Ask Archer: Does the Fed Play Politics With Interest Rates?
A reader asks: Does the Fed play politics with interest rates?
Archer replies: In the 1964 film, A Shot in the Dark, Peter Sellers plays the bumbling detective Inspector Clouseau, a member of the Sûreté in Paris. There is a murder in a villa outside the city and Sellers/Clouseau is mistakenly assigned to the case.
Arriving on the scene, Clouseau addresses the household staff who have been gathered to be questioned. Pacing about, he characterizes his investigative style as follows: “I believe everything … and I believe nothing. I suspect everyone. And I suspect no one.”
That pretty much covers all the available possibilities. Likewise, in a recent interview with Yahoo Finance, Chicago Fed President Austan Goolsbee, apparently channeling Clouseau, said this when asked about interest rate policy, “Everything is always on the table, and (everything is always) off the table.”
Kind of like the prospects for Schrodinger’s Cat, it all depends.
To be fair, Goolsbee has a seriousness that Clouseau lacks, so possibly he believes he has offered up real insight. Or possibly he is being funny. During the course of the fourteen minute conversation, he goes on to observe “I don’t believe we should ever rule out, or rule in, anything when we have a whole lot of data to come.” Question for the former chair of the Council of Economic Advisors (Obama Administration): when is there not a “whole lot of data to come?”
Not much for an investor to go on. (Not investment advice.) Einstein is purported to have said that “God does not play dice with the universe.” So does our secular deity, the Fed, play politics with interest rates? In this, we are again guided by the sublimely ridiculous Clouseau. “Facts,” he says to his right hand man, Hercule. “Behind them is a whole fabric of deductive truth.”
And what are those facts, Hercule? Recent CPI readings suggest that inflation is anything but under control, but so far the Fed is sticking with its “three-cuts in 2024” mantra. “Disinflation disimproves,” is how Jim Grant memorably put it many years ago during a similar interregnum from what was then about to become a decades long decline in price levels. And so it may again.
The markets, at least, are signaling scepticism. Larry Summers, never shy, says that the central bank’s next rate move may be higher. Mohamed El-Erian, as good a barometer as any of well-informed conventional wisdom, wrote on Bloomberg that “Rather than maintain a policy reaction function anchored by excessive dependence on backward-looking data, the Fed would be well advised to take this opportunity to undertake a belated pivot to a more strategic view of secular prospects. Such a pivot would recognize that the optimal medium-term inflation level for the US is closer to 3% and, as such, give policymakers the flexibility to not overreact to the latest inflation prints.” Not sure what a “reaction function” is, but you get the idea.
Former central bank Chair Helicopter Ben Bernanke recently stepped back into the fray, suggesting that “The Fed will be working hard to close the barn door just as soon as the last horse is on his or her way.”
Not really. What he actually said, apropos the central bank’s counterpart in the United Kingdom, was, “The forecasting and policy challenges faced by the Bank of England in recent years were hardly unique. The Bank, like other central banks and policy institutions, will be working to draw the appropriate lessons from this experience.”
Knowing this, we can all sleep easier. The truth is that, with the exception of El-Erian, no one here is exactly skating to where the puck is going to be. That is a fact, per Clouseau. Somewhere behind that fabric lies the deductive truth. Or possibly a dead cat.
Woof.
(NOTE TO READERS: My book, Radical Problems, Simple Solutions: How Markets can Help Fix the Retirement Crisis and Solve Wealth Inequality is out. To purchase a copy and support your local independent bookstore, go to Flyleaf Books.)