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Chairman Powell Confirms That He Hopes For The Best, But Plans For Another V-Shaped Lost Half-Decade Of A W-Shaped Lost Decade – Seeking Alpha

Aug 30th, 2020

(Source and caption by the Author)

It was vintage Chairman Powell on show at Jackson Hole. His fans will be looking forward to five more years of his latest chapter of the Monetary Policy Story at the Fed.

Anyone expecting pure clarity from Jackson Hole was disappointed. As usual, Chairman Powell created more questions and uncertainty than answers and certainty. The former two will, as usual, force him to act as he should have promised to do in the first place. Its all part of his process and we must ultimately trust the process.

As noted in the last report, the Fed had continued to produce copious evidence, in support of its next monetary easing, to coincide with the ensuing Jackson Hole central banker colloquium. The problem with this preparation was that it raised expectations and ultimately disappointment in the final delivery.

The Fed, as an institution, approached Jackson Hole with a slight credibility deficit in relation to its efforts so far for Main Street. The Congressional oversight panel of the Main Street Lending Programme (MLP), run by the Boston Fed, did not grade the said efforts so far too kindly. The criticism was, however, constructive.

The Fed was guided to broaden the outreach and coverage, of the MLP, rather than to keep it tightly controlled by the Boston Fed. In practice, therefore, internal financial controls and accountability will become much slacker and the program will become more generous. Consequently, the room for fraud will be much larger. If and when these frauds occur, Congress should not blame Eric Rosengren and his Boston Fed team. Neither should Rosengren say I told you so.

The San Francisco Fed got in on the pre-meeting evidence trail act with some analysis of the impact of COVID-19 on inflation. The research finds that the collapse in aggregate demand, during the outbreak, has driven inflation measures lower. Clearly, based on the Feds inflation mandate, and commensurate inflation targeting process, the case is strong for further monetary policy easing.

The last report also discussed the current fixation on the V-shape versus W-Shape profile recovery debate. This debate was being framed by the Fed to push Congress for a further fiscal stimulus to avert the possibility of the W.

Evidently, the Feds pre-Jackson Hole framing has worked on the professional economist fraternity/sorority. A pre-conference poll of the National Association of Business Economists (NABE) found that half of its panelists expect a return to Q4/2019 GDP levels in 2022. Furthermore, two-thirds of the panelists said that the US economy is still in the recession, that commenced in February, whilst almost 80% believe that there is at least a 25% probability of the dreaded W-shape.

Most importantly, the NABE panelists views are conditional upon the successful implementation of another fiscal stimulus and strict adherence to healthcare protocols. This view puts them exactly on the same page as the Fed pre-conference. By nature of this affiliation, these panelists were thus more likely do the Feds extended forward guidance proselytizing with greater alacrity. Assuming that policymakers, consumers, and speculators are listening, said extended forward guidance, thus, has a high chance of success. All this, of course, assumed that Chairman Powell and his following speakers followed through with language and explanations that fitted prior expectations. As we shall see, the Chairman and his team fell short, although they were more than ably assisted by their staffers.

Richmond Fed president Thomas Barkin, pre-Jackson Hole, deftly pivoted away from immediate pandemic relief towards long-term economic fundamentals. Barkin is still not ready to abandon those who are unemployed or furloughed and face grim employment prospects in the near future just yet. He does, however, recognize that many jobs that involve personal physical proximity will disappear. Whilst those whose livelihoods disappear, with these jobs, need immediate support to sustain their survival, going forward, he suggests that the money will be better spent retraining them than simply preserving their lives.

Unfortunately, Barkin ignores the fact that the retrained will be competing with incumbents; thereby driving the returns to labor lower through competition for jobs. Nor does he note that the retrained will also have to compete with computers and algorithms, which they cannot beat, in the more process orientated jobs. Ultimately, Barkin will have to confront this competitive brave new world and thesis that a universal basic living allowance may be required to prevent this structurally unemployed cohort from turning to crime.

(Source: Wikipedia, captions by Nat King Cole and the author)

The last report updated on the Helicopter Money Is In The Cloud investment theme. The underlying thesis is that the national security importance of US Meg Cap Tech, along with its scale and productivity are force-multipliers which place it in the focus of American efforts to sustain its position in the global economys post-COVID-19 environment.

(Source: Bloomberg, caption by the Author)

The latest update to this thesis finds Exxon being kicked-out, of the Dow Jones Index, to be replaced by technology-enabled names. This rebalancing is notable in that it signals that Big Oil is losing its position, at the heart of Americas geo-strategy, to Big Tech.

