What now, Lieutenant?

A friend of mine was a Lieutenant in the Marine Corps and led a platoon in battle. He told me the worst feeling he had in combat was when his troops would look at him after plans A, B, and C failed and ask, “What now, Lieutenant?” There was no plan D. I imagine that the world’s Central Bankers are experiencing a similar feeling these days.

With regard to the European Central Bank (ECB), the Bank of Japan (BOJ), and perhaps even the Federal Reserve (Fed), it appears they have used every plan in the playbook, and have even created a host of new ones, with very little to show for their efforts. I believe one of the Central Banks’ greatest fears is the perception that they are powerless. It appears perception has become a reality. Even the Fed is down to their last bullet: one measly 25 basis point rate cut and that’s it. Except for a couple of outliers, I don’t think any Fed governor has the stomach for Negative Interest Rate Policy (NIRP), mainly because it’s just a stupid and dangerous policy.

If anything, the Fed may have actually eased this week with Chairwoman Yellen’s speech on Tuesday. She said, “I consider it appropriate for the committee (Federal Open Market Committee) to proceed cautiously in adjusting policy. This caution is especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric.” Additionally, since the March FOMC meeting, the Fed has talked about letting the unemployment rate run below the Non-Accelerating Inflation Rate of Unemployment (NAIRU). This is essentially moving the goalpost on their inflation and growth targets in order to push back the levels they would have to see in order to move forward with monetary policy normalization. This is why the market has swiftly taken FOMC rate hikes out of 2016 as evidenced by a 75 basis point two-year Treasury note.


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