Even though many expected the Fed would taper its stimulus program at the recent FOMC meeting, John Butler explains that such talk by the Fed is merely an attempt to deflect critics while, in reality, the core FOMC group still remains very much in support of ongoing accommodation:
“The Fed clearly understands that the economy is underperforming…they’ve been surprised it’s been this bad for this long. And some of the non-headline statistics, which may not make the front page of the financial news, may in fact matter a lot to the Fed. For example, the fact that the workforce is still shrinking—that’s terrible news for the central bank if you adjust economic growth for the inventory cycle, which looks far worse than the headline numbers…if you make that adjustment, in fact, the US has failed to even grow at 2% at any point in this so-called recovery.”
“I think the Fed is terrified of what an exit strategy might entail. And, I think, the Fed is also very, very aware of just how weak the economy remains. And that’s why I think, ultimately, they are going to try and treat this as a public relations exercise and not deliver any material monetary blow to the fragile economy and fragile financial markets, but simply rather try and deflect their critics in some other way.”
“It’s important to remember the way the FOMC is structured, the way the voting is structured. There’s a rotational process by the regional bank presidents and then there’s a core group that always votes, which is comprised of the board of governors in Washington, but also includes the president of the NY Fed. And when you look at that voting structure it becomes clear that the core group has been and remains overwhelmingly—I would say unanimously—in support of aggressive quantitative easing, but that the dissent has been originating from a handful of the regional bank presidents.”
“[C]oncerns whether or not quantitative easing is effective, whether it is distorting the economy—I have a lot of sympathy with that view, but let’s face it, it remains a minority view. The economic and financial mainstream, both in academia as well as policy, clearly believes that when in doubt, print…so the dissent is still quite marginal, but you can’t dismiss it entirely and that’s why, of course, the Fed has had to at least acknowledge this dissent, because to refuse to acknowledge it would risk certain members of the Federal Reserve banks going to the press directly and saying, ‘We’re not even getting a fair hearing. They’re not even acknowledging our views.’ And that would look even worse than at least acknowledging it within the official statements.”
In the rest of this interview, John discusses how the so-called bond vigilantes are not the real threat to the Fed or the US economy, but the “dollar vigilantes.” Likewise, he says that if the Fed stays on its current path we will most likely be looking at a repeat of the 1970s and also explains what this means for investors. Lastly, John says how the Fed could provide a symbolic "taper" in future meetings to quell criticism while still providing the same level of accommodation to the markets.
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