The initial curtain-raiser for Chairman Powells Jackson Hole speech was provided by the Hawkish Kansas City Fed president Esther George. Since Jackson Hole is in Georges territory it is her gig, so to speak. She raised the curtain by opining that she is not averse to letting inflation run a little hotter than the target for a little while. She now alleges that the 2% inflation target has never been viewed as a ceiling in her eyes. On listening to George, Mr. Market was primed for action on the inflation targeting front.

Whilst not disappointed by what he then found out Mr. Market was, nevertheless, underwhelmed.

In contrast to Esther George, Fed Governor Michelle Bowman took nothing away from Chairman Powell in her preceding speech to a group of Kansan CEOs. She would only note that, despite the recent weakening in economic activity and future uncertainty, the US banking system went into the COVID-19 crisis in the best shape that it has been in since the GFC. Notwithstanding this innate strength, the banking sector has been supported by various Fed emergency lending programs in addition to the pausing of a scheduled counter-cyclical tightening of capital adequacy rules.

Mr. Market was, thus, subliminally programmed to expect Chairman Powell to opine that the outcome of the Feds policy framework review has led to an innate bias towards overshooting the inflation target. After this framing, Chairman Powells speech was anti-climactic rather than climacteric.

Powells perennial problem is that he tries to avoid delivering surprises which make him look radical. His final delivery is therefore humdrum and generally disappoints expectations. The corollary impact is that he is initially seen as not doing enough. The widening of his credible commitment deficit, then, forces him to be radical over time. And, so, it was at this Jackson Hole.

The Fed Chairman lamented that the Feds response to the GFC was perfect and that plans and economic conditions for monetary policy normalization had been going according to plan before the COVID-19 pandemic arrived. The Feds Monetary Policy Framework Review, that had been conceived in these happier times, to de deal with an envisaged new normal of strong growth and low inflation was, thus, rendered obsolete. What has evolved during the pandemic, is a new new normal which is deflationary. The Feds Monetary Policy Framework Review was, thus, also a victim of the COVID-19 pandemic.

As expected, Powell proselytized the expected strategy of allowing inflation to slightly overshoot, whilst the economy allegedly runs hot and employment increases. As a stated objective, this is fine but, unfortunately, this was already expected. What listeners wanted to hear was how this overheating/overshooting would be achieved. What they got was silence on the details, another hallmark of Powells tenure.

(Source and caption by the Author)

Thus far, the Fed has failed to hit its inflation target over the medium-term and even longer than that. Why, therefore, with no detailed explanation should anyone expect it to be successful, this time, especially when faced with the unprecedented COVID-19 pandemic.

(Source: Federal Reserve Board, caption by the Author)

In summation, Chairman Powell predicted that there will not be another framework review for another five years. This implies that monetary policy will remain loose and/or expand further for the next five years. This timeline seems ominously resonant with the authors thesis that the current V-shape recovery is the first half of a Lost Decade W-shape.

St. Louis Fed president James Bullard was first to the punch, in the attempt, to explain what Chairman Powell actually meant.

Unfortunately, Bullard had no explanations as to how what was meant would be achieved in practice. In his view, were (the Fed) going to try to make up for past misses. Since the Fed has missed most of the time, this could be a lengthy and risky attempt at overcompensating for the previous failure. Given the obvious threat of perpetual easing, because of perpetual former failure, Bullard then tried to provide practical context with an example.

For example, If you wanted to stay on the price-level path that was established from 1995 to 2012 you could run 2.5% inflation for quite a while, Bullard contextually explained. His offer immediately collapses consciousness onto thinking about how long a miss the Fed intends to correct. His example suggests that the Fed has a between five-and-ten years time horizon for the miss that it intends to correct. Interestingly, this duration also dovetails nicely with the emerging thesis that the US economy is completing a five-year V-shape that is the first-half of a Lost Decade W-shape.

Dallas Fed president Robert Kaplan, then, spitballed-in some confidence limits around the average inflation target picture that was under vague construction. Apparently, he could live with inflation between 2.25% and 2.5% but were it to go into the 2.5% to 3% range for a year he would feel obliged to raise interest rates.

Clearly, what Kaplan is trying to do is to set limits on Mr. Markets enthusiasm and convey a credible commitment to a long-term overshooting convergence picture rather than a short-term spiked one. A longer-term convergence would sustain employment without creating the risk of undermining it with sudden rate hikes from an inflation spike.

