Some political pundits have opined that part of the reason that populist rhetoric has become so pervasive of late is the wish to return to the “good old days”. As some have so aptly pointed out, while we have our problems today the good old days probably were not that good. By any metric: poverty levels, mortality rates, rates of democracy, etc.. things have improved measurably just over the last 20 years. We are nominating one particular area where a return to yesteryear might do us all some good: Central Banking. In the days when QE was something that would have been positively unheard of, the goal of Central Banks was to gently lean into the business cycle utilizing the Fed funds and discount rates. In the olden days, recessions happened every so often, capital markets declined as they are wont to do, and somehow the global economy survived and even grew at a reasonable rate of growth. Those days are long gone, along with the credibility of an institution that touts itself as above reproach as well as political rancor. This Fed, along with all other Central Banks around the world, has become a tired one trick pony. On this day, we listened to the Fed Chairman when asked about what a rate cut would even accomplish given that we have:unemployment at multi-decade lows, unbelievable lax financial conditions, and Government bond yields at multi-year lows and his response was that “they were pretty sure they know how these cuts filter through into economic activity”. Really!, a look at the charts below showing financial conditions as well as the yield on the 2 year Treasury would argue that lower rates are not going to accomplish much given where they already are.
Our intuition tells us that the talk of imminent rate cuts is less driven by weakening economic activity and more by a weakening in the backbone of those stewarded with guarding the very credibility of our entire financial system. We talked about how The Donald would find a new boogey man and it appears to be Central Banks, though not confined to the Fed however as he threw some shade at Mario Draghi yesterday in response to a possible resumption of ECB QE. Interesting times, not better, just more interesting.