by Charles Hugh Smith, Of Two Minds:
Whatever the Fed chooses to do, it’s already failed..
Wile E. Coyote has gotten a bad rap: in all fairness, his schemes are ingenious, if overly complicated, and it’s not his fault that the Acme detonator misfires or the Road Runner doesn’t respond as predicted. Every set-up to nail the Road Runner shouldwork. That it fails and leaves him suspended over the cliff for a woefully brief second to intuit his impending doom really isn’t his fault.
Wile E. Coyote and the Federal Reserve share a lot of similarities. Just as Wile is always trying to catch the Road Runner, the Federal Reserve and other central banks have been trying for 10 years to trigger a self-sustaining economic expansion, i.e. an expansion based on the self-reinforcing dynamics of increasing productivity driving increasing wages which then fuel consumption and investment in productivity, and so on.
In a self-sustaining expansion based on fundamentals, central banks can “normalize” (raise) interest rates relatively painlessly to levels that are at least 3% above official inflation, so pension funds and other institutions that need low-risk yields can survive.
Official inflation in the U.S. is about 3% (real-world inflation is running between 8% and 13% in urban America, as per the Chapwood Index, but that’s another essay), so the Fed Funds Rate should be at 6% minimum, which would set mortgages and other long-term loans at 7% or so.
A Fed Funds Rate of 6% (600 basis points) would give the Fed 500 basis points of leeway in a recession to lower rates to 1% to goose borrowing, investing and spending in a recession.
But all the central banks’ intricate plans have failed, and so they are having a Wile E. Coyote moment of impending doom. The Acme Brand detonator they counted on– negative interest rates–has failed to spark a self-sustaining expansion, and all the Fed’s convoluted schemes–Operation Twist, buying a trillion dollars in sketchy home mortgages, etc.–failed to catch the prize.
And so the Fed was only able to raise rates, more or less at the last minute, by 2%— a pathetic admission that even after a decade of central bank-dependent expansion, the Fed couldn’t even raise rates into positive territory, i.e. above the official rate of inflation.