Whilst this author finds Kaplans framing and halo-painting attempt laudable, he also finds it riddled with self-affirming cognitive bias. Kaplan is assuming that by saying that he will reach his inflation target that he will actually do so. All the evidence, so far, contradicts this assumption. Indeed, his preference for the slow accretion to target method suggests that no real monetary policy muscle will be stretched in trying to attain it. Kaplan intends to get there simply by saying that he will get there and then letting Mr. Market and Mr. Real Economy take him there slowly under their own steam without any further monetary policy fuel.

Kaplan and the Fed must ultimately walk the talk, not just over time but also with monetary aggregate volume. Mr. Market and Mr. Real Economy, will both ultimately say dont tell me, show me, thereby, showing Kaplan the effective limits of extended forward guidance as an unconventional monetary policy tool.

In the absence of meaningful guidance on execution tactics and tools, from the Fed Chair, Presidents, and Governors it was left to the Feds staffers to fill in the details. Extended forward guidance by way of Fed staffers, thus became the Feds latest sublime communication policy. This author has nothing but respect and admiration for the Feds staffers, especially after reviewing their articles submitted at Jackson Hole, but feels that what they have to say would carry more weight if it came from their leaders.

(Source: Federal Reserve, caption by the Author)

To burnish the positive halo-effect surrounding Chairman Powell, into a slam-dunk on average inflation targeting, some of the Feds staffers then submitted some empirical work. This work concludes that although inflation makeup strategies are no-panacea, they are a good practical choice with limited negative consequences if they dont work out. The risk-reward and cost-benefit analysis boxes are thereby ticked.

(Source: Federal Reserve Board, caption by the Author)

A further piece of staffer empirical wisdom advised the Fed not to bet the house on one monetary policy balance sheet tool. Rather, the Fed should present an array of tools at its disposition and use each one judiciously for the appropriate policy challenge being undertaken. These researchers, thus, advised the Fed to continue in the incremental way that it has done so far. The researchers failed to note that, in doing so, the probability of missing the inflation target also rises based on past underperformance. Robert Kaplan would love this advice, even if its application fails to move the inflation needle to target.

(Source: Federal Reserve Board, caption by the Author)

On the employment mandate piece of the overshooting thesis, other Fed staffers have come up with some corresponding average employment benchmarks to go with the average inflation target. This author notes carefully that these are benchmarks and not targets. The Fed, thus, neatly evades being tied down to potential failure to achieve its employment mandate by adopting benchmarks rather than aiming for targets.

(Source: Federal Reserve Board, caption by the Author)

In an attempt to appear both transparent and objective, some Fed staffers also critiqued the performance of the Fed in response to various challenges. This criticism was then lost in the milieu of further criticism of the performance of other central banks under the same circumstances. The Feds actions and performance were, thus, normalized and justified against its global peer group. What was missing from this fudge, is the current evidence which suggests that the Fed and American policymakers, in general, are doing worse than their peers in relation to the COVID-19 challenge. The fact that the Fed did better in the GFC of 2007-09, heavily skewed the findings and obscured the picture of today. The fact that the Fed has held-out, against going through the Zero Lower Bound, is an alleged badge of honor and one of US economic virility rather than one of shameful policy inertia.

(Source: Federal Reserve Board, caption by the Author)

In relation to inflation range targeting, some Fed staffers provided a guide for the perplexed FOMC member. This guide sought to define intentions and capabilities to achieve the target, by identifying what can be achieved, from what is beyond achieving, and what cannot be known with certainty. This guide highlighted the risks to the Fed of being hoisted, once again, by a petard of an inflation target reach that is beyond its practical grasp.

(Source: Federal Reserve Board, caption by the Author)

A further note of caution was injected by a staffer article that found that whilst, in theory, inflation makeup strategies are optimal they may actually be unachievable practically. Thus, talking the talk does not necessarily lead to walking the talk.

(Source: Federal Reserve Board, caption by the Author)

This author was particularly taken with an idiots guide to average inflation targeting in an economic environment that has been created by Modern Monetary Theory (MMT). The staffers responsible gave MMT a new acronym HANK.

HANK is a Heterogenous Agent New Keynesian, which is apparently how permanently expanded monetary and fiscal policy manifest themselves, in one economic body, at the Zero Lower Bound. According to these staffers, inflation makeup strategies work best when the beast of HANK has been released. Thus, providence and detailed empirical analysis have defined that average inflation targeting and HANK (aka MMT) are made for each other. This author is disappointed that average inflation targeting didnt get its own acronym of AIT, to complete the perfect symmetry of audacity married to mendacity!

The problem with MMT is that it is, by nature, a permanent combination of expanded monetary and fiscal policy. As such, the risk is that the Fed never gets to normalize conventional monetary policy, even, before a new economic downturn ensues. The compounding of financial stability risk, through divergent asset prices from economic reality, is already quite a large elephant in the room in todays capital markets. Failure to address it, at this Jackson Hole, would simply make it even larger and more dangerous.

