Yellen, Jackson Hole and Why the Federal Reserve’s Toolkit Is Threadbare

At 3pm UK time, the chair of the US Federal Reserve Janet Yellen will deliver her speech at the 2016 Jackson Hole symposium, hosted by the Federal Reserve Bank of Kansas City. Ironically the theme for this year’s event is Designing Resilient Monetary Policy Frameworks for the Future, which given the fiasco the Federal Reserve has presided over since the 2008 crash are hollow words. Yellen’s speech meanwhile is entitled The Fed’s Monetary Policy Toolkit.

So let us explore what options are realistically left in the Feds toolkit.

  1. Quantitative Easing (QE) expansion
  2. Helicopter Money
  3. Lowering / Raising interest rates
  4. Forward guidance

It is quite clear that QE has never achieved its stated aims as the velocity of money chart below clearly demonstrates. QE was merely a vehicle to prop up failing banks and we have never seen that money channeled into businesses to stimulate economic growth. Any further QE measures would be futile, although in the event of a systemic crisis you can be assured they will pump literally trillions into the banks in a futile attempt to stave of the inevitable collapse.


fredgraph- vel of Money

The term Helicopter money gained notoriety during the late 1960s via the American Economist, Milton Friedman. In essence it is an alternative to QE when interest rates are close to zero and the economy remains weak or enters a recession.  In simple terms it is a mechanism whereby large sums of money are printed and distributed to the public in order to stimulate the economy. The precise terms of how that would be acheived is another matter. Some may quite legitimately argue that Western economics have never been out of recession and remain weak and we know that zero interest rate policy (ZIRP) and negative interest rate policy (NIRP) are commonplace. However to suggest the issuance of helicopter now would be to admit that the economic was in dire straits and there was no chance of interest rate hikes, something the Feds are at pains to avoid saying.

We have discussed elsewhere on this site why the Feds cannot in reality raise interest rates but equally we know that long term low interest rates have deeply damaged economies. There within lies the paradox that confronts the Feds who is reality can only continue to lower interest rates, as seen by the recent interest rate fall in the UK along with an additional injection of QE to the tune of £60bn.

So what can we expect to hear today at Jackson Hole? This neatly leads us onto point 4 and forward guidance. This is essentially a hot air assurance given by central banks to influence, via their own forecasts, market expectations of future levels of interest rates. It is time that economists, analysts and political commentators ignored this baseless rhetoric. I would suggest everyone goes back to 2009 and assess the assurances the Feds gave, and since then, regarding the global economy and their policies to “fix” things.

I would expect we will hear glib references  to forward guidance, an anticipation of interest rate hikes and how the US economy is stabilising mixed with an unhealthy amount of platitudes. We should also expect to see an attempt to smash the price of Gold and Silver on the back of the expiration of month contracts, which saw the massive dumping of paper into the market in recent days and the corresponding fall in price of both precious metals.

Whatever they say and do , the reality is that the Feds toolkit is threadbare and they know it. The economic abyss is a forgone conclusion and has been since 2008. Perhaps we need to be paying far more attention to global geopolitics right now rather than the words of Yellen and others, coming out of the appropriately named Jackson Hole.

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