The Federal Open Market Committee (FOMC) just finished up its meeting on monetary policy and released its latest statement. There were no unexpected policy changes in terms of the federal funds target rate and the Fed’s slow draining of its balance sheet.
CNBC showed a nice comparison of the changes from the previous FOMC statement.
Probably the most significant change is the committee’s view of inflation. The previous statement said, “Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term.”
The latest statement said, “Inflation on a 12-month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term.”
In other words, the slight wording change in the statement indicates that the Fed sees inflation (based on its definition) as picking up slightly, or at least perceives slightly higher inflation in the near future.
Of course, in terms of monetary policy, we actually have slight deflation right now. In terms of the Fed’s balance sheet, the money supply is going slightly down with the Fed’s policy of allowing a small amount (relative to the total size) to mature and not be rolled over. In fact, as of February 1, 2018, the Fed will be rolling off $20 billion per month, which is up from $10 billion per month previously
The FOMC decision – or perhaps non-decision – came the day after Trump’s State of the Union speech. From a libertarian standpoint, there was nothing unexpected. There was the usual political theater. And of course, the Democrats hated almost everything that Trump said.
While Trump is still a disaster on foreign policy, he is not as hawkish as he could be. He is not as hawkish as other presidents have been in the past or as much as most of the other potential candidates from 2015/ 2016 could have been.
On economic grounds, he is right to say that we need less regulation. He was right in calling for a cut in corporate tax rates. Unfortunately, he doesn’t get much right after that. He wants a massive infrastructure program that will centralize what should be done at a local level (or privately) if it should be done at all. This will just be more boondoggles with another trillion dollars or so added to the already over-bloated debt.
As I have previously said, Trump is going to regret that he claimed so much credit for the booming (for some) economy and the booming stock market. The Federal Reserve is still tightening its monetary policy. The stock market has boomed with three rounds of QE, but we have to wonder how long the stock market can go without more Fed injections, let alone a slightly deflationary stance.
This was Janet Yellen’s last meeting as Fed chair. Jerome Powell is set to take over on February 3, 2018. He is not a good appointment by Trump, but perhaps Trump is depending on a Keynesian type who will juice the economy when it is needed. We shouldn’t expect any radical shift when Powell takes over, but you can bet that the Fed will quickly reverse course if the economy takes a hit. The Fed will not only stop rolling off securities, but it will probably start a new round of purchases (QE4?).
The markets, in the midst of its rather historic run, took a break on Tuesday. Supposedly the thought of higher interest rates spooked the markets for one day. Stocks, bonds, and gold all went down that day. Or maybe investors just needed a short break before resuming the buying spree, particularly in stocks.
It is interesting that Yellen will escape without having to deal with any major crises on her watch. Previous Fed chairs were not so fortunate.
For Jerome Powell, he may end up wishing he never got the position of Fed chair. He could end up playing the role of Ben Bernanke, but the public may not be quite as patient with massive bailouts of the financial industry this time around.
Despite what Trump may have said in his speech, the state of the union can change quickly. A boom can turn to bust quickly.
I am interested if you have ever read any of Collen Roche’s stuff? Is so what is your opinion? He does not agree with most Libertarians on QE or debt.
https://www.pragcap.com/biggest-myths-in-economics/
I hadn’t heard of him before. In the post you linked to, there are too many things to refute. He says the government doesn’t print money in point number one. And while most of the money creation is digital in nature, I don’t think that is his main point. But then he contradicts this first point with point number three, where he says that a nation with a printing press whose debt is denominated in the currency it can print, can become solvent. So on the one hand, he says that government doesn’t print money, but on the other hand, don’t worry about the national debt because the government prints money.
In point number five, he makes a critical error in saying that “When the Fed buys these assets it is technically ‘printing’ new money, but it is also effectively ‘unprinting’ the T-bond or MBS from the private sector.” This is a complete misunderstanding of the way it works. When a private investor buys a government bond, the money shifts from the bank account of the investor to the U.S. Treasury. No new money is in existence. But when the Fed buys a government bond or Treasury bill, it creates money (digitally) out of thin air in order to buy that debt. So the Fed is printing money (digitally speaking) when it buys government debt.