It would have been egregious for the Feds staffers to avoid this very obvious unintended consequence during their prosaic extended forward guidance in lieu of the real thing from their masters. The omission, of the obvious, would have devalued all of their guidance and widened the yawning credible commitment gap, over continued inflation target missing, even wider.

Consequently, the staffers devised a cunning plan, to state the obvious about financial stability risk, whilst simultaneously conspiring to make the dangerous elephant in the corner even larger. Rational exuberance has replaced Greenspans irrational exuberance as this beast is carefully nurtured.

(Source: Federal Reserve Bank, caption by the Author)

First up, the staffers framed the beast apologetically in dual mandate terms. The beast is apparently a rational construct and logical outcome of the Feds dual mandate drivers to create employment and govern inflation. The current deflationary economic conditions, when framed through the dual mandate, contrive to make the Fed even more likely to make this rational beast even larger. It is what it is and by being frank about it, the beast can allegedly be tamed.

(Source: Federal Reserve Board, caption by the Author)

Needless to say, in case the beast refuses to be tamed, the staffers have a theoretical solution for this eventuality too. They advise that the Fed should keep some policy commitments outside of its mandate and its toolbox. In effect, the Fed then has the flexibility to expand monetary policy by procrastinating and then calling upon these non-core commitments as excuses and distractions.

(Source: Wikipedia, caption inspired by Naughty by Nature, the article where used by the Author)

This author already sees signs of the use of this procrastination guidance tool in the Feds embrace of an unofficial Inclusivity Mandate in relation to the social mission of preventing some Americans from falling further behind in the economy. To achieved Inclusivity, the Fed is willing to style drift away from its official dual mandate and by so doing feed the asset price beast.

(Source: Federal Reserve Board, caption by Charles Foster Kane)

Some Fed staffers, also, seem to think that by applying copious amounts of extended forward guidance the Fed can avoid the reinforcing conditions, of monetary policy easing and macroprudential light-touching, from creating a financial bubble. Apparently, by saying that there is no bubble in asset prices, or deflating prices with disparaging guidance, the Fed can keep the risk-asset price party going for as long as it cares to. This appears to be wishful thinking, but Mr. Market is prepared to buy it as long as prices keep going up on average.

This was the time for bold and detailed speeches. Unfortunately, neither occurred in the same breath at Jackson Hole. All the ingredients were available to make a big splash, but instead, Chairman Powell chose to take a tentative dip of his toe into the pool. His circumspection, in relation to detail, is not surprising based on the various practical caveats that came to light when the Feds staffers tried their hand at extended forward guidance. The staffers research and output were exhaustive. The problem is that they revealed a process that may be exhausting rather than stimulating in practice. Mr. Market, Mr. Real Economy, and especially Mr. President like to see immediate results and show a high degree of intolerance for things that take time to achieve.

The Feds speakers have, thus, left it all to do at ensuing FOMC meetings and other extended forward guidance speaking opportunities. Reading between the lines of the staffer papers, this process is going to be unedifying since the evidence is inconclusive and portrays many practical obstacles. It would be a lot easier for the Fed if a good old financial crisis intervened and simply caused it to throw caution to the wind. This may yet happen.

By contrast, to Jackson Hole, the political sideshow being run by the GOP was far more impactful.

(Sources: climateerinvest, national postalmuseum, caption and editing by the Author)

Whilst a wholesome Trump Family projected traditional American Family values, wealthy white Americans were offered tax cuts and poor white Americans were given the green light to continue a domestic race war. The allegedly radical Joe Biden apparently threatens this American Dream. Whats not to like, about these two campaign-promises, when one is agonizing away behind the curtain in the voting booth? In fact, why agonize at all if one is at home filling in a postal ballot paper?

There was absolutely no credibility gap with the Presidents intended audience and support base. Biden did not get a polling boost after his acceptance speech. President Trump, however, did.

(Source and caption by the Author)

In previous articles, this author has noted that President Trumps prosecution, of his own Civil War, in practice, weakens Americas global war to remain relevant and in control of the economic and political levers of the global economy. These finite and diminishing global resources which then get expended on the domestic civil war and tax cuts are thus at risk. Consequently, those who understand this bigger picture will see fit to remove him, should he get re-elected, through the impeachment process. This is also part of the process and we should, also, trust the process.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Chairman Powell Confirms That He Hopes For The Best, But Plans For Another V-Shaped Lost Half-Decade Of A W-Shaped Lost Decade - Seeking Alpha

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