Why the Fed Keeps Getting It Wrong
The comments below are an edited and abridged synopsis of an article by Jim Rickards
The Fed assumes many things about markets that are simply false; that they are always efficient, for example. They are not. Under volatile conditions they gap up and down—they don’t move in rational, predictable increments.
The problem is that the Fed’s equilibrium models are empirically false. The Fed has the worst forecasting record in the world. It’s basically been wrong every year since 2009.
Currently, the economy faces severe headwinds in the form of geopolitical instability, inflation and ongoing supply chain disruptions. The chances of recession are very high.
The current fed funds target rate is between 4.75% and 5%. So, if there is a recession this year, the Fed has dry powder to fight it. But then the cycle starts all over again.
The problem with any kind of market manipulation (what central bankers call policy) is that there’s no way to end it without unintended consequences. Once you start down the path of manipulation, it requires more and more manipulation to keep the game going. Finally it is no longer possible to turn back without crashing the system.
Japan’s lost decade is now three lost decades. The US began its first lost decade in 2009 and is now in its second, with no end in sight. Central bank policy in both countries has been completely ineffective at restoring long-term trend growth or solving the steady accumulation of unsustainable debt.
The irony is that in the early 2000s, former Fed Chair Ben Bernanke routinely criticized Japan for its inability to escape from recession, deflation and slow growth.
Bernanke thought that low interest rates and massive money printing would lead to lending and spending that would restore trend growth. But he ignored the role of velocity and the unwillingness of banks to lend or individuals to borrow.
When that happens, the Fed is pushing on a string—printing money with no result except asset bubbles, and that’s where the US is today.
