has a spotlight on yield curve inversion, and he wants to prevent one.

Please consider the Risk of Yield Curve Inversion—and How to Avoid It by James Bullard.

At the current pace of rate hikes, based on projections for one-year Treasury yields, the U.S. nominal yield curve would invert in late 2018 or early 2019.

Bullard wants to prevent that from happening. He proposes two ideas.

1) If longer-term nominal interest rates begin to rise in tandem with the policy rate or
2) if the FOMC does not raise the policy rate as aggressively as suggested by the September 2018 FOMC Summary of Economic Projections(SEP).

Point two is in reference to the "Dot Plot".

Bullard rejects point one due to the fact that the 10-year yield has been "roughly constant since 2014. Consequently, it seems unlikely that longer-term nominal interest rates will begin to rise in tandem with the Fed’s policy rate."

Bullard Concludes

Some argue that this time is different when it comes to the yield curve. I recall similar comments relative to the yield curve inversions in the early 2000s and the mid-2000s—both of which were followed by recessions. To be sure, yield curve inversion could be driven by factors that are unrelated to future macroeconomic performance.

Critical Thinking Not

  • For starters, a yield curve inversion is not a requirement for a recession. One look at Japan or Italy proves as much.
  • Second, Bullard is oblivious to bubbles. Holding rates too low to long is a sure-fire way to create bubbles. And we are in one heck of a set of bubbles right now that not a single person at the Fed can see.
  • Third, Fed policy ought not be to prevent inversions but rather to prevent bubbles.

Point number three presumes there should be a Fed in the first place, but clearly there shouldn't.

Fed Uncertainty Principle

My "Fed Uncertainty Principle", written April 3, 2008, accurately predicted this state of affairs before the housing bubble and Lehman imploded.

Fed Uncertainty Basis Principle: The fed, by its very existence, has completely distorted the market via self-reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed’s actions. There would not be a Fed in a free market, and by implication, there would not be observer/participant feedback loops either.

Corollary Number One: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn’t know (much more than it wants to admit), particularly in times of economic stress.

Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Corollary Number Three: Don’t expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

Corollary Number Four: The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.

History Lesson

No one at the Fed has ever spotted a bubble in real time, nor can they spot conditions that blow bubbles.

The Fed has been blowing bubbles of increasing amplitude since 1998. We had a dot-com bubble followed by a housing bubble and then an everything bubble.

Junk Bonds and Zombies

Junk bond issuance is at record high with increasingly easy terms and record low yields.

A record number of companies are zombies, unable to finance debt out of profits.

Not the Only Clueless Clown

Sadly, James Bullard is not the only clueless clown.

It did not occur to Yellen or Bullard or anyone else currently on the Fed that booms inevitably lead to busts.

Instead of "making up for busts" the Fed ought to prevent unwarranted booms.

UN Report Cites Central Bank Liquidity Bubbles, Loose Money, Debt Expansion

The UN report was concerned about an avalanche of debt and excess liquidity among other concerns, all of which were correct.

The report failed to blame central banks, governments, and fractional reserve lending. Instead, the UN blasted "hyperglobalization".

Thus, the UN blamed a symptom, not a cause. Bullard did the same thing.

My "Fed Uncertainty Principle" predicts more of the same.

Mike “Mish” Shedlock​

Comments
No. 1-5
AWC
AWC

They don't need to be smart. They just need to maintain ownership and control of the National Currency. A hard fact to deal with, but it's just the way it is.

AWC
AWC

What Ever It Takes. The Fed will not let this go. They now own it. Such is "Moral Hazard."

And, "Don't Fight the Fed" is back in spades. Or, keep following the Doom and Gloom bloggers for another decade. Might get even more expensive than the last 10 years, though.

hmk
hmk

First you have to believe that they are not that stupid and mean what comes out of their piehole. You are correct the fed should not exist in its current form. They have no business trying to run the largest economy in the world. I would argue that their original charter as being the lender of last resort in the event of a liquidity crisis is still a good idea. They desperately want to keep interest rates low to prevent a liquidity crisis for the govt. If interest rates were set by the free market or even reflected the true cost of living govt financing costs would skyrocket. Its better to perpetrate a fraudulent story and steal from the sheep via stealthily eroding your savings via inflation than face the truth. What astounds me is that no one in the media, economists or even the average citizen questions that the king has no clothes. Its like living in alice in wonderland. I just don't understand it.

TheLege
TheLege

These people are geniuses. Pay them more!

Schaap60
Schaap60

That was a walk down memory lane circa 2008. Time will tell if we have to walk down 2009 and 2010 as well.

Stories