Le morte de politique monetaire

Information is always revealed, though whether it is interpreted correctly is another matter entirely. This week we learned that monetary policy as it was known, a policy made by an independent policy authority is now finished. Will it ever come back? Unclear at this time.

Fiscal v. Monetary Policy

There is no sense of the divide between fiscal and monetary policy in America anymore. At the best of times and in the best of circumstances these two complemented each other. At the very least they counteracted the excesses or problems created by each other, when it was not the best of times or the best of circumstances. Now, the situation is drastically different.

Monetary policy is already left in a reactionary mode with fiscal policy on a disastrous trajectory with no recognition of a need for correction by any responsible authority. Add into the mix a president with a penchant for tweeting policy ideas, as if a few hundred characters was capable of capturing the nuance of policy in this century.

The President is wrong that business is at a competitive disadvantage in the US compared to other countries because these other countries have negative rates. Now the President’s business history includes real estate purchase and development. This line of business involves a great amount of debt typically and low rates are clearly favorable and lower costs and likely risks.

The distinction is so blurred at this time that I heard a news reporter on Bloomberg Radio this week read that markets wondered if central banks would coordinate activity in an effort to give them a “fiscal boost.”

What we learned this week

The Federal Reserve executed an inter-meeting rate cut. Let’s not call it a surprise since it was widely anticipated and was in some quarters priced in already. This cut which was supposed to support markets did nothing of the sort as they continued to fall. Why did this cut fail to work?

Well let’s see: cutting rates ease credit conditions, in a situation where credit conditions were already good and there was no serious business demand for the easing. If we look at the precipitating factor for the market declines as the coronavirus outbreak the move is even more questionable. The virus outbreak creates a negative outlook for earnings by companies in many sectors, not a situation where the rate cut clearly helps.

The move smelled on its own of panic: that there was no plan in place and we will cut rates to see if that helps. In that way these types of move help create their own issues. People start to wonder if the Fed knows something they do not. They ask, what does the Fed see in its outlook that I may not? I doubt seriously that this issue was brought up when discussing the outcomes of this move.


There are no clear indicators about how this is going to play out. We have the volatility of a Presidential election year, the corona virus and the impact on business, a disastrous fiscal position for the US government budget, and the list can go on and on. The most interesting outcome may be the supposed response to the Biden wins on Super Tuesday. The bump there, and the interpretation that markets rose as a response to the possibility of a centrist candidate is sure to create interesting responses in some quarters.

All this goes on and we sacrificed one of the great features of the US policy regime, the independence of the Federal Reserve. I would suggest there were always issues with the independence and some natural limits on it, but it still offered the possibility of a counterpoint to fiscal policy. The specter of monetized trillion dollar deficits is not only real but likely and will be a drag on the economy as it happens. The way out of this scenario right now seems to be growth, likely generated through a technological leap forward to improve production.

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