Central Bank Credibility Takes Another Hit

lance_HSA few weeks ago, the Fed met and announced their policy decision with no change and no big surprise. No shocker there.

But after parsing the statement for changes from their previous statement, there were a couple items of interest.

Until this last meeting they had said that: “Global economic and financial developments continue to pose risks.” This time they removed that language entirely.

I guess they’re trying to be more “data-dependent,” instead of paying attention to what’s happening overseas…

They also mentioned that while economic activity has slowed, labor market conditions are still improving. One voting member even voted for a hike.

So just looking at the changes, you might think this means the Fed’s optimistic about hiking soon.

Maybe… but the market isn’t buying it, and bond yields reacted similarly. Besides that, I can think of at least a few reasons for not hiking…

There’s poor economic data for one (duh). But if you look down the calendar, there just isn’t really a great opportunity for them to do it, either.

A June hike would come too close to Britain’s vote on exiting the EU. Then, a September hike is just ahead of the presidential election.

Maybe they’ll aim for December, but there’s a full six months for them to turn tail and run on that too.

But let’s forget the Fed for a moment…

The real big surprise came a couple weeks ago when the Bank of Japan (BoJ) announced no change in policy, after most were expecting more stimulus.

World equity markets didn’t like that too much. They sold off sharply, and Japan’s stock index was down an eye-popping 3.61% in a day and has continued to fall!

It shouldn’t surprise anyone that Japan is finally running out of tools to stimulate. They’ve thrown everything they could at deflation and a stagnant economy for the past couple decades. Too bad none of it’s worked. Negative interest rates aren’t doing the trick either. Maybe they’re finally starting to realize this.

The European Central Bank (ECB) is also running out of options. In March they expanded their monthly bond purchases, or quantitative easing, by 20 billion euros and lowered their interest rates. There was speculation that the ECB might have done even more considering their economy is barely growing and the euro is stubbornly strong.

But what else can they do? The deposit rate in Europe is already negative. Maybe the main refinancing rate is next on the chopping block? Whatever happens, no one expects any sort of move until maybe September.

Even if central banks increase their stimulus efforts, what’s the endgame here? Will they suddenly spark the fires of inflation after years of failing to achieve this? Give me a break. All these massive amounts of bond buying, interest rate cutting and other central bank shenanigans haven’t done squat! About all central banks have done is create extreme volatility with their frequent interventions.

I can only imagine the chaos and damage that will come from all this. Kicking the can down the road, piling up more debt and devaluing currencies can only get you so far.

Dr. Lacy Hunt held a workshop on the characteristics of extremely over-indebted economies at our last Irrational Economic Summit. He offers a sobering view on how debt puts a constraint on economic activity. It’s even worse given that the debt is largely unproductive – because you’re essentially borrowing from the future, making it harder to pay later.

Dr. Hunt is sort of the outsider looking in, but Dr. Nayantara Hensel has actually had the opportunity to sit down with former Federal Reserve chair Ben Bernanke. She’s the former Chief Economist for the Navy and will also be speaking at our conference this October. She’s more of an “insider” and will have some unique insight into future Fed policy.

There aren’t too many economists we like at Dent Research, and we aim to bring the few we do like out to this conference. That said, you don’t want to miss what they have to say.

Lance Gaitan

Editor, Treasury Profits Accelerator

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Categories: Central Banks

About Author

Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis. After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.