Even the Fed, which has for years been describing the economy as “expanding at a moderate pace,” and which a few months back was saying it was “hawkish,” has, through Janet Yellen’s testimony today, been forced to admit that a rate cut may again be on the horizon:
At the end of the hearing, Rep. John Delaney, D-Md., noted the Fed’s plans for gradual rate increases hinged on its outlook for moderate growth. He asked if that view of the economy has recently been downgraded.
“The answer is maybe, but the jury is out,” Yellen said.
It’s hard to say what this means in terms of the timing of a future cut, but by even admitting that “the jury is out” on the need for another cut, Yellen is signaling that the Fed’s big plans for declaring victory on economic growth and hiking rates has bee a failure.
The narrative, of course, has always been that zero interest rate policy will create a robust economy, which will then allow the Fed to raise the Fed Funds Rate. The good economic news peaked back in September, though, and the Fed chickened out on raising rates at the time. This then meant they had to raise rates in December, when the economy was already weakening again. The Fed knew this of course, but the Fed was desperate to find a window somewhere that would allow for a rate increase. After all, with the target rate essentially at zero, the Fed knew it would have nowhere to go at all, if the economy worsened again.
Had they not raised rates in December, they’d be looking at negative rates as their next move, but they lucked out and managed to get the rate up to 0.5 percent, so now, they can at least return to a 0.25 percent target without having to start talking about negative rates.
But, even a small but back down to 0.25 percent will be a declaration of failure for the Fed, and a signal that, no, the economy was never really strong enough for that December rate hike after all.
Oddly, though, Yellen suggested that negative interest rates may not even be legal, which seemed like an unnecessary point to raise. This would seem to suggest that the Fed really, truly does not want to go negative. And, maybe, given the realities of negative rates in Europe and Japan, the Fed has realized that negative rates are not quite the wonderful thing they were imagined to be.
After all, the ECB’s Draghi already admitted in January that their negative rate police has not had the desired effect. ”It will therefore be necessary to review and possibly reconsider our monetary policy stance,” Draghi said. By this, of course, he meant that even more monetary stimulus may be necessary. In other words, years of ultra-easy money has not been enough. What Europe needs if ultra-ultra-easy money.
Likewise, Japan adopted negative interest rates for the first time in late January in response to years of a tepid economy, only days after claiming that the Bank of Japan was not considering negative rates at all. That move, as Marketwatch admitted, had a whiff of “desperation” about it, and Draghi even managed to top his “whatever it takes” comment in January by declaring that “there are no limits” to what the ECD is willing to do.
Yet again, the Fed looks almost sane by comparison, but we should remember that in spite of letting interest rates rise a tiny bit, the Fed is not actually shrinking its balance sheet. The Fed’s still doing quantitative easing, but in a different way. And in case there was any question about teh Fed on the balance sheet question, Yellen noted during her testimony today that ”we’re going to wait to shrink our balance sheet,” which has been the constant refrain since the bad old days of 2009.
