Dear Mr. Dudley,
Your recent comments following the latest FOMC statement were remarkably unproductive.
Your justifications for additional rate hikes, aimed at addressing supposed fears of soaring unemployment and inflation, seemed insincere at best.
Concerning Unemployment
The idea of “crashing unemployment” feels like a recent invention in economic discussions, and it’s questionable at that.
Years ago, before the era of globalization, the primary concern was wage inflation linked to full employment. With the official unemployment rate hovering at just 4.3 percent and wages still stagnating, it seems the Fed has conjured up a new bogeyman. How should we interpret this?
Firstly, the Fed’s unconventional monetary policies have successfully distanced financial systems from the real economy. What was once deemed unimaginable is now commonplace.
For instance, the notion of negative interest rates was unfathomable until fairly recently, but years of central bank asset purchases have made this a reality.
Perhaps the looming risk of crashing unemployment will soon be overshadowed by the absurdity of negative unemployment. Unforeseen events can occur, especially considering the inherent limitations of the Bureau of Labor Statistics’ birth-death model.
Furthermore, muddling the Fed’s messaging with misleading concepts like crashing unemployment shortchanges their objective of transparent communication. Simply put, Fed communications have taken a turn from problematic to downright confusing.
In the prosperous days of Alan Greenspan’s Goldilocks economy, for example, the Fed effectively used “jawboning” to manage inflation expectations. Greenspan, ever the smooth talker, would downplay inflation concerns even while cutting rates.
However, times have certainly changed. The Fed seems to have flipped this tactic; now, it appears the Fed is inflating inflation expectations while simultaneously raising rates, as suggested by your recent remarks.
Congratulations and Thank You!
History may well view this policy approach as a colossal failure. At least the Fed is consistent in one aspect: it often misjudges the economic landscape.
Remember back on January 10, 2008? Just a month after the onset of the Great Recession, then-Fed Chair Ben Bernanke insisted, “The Federal Reserve is not currently forecasting a recession.” While it’s true that economists often identify recessions retrospectively, such a forecast should ideally recognize when one is already unfolding.
Bernanke’s statement has become infamous, reminiscent of Irving Fisher’s ill-fated proclamation in October 1929 that “Stock prices have reached what looks like a permanently high plateau.” By the end of that month, the stock market crashed and did not return to previous highs during Fisher’s lifetime.
To be fair, Fisher was not a member of the Fed, but he was a dedicated central planner with a similar mindset. However, gaffes like those from supposed authorities like Bernanke and Fisher add a certain ironic humor to our economic discourse. Don’t you agree?
Therefore, Mr. Dudley, congratulations are in order! On Monday you provided what will undoubtedly be a memorable quote in the archives of economic discussions:
“I’m actually very confident that even though the expansion is relatively long in the tooth, we still have quite a long way to go. This is actually a pretty good place to be.” – William Dudley, June 19, 2017
Thank you for your insightful observations. They will surely spark laughter during the challenging years to come.
Too Little, Too Late
Ultimately, your reasoning for rate hikes is not rooted in an irrational fear of a crashing unemployment rate or the need to manage price inflation. Rather, it appears to be a cover for previous missteps.
The esteemed James Rickards, in his article titled The Fed’s Road Ahead, encapsulated the essence of current Fed policy:
“Now we’re at a very delicate point, because the Fed missed the opportunity to raise rates five years ago. They’re trying to play catch-up, and yesterday’s [June 14] was the third rate hike in six months.
“Economic research shows that in a recession, they [the Fed] need to cut interest rates by 300 basis points or more, or 3 percent, to lift the economy. I’m not saying we are in a recession now, although we’re probably close.
“But if a recession arrives in a few months or even a year, how can the Fed cut rates by 3 percent if they’re currently at just 1.25 percent?
“The answer is, they can’t.
“So the Fed is scrambling to increase interest rates to 300 basis points, or 3 percent, before the next recession strikes, allowing them room to make cuts again. In essence, they are raising rates only so they will have the ability to cut them later.”
Regrettably, Mr. Dudley, the Fed seems to have miscalculated. The current attempts to raise rates are likely to be too little, too late. Realistically, it’s nearly impossible for the Fed to raise the federal funds rate to 3 percent before the next recession hits—you might not even reach 2 percent.
Regardless, you should remain resolute. If you intend to raise rates, then do so decisively. Don’t backtrack—raise them more.
Crush stock values. Plummet bond markets. Wreck real estate. Deflate asset prices. Clear away the debt and speculative excesses plaguing financial markets.
Allow struggling businesses to fail. Let the so-called too-big-to-fail banks face their demise. You might even want to consult Dick “The Gorilla” Fuld if needed. Then allow natural market forces to prevail.
In short, it’s time to conclude the experiment with paper money and close the doors of the Federal Reserve. Undoubtedly, this will lead to a painful restructuring for the economy and countless individuals. But is there truly any other option?
The reality is that the Fed can only maintain the financial order for so much longer. So why perpetuate the illusion with outlandish concepts like crashing unemployment? It’s quite insulting.
Your credibility is in tatters. Better to face the inevitable now rather than later.
Sincerely,
MN Gordon
for Economic Prism
P.S. What’s the deal with Neel Kashkari? The man has gone rogue.
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