Walking the (Recovery) Talk
It’s been a big week of economic data. As usual we will summarise it in tomorrow’s Weekly Wrap podcast. But for context before you listen to that it is worth noting the US Fed is still talking up the prospects of a rate rise this year (otherwise called “tightening” or “removing accommodation” of their stimulatory monetary policy – i.e. QE and ZIRP). They selectively refer to the few good news prints and seem to ignore the predominance of bad and below expectation prints. But they are stuck in the dilemma of walking the talk. You can’t keep talking up the economy yet keep interest rates near zero. The danger is they start to believe their own rhetoric and “try” it – even just a little to prove something. Many believe this will trigger the next crash. One of the world’s largest banks, and maybe one with a little more perspective not being domiciled in Wall Street, Deutschebank, had this to say recently…
"Truth be told, we think the Fed is obliged to talk up the economy because if they were brutally honest, what vestiges of optimism still remaining in the domestic sectors could quickly evaporate. At issue is whether the Fed in particular, but the market in general, has properly understood the nature of the economic problem. The more we dig into this, the more we are afraid they do not. So aside from a data revision tsunami, we would suggest the Fed has the outlook not just horribly wrong, but completely misunderstood. Thus, the idea that the economy is 'ready' for a removal of accommodation [raising rates], and that there is any sense in such a move from the perspective of rising inflation expectations and a stronger real growth outlook, is nonsense."
Maybe the Fed is sweating on a Greek blow up this month or escalations in the South China Sea, Yemen or Iraq to blame on not removing this stimulus that is causing huge asset bubbles all around